-----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, EWd2rPmr2FWWs6bKrywhcNJAr+BvEib8RhHU+31sbOg+nLY/8L/XkesRuf1vrr85 ULTdLgmVRJVxb9u+0rxc7g== 0000898430-96-001925.txt : 19960517 0000898430-96-001925.hdr.sgml : 19960517 ACCESSION NUMBER: 0000898430-96-001925 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19960515 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 SEC ACT: 1933 Act SEC FILE NUMBER: 333-03749 FILM NUMBER: 96565104 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 1 FORM S-4 As filed with the Securities and Exchange Commission on May 15, 1996 Registration No. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form S-4 REGISTRATION STATEMENT Under The Securities Act of 1933 ______________ PUBLIC STORAGE, INC. (Exact name of registrant as specified in its charter) California (State or other jurisdiction of incorporation or organization) 95-3551121 6798 (I.R.S. Employer Identification No.) (Primary Standard Industrial Classification Code Number) 701 Western Avenue, Suite 200 HUGH W. HORNE Glendale, California 91201-2397 Public Storage, Inc. (818) 244-8080 701 Western Avenue, Suite 200 (Address, including zip code, and Glendale, California 91201-2397 telephone number, including area code, (818) 244-8080 of registrant's principal executive offices) (Name, address, including zip code, and telephone number, including area code, of agent for service)
______________ Copies to: DAVID GOLDBERG, ESQ. Public Storage, Inc. 701 Western Avenue, Suite 200 Glendale, California 91201-2397 ______________ Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. ______________ If the only securities being registered on this Form are being offered in connection with the formation of a holding company, check the following box. [ ] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X]
CALCULATION OF REGISTRATION FEE ========================================================================================================================= Proposed Proposed Amount Offering Maximum Maximum to be Price Aggregate Amount of Title of Each Class of Securities to be Registered Registered Per Share Offering Price Registration Fee - ------------------------------------------------------------------------------------------------------------------------- Common Stock, $.10 par value per share (1) (1) (1) $8,010(1)(2) =========================================================================================================================
(1) This Registration Statement relates to the proposed merger of Storage Properties, Inc. ("SPI") into the Registrant and the conversion of shares of common stock of SPI into either cash (as to up to 20% of the outstanding shares of common stock of SPI) or common stock of the Registrant. At the merger, there will be a maximum of 3,348,167 shares of common stock of SPI outstanding. The closing price of the common stock of SPI on the American Stock Exchange on May 9, 1996 was $6.9375 per share. The number of shares of common stock of the Registrant to be issued in the merger cannot be determined at this time. (2) Calculated in accordance with rule 457(f)(1) under the Securities Act of 1933. $4,900 of the registration fee was previously paid in connection with SPI's preliminary proxy materials. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ================================================================================ 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 Front Cover Page Statement and Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back See page 1 and pages (iii)-(iv) Cover Pages of Prospectus 3. Risk Factors, Ratio of Earnings Risk Factors and Material to Fixed Charges and Other Considerations Information 4. Terms of the Transaction Summary and The Merger 5. Pro Forma Financial Information Pro Forma Financial Statements 6. Material Contacts with the Risk Factors and Material Company Being Acquired Considerations, Conflicts of Interest in the Merger and The Merger 7. Additional Information Required * for Reoffering by Persons and Parties Deemed to be Underwriters 8. Interests of Named Experts and Legal Opinions Counsel 9. Disclosure of Commission Position The Merger -- Comparison of SPI on Indemnification for Securities Common Stock with PSI Common Stock -- Act Liabilities Management and Duties B. Information About the Registrant 10. Information with Respect to S-3 Incorporation of Certain Documents by Registrants Reference 11. Incorporation of Certain Incorporation of Certain Documents by Information By Reference Reference 12. Information with Respect to S-2 Incorporation of Certain Documents by or S-3 Registrants Reference 13. Incorporation of Certain Incorporation of Certain Documents by Information By Reference Reference 14. Information with Respect to Incorporation of Certain Documents by Registrants Other than S-2 or S-3 Reference Registrants _________________ * Omitted as Inapplicable. (ii) C. Information About the Company Being Acquired 15. Information with Respect to S-3 Incorporation of Certain Documents by Companies Reference 16. Information with Respect to S-2 Incorporation of Certain Documents by or S-3 Companies Reference 17. Information with Respect to Incorporation of Certain Documents by Companies Other than S-2 or S-3 Reference Companies D. Voting and Management Information 18. Information if Proxies, Consents Incorporation of Certain Documents by or Authorizations are to be Reference Solicited 19. Information if Proxies, Consents Incorporation of Certain Documents by or Authorizations are not to be Reference Solicited or in an Exchange Offer _________________ * Omitted as Inapplicable. (iii) STORAGE PROPERTIES, INC. NOTICE OF SPECIAL MEETING OF SHAREHOLDERS _______________, 1996 A special meeting of shareholders of Storage Properties, Inc., a California corporation ("SPI"), will be held at SPI's offices at 600 North Brand Boulevard, Suite 300, Glendale, California on _______________, 1996, at the hour of _______ __.m. The purpose of the meeting will be to consider and vote upon an Agreement and Plan of Reorganization between SPI and Public Storage, Inc. ("PSI") described in the accompanying Proxy Statement and Prospectus pursuant to which SPI would be merged with and into PSI (the "Merger"). Upon the Merger, each outstanding share of SPI Common Stock (other than shares held by PSI or by shareholders of SPI who have properly exercised dissenters' rights under California law ("Dissenting Shares")) would be converted into the right to receive cash, PSI Common Stock or a combination of the two, as follows: (i) with respect to a certain number of shares of SPI Common Stock (not to exceed 20% of the outstanding SPI Common Stock, or 669,633 shares, less any Dissenting Shares), upon a shareholder's election, $7.31 in cash, subject to reduction as described below (the "Cash Election") or (ii) that number (subject to rounding) of shares of PSI Common Stock determined by dividing $7.31, subject to reduction as described below, by the average of the per share closing prices on the New York Stock Exchange of PSI Common Stock during the 20 consecutive trading days ending on the fifth trading day prior to the special meeting of the shareholders of SPI. If a shareholder does not make a Cash Election, all of his or her SPI Common Stock would be converted into PSI Common Stock in the Merger. The consideration paid by PSI in the Merger will be reduced on a pro rata basis by the amount of cash distributions required to be paid by SPI to its shareholders prior to completion of the Merger in order to satisfy SPI's REIT distribution requirements ("Required REIT Distributions"). The consideration received by the shareholders of SPI in the Merger, however, along with any Required REIT Distributions, will not be less than $7.31 per share of SPI Common Stock, which amount represents the market value of SPI's real estate assets at February 29, 1996 (based on an independent appraisal) and the estimated net asset value of its other assets at June 30, 1996. Additional pre-merger cash distributions would be made to the shareholders of SPI to cause SPI's estimated net asset value as of the date of the Merger to be substantially equivalent to its estimated net asset value as of June 30, 1996. The SPI Common Stock held by PSI will be cancelled in the Merger. The SPI Board of Directors has determined that holders of record of SPI Common Stock at the close of business on May 13, 1996 will be entitled to receive notice of, and to vote at, the meeting or any adjournment of the meeting. Please complete, date, sign and promptly mail the enclosed proxy in the stamped return envelope included with these materials. You are cordially invited to attend the meeting in person. If you do attend and you have already signed and returned the proxy, the powers of the proxy holders named in the proxy will be suspended if you desire to vote in person. Therefore, whether or not you presently intend to attend the meeting in person, you are urged to complete, date, sign and return the proxy. By Order of the Board of Directors OBREN B. GERICH, Secretary Glendale, California _______________, 1996 PUBLIC STORAGE, INC. STORAGE PROPERTIES, INC. PROXY STATEMENT AND PROSPECTUS SPECIAL MEETING OF SHAREHOLDERS OF STORAGE PROPERTIES, INC. _______________, 1996 This Proxy Statement and Prospectus is being furnished to holders of shares of Common Stock, par value $.05 per share (the "SPI Common Stock") of Storage Properties, Inc. ("SPI") and relates to a meeting of shareholders of SPI called to approve the proposed merger of SPI with and into Public Storage, Inc. ("PSI") (the "Merger") pursuant to the Agreement and Plan of Reorganization attached as Appendix A to this Proxy Statement and Prospectus (the "Merger Agreement"). Holders of SPI Common Stock are referred to hereafter as the "SPI Shareholders." PSI and its executive officers have significant relationships with SPI, and PSI owns approximately 9% of the SPI Common Stock. See "Summary -- Relationships." PSI has informed SPI that it intends to vote its shares for the Merger. The Board of Directors of SPI, based on recommendations of a special committee composed of independent directors, recommends that SPI Shareholders vote for the Merger. SPI has imposed as an additional condition to the Merger that it be approved by a majority of the shares of SPI Common Stock voting at the shareholder meeting not held by PSI. The Merger involves certain factors that should be considered by SPI Shareholders, including the following: . The Merger has not been negotiated at arm's length, and no unaffiliated representatives were appointed to negotiate the terms of the Merger on behalf of SPI. . The nature of the investment of SPI Shareholders who receive shares of Common Stock, par value $.10 per share, of PSI (the "PSI Common Stock") is being changed from holding an interest in an entity engaged solely in the ownership of mini-warehouses to holding an investment in a fully-integrated real estate company specializing in all aspects of the mini-warehouse industry. . Based on the current price of the PSI Common Stock ($21 per share) and the current regular quarterly distribution rates for SPI and PSI, the level of distributions to SPI Shareholders who receive PSI Common Stock in the Merger would be approximately 4% lower after the Merger than before. . The properties of SPI may continue to appreciate in value and might be able to be liquidated at a later date for more consideration than receivable in the Merger. . Under California law, SPI Shareholders will be entitled to dissenters' rights of appraisal in connection with the Merger only if demands for payments are filed with respect to 5% or more of the outstanding shares of SPI Common Stock. . PSI and its affiliates have conflicts of interest in connection with the Merger. (Continued of following page) --------------------- 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. ______________, 1996 . B. Wayne Hughes ("Hughes"), the chief executive officer of SPI and PSI, and members of his family (the "Hughes Family") own approximately 51% of the PSI Common Stock. . The public PSI Shareholders are further limited in their ability to change control of PSI due to restrictions in PSI's organizational documents on beneficial ownership. . As a result of a prior business combination, PSI is subject to tax risks, including additional risks as to PSI's continued qualification as a real estate investment trust ("REIT"). . In making real estate investments, PSI has incurred, and may continue to incur, debt. . The interest of holders of PSI Common Stock ("PSI Shareholders") can be diluted through the issuance of additional securities. PSI has outstanding, and intends to issue additional, securities with priority over PSI Common Stock. . The market price of PSI Common Stock may fluctuate following establishment of the number of shares to be issued to SPI Shareholders in the Merger and prior to issuance and could decrease as a result of increased selling activity following issuance of shares in the Merger and other factors. . The consideration to be received by SPI Shareholders in the Merger is based on third party appraisals. However, appraisals are opinions as of the date specified, are subject to certain assumptions and may not represent the true worth or realizable value of SPI's properties. . SPI Shareholders who receive any cash in connection with the Merger may have a taxable gain. SEE "RISK FACTORS AND MATERIAL CONSIDERATIONS" BEGINNING ON PAGE ___ OF THIS PROXY STATEMENT AND PROSPECTUS. The PSI Common Stock is traded on the New York Stock Exchange ("NYSE") under the symbol "PSA". On _______________, 1996, the closing price of the PSI Common Stock on the NYSE was $_____. The SPI Common Stock is traded on the American Stock Exchange ("AMEX") under the symbol "STG". On _______________, 1996, the closing price of the SPI Common Stock on the AMEX was $_____. This Proxy Statement and Prospectus is first being mailed on or about May 21, 1996 to SPI Shareholders of record at the close of business on May 13, 1996. NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH INFORMATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY PSI OR SPI. THIS PROXY STATEMENT AND PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES, OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE REGISTERED SECURITIES TO WHICH THIS PROXY STATEMENT AND PROSPECTUS RELATES TO OR BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. ii TABLE OF CONTENTS
Page ---- Available Information................................................ 1 Incorporation of Certain Documents by Reference...................... 1 Summary.............................................................. 2 Overview of Merger................................................ 2 Meetings and Vote Requirements of Shareholders.................... 2 PSI............................................................... 3 SPI............................................................... 3 Merger with PSMI.................................................. 3 Risk Factors and Material Considerations.......................... 3 Background and Reasons for the Merger............................. 5 Potential Advantages of the Merger................................ 6 Rights of Dissenting Shareholders................................. 6 Determination of Payments to be Received by SPI Shareholders in Connection with the Merger.................................... 7 Federal Income Tax Matters........................................ 7 Recommendations; Opinion of Financial Advisor..................... 7 Comparison of SPI Common Stock with PSI Common Stock.............. 8 Summary Financial Information..................................... 11 Relationships..................................................... 13 Risk Factors and Material Considerations............................. 15 No Arm's Length Negotiation or Unaffiliated Representatives....... 15 Change in Nature of Investment.................................... 15 Uncertainty Regarding Market Price of PSI Common Stock............ 15 Potential Loss of Future Appreciation............................. 15 Limitation on Dissenters' Rights of Appraisal..................... 15 Lower Level of Distributions to SPI Shareholders.................. 15 Control and Influence by the Hughes Family........................ 16 Ownership Limitations............................................. 16 Tax Risks......................................................... 16 Financing Risks................................................... 17 Merger Consideration Based on Appraisals Instead of Arm's Length Negotiation...................................................... 18 Tax to SPI Shareholders........................................... 18 Operating Risks................................................... 18 Shares Eligible for Future Sale................................... 20 Conflicts of Interest in the Merger.................................. 20 The Merger........................................................... 21 General........................................................... 21 Background........................................................ 21 Reasons for the Merger and Timing................................. 23 Alternatives to the Merger........................................ 23 No Solicitation of Other Proposals................................ 25 Determination of Payments to be Received by SPI Shareholders in Connection with the Merger....................................... 25 Potential Advantages of the Merger to SPI......................... 27 Recommendation to SPI Shareholders and Fairness Analysis.......... 27 Comparison of Consideration to be Received in the Merger to Other Alternatives..................................................... 29 Real Estate Portfolio Appraisal by Wilson......................... 32 Fairness Opinion from Stanger..................................... 34 The Merger Agreement.............................................. 39 Cash Election Procedure........................................... 40 Consequences to SPI if the Merger is Not Completed................ 41
iii
Page ---- Costs of the Merger............................................... 42 Accounting Treatment.............................................. 42 Regulatory Requirements........................................... 42 Comparison of SPI Common Stock with PSI Common Stock.............. 43 Approval of the Merger............................................... 47 Security Ownership of Certain Beneficial Owners and Management.... 48 Solicitation of Proxies........................................... 53 Description of SPI's Properties...................................... 54 Description of PSI's Properties...................................... 58 Distributions and Price Range of PSI Common Stock.................... 59 Distributions and Price Range of SPI Common Stock.................... 60 Description of PSI Capital Stock..................................... 61 Common Stock...................................................... 61 Ownership Limitations............................................. 61 Class B Common Stock.............................................. 62 Preferred Stock................................................... 63 Effects of Issuance of Capital Stock.............................. 64 Dissenting Shareholders' Rights of Appraisal......................... 65 Certain Federal Income Tax Matters................................... 67 The Merger........................................................ 67 Opinion of Counsel................................................ 68 General Tax Treatment of PSI...................................... 69 Consequences of the PSMI Merger on PSI's Qualification as a REIT.. 72 Taxation of PSI Shareholders...................................... 76 State and Local Taxes............................................. 78 Legal Opinions....................................................... 78 Experts.............................................................. 78 Independent Auditors................................................. 78 Shareholder Proposals................................................ 78 Glossary............................................................. 79 Appendix A - Agreement and Plan of Reorganization between PSI and SPI dated as of March 4, 1996 Appendix B - Real Estate Appraisal Report by Charles R. Wilson & Associates, Inc. dated March 29, 1996 Appendix C - Opinion of Robert A. Stanger & Co., Inc. dated May 15, 1996 Appendix D - Chapter 13 of the California General Corporation Law Concerning Dissenters' Rights Appendix E - Financial Statements of SPI Appendix F - Management's Discussion and Analysis of Financial Condition and Results of Operations of SPI
AVAILABLE INFORMATION Each of PSI and SPI is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, file reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such material 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, in the case of PSI, at the NYSE, 20 Broad Street, New York, New York 10005 and, in the case of SPI, at the AMEX, 86 Trinity Place, New York, New York 10006. PSI 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 Proxy Statement and 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 PSI with the Commission pursuant to Section 13 of 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, 1995, as amended by a Form 10-K/A dated April 29, 1996 and a Form 10-K/A dated May 14, 1996 and (ii) the Current Report on Form 8-K dated January 22, 1996. All documents filed by PSI pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Proxy Statement and Prospectus and prior to the date of the special meetings of SPI Shareholders shall be deemed to be incorporated by reference herein from the date of filing such documents. The following documents filed by SPI with the Commission pursuant to Section 13 of the Exchange Act (File No. 1-10609) are incorporated herein by reference: (i) the Annual Report on Form 10-K for the year ended December 31, 1995, as amended by a Form 10-K/A dated April 26, 1996 and (ii) the Current Report on Form 8-K dated March 4, 1996. 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 Proxy Statement and Prospectus to the extent that a statement contained herein or in any 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 Proxy Statement and Prospectus. Also incorporated by reference herein is the Merger Agreement, which is attached as Appendix A to this Proxy Statement and Prospectus. THIS PROXY STATEMENT AND PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (INCLUDING DOCUMENTS FILED SUBSEQUENT TO THE DATE HEREOF), EXCEPT THE EXHIBITS TO SUCH DOCUMENTS (UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE IN SUCH DOCUMENTS), SHALL BE DELIVERED TO ANY PERSON TO WHOM THIS PROXY STATEMENT AND PROSPECTUS IS DELIVERED, UPON WRITTEN OR ORAL REQUEST OF SUCH PERSON AND BY FIRST CLASS MAIL WITHIN ONE BUSINESS DAY OF RECEIPT OF SUCH REQUEST. REQUESTS FOR SUCH COPIES SHOULD BE DIRECTED TO INVESTOR SERVICES DEPARTMENT, 701 WESTERN AVENUE, SUITE 200, GLENDALE, CALIFORNIA 91201-2397 OR BY TELEPHONE AT (818) 244-8080. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY _______________, 1996. 1 SUMMARY The following summary is qualified in its entirety by the detailed information appearing elsewhere in this Proxy Statement and Prospectus. See "Glossary" for definitions of certain terms used in this Proxy Statement and Prospectus. OVERVIEW OF MERGER Upon consummation of the Merger, SPI will be merged into PSI, which will be the surviving corporation. Each share of SPI Common Stock outstanding immediately prior to the consummation of the Merger (other than shares held by SPI Shareholders who have properly exercised dissenter's rights under California law ("Dissenting Shares")) will be converted into the right to receive cash, PSI Common Stock or a combination of the two, as follows: (i) with respect to a certain number of shares of SPI Common Stock (not to exceed 20% of the outstanding SPI Common Stock, or 669,633 shares, less any Dissenting Shares), upon a SPI Shareholder's election (the "Cash Election"), $7.31 in cash, subject to reduction as described below, or (ii) that number of shares of PSI Common Stock (subject to rounding) determined by dividing $7.31, subject to reduction as described below, by the average of the per share closing prices on the NYSE of PSI Common Stock during the 20 consecutive trading days ending on the fifth trading day prior to the special meeting of SPI Shareholders. If a SPI Shareholder does not make a Cash Election, all of his or her SPI Common Stock would be converted into PSI Common Stock. The consideration paid by PSI to SPI Shareholders in the Merger will be reduced on a pro rata basis by the amount of cash distributions required to be paid to SPI Shareholders by SPI prior to completion of the Merger (estimated to be approximately $.20 per share) in order to satisfy SPI's REIT distribution requirements ("Required REIT Distributions"). The consideration received by SPI Shareholders in the Merger, however, along with any Required REIT Distributions, will not be less than $7.31 per share of SPI Common Stock, which amount represents the market value of SPI's real estate assets at February 29, 1996 (based on an independent appraisal) and the estimated net asset value of its other assets at June 30, 1996. SPI Shareholders would receive the Required REIT Distributions upon any liquidation of SPI, regardless of the Merger. Additional pre-merger cash distributions would be made to SPI Shareholders to cause SPI's estimated net asset value as of the date of the Merger to be substantially equivalent to its estimated net asset value as of June 30, 1996. The SPI Common Stock held by PSI will be cancelled in the Merger. See "The Merger -- Determination of Payments to be Received by SPI Shareholders in Connection with the Merger." For a description of the terms of the Merger, see "The Merger -- The Merger Agreement." The PSI Common Stock is listed on the NYSE, and the SPI Common Stock is listed on the AMEX. On March 1, 1996, the last full trading day prior to the first announcement of the proposed Merger, the reported closing sales prices per share of PSI and SPI Common Stock on the NYSE and AMEX, respectively, were $21 1/2 and $6/5//8, respectively. On _______________, 1996, the last full trading day prior to the date of this Proxy Statement and Prospectus, the reported closing sales prices per share of PSI and SPI Common Stock were $_____ and $_____, respectively. MEETINGS AND VOTE REQUIREMENTS OF SHAREHOLDERS Meeting Date ___________, 1996 at ______ __.m. Record Date May 13, 1996 Purpose To Approve the Merger Shares of Common Stock Outstanding 3,348,167 Shares Vote Required Majority of Shares of Outstanding SPI Common Stock * Percentage Ownership by PSI 9% Shareholder Lists Available upon written demand _______________ * SPI has imposed as an additional condition to the Merger that it be approved by a majority of the shares of SPI Common Stock voting at the meeting of SPI Shareholders not held by PSI. 2 PSI PSI is a fully integrated, self-administered and self-managed REIT, organized as a California corporation that acquires, develops, owns and operates self- service facilities offering space for personal and business use ("mini- warehouses"). PSI is the largest owner and operator of mini-warehouses in the United States. PSI also owns and operates, to a lesser extent, business parks containing commercial and industrial rental space. At December 31, 1995, PSI had equity interests (through direct ownership, as well as general and limited partnership and capital stock interests) in 1,050 properties located in 37 states, consisting of 1,016 mini-warehouse facilities and 34 business parks. In a series of mergers among Public Storage Management, Inc. and its affiliates (collectively, "PSMI"), culminating in the November 1995 merger of PSMI into Storage Equities, Inc. ("SEI") (the "PSMI Merger"), SEI became self- administered and self-managed, acquired substantially all of PSMI's United States real estate interests and was renamed "Public Storage, Inc." See "-- Merger with PSMI." SPI SPI is a REIT organized in 1989 as a California corporation. PSMI was the sponsor of SPI. SPI owns seven mini-warehouses and one parcel of vacant land located in six states. All of these facilities are operated under the "Public Storage" name. See "Description of SPI's Properties." The SPI Common Stock is traded on the AMEX under the symbol "STG". SPI is advised and its facilities are managed by PSI. SPI's operations are under the general supervision of its five-member board of directors, consisting of two members who are directors and executive officers of PSI, one member who is a director of PSI and two independent directors. The principal executive offices of PSI and SPI are located at 701 Western Avenue, Suite 200, Glendale, California 91201-2397. Their telephone number is (818) 244-8080. MERGER WITH PSMI In a series of mergers among PSMI and its affiliates, culminating in the PSMI Merger, SEI became self-administered and self-managed, acquired substantially all of the United States real estate operations of PSMI, and changed its name to "Public Storage, Inc." In addition, the outstanding capital stock of PSMI was converted into an aggregate of 29,449,513 shares of PSI Common Stock (exclusive of shares of PSI Common Stock held by PSMI prior to the PSMI Merger) and 7,000,000 shares of PSI Class B Common Stock. The real estate operations acquired in the PSMI Merger included (1) the "Public Storage" name, (2) seven wholly owned properties, (3) all-inclusive deeds of trust secured by ten mini-warehouses, (4) general and limited partnership interests in 47 limited partnerships owning an aggregate of 286 mini-warehouses, (5) shares of common stock in 16 REITs owning an aggregate of 218 mini-warehouses and 14 commercial properties, (6) property management contracts, exclusive of facilities owned by PSI, for 563 mini-warehouses and, through ownership of a 95% economic interest in a subsidiary, 24 commercial properties (522 of which collectively were owned by entities affiliated with PSMI) and (7) a 95% economic interest in another subsidiary that currently sells locks and boxes in mini-warehouses operated by PSI. In the PSMI Merger, PSI assumed all of PSMI's rights and obligations under the Advisory Agreement dated June 23, 1989 between PSMI and SPI (the "Advisory Agreement"). RISK FACTORS AND MATERIAL CONSIDERATIONS The Merger involves certain factors that should be considered by SPI Shareholders, including the following: . No Arm's Length Negotiation or Unaffiliated Representatives. The Merger has not been negotiated at arm's length, and no unaffiliated representatives were appointed to negotiate the terms of the Merger on behalf of SPI. If such persons had been engaged, the terms of the Merger may have been more favorable to SPI Shareholders. 3 . Change in Nature of Investment. The nature of the investment of SPI Shareholders who receive PSI Common Stock is being changed from holding an interest in an entity engaged solely in the ownership of mini-warehouses to holding an investment in a fully-integrated real estate company which is engaged in all aspects of the mini-warehouse industry, including property development and management. . Lower Level of Distributions After the Merger to SPI Shareholders. Depending on the market price of the PSI Common Stock during the period in which the number of shares to be issued in the Merger is established, the level of distributions to SPI Shareholders who receive PSI Common Stock in the Merger may be lower after the Merger than before. Based on a market price of PSI Common Stock of $21 and the current regular quarterly distribution rate for PSI ($.22 per share) and SPI ($.08 per share), SPI Shareholders would receive approximately $.003 (4.3%) less in regular quarterly distributions per share of SPI Common Stock after the Merger from PSI than before the Merger from SPI and approximately $.001 less per share in regular quarterly distributions for each $.25 (1.2%) increase in the market price of PSI Common Stock above $21. . Potential Loss of Future Appreciation. SPI's properties may continue to appreciate in value and might be able to be liquidated at a later date for more consideration than receivable in the Merger. . Limitation on Dissenters' Rights of Appraisal. Under California law, SPI Shareholders will be entitled to dissenters' rights of appraisal in connection with the Merger ("Dissenters' Rights") only if demands for payment are filed with respect to 5% or more of the outstanding shares of SPI Common Stock. . Conflicts of Interest. PSI and its affiliates, which are affiliated with SPI, have conflicts of interest in connection with the Merger. . Control and Influence by the Hughes Family. The Hughes Family owns approximately 51% of the PSI Common Stock (approximately 55% upon conversion of the Class B Common Stock). . Ownership Limitations. The public PSI Shareholders are further limited in their ability to change control of PSI due to restrictions in PSI's Articles of Incorporation on beneficial ownership. . Tax Risks -- Additional Risks to Continued REIT Qualification. As a result of the PSMI Merger, PSI is subject to tax risks, including risks as to PSI's continued qualification as a REIT resulting from a substantial increase in PSI's nonqualifying income. . Financing Risks. In making real estate investments, PSI has incurred, and may continue to incur, debt. The incurrence of debt increases the risk of loss of investment. . Possible Future Dilution. The interest of PSI Shareholders can be diluted through the issuance of additional securities by PSI. PSI has outstanding, and intends to issue additional, securities with priority over PSI Common Stock. . Uncertainty Regarding Market Price of PSI Common Stock. The market price of PSI Common Stock may fluctuate following establishment of the number of shares to be issued to SPI Shareholders in the Merger and prior to issuance and could decrease as a result of increased selling activity following issuance of shares in the Merger and other factors. . Merger Consideration Based on Appraisals Instead of Arm's Length Negotiations. The consideration to be paid to SPI Shareholders is based on third party appraisals of SPI's properties. However, appraisals are opinions as of the date specified and are subject to certain assumptions and may not represent the true worth or realizable value of SPI's properties. There can be no assurance that if SPI's properties were sold, they would be sold at the appraised values; the sales price might be higher or lower. 4 . Tax to SPI Shareholders Upon Receipt of Cash. SPI Shareholders who receive any cash in connection with the Merger may recognize a taxable gain. In addition, the Required REIT Distributions will be taxable to all SPI Shareholders as ordinary income. . Payment to PSI. The Merger results in the payment of $2,270,000 under the Advisory Agreement, which reduces the number of shares of PSI Common Stock to be issued to SPI Shareholders in the Merger. BACKGROUND AND REASONS FOR THE MERGER THE MERGER HAS BEEN INITIATED AND STRUCTURED BY INDIVIDUALS WHO ARE EXECUTIVE OFFICERS OF BOTH PSI AND SPI. A SPECIAL COMMITTEE COMPOSED OF INDEPENDENT DIRECTORS OF SPI (THE "SPI SPECIAL COMMITTEE") HAS REVIEWED THE TERMS OF THE MERGER, AND THE BOARD OF DIRECTORS OF SPI, BASED ON RECOMMENDATIONS OF THE SPI SPECIAL COMMITTEE WHICH THE BOARD OF DIRECTORS HAS ADOPTED, AND ON THE OPINION OF A FINANCIAL ADVISOR IN WHICH IT CONCURS, BELIEVES THAT THE MERGER IS FAIR TO THE PUBLIC SHAREHOLDERS OF SPI, AND RECOMMENDS THAT SPI SHAREHOLDERS VOTE FOR THE MERGER. PSI, which was organized in 1980, has from time to time taken actions to increase its asset and capital base and increase diversification. Between September 1994 and March 1996, PSI merged with five REITs which, like SPI, had been affiliated with PSI. In February 1996, the SPI Board of Directors appointed the SPI Special Committee to consider and make recommendations to the SPI Board of Directors and shareholders regarding a possible merger with PSI. On March 19, 1996, the SPI Board of Directors based on recommendations of the SPI Special Committee, which were adopted by the SPI Board of Directors, approved the Merger and determined to recommend that SPI Shareholders vote for the Merger. The SPI Board of Directors and the SPI Special Committee believe that the consideration being offered in the Merger compares favorably with the trading price of the SPI Common Stock immediately prior to the first announcement of the Merger and during other periods, a range of estimated going concern values per share of SPI Common Stock and an estimated liquidation value per share of SPI Common Stock. The SPI Board of Directors and the SPI Special Committee recognize that this comparison is subject to significant assumptions, qualifications and limitations. See "The Merger -- Comparison of Consideration to be Received in the Merger to Other Alternatives." Prior to concluding that the Merger should be proposed to SPI Shareholders, the SPI Board of Directors and the SPI Special Committee considered several alternatives to the Merger, including liquidation of SPI and continued operation of SPI. In order to determine whether the Merger or one of the alternatives would be more advantageous to SPI Shareholders, the SPI Board of Directors and the SPI Special Committee compared the potential benefits and detriments of the Merger with the potential benefits and detriments of other alternatives. Based upon a comparison of the potential benefits and detriments of the Merger with their alternatives, the SPI Board of Directors and the SPI Special Committee have concluded that the Merger is more attractive to SPI Shareholders than any of the alternatives considered. The SPI Board of Directors did not solicit any other proposals for the acquisition of SPI or its properties. See "The Merger - - - No Solicitation of Other Proposals." In comparing the Merger to other alternatives, the SPI Board of Directors and the SPI Special Committee noted the following: Liquidation. The SPI Board of Directors and the SPI Special Committee do not believe this is an opportune time to sell SPI's properties because they may continue to appreciate in value. The Merger provides SPI Shareholders with the opportunity either to convert their investment in SPI into an investment in PSI, which like SPI primarily owns mini-warehouses, on a tax-free basis or to receive cash based on the appraised value of SPI's properties as to a portion of their investment. However, if SPI liquidated its assets through asset sales to unaffiliated third parties, SPI Shareholders would not need to rely upon a real estate portfolio appraisal to estimate the fair market value of SPI's properties. 5 Continued Operation. Nothing requires the liquidation or merger of SPI at this time. SPI is operating profitably. Continued operation should provide SPI Shareholders with continued distributions of net operating cash flow and participation in future appreciation of SPI's properties, as well as avoiding many of the risks described under "Risk Factors and Material Considerations." However, continued operation would fail to secure the potential benefits of the Merger described under "The Merger -- Potential Advantages of the Merger." There are no restrictions in SPI's organizational documents on investment of cash flow and issuance of securities by SPI, and SPI is not precluded from taking advantage of investment opportunities and growing as new investments are made. However, the SPI Board of Directors and the SPI Special Committee believe that PSI's larger capital base and greater liquidity and diversification better enable PSI to take advantage of investment opportunities and to raise investment capital. POTENTIAL ADVANTAGES OF THE MERGER The principal potential benefits to SPI Shareholders who receive PSI Common Stock are: . Acquisition of Additional Properties. Following the Merger, SPI Shareholders will be investors in an entity with a larger asset base and market capitalization than SPI. PSI has grown and is expected to continue to grow, as new investments are made. . Increased Liquidity. SPI has 3,348,167 shares of SPI Common Stock listed on the AMEX with an average daily trading volume during the 12 months ended December 31, 1995 of 3,051 shares. In comparison, PSI has approximately 71.5 million shares of Common Stock listed on the NYSE (35.6 million of which are freely tradeable) with an average daily trading volume during the same period of 59,432 shares (52,913 shares if May 1995, during which PSI was engaged in a public offering of Common Stock, is excluded). Given PSI's greater market capitalization and trading volume than SPI, SPI Shareholders who receive PSI Common Stock in exchange for their common stock are likely to enjoy a more active trading market and increased liquidity for their shares. . Tax-Free Treatment if Only PSI Common Stock is Received. The Merger is intended to qualify as a tax-free reorganization. Assuming such qualification, no taxable gain or loss will be recognized in connection with the Merger by SPI Shareholders who exchange their SPI Common Stock solely for PSI Common Stock. However, the Required REIT Distributions will be taxable to all SPI Shareholders as ordinary income. See "Certain Federal Income Tax Matters -- The Merger." RIGHTS OF DISSENTING SHAREHOLDERS Pursuant to Chapter 13 of the Corporations Code of the State of California (the "California Code"), SPI Shareholders will be entitled to obtain appraisal of the fair value of their shares ("Dissenters' Rights") if demands for payment are filed with respect to 5% or more of the outstanding shares of SPI Common Stock. A dissenting shareholder who wishes to require SPI to purchase his or her shares of SPI Common Stock must: (1) vote against the Merger any or all of the shares of SPI Common Stock entitled to be voted (shares of SPI Common Stock not voted are not considered to be voted against the Merger and will not be counted toward the 5% minimum for Dissenters' Rights to exist); provided that if a SPI Shareholder votes part of the shares entitled to be voted in favor of the Merger, and fails to specify the number of shares voted, it is conclusively presumed under California law that such shareholder's approving vote is with respect to all shares entitled to be voted; (2) make written demand upon SPI or its transfer agent, which is received not later than the date of the meeting of SPI Shareholders, setting forth the number of shares of SPI Common Stock demanded to be purchased by SPI and a statement as to claimed fair market value of such shares at March 1, 1996; and 6 (3) submit for endorsement, within 30 days after the date on which the notice of approval of the Merger by SPI Shareholders is mailed to such shareholders, to SPI or its transfer agent the certificates representing any shares in regard to which demand for purchase is being made, or to be exchanged for certificates of appropriate denominations so endorsed, with a statement that the shares are Dissenting Shares. The provisions of Chapter 13 are technical in nature and complex. SPI Shareholders desiring to exercise Dissenters' Rights and to obtain appraisal of the fair value of their shares should consult counsel, since the failure to comply strictly with the provisions of Chapter 13 may result in a waiver or forfeiture of their appraisal rights. A copy of Chapter 13 of the California Code is attached hereto as Appendix D. See "Dissenting Shareholders' Rights of Appraisal." DETERMINATION OF PAYMENTS TO BE RECEIVED BY SPI SHAREHOLDERS IN CONNECTION WITH THE MERGER In connection with the Merger, SPI Shareholders will receive the net asset value or $7.31 per share of SPI Common Stock. SPI's net asset value is the sum of (a) the appraised value of SPI's real estate assets determined by Wilson, as of February 29, 1996, plus (b) the estimated book value of SPI's non-real estate assets as of June 30, 1996, less (c) SPI's estimated liabilities as of June 30, 1996. Pre-merger cash distributions would be made to SPI Shareholders to cause SPI's estimated net asset value as of the date of the Merger to be substantially equivalent to its estimated net asset value as of June 30, 1996. The consideration paid to SPI Shareholders by PSI in the Merger will be reduced on a pro rata basis by the amount of the Required REIT Distributions paid to SPI Shareholders by SPI prior to completion of the Merger. See "The Merger -- Determination of Payments to be Received by SPI Shareholders in Connection with the Merger." However, the consideration received by SPI Shareholders in the Merger along with the Required REIT Distributions (which will be paid in cash) will not be less than $7.31. FEDERAL INCOME TAX MATTERS The Merger is intended to qualify as a tax-free reorganization under Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the "Code"), in which case generally (i) no gain or loss would be recognized by SPI Shareholders who receive solely PSI Common Stock in exchange for their SPI Common Stock; (ii) gain or loss would be recognized by SPI Shareholders who receive solely cash in exchange for their SPI Common Stock in an amount equal to the difference between their adjusted basis in their SPI Common Stock and the amount of cash received in exchange therefor; and (iii) gain or loss would be recognized by SPI Shareholders who receive a combination of PSI Common Stock and cash in exchange for their SPI Common Stock in an amount equal to the difference between their adjusted basis in their SPI Common Stock and the sum of (a) the fair market value of the PSI Common Stock received and (b) the amount of cash received, but only to the extent of the amount of cash received. The Required REIT Distributions would not be treated as cash paid in exchange for the SPI Common Stock but rather as a dividend taxable to all recipients as ordinary income. See "Certain Federal Income Tax Matters -- The Merger." RECOMMENDATIONS; OPINION OF FINANCIAL ADVISOR RECOMMENDATION OF SPI BOARD OF DIRECTORS TO SPI SHAREHOLDERS. Based upon an analysis of the Merger, the SPI Special Committee and the SPI Board of Directors have concluded that (i) the terms of the Merger are fair to the public shareholders of SPI, (ii) after comparing the potential benefits and detriments of the Merger with those of several alternatives, the Merger is more advantageous to SPI Shareholders than such alternatives and (iii) SPI Shareholders should vote for the Merger. The SPI Special Committee and the SPI Board of Directors based their conclusion on the following factors: (i) the Merger provides SPI Shareholders with a choice of converting their investment into an investment in PSI or, with respect to up to 20% of the outstanding SPI Common Stock (less any Dissenting Shares), receiving cash for their investment; (ii) the properties of SPI have been appraised by an independent appraiser and SPI has received a fairness opinion from Robert A. Stanger & Co. Inc. ("Stanger") relating to the consideration to be received in the Merger; (iii) the Merger is required to be approved by SPI Shareholders and, subject to certain limitations, these shareholders 7 will have the right to exercise Dissenters' Rights; and (iv) based on certain significant assumptions, qualifications and limitations, the consideration being offered in the Merger compares favorably with other alternatives. ABSENCE OF ARM'S LENGTH NEGOTIATION. The terms of the Merger are not the result of arm's length negotiation. The SPI Board of Directors does not believe that the absence of independent representatives to negotiate the Merger undermines the fairness of the Merger because the terms of the Merger have been reviewed and approved by the SPI Special Committee, comprised of independent directors of SPI. FAIRNESS OPINION FROM STANGER. Stanger was engaged by SPI through the SPI Special Committee to deliver a written summary of its determination as to the fairness of the consideration to be received in the Merger, from a financial point of view, to the public shareholders of SPI. The full text of the opinion is set forth in Appendix C to this Proxy Statement and Prospectus. Subject to the assumptions, qualifications and limitations contained therein, the fairness opinion concludes that, as of the date of the fairness opinion, the consideration to be received in the Merger is fair to the public shareholders of SPI, from a financial point of view. In arriving at its opinion, Stanger considered, among other things, the independent appraised value of the portfolio of properties of SPI, the estimated liquidation value of SPI prepared by SPI, based upon liquidation of the portfolio on a property-by-property basis, financial analyses and projections prepared by SPI concerning the going-concern value from continuing operation of SPI as a stand-alone entity, and a comparison of the historical market prices of the common stock of SPI with the consideration offered in the Merger. Stanger was not requested to, and therefore did not: (i) select the method of determining the consideration offered in the Merger; (ii) make any recommendation to SPI Shareholders with respect to whether to approve or reject the Merger or whether to select the cash or common stock option in the Merger; or (iii) express any opinion as to the business decision to effect the Merger, alternatives to the Merger, or tax factors resulting from the PSMI Merger or relating to PSI's continued qualification as a REIT. Stanger's opinion is based on business, economic, real estate and securities markets, and other conditions as of the date of its analysis. See "The Merger -- Fairness Opinion from Stanger." COMPARISON OF SPI COMMON STOCK WITH PSI COMMON STOCK The information below summarizes certain principal differences between SPI Common Stock and PSI Common Stock and the effect of the Merger on SPI Shareholders who receive PSI Common Stock in the Merger (set forth in italics below each caption). For an expanded discussion of these and other comparisons and effects, see "The Merger -- Comparison of SPI Common Stock with PSI Common Stock." SPI PSI INVESTMENT OBJECTIVES AND POLICIES To provide (i) quarterly cash To maximize funds from operations distributions from operations and ("FFO") allocable to holders of PSI (ii) long-term capital gains through Common Stock and to increase appreciation in the value of shareholder value through internal properties. growth and acquisitions. FFO is a supplemental performance measure for equity REITs used by industry analysts. FFO does not take into consideration principal payments on debt, capital improvements, distributions and other obligations of PSI. Accordingly, FFO is not a substitute for PSI's net cash provided by operating activities or net income as a measure of PSI's liquidity or operating performance. An increase in PSI's FFO will not necessarily correspond with an increase in distributions to holders of PSI Common Stock. See "-- Liquidity, Marketability and Distributions." 8 SPI PSI SPI Shareholders who receive PSI Common Stock in the Merger will be changing their investment from holding an interest in an entity engaged solely in the ownership of mini-warehouses to holding an investment in a fully- integrated real estate company, specializing in all aspects of the mini- warehouse industry. The interest of PSI Shareholders can be diluted through the issuance of additional securities, including securities that would have priority over PSI Common Stock as to cash flow, distributions and liquidation proceeds. PSI has an effective registration statement for preferred stock, common stock and warrants and intends to issue additional securities under this registration statement. There is no assurance that any such securities will be issued. See "Risk Factors and Material Considerations -- Uncertainty Regarding Market Price of PSI Common Stock" and "-- Financing Risks -- Dilution and Subordination." BORROWING POLICIES Has not incurred borrowings in Has incurred borrowings in acquisition of properties, although furtherance of its investment not precluded by organizational objectives, subject to certain documents. limitations. PSI, unlike SPI, has incurred debt in the ordinary course of business and reinvests proceeds from borrowings. The incurrence of debt increases the risk of loss of investment. PROPERTIES (As of December 31, 1995) Six wholly owned properties, one Direct and indirect equity interests joint venture property interest and in 1,050 properties in 37 states. one parcel of vacant land in six states. Because PSI owns substantially more property interests in more states than SPI, PSI's results of operations are less affected by the operations of a single property than are those of SPI, and it would be more difficult to liquidate PSI than SPI within a reasonable period of time. LIQUIDITY, MARKETABILITY AND DISTRIBUTIONS SPI Common Stock is traded on the PSI Common Stock is traded on the AMEX. During the 12 months ended NYSE. During the 12 months ended December 31, 1995, the average daily December 31, 1995, the average daily trading volume of SPI Common Stock trading volume of PSI Common Stock was 3,051 shares. was 59,432 shares (52,913 shares if May 1995, during which PSI was engaged in a public offering of Common Stock, is excluded). PSI has issued, and may in the future issue, securities that have priority over PSI Common Stock as to cash flow, distributions and liquidation proceeds. Distributions may be declared by the boards of directors of SPI and PSI out of any funds legally available for that purpose. SPI and PSI are required to distribute at least 95% of their ordinary REIT taxable income in order to maintain their qualification as REITs. PSI distributes less than its cash available for distribution (recently distributing amounts approximately equal to its taxable income), permitting it to retain funds for additional investment and debt reduction. A SPI Shareholder who receives PSI Common Stock in the Merger should have an investment for which the market is broader and more active than the market for SPI Common Stock. Distributions on PSI Common Stock are subject, however, to priority of preferred stock. 9 SPI PSI ADDITIONAL ISSUANCES OF SECURITIES AND ANTI-TAKEOVER PROVISIONS Subject to the rules of the AMEX and Subject to the rules of the NYSE and applicable provisions of California applicable provisions of California law, SPI can issue authorized common law, PSI has issued and intends to and preferred stock without continue to issue authorized common shareholder approval. and preferred stock without shareholder approval. Given the ownership level of PSI Common Stock by the Hughes Family, PSI should be in a better position to deter attempts to obtain control in transactions not approved by PSI's Board of Directors than SPI, and PSI Shareholders could be less likely to benefit from a takeover not approved by PSI's Board of Directors than would SPI Shareholders in a similar circumstance. 10 SUMMARY FINANCIAL INFORMATION The financial data in this section should be read in conjunction with the financial statements and pro forma financial statements incorporated herein by reference. PSI - HISTORICAL
Years Ended December 31, ---------------------------------------------------------------------------- 1991 1992 1993 1994 1995 -------- -------- -------- -------- ------------------------ ($ In thousands, except per share data) Historical Proforma(1) ---------- ----------- OPERATING DATA: Total revenues $ 93,528 $ 97,448 $114,680 $147,196 $ 212,650 $ 268,076 Depreciation and amortization 21,773 22,405 24,998 28,274 40,760 53,727 Interest expense 10,621 9,834 6,079 6,893 8,508 15,930 Minority interest in income 6,693 6,895 7,291 9,481 7,137 6,992 Net income 11,954 15,123 28,036 42,118 70,386 108,443 BALANCE SHEET DATA (AT END OF PERIOD): Total cash and cash equivalents $ 6,439 $ 8,384 $ 10,532 $ 20,151 $ 80,436 $ 80,436 Total assets 548,220 537,724 666,133 820,309 1,937,461 1,937,461 Total debt 104,244 69,478 84,076 77,235 158,052 158,052 Shareholders' equity 188,113 253,669 376,066 587,786 1,634,503 1,634,503 PER SHARE OF COMMON STOCK: Net income $ .81 $ .90 $ .98 $ 1.05 $ .95 $ 1.05 Distributions(2) .82 .84 .84 .85 .88 .88 Book value (at end of period)(3) 12.75 12.02 11.93 12.66 13.99 13.99 Weighted average shares of Common Stock (in thousands) 14,751 15,981 17,558 24,077 41,171 71,736
11 SPI - HISTORICAL
Years Ended December 31, ----------------------------------------------- 1991 1992 1993 1994 1995 ------- ------- ------- ------- ------- ($ In thousands, except per share data) OPERATING DATA: Total revenues $ 3,653 $ 3,634 $ 3,447 $ 3,557 $ 3,746 Depreciation and amortization 102 108 341 612 777 Net income 3,070 3,097 2,373 1,765 1,310 BALANCE SHEET DATA (AT END OF PERIOD): Total cash and cash equivalents $ 400 $ 286 $ 2,280 $ 2,241 $ 3,608 Total assets 28,783 28,519 28,361 28,956 28,308 Total debt -- -- -- -- -- Shareholders' equity 27,898 27,647 27,710 27,433 27,002 PER SHARE OF COMMON STOCK: Net income $ .91 $ .92 $ .71 $ .53 $ .39 Distributions(4) 1.00 1.00 .69 .61 .52 Book value (at end of period) 8.31 8.25 8.28 8.19 8.06 Weighted average shares of common stock (in thousands) 3,358 3,348 3,348 3,348 3,348
_______________ (1) Historical information of PSI for 1995 has been restated to reflect the pro forma impact of the PSMI Merger which occurred November 16, 1995. The pro forma results presented are as if the PSMI Merger occurred on the first day of the period presented. (2) For federal income tax purposes distributions are from ordinary income. The distributions for generally accepted accounting principles ("GAAP") were from investment income. (3) Book value per share for PSI in 1995 is based on the number of shares of Common Stock and Class B Common Stock outstanding at December 31, 1995. (4) For federal income tax purposes, distributions for (a) 1991 consist of $.99 of ordinary income and $.01 of return of capital, (b) distributions for 1992 consisted of $.95 of ordinary income and $.05 of return of capital and (c) distributions for 1993, 1994 and 1995 are from ordinary income. Distributions through 1992 exceeded net income computed in accordance with GAAP. The distributions for GAAP purposes include a return of capital for 1991 of $.09 and for 1992 of $.08. All distributions for 1993, 1994 and 1995 were from investment income. Distributions for each year include distributions declared during the fourth quarter and paid in January. The difference between the components of distributions for GAAP purposes and tax purposes results primarily from the methods used to compute depreciation expense. 12 RELATIONSHIPS The following charts show the relationships among SPI, PSI and certain of their affiliates both before and after the Merger. SPI is advised by, and its properties are managed by, PSI, the principal shareholder of SPI, under the supervision of its Board of Directors. PSI is controlled by B. Wayne Hughes, the chairman of the board and chief executive officer of SPI and PSI. BEFORE THE MERGER [CHART OMITTED HERE] Description of Graphic Chart illustrating the affiliated relationships among SPI, PSI and certain affiliates before the Merger: BWH owns 51% of PSI and Public Shareholders own 49% of PSI; PSI (which is the Property Manager and Adviser of SPI) owns 9% of SPI and Public Shareholders own 91% of SPI. SOLID LINES INDICATE OWNERSHIP INTERESTS AND BROKEN LINES INDICATE OTHER RELATIONSHIPS. (See notes on succeeding page.) 13 AFTER THE MERGER (Assuming Maximum Cash Elections) [CHART OMITTED HERE] Description of Graphic Chart illustrating the affiliated relationships between PSI and certain affiliates after the Mergers: BWH owns 51% of PSI and Public Shareholders own 49% of PSI. BWH = B. Wayne Hughes. Mr. Hughes is the chairman of the board and chief executive officer of SPI and PSI SPI = Storage Properties, Inc. PSI = Public Storage, Inc. Mr. Hughes and members of his family own 51% of the PSI Common Stock (55% upon the conversion of PSI's Class B Common Stock). 14 RISK FACTORS AND MATERIAL CONSIDERATIONS The Merger involves the following factors which should be considered by SPI Shareholders, including the following: NO ARM'S LENGTH NEGOTIATION OR UNAFFILIATED REPRESENTATIVES The Merger has not been negotiated at arm's length, and PSI and its affiliates have significant relationships with SPI. No unaffiliated representatives were appointed to negotiate the terms of the Merger on behalf of SPI. If such persons had been engaged, the terms of the Merger might have been more favorable to the shareholders of SPI. CHANGE IN NATURE OF INVESTMENT The nature of the investment of SPI Shareholders who receive PSI Common Stock is being changed from holding an interest in an entity engaged solely in the ownership of mini-warehouses to holding an investment in a fully-integrated real estate company which is engaged in all aspects of the mini-warehouse industry, including property development and management. UNCERTAINTY REGARDING MARKET PRICE OF PSI COMMON STOCK The number of shares of PSI Common Stock that would be received by SPI Shareholders is based on the average market price of PSI Common Stock for the 20 consecutive trading days ending on the fifth trading day prior to the SPI Shareholders' meeting. Since the market price of PSI Common Stock fluctuates, the market value of PSI Common Stock that holders of SPI Common Stock may receive in the Merger may decrease following establishment of the number of shares. In addition, because of increased selling activity following issuance of shares in the Merger and other factors, the market value of PSI Common Stock that SPI Shareholders may receive in the Merger may decrease following the Merger. POTENTIAL LOSS OF FUTURE APPRECIATION The properties of SPI may continue to appreciate in value and might be able to be liquidated at a later date for more consideration than receivable in the Merger. LIMITATION ON DISSENTERS' RIGHTS OF APPRAISAL Under California law, SPI Shareholders will be entitled to Dissenters' Rights in connection with the Merger only if demands for payment are filed with respect to 5% or more of the outstanding shares of SPI Common Stock. See "Dissenting Shareholders Rights of Appraisal." LOWER LEVEL OF DISTRIBUTIONS TO SPI SHAREHOLDERS Depending on the market price of the PSI Common Stock during the period in which the number of shares to be issued in the Merger is established, the level of distributions to SPI Shareholders who receive PSI Common Stock in the Merger may be lower after the Merger than before. Based on a market price of PSI Common Stock of $21 and the current regular quarterly distribution rate for PSI ($.22 per share) and SPI ($.08 per share), SPI Shareholders would receive approximately $.003 (4.3%) less in regular quarterly distributions per share of SPI Common Stock after the Merger from PSI than before the Merger from SPI and approximately $.001 less per share in regular quarterly distributions for each $.25 (1.2%) increase in the market price of PSI Common Stock above $21. 15 CONTROL AND INFLUENCE BY THE HUGHES FAMILY The Hughes Family owns approximately 51% of the outstanding shares of PSI Common Stock (approximately 55% upon conversion of PSI's Class B Common Stock). Consequently, the Hughes Family controls matters submitted to a vote of PSI Shareholders, including the election of directors, amendment of PSI's Articles of Incorporation, dissolution and the approval of other extraordinary transactions. OWNERSHIP LIMITATIONS Public shareholders are further limited in their ability to change control of PSI due to restrictions in the PSI Articles of Incorporation and Bylaws on beneficial ownership. Unless such limitations are waived by PSI's Board of Directors, no shareholder may own more than (A) 2.0% of the outstanding shares of all common stock of PSI or (B) 9.9% of the outstanding shares of each class or series of shares of preferred stock of PSI. The PSI Articles of Incorporation and Bylaws provide, however, that no person shall be deemed to exceed the ownership limit solely by reason of the beneficial ownership of shares of any class of stock to the extent that such shares of stock were beneficially owned by such person at the time of the PSMI Merger, which includes the PSI Common Stock owned by the Hughes Family at the time of the PSMI Merger. 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 PSI 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 PSI Board of Directors has not approved even if a majority of the public shareholders of PSI 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 PSI Capital Stock -- Ownership Limitations." TAX RISKS Increased Risk of Violation of Gross Income Requirements. As a result of the PSMI Merger, PSI 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 PSI ("Nonqualifying Income"). In 1996 and future years, if PSI's Nonqualifying Income were to exceed 5% of its total gross income, PSI's REIT status may terminate for that year and future years unless PSI meets certain "reasonable cause" standards. Even if PSI meets such standards, however, it would be subject to a 100% excise tax on any excess Nonqualifying Income. Increased Risk of Violation of Ownership Requirements. For PSI 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. Following the PSMI Merger, the value of the outstanding capital stock of PSI held by the Hughes Family was estimated at approximately 45%. Accordingly, no four individuals other than the Hughes Family could own directly or constructively, in the aggregate, more than 5% of the value of outstanding capital stock of PSI. In order to assist PSI in meeting these ownership restrictions, the PSI Articles of Incorporation and Bylaws contain the ownership limitations described under "Description of PSI Capital Stock -- Ownership Limitations." However, even with these ownership limitations, there still could be a 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 PSI Articles of Incorporation and Bylaws. Therefore, to further assist PSI in meeting the ownership restrictions, the Hughes Family has entered into an agreement with PSI restricting the Hughes Family's acquisition of additional shares of capital stock of PSI 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 PSI Common Stock owned by Hughes necessary to prevent such violation will automatically and irrevocably be transferred to a designated charitable beneficiary. The provisions in the PSI Articles of Incorporation and Bylaws and the agreement with 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. 16 There can be no assurance, however, that the IRS might not seek to take a different position with respect to PSI (a private letter ruling is legally binding only with respect to the taxpayer to whom it was issued) or contend that PSI failed to enforce these various arrangements and, hence, there can be no absolute assurance that these arrangements will necessarily preserve PSI's REIT status. No private letter ruling has been sought by PSI from the IRS on the effect of these arrangements. Elimination of Any Accumulated Earnings and Profits. Any accumulated earnings and profits of PSMI carried over to PSI in the PSMI Merger. To retain its REIT status, PSI would have had to distribute any acquired earnings and profits on or before December 31, 1995. As a condition to the PSMI Merger, PSI obtained from PSMI a study of the earnings and profits that showed that PSMI had no earnings and profits at the time of the PSMI Merger. The determination of earnings and profits depends upon a number of factual matters related to the activities and operation of PSMI and its predecessors in years prior to the PSMI 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 PSMI Merger, PSI may lose its REIT qualification for 1995 and, perhaps, for subsequent years unless certain relief provisions apply. See "Certain Federal Income Tax Considerations -- Consequences of the Merger on PSI's Qualification as a REIT -- Elimination of any Accumulated Earnings and Profits Attributable to Non-REIT Years." Consequences of Failure to Quality as a REIT. For any taxable year that PSI fails to qualify as a REIT and the relief provisions do not apply, PSI 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 PSI for distribution to its shareholders or for reinvestment. As a result, failure of PSI to qualify during any taxable year as a REIT could have a material adverse effect upon PSI and its shareholders. Furthermore, unless certain relief provisions apply, PSI would not be eligible to elect REIT status again until the fifth taxable year that begins after the first year for which PSI fails to qualify. Corporate Level Tax on Sale of Certain Built-in Gain Assets. PSI will be subject to a corporate level tax if it disposes of any of the assets acquired in the PSMI Merger at any time during the 10-year period beginning at the time of the PSMI 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 PSMI Merger of the assets disposed of and (b) the selling price of such assets over (ii) PSI's adjusted basis at the time of the PSMI Merger in such assets (such excess being referred to as the "Built-in Gain"). PSI currently does not intend to dispose of any of the assets acquired in the PSMI Merger during the Restriction Period, but there can be no assurance that one or more such dispositions will not occur. FINANCING RISKS Dilution and Subordination. The interest of PSI Shareholders, including persons who receive shares in the Merger, can be diluted through the issuance of additional securities. Since October 1992, PSI has issued shares of preferred stock in public offerings and intends to issue additional such shares. These issuances could involve certain risks to holders of shares of PSI Common Stock, including shares of PSI Common Stock to be issued in the Merger. In the event of a liquidation of PSI, the holders of the preferred stock will be entitled to receive, before any distribution of assets to holders of PSI Common Stock, liquidating distributions (an aggregate of approximately $770 million 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 PSI Board of Directors, cash dividends (an aggregate of approximately $72 million per year in respect of preferred stock issued to date), in preference to holders of PSI Common Stock. As a REIT, PSI must distribute at least 95% of its taxable income to its shareholders (which include not only holders of PSI Common Stock but also holders of preferred stock). Failure to pay full dividends on the preferred stock could jeopardize PSI's qualification as a REIT. See "Certain Federal Income Tax Matters." 17 Certain of these securities have been issued under a currently effective registration statement of PSI for preferred stock, common stock and warrants. PSI intends to issue additional securities under this registration statement. There is no assurance that any such securities will be issued. Risk of Leverage. In making real estate investments, PSI, unlike SPI, has incurred, and may continue to incur, debt, subject to certain limitations. The incurrence of debt increases the risk of loss of the investment. At December 31, 1995, PSI's debt as a percentage of its total capitalization was approximately 9%. MERGER CONSIDERATION BASED ON APPRAISALS INSTEAD OF ARM'S LENGTH NEGOTIATION The consideration to be received by SPI Shareholders is based on a third party appraisal of the portfolio of real property assets valuing the real property assets of SPI at $23,500,000. However, appraisals are opinions as of the date specified and are subject to certain assumptions and may not represent the true worth or realizable value of these properties. There can be no assurance that if these properties were sold, they would be sold at the appraised values; the sales price might be higher or lower. TAX TO SPI SHAREHOLDERS SPI Shareholders who receive cash in connection with the Merger in exchange for their SPI Common Stock will recognize taxable gain (loss) to the extent that the amount of cash received exceeds (is less than) the adjusted basis of such shareholder in his or her SPI Common Stock. A SPI Shareholder receiving a combination of cash and PSI Common Stock in the Merger in exchange for his or her SPI Common Stock will recognize taxable gain equal to the lesser of the amount of the cash received or the difference between his or her adjusted basis in his or her SPI Common Stock and the sum of (1) the fair market value of the PSI Common Stock received and (2) the amount of cash received, but only to the extent of the cash received. The Required REIT Distributions will be taxable to all SPI Shareholders as ordinary income. OPERATING RISKS General Risks of Real Estate Ownership. Like SPI, PSI is subject to the risks generally incident to the ownership of real estate-related assets, including lack of demand for rental spaces or units in a locale, changes in general economic or local conditions, changes in supply of or demand for similar or competing facilities in an area, the impact of environmental protection laws, changes in interest rates and availability of permanent mortgage funds which may render the sale or financing of a property difficult or unattractive and changes in tax, real estate and zoning laws. Significant Competition Among Mini-Warehouses. Like SPI, most of PSI's properties are mini-warehouses. Competition in the market areas in which many of their properties are located is significant and has affected the occupancy levels, rental rates and operating expenses of certain of their properties. 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 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. 18 PSI 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, PSI's operations and recent property acquisitions, PSI 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. PSI 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, PSI believes it has funds available to cover any liability from environmental contamination or potential contamination and PSI 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 PSI. PSI 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. PSI 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 PSI 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 PSI, the insurance premiums would be Nonqualifying Income to PSI. PSI would be precluded from exercising its right of first refusal with respect to the stock of the reinsurance corporation if such exercise would cause PSI 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. PSI 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 PSI 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 PSMI Merger, Public Storage Commercial Properties Group, Inc. ("PSCP"), a subsidiary of PSMI, managed commercial properties for PSI and others. Because certain of the revenues generated by PSCP would be Nonqualifying Income to PSI, prior to the PSMI 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 PSI acquired the preferred stock of PSCP in the PSMI Merger, the Hughes Family is able to continue to control the operations of PSCP by reason of its ownership of PSCP's voting stock. Merchandise Company. Prior to the PSMI Merger, PSMI sold locks, boxes and tape at certain mini-warehouse locations. Because the revenues received from the sale of these items would be Nonqualifying Income to PSI, immediately prior to the PSMI Merger, PSMI transferred this lock and box business to a separate corporation (the "Lock/Box Company"). In the PSMI Merger, PSI acquired the 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 PSMI Merger, PSI may be subject to certain liabilities and associated costs in its capacity as general partner of former PSMI limited partnerships arising out of facts and circumstances in existence prior to such merger, and PSI will also have general partner liability for post-merger activities of these partnerships, as it does for other partnerships for which it is a general partner. Subject to certain limitations, Hughes has agreed 19 to indemnify PSI for pre-merger activities and place in escrow shares of PSI Class B Common Stock received in the PSMI Merger to support such indemnification. SHARES ELIGIBLE FOR FUTURE SALE Future sales of substantial amounts of PSI Common Stock in the public market could adversely affect prevailing market prices. There are approximately 73 million shares of PSI Common Stock and seven million shares of Class B Common Stock outstanding. Of these shares, approximately 37.2 million shares of PSI Common Stock are tradeable without restriction (except as to affiliates of PSI) or further registration under the Securities Act. The remaining approximately 35.8 million shares of PSI Common Stock and seven million shares of Class B Common Stock were issued in the PSMI 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 (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 PSMI Merger, in the case of the PSI Common Stock, or for seven years following the PSMI 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 27.3 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 PSI Common Stock in the public market could adversely affect the market price of the PSI Common Stock. CONFLICTS OF INTEREST IN THE MERGER PSI and its affiliates have conflicts of interest in connection with the Merger. PSI owns approximately 9% of the SPI Common Stock. See "Summary -- Relationships." The Merger has been initiated and structured by individuals who are executive officers of PSI and SPI, and the Merger has not been negotiated at arm's length. No independent representatives have been retained to negotiate the terms of the Merger on behalf of SPI. If such representatives had been retained, the terms of the Merger might have been more favorable to SPI Shareholders. Although independent representatives were not retained by SPI, it has created a special committee comprised of independent directors, which has engaged an independent financial advisor, to evaluate the Merger. The Special Committee has reviewed the terms of the Merger and recommends that the SPI Shareholders vote for the Merger. Based upon the use of an independent appraisal firm to determine the value of consideration to be paid to SPI Shareholders, the fairness opinions and the participation of the SPI Special Committee, the SPI Board of Directors considered that the engagement of independent representatives to negotiate the terms of the Merger was not necessary or cost effective. 20 THE MERGER GENERAL As a result of the Merger, the separate existence of SPI would cease. Upon consummation of the Merger, each outstanding share of SPI Common Stock (other than Dissenting Shares) would be converted into the right to receive cash, PSI Common Stock or a combination of the two, as follows: (i) with respect to a certain number of shares of SPI Common Stock (not to exceed 20% of the outstanding SPI Common Stock, or 669,633 shares, less any Dissenting Shares), upon a Cash Election, $7.31 in cash, subject to reduction as described below, or (ii) that number of shares of PSI Common Stock (subject to rounding) determined by dividing $7.31, subject to reduction as described below, by the average of the per share closing prices on the NYSE of PSI Common Stock during the 20 consecutive trading days ending on the fifth trading day prior to the special meeting of the SPI Shareholders. If a SPI Shareholder does not make a Cash Election, all of his or her SPI Common Stock would be converted into PSI Common Stock in the Merger. The consideration paid to SPI Shareholders by PSI in the Merger will be reduced on a pro rata basis by the Required REIT Distributions (estimated to be approximately $.20 per share). The consideration received by SPI Shareholders in the Merger, however, along with any Required REIT Distributions, will not be less than $7.31 per share of SPI Common Stock, which amount represents the market value of SPI's real estate assets at February 29, 1996 (based on an independent appraisal) and the estimated net asset value of its other assets at June 30, 1996. SPI Shareholders would receive the Required REIT Distributions upon any liquidation of SPI, regardless of the Merger. Additional pre-merger cash distributions would be made to the SPI Shareholders to cause SPI's estimated net asset value as of the date of the Merger to be substantially equivalent to its estimated net asset value as of June 30, 1996. The SPI Common Stock held by PSI will be cancelled in the Merger. It is estimated that the aggregate consideration (cash and PSI Common Stock) to be paid by PSI to purchase all of the SPI Common Stock in the Merger and to pay related costs and expenses would be $25,240,000 (assuming no Required REIT Distributions) and that the total amount of cash that would be required by PSI to purchase the SPI Common Stock from SPI Shareholders making Cash Elections and to pay the costs and expenses of the Merger would be $5,660,000 (assuming maximum Cash Elections). See "-- Determination of Payments to be Received by SPI Shareholders in Connection with the Merger" and "-- Costs of the Merger." These amounts would be reduced to the extent SPI must pay a Required REIT Distribution. BACKGROUND GENERAL. THE MERGER HAS BEEN INITIATED AND STRUCTURED BY INDIVIDUALS WHO ARE EXECUTIVE OFFICERS OF BOTH PSI AND SPI. THE SPI SPECIAL COMMITTEE, COMPOSED OF INDEPENDENT DIRECTORS OF SPI, HAS REVIEWED THE TERMS OF THE MERGER, AND THE SPI BOARD OF DIRECTORS, BASED ON RECOMMENDATIONS OF THE SPI SPECIAL COMMITTEE, WHICH THE SPI BOARD OF DIRECTORS HAS ADOPTED, AND ON THE OPINION OF A FINANCIAL ADVISOR IN WHICH IT CONCURS, BELIEVES THAT THE MERGER IS FAIR TO THE PUBLIC SHAREHOLDERS OF SPI, AND RECOMMENDS THAT SPI SHAREHOLDERS VOTE FOR THE MERGER. SPI was organized in 1989 to make investments in mini-warehouses. PSI, which was organized in 1980, has from time to time taken actions to increase its asset and capital base and increase diversification. Between September 1994 and March 1996, PSI merged with five REITs, which like SPI had been affiliated with PSI. SPI BOARD ACTIONS. The SPI Board of Directors consists of five members: two executive officers of PSI, one other director of PSI and two independent directors, Vern O. Curtis and Jack D. Steele. At a telephonic meeting on January 30, 1996 of the SPI Board of Directors, which included officers and in-house counsel, the SPI Board of Directors appointed a special committee of independent directors, consisting of Vern O. Curtis and Jack D. Steele, to consider and make recommendations to the Board of Directors regarding a proposed merger of SPI into PSI. Mr. Curtis and Mr. Steele were the members of the special committees that considered the mergers of five other REITs into PSI between September 1994 and March 1996. Following the board meeting, the SPI Special Committee held an organizational meeting by telephone, which included officers, and discussed the qualifications of Stanger and Wilson. Following the discussion, the SPI Special Committee approved Wilson, on behalf 21 of SPI and PSI, to appraise the properties of SPI, determined to engage Hogan & Hartson L.L.P. as special counsel to represent and advise the SPI Special Committee as to its legal obligations in making recommendations regarding the proposed merger with PSI and approved the engagement of Stanger to render an opinion as to the fairness, from a financial point of view, of the consideration to be received by SPI Shareholders in the Merger. Wilson, Hogan & Hartson L.L.P. and Stanger had acted in similar capacities in connection with the mergers of five other REITs into PSI. On February 27, 1996, the SPI Special Committee held a meeting, which included officers of SPI, and discussed the portfolio appraisal of SPI's properties, the projected liquidation value of SPI and the payment to PSI under the Advisory Agreement. During the discussion it was noted that the amount payable to PSI under the Advisory Agreement was less than the amount to which PSI would be entitled upon the termination of the Advisory Agreement by either SPI and PSI and that either party is now entitled to terminate the Advisory Agreement at any time. On March 19, 1996, the SPI Special Committee held a meeting, which included officers of SPI. Representatives of Stanger and Wilson participated by telephone for a portion of the meeting. First, an officer of SPI described the mechanics of arriving at the value per share of SPI Common Stock. He noted that a disposition of SPI's properties in the Merger results in $2,270,000 being payable to PSI under the Advisory Contract and this results in a reduction in the number of shares of PSI Common Stock being issued in the Merger. The officer of SPI contrasted this amount with the termination fee of $3,903,900 that PSI could have elected to receive under the Advisory Contract. Next, a representative of Wilson described briefly the methodologies used in appraising SPI's properties. He noted that increased liquidity in the market for mini- warehouses generally had increased recent sales prices. He also noted that two of SPI's properties were located in distressed areas, that one of the properties was on leased land, which tends to reduce the overall value of SPI's properties and that the portfolio included a parcel of vacant land. The Stanger representatives presented Stanger's analysis, which included the following items: (1) they briefly reviewed Stanger's recent experience relating to mini- warehouses; (2) they noted that Stanger had performed a similar analysis in connection with prior mergers of REITs into PSI, including a review of the portfolio appraisals prepared by Wilson; (3) they noted that Stanger reviewed the appraisal methodologies utilized; (4) they noted that Stanger reviewed the capitalization rates utilized in the portfolio appraisals, which appeared to be approximately 9.6% (9.2% excluding the property on leased land), based on net operating income generated for the 12 months prior to the appraisal date; (5) they noted that Stanger reviewed the capitalization rates on PSI transactions during the prior 12 months, reviewed capitalization rates currently cited by industry sources for mini-warehouse transactions, and concluded that, subject to receipt of additional information from Wilson, the capitalization rates used in Wilson's appraisal were consistent with transactions in the market; (6) they noted that Stanger reviewed a liquidation analysis, including assumptions (liquidation of SPI's properties on a property-by-property basis) prepared by SPI based on certain information provided by Wilson and that, subject to final verification, the projected consideration per share resulting from liquidation under that analysis appeared to be less than the consideration offered in the Merger; (7) they noted that Stanger reviewed a going concern analysis and that, subject to final verification, the estimated value per share on a going concern basis appeared to be lower than the consideration offered in the Merger; and (8) they indicated that, while they had not completed their review, at this time they believed that Stanger would be prepared to render its opinion that the consideration to be received in the Merger is fair to the public shareholders of SPI from a financial point of view. Following the discussion, the SPI Special Committee expressed the belief that the Merger is fair to, and in the best interests of, public shareholders of SPI and determined to recommend to the Board that the Merger be approved and to recommend that SPI Shareholders vote for the Merger. Following the meeting of the SPI Special Committee, the SPI Board of Directors held a telephonic meeting to consider the Merger. Also present were officers of SPI. The members of the SPI Special Committee reported on the meeting with representatives of Stanger and Wilson. An officer of SPI described the mechanics of arriving at the value per share of SPI Common Stock. The Board discussed the Advisory Contract and SPI's portfolio of properties. Based on recommendations of the SPI Special Committee, which were adopted by the SPI Board of Directors, the SPI Board of Directors expressed the belief that the Merger is fair to, and in the best interests of, public shareholders of SPI, approved the Merger, determined to recommend that SPI Shareholders vote for the Merger and approved the filing with the Commission of preliminary proxy materials. See "-- Comparison of Consideration to be Received in the Merger to Other Alternatives." 22 PUBLIC ANNOUNCEMENT OF THE MERGER AND COMMISSION FILINGS. On March 4, 1996, PSI and SPI publicly announced the general terms of the Merger. On March 29, 1996, SPI filed preliminary proxy materials with the Commission. On _______________, 1996, PSI filed a registration statement, which was declared effective on _______________, 1996. REASONS FOR THE MERGER AND TIMING The reasons for the decision of the SPI Special Committee and SPI Board of Directors to recommend the Merger include: . The Merger provides SPI Shareholders with the choice of either (A) converting their investment in SPI into an investment in PSI, which generally owns the same type of properties as SPI, on a tax-free basis (assuming the Merger is a tax-free reorganization) and which has, and intends to continue, to acquire additional properties or (B) with respect to up to 20% of the outstanding SPI Common Stock (less any Dissenting Shares), receiving in cash the amounts they would receive if the properties of SPI were sold at their appraised values and the corporation were liquidated (without any reduction for real estate commissions and other sales expenses). See "-- Recommendation to SPI Shareholders and Fairness Analysis." . The SPI Special Committee and SPI Board of Directors believe that the Merger is more advantageous to SPI Shareholders than any of the alternatives. See "-- Alternatives to Merger" and "-- Recommendation to SPI Shareholders and Fairness Analysis." . PSI has agreed to merge with SPI at this time, subject to approval by SPI Shareholders and certain other conditions. See "-- The Merger Agreement -- Conditions to Consummation of the Merger." ALTERNATIVES TO THE MERGER The following is a brief discussion of the benefits and disadvantages of alternatives to the Merger that could have been pursued by the SPI Board of Directors. LIQUIDATION BENEFITS OF LIQUIDATION. An alternative to the Merger would be to liquidate the assets of SPI, distribute the net liquidation proceeds to its shareholders in proportion to their share ownership and thereafter dissolve SPI. Through such liquidation, SPI would provide for a final wrapping up of their shareholders' interests in the corporation. SPI Shareholders would receive cash liquidation proceeds (as they will as to a portion of their investment if they make Cash Elections). If SPI liquidated its assets through asset sales to unaffiliated third parties, its shareholders would not need to rely upon a real estate portfolio appraisal of the fair market value of its real estate assets. Such assets would be valued through arm's length negotiations between SPI and prospective purchasers. DISADVANTAGES OF LIQUIDATION. Various conditions in the financial and real estate markets have had a materially adverse impact upon the value of commercial real estate. These conditions have included, among others, the following: (i) the increased construction of mini-warehouses and business parks from 1984 to 1988, which has increased competition, (ii) the general deterioration of the real estate market (resulting from a variety of factors, including the 1986 changes in tax laws), which has significantly affected property values and decreased real estate sales activities, (iii) the reduced sources of real estate financing (resulting from a variety of factors, including adverse developments in the savings and loan industry) and (iv) the glut in the real estate market caused by overbuilding and sales of properties acquired by financial institutions. Although conditions have improved, these developments have resulted in a reduced market for the sale and financing of commercial real estate, making this, in the view of the board of directors and special committee of SPI, a less than optimal time to liquidate the real estate assets of SPI. The proceeds available for reinvestment after liquidation would be reduced as a result of real estate commissions and other sales expenses (estimated at $.37 per share of SPI Common Stock). 23 SPI Shareholders should recognize that appraisals are opinions as of the date specified and are subject to certain assumptions and may not represent the true worth or realizable value of these properties. There can be no assurance that if these properties were sold, they would be sold at the appraised values; the sales prices might be higher or lower than the appraised values. LIQUIDATION PROCEDURES. As with a merger, a liquidation of SPI would require approval by the holders of a majority of outstanding common stock. Upon the dissolution of SPI, its properties would be sold and any funds remaining after payment of debts, and liabilities would be distributed to shareholders in respect of their shares. As a holder of approximately 9% of the shares of SPI Common Stock, PSI would receive approximately 9% of the available funds in the liquidation (in addition to amounts it would receive in connection with the Advisory Agreement). The process for liquidating the assets of SPI would in large measure be within the control of the SPI Board of Directors. Liquidation may be accomplished through a series of separate transactions with different purchasers or as a part of a multi-property transaction. The SPI Board of Directors may engage real estate brokers, investment bankers, financial consultants and others to assist with the disposition of the corporation's assets. These persons may assist with the identification of prospective purchasers, arrangements for asset financing, and assistance with the structure of the transaction. The SPI Board of Directors, as fiduciaries to SPI Shareholders, remains responsible for determining the terms and conditions of the transaction. One of the more significant considerations for the SPI Board of Directors would be the decision whether to insist upon payment in full upon sale of a property or to accept a portion of the sale price at closing and the balance through installment payments. Acceptance of a sale proposal providing for deferred payments would extend the life of the corporation until receipt of those amounts by the corporation and their distribution to the shareholders. Such arrangements would also expose the corporation to the risk that deferred payments might not be collected in full and that the corporation might be forced to foreclose on any collateral given to secure payment of the deferred obligations. It is not possible to predict the time period that would be required to liquidate SPI because it would depend on market conditions at the time of liquidation. CONTINUED OPERATION OF SPI BENEFITS OF CONTINUATION. Another alternative to the Merger would be to continue SPI in accordance with its existing business plan, with SPI remaining as a separate legal entity and with its own assets and liabilities. Nothing requires the liquidation or merger of SPI at this time, and SPI is operating profitably and does not need to liquidate or reorganize to satisfy debt obligations or other current liabilities or to avert defaults, foreclosures or other adverse business developments. There has been improvement in the mini-warehouse markets. As the pace of new mini-warehouse development has slowed from the 1984-1988 levels, there has been a corresponding improvement in the financial performance of existing properties. This improvement is evidenced by the performance of SPI's mini- warehouses. For example, from 1992 to 1995, occupancy per square foot increased from an average of 76% to 91%, and realized monthly rents from an average of $.71 per square foot to $.88 per square foot (assuming all facilities had been owned by SPI for all periods). Assuming that there is no substantial new development of mini-warehouses in the foreseeable future, the SPI Board of Directors anticipates that the financial performance from existing facilities may continue to improve, although not necessarily at the rate of improvement experienced in prior years. Should such improvements continue, the value of SPI's properties would be expected to increase. See "Description of SPI's Properties." A number of advantages are expected to arise from the continued operation of SPI. SPI Shareholders should continue to receive regular quarterly distributions of net cash flow arising from operations and the sale or refinancing of SPI's assets. Given the currently improving market conditions for mini-warehouses, the SPI Board of Directors and the SPI Special Committee believe that the level of these distributions to SPI may improve. Continuing SPI affords SPI Shareholders with the opportunity to participate in any future appreciation in SPI's properties. In addition, the decision to continue SPI, if selected, means that there would be no change in the nature of SPI's Shareholders' investment. This option avoids whatever disadvantages might be deemed inherent in the Merger. See "Risk Factors and Material Considerations" for discussion of various risks associated with the Merger. 24 There are no restrictions in SPI's organizational documents on the investment of cash flow and issuance of securities by SPI, and SPI is not precluded from taking advantage of new real estate opportunities through the reinvestment of cash flow and the investment of proceeds from the issuance of securities. The SPI Board of Directors and the SPI Special Committee believe that SPI Shareholders could better take advantage through PSI than through SPI of the current market for REIT securities for the following reasons. First, PSI has a larger capital base. At December 31, 1995, SPI had total shareholders' equity of $27,002,000 compared with PSI's total shareholders' equity of $1,634,503,000 (including preferred stock) and $1,098,383,000 (without preferred stock). Second, the market for PSI Common Stock should be more liquid than the market for common stock of SPI. During the 12 months ended December 31, 1995, the average daily trading volume of SPI Common Stock on the AMEX was 3,051. In comparison, during the 12 months ended December 31, 1995, the average daily trading volume of PSI Common Stock on the NYSE was 59,432 shares (52,913 shares if May 1995, during which PSI was engaged in a public offering of common stock, is excluded). Third, PSI has broader geographic diversification than SPI. At December 31, 1995, SPI owned seven properties and one parcel of vacant land in six states and PSI owned equity interests (directly, as well as through general and limited partnership interests and stock interests) in 1,050 properties in 37 states. For additional information on the properties owned by SPI and PSI, see "-- Comparison of SPI Common Stock with PSI Common Stock," "Description of SPI's Properties" and "Description of PSI's Properties." NO SOLICITATION OF OTHER PROPOSALS Neither the SPI Board of Directors nor the SPI Special Committee solicited any other proposal for the acquisition of SPI or its properties. The SPI Board of Directors agreed to the Merger Agreement, which includes a provision against soliciting other offers to buy, because it believes that the potential advantages to SPI Shareholders described under "-- Potential Advantages of the Merger" are more likely to be achieved through the Merger than in a transaction with another party. In particular, assuming the Merger qualifies as a tax-free reorganization, no taxable gain or loss will be recognized by SPI Shareholders who exchange their SPI Common Stock solely for PSI Common Stock. The Required REIT Distributions generally will be taxable to all SPI Shareholders as ordinary income to the extent of the corporation's earnings and profits. The proceeds available for reinvestment after liquidation would be reduced as a result of real estate commissions and other sales expenses (estimated at $.37 per share of SPI Common Stock). However, another proposal could have been for a higher price and possibly also structured as a merger qualifying as a tax-free reorganization. Under California law, most acquisitions of SPI or its properties would require approval by SPI Shareholders. PSI owns approximately 9% of the SPI Common Stock. DETERMINATION OF PAYMENTS TO BE RECEIVED BY SPI SHAREHOLDERS IN CONNECTION WITH THE MERGER In connection with the Merger, SPI Shareholders will receive a value of $7.31 (less the amount of any Required REIT Distributions) per share of SPI Common Stock in cash, PSI Common Stock, or a combination of the two, calculated as follows: 1. The market value (not book value) of SPI's real estate assets has been determined by Wilson, showing such values as of February 29, 1996. In valuing SPI's real estate assets, Wilson considered the applicability of all three commonly recognized approaches to valuation: the cost approach, the income approach and the sales comparison approach. Wilson did not consider the cost approach (except with respect to the vacant land) to be applicable to SPI's properties. Wilson reconciled the values indicated from the sales comparison and income approaches to arrive at a final valuation conclusion. Wilson gave primary emphasis to the income approach. The resulting effective implied capitalization rate for SPI's portfolio of operating real estate assets based on property operations (before non-recurring charges) for the 12 months ended February 29, 1996 averaged 9.66% (9.20% if the leasehold interest is excluded). Wilson's valuation is as of February 29, 1996 in the context of the information available on that date. See "-- Real Estate Portfolio Appraisals by Wilson." 2. SPI's net asset value has been computed as (a) the market value of SPI's real estate assets as of February 29, 1996 ($23,500,000) plus (b) the estimated book value of SPI's non-real estate assets as of June 30, 1996 (a total of $3,620,000) less (c) SPI's estimated liabilities as of June 30, 1996 (a total of $369,000) less (d) the estimated amount payable to PSI under the Advisory Agreement ($2,270,000). 25 3. SPI's net asset value per share of SPI Common Stock was calculated at $7.31 by dividing SPI's net asset value (as computed in 2 above, $24,481,000) by the number of outstanding shares of SPI Common Stock (3,348,167). 4. Upon completion of the Merger, each share of SPI Common Stock (other than Dissenting Shares) would be converted into the right to receive $7.31 in cash (with respect to up to 20% of the outstanding SPI Common Stock, less any Dissenting Shares), subject to reduction as described below, or that number of shares of PSI Common Stock determined by dividing $7.31, subject to reduction as described below, by the average of the closing prices on the NYSE of PSI Common Stock during the 20 consecutive trading days ending on the fifth trading day prior to the meeting of SPI Shareholders. Pre-merger cash distributions would be made to SPI Shareholders to cause SPI's estimated net asset value as of the date of the Merger to be substantially equivalent to its estimated net asset value as of June 30, 1996. The consideration paid by PSI to SPI Shareholders in the Merger will be reduced on a pro rata basis by the amount of any Required REIT Distributions. However, the consideration received by SPI Shareholders in the Merger along with the Required REIT Distributions (which will be paid in cash) will not be less than $7.31. The following tables set forth the calculation of the payments to be paid to SPI Shareholders: COMPUTATION OF PAYMENTS
Net book Appraised Book value SPI's SPI's net Payments value of market of SPI's net asset asset value received in SPI's real value of other net value(1)(3) per share connection with estate SPI's assets(1)(3) of SPI the Merger per portfolio(1) real estate Common original $1,000 portfolio(2) Stock(1) investment in SPI(4) - ---------------------------------------------------------------------------------------------------------- $24,187,000 $23,500,000 $981,000 $24,481,000 $7.31 $731
_______________ (1) Estimated as of June 30, 1996. Does not reflect the effect of Required REIT Distributions, estimated to be approximately $.20 per share or $670,000 in the aggregate. SPI Shareholders would receive the Required REIT Distributions upon any liquidation of SPI, regardless of the Merger. (2) As of February 29, 1996. (3) Reflects estimated amount payable to PSI under the Advisory Agreement ($2,270,000). PSI would be entitled to receive $3,905,800 upon termination of the Advisory Agreement by either SPI or PSI. (4) Does not include quarterly cash distributions to SPI Shareholders. The market price of PSI Common Stock may fluctuate following establishment of the number of shares to be issued to SPI Shareholders in the Merger and prior to issuance and could decrease as a result of increased selling activity following issuance of shares in the Merger and other factors. 26 POTENTIAL ADVANTAGES OF THE MERGER TO SPI The principal potential benefits to SPI Shareholders who receive PSI Common Stock include the following: ACQUISITION OF ADDITIONAL PROPERTIES. The primary business activity of SPI is operating the properties originally acquired. SPI has not raised additional capital, although not precluded by its articles of incorporation and bylaws. PSI, on the other hand, has expanded, and is expected to continue to expand, its asset and capital base. PSI also borrows money to fund new acquisitions. Accordingly, SPI Shareholders who receive PSI Common Stock in the Merger will be investors in an entity that has grown, and is expected to continue to grow, as new investments are made. INCREASED LIQUIDITY. During the 12 months ended December 31, 1995, the average daily trading volume of SPI Common Stock on the AMEX was 3,051 shares. In comparison, during the 12 months ended December 31, 1995, the average daily trading volume of PSI Common Stock on the NYSE was 59,432 shares (52,913 shares if May 1995, during which PSI was engaged in a public offering of common stock, is excluded). Accordingly, the investment in PSI of SPI Shareholders who receive PSI Common Stock in the Merger should have greater liquidity than their current investment in SPI. POSSIBLE TAX-FREE TREATMENT. The Merger is intended to qualify as a tax- free reorganization. Assuming such qualification, no taxable gain or loss will be recognized in connection with the Merger by SPI Shareholders who exchange their SPI Common Stock solely for PSI Common Stock. However, the Required REIT Distributions will be taxable to all SPI Shareholders as ordinary income. See "Certain Federal Income Tax Matters -- The Merger." RECOMMENDATION TO SPI SHAREHOLDERS AND FAIRNESS ANALYSIS CONCLUSIONS. Based upon an analysis of the Merger, the SPI Special Committee and SPI Board of Directors have concluded (i) that the terms of the Merger are fair to SPI Shareholders, (ii) after comparing the potential benefits and detriments of the Merger with alternatives, that the Merger is more advantageous to SPI Shareholders than such alternatives and (iii) that SPI Shareholders should vote for the Merger. Although the SPI Board of Directors and SPI Special Committee reasonably believe the terms of the Merger are fair to SPI Shareholders and recommend that SPI Shareholders vote for the Merger, affiliates of PSI are members of the SPI Board of Directors, and PSI has other significant relationships with SPI and conflicts of interest with respect to the Merger. The Merger has been initiated and structured by individuals who are executive officers of SPI and who are also affiliated with PSI. The SPI Special Committee, composed of independent directors, has reviewed and approved the terms of the Merger. See "Summary -- Relationships" and "Conflicts of Interest." MATERIAL FACTORS UNDERLYING CONCLUSIONS OF SPECIAL COMMITTEE AND BOARD OF DIRECTORS OF SPI. The following is a discussion of the material factors underlying the conclusions of the SPI Special Committee and SPI Board of Directors. The SPI Board of Directors and SPI Special Committee have not quantified the relative importance of these factors. 1. Consideration Offered. The SPI Board of Directors and SPI Special Committee believe that (i) the proposal that the consideration to be paid to SPI Shareholders in the Merger be based on the value of the assets of SPI is reasonable, (ii) the net asset value of SPI represents a fair estimate of the value of its assets, net of liabilities, and constitutes a reasonable basis for determining the consideration to be received by SPI Shareholders and (iii) the amount payable to PSI under the Advisory Agreement is fair because it represents the amount PSI would receive under the Advisory Agreement upon the sale of SPI's properties and is less than the amount to which PSI would be entitled upon the termination of the Advisory Agreement by either SPI or PSI. There was no negotiation regarding the basis for determining the consideration to be paid to SPI Shareholders in the Merger or the amount payable to PSI under the Advisory Agreement. See "-- Background." 2. Choice as to Form of Consideration. The Merger provides SPI Shareholders with the choice of either (A) converting their investment into an investment in PSI, which generally owns the same type of properties as SPI, 27 on a tax-free basis (assuming the Merger is a tax-free reorganization and except that the Required REIT Distributions will be taxable as ordinary income) and which has acquired, and is expected to continue to acquire, additional properties or (B) with respect to up to 20% of the outstanding SPI Common Stock (less any Dissenting Shares), receiving in cash the amount they would receive if SPI's properties were sold at their appraised values and SPI were liquidated (without any reduction for real estate commissions and other sales expenses). 3. Independent Portfolio Appraisals and Fairness Opinions. The conclusions of the SPI Special Committee and SPI Board of Directors are partially based upon the portfolio appraisals prepared by Wilson and Stanger's fairness opinion. The SPI Special Committee and SPI Board of Directors attributed significant weight to these items, which they believe support their position, and do not know of any factors that are reasonably likely to detract from the conclusions in Wilson's portfolio appraisals and Stanger's fairness opinion. The SPI Special Committee and SPI Board of Directors believe that the engagement of Wilson and Stanger to provide the portfolio appraisals and the fairness opinion, respectively, assisted the SPI Special Committee and SPI Board of Directors in the fulfillment of their duties to SPI Shareholders, notwithstanding that each of these parties has received fees in connection with their engagements and may receive fees in the future. See "-- Real Estate Portfolio Appraisal by Wilson" and "-- Fairness Opinion from Stanger." 4. Voting Procedures and Dissenters' Rights. The SPI Special Committee and SPI Board of Directors believe that the voting process and the rights of dissenting shareholders of SPI support their conclusions as to the Merger. The Merger is required to be approved by a majority of the outstanding shares of SPI Common Stock, as well as by a majority of the shares of SPI Common Stock voting at the meeting of SPI Shareholders not held by PSI. SPI Shareholders will have the right to exercise Dissenters' Rights, although the SPI Special Committee and SPI Board of Directors recognize that these rights may be exercised by SPI Shareholders only if demands for payment are filed with respect to 5% or more of the outstanding shares of SPI Common Stock. 5. Comparison of Payments to be Received at the Time of the Merger to Other Alternatives. The payments to be received at the time of the Merger of $7.31 per share of SPI Common Stock compares favorably with (A) the trading price of the SPI Common Stock immediately prior to the first announcement of the Merger ($6.63) and during other periods, (B) a range of estimated going concern value per share of SPI Common Stock ($6.11 to $7.27) and (C) an estimated liquidation value per share of SPI Common Stock ($6.45). The SPI Board of Directors and SPI Special Committee recognize that this comparison is subject to significant assumptions, qualifications and limitations. See "-- Comparison of Consideration to be Received in the Merger to Other Alternatives." 6. Lower Level of Distributions to SPI Shareholders After the Merger. Depending on the market price of the PSI Common Stock during the period in which the number of shares to be issued in the Merger is established, the level of distributions to SPI Shareholders who receive PSI Common Stock in the Merger may be lower after the Merger than before. Based on a market price of PSI Common Stock of $21 and the current regular quarterly distribution rate for PSI ($.22 per share) and SPI ($.08 per share), SPI Shareholders would receive approximately $.003 (4%) less in regular quarterly distributions per share of SPI Common Stock after the Merger from PSI than before the Merger from SPI and approximately $.001 less per share in regular quarterly distributions for each $.25 (1.2%) increase in the market price of PSI Common Stock above $21. 7. Conflicts of Interest. The Merger has been initiated and structured by individuals who are executive officers of SPI and who are also affiliated with PSI. Independent representatives were not engaged to negotiate these arrangements on behalf of the public shareholders of SPI, and the terms of the Merger are not the result of arm's length negotiations. The consideration to be received by SPI Shareholders in the Merger will be reduced as a result of amounts payable to PSI under the Advisory Agreement. The SPI Special Committee and SPI Board of Directors do not believe that the absence of independent representatives to negotiate the Merger undermines the fairness of the Merger because the Merger has been reviewed and approved by the SPI Special Committee, comprised of independent directors. Based upon the use of an independent appraisal firm, the Stanger fairness opinion and the participation of the SPI Special Committee, the SPI Board of Directors and SPI Special Committee considered that the engagement of such independent representatives was not necessary or cost effective. 28 COMPARISON OF BENEFITS AND DETRIMENTS. Prior to concluding that the Merger should be proposed to SPI Shareholders, the SPI Board of Directors and SPI Special Committee considered several alternatives to the Merger. The alternatives considered by the SPI Board of Directors and SPI Special Committee were liquidation and continuation of operations. In order to determine whether the Merger or one of its alternatives would be more advantageous to SPI Shareholders, the SPI Board of Directors and SPI Special Committee compared the potential benefits and detriments of the Merger with the potential benefits and detriments of the alternatives. See "-- Alternatives to Merger" for a discussion of the potential benefits and detriments of each of these alternatives. Each of the Merger and its alternatives offers potential benefits and suffers from potential detriments not possessed by the other alternatives. Set forth below are the conclusions of the SPI Board of Directors and SPI Special Committee regarding the comparison of the Merger to the alternatives. (i) The SPI Board of Directors and SPI Special Committee favor the Merger over liquidation because they believe that (A) the Merger permits SPI Shareholders to take advantage of the current markets for REIT securities which more fully reflect the underlying net asset value of many REITs that grow, like PSI, (B) SPI should not be liquidated at this time (other than through the Merger that provides SPI Shareholders who receive PSI Common Stock with greater liquidity and increased geographic diversification, while retaining an interest in a similar type of properties which may increase in value), (C) the Merger provides SPI Shareholders, with respect to up to 20% of the outstanding SPI Common Stock (less any SPI Dissenting Shares) with the opportunity, if they so elect, to receive in cash the amounts they would receive if SPI's properties were sold at their appraised values and were liquidated (without any reduction for real estate commissions and other sales expenses) and (D) the amount being received by PSI in the Merger in respect of the Advisory Agreement is less than the amount to which PSI would be entitled upon the termination of the Advisory Agreement by either SPI or PSI. (ii) The SPI Board of Directors and SPI Special Committee have concluded that continued operation is not as attractive an alternative as the Merger because the Merger affords SPI Shareholders increased liquidity and the opportunity to participate in PSI, an entity that, unlike SPI, has grown, and is expected to continue to grow, as new investments are made. However, the SPI Board of Directors and SPI Special Committee recognize that the level of distributions to SPI Shareholders who receive PSI Common Stock may be reduced. See "-- Recommendation to SPI Shareholders -- 6. Lower Level of Distributions to SPI Shareholders After the Merger." The SPI Board of Directors and SPI Special Committee believe that SPI Shareholders would have better opportunities to participate in the current markets for equity securities of REITs through PSI than through SPI because of PSI's larger capital base, greater liquidity and broader geographic diversification. Based upon this comparison of the potential benefits and detriments of the Merger with its alternatives, the SPI Board of Directors and SPI Special Committee have concluded that the Merger is more attractive to SPI Shareholders than any of the alternatives. COMPARISON OF CONSIDERATION TO BE RECEIVED IN THE MERGER TO OTHER ALTERNATIVES GENERAL. To assist SPI Shareholders in evaluating the Merger, the SPI Board of Directors and SPI Special Committee compared the consideration to be received in the Merger, i.e., a value of $7.31 per share (less the amount of any Required REIT Distributions) of SPI Common Stock against: (i) the trading price of the SPI Common Stock on the AMEX; (ii) estimates of the value of SPI on a liquidation basis assuming that their assets were sold at their appraised fair market value and the net proceeds distributed to the SPI Shareholders in accordance with their share ownership in SPI; and (iii) estimates of the value of SPI on a going-concern basis assuming that SPI were to continue as a stand- alone entity and its securities sold at the end of either a five-year or ten- year holding period or its assets sold at the end of a ten-year holding period. Due to the uncertainty in establishing these values, the SPI Board of Directors and SPI Special Committee have established a range of estimated values for certain of the alternatives, representing a high and low estimated value for the potential consideration. Since the value of the consideration for alternatives to the Merger is dependent upon varying market conditions, no assurance can be given that the range of estimated values indicated establishes the highest or lowest possible values. However, the SPI Board of Directors and SPI Special Committee believe that analyzing the alternatives in terms of ranges of estimated value, based on currently available 29 market data and, where appropriate, reasonable assumptions made in good faith, establishes a reasonable framework for comparing alternatives. The results of this comparative analysis are summarized in the following table. SPI Shareholders should bear in mind that the estimated values assigned to the alternate forms of consideration are based on a variety of assumptions that have been made by SPI. These assumptions relate, among other things, to: projections as to SPI's future income, expenses, cash flow and other significant financial matters; the capitalization rates that will be used by prospective buyers when SPI's assets are liquidated; and, appropriate discount rates to apply to expected cash flows in computing the present value of the cash flows that may be received with respect to shares of SPI Common Stock. In addition, these estimates are based upon certain information available to SPI at the time the estimates were computed, and no assurance can be given that the same conditions analyzed by them in arriving at the estimates of value would exist at the time of the Merger. The assumptions used have been determined by the SPI Board of Directors and SPI Special Committee in good faith, and, where appropriate, are based upon current and historical information regarding SPI and current real estate markets, and have been highlighted below to the extent critical to the conclusions of the SPI Board of Directors and SPI Special Committee. While SPI believes it has a reasonable basis for the assumptions selected, the assumptions employed by it as to future events may not reflect its actual experience. The estimated values of alternate forms of consideration would have been different had SPI made different assumptions, and such differences could be material. No assurance can be given that such consideration would be realized through any of the designated alternatives, and SPI Shareholders should carefully consider the following discussions to understand the assumptions, qualifications and limitations inherent in the presented valuations.
- -------------------------------------------------------------------------------------------------------- Estimated Going Estimated Liquidation Payments in the Merger Trading Prices of Concern Value per Share of SPI per Share of SPI SPI Value per Share of SPI Common Stock at Common Stock Common Stock (2) Common Stock (3) Appraised Value (4) - -------------------------------------------------------------------------------------------------------- $7.31(1) $6 $6 3/8 $6.11 $7.27 $6.45 - --------------------------------------------------------------------------------------------------------
_______________ (1) Based on SPI's net asset value consisting of the independently appraised market value of SPI's real estate assets as of February 29, 1996, the estimated book value of its other net assets as of June 30, 1996 and estimated amount payable to PSI under the Advisory Agreement and assuming no Required REIT Distributions. See "-- Determination of Payments to be Received by SPI Shareholders in Connection with the Merger." (2) High and low sales prices on the AMEX composite tape for the fourth quarter of 1995, the last full calendar quarter prior to the announcement of the Merger. On March 1, 1996, the closing price of SPI Common Stock was $6 5/8. (3) High and low of three methods of estimating going concern value. Based upon a number of assumptions regarding the future net operating income and distributions of SPI and the date of its liquidation. See "-- Going-Concern Value." (4) Based upon Wilson's real estate appraisal, less estimated expenses of liquidation. Reflects termination fee of $3,905,800 payable to PSI under the Advisory Agreement. See "-- Liquidation Values." TRADING PRICES OF SPI COMMON STOCK. The SPI Board of Directors and SPI Special Committee also considered that the trading price for SPI Common Stock averaged $6.35, $6.28, $6.04 and $5.90 for the 20-day, 60-day, 180-day and 360- day periods preceding the announcement of the proposed Merger and that the closing price for SPI Common Stock on the last trading day prior to the first announcement of the Merger was $6 5/8. The SPI Board of Directors also considered that the consideration offered in the Merger adjusted for interim earnings of approximately $.13 per share (which amount represents increases in current net assets projected to be generated and retained between 30 the date of the property Appraisal and June 30, 1996) represents a premium of 13.0%, 14.3%, 18.8%, 21.7% and 8.4% over the 20-day, 60-day, 180-day and 360-day average closing prices and the closing price on the last trading day prior to the announcement of the proposed Merger, respectively. GOING-CONCERN VALUE. The SPI Board of Directors and SPI Special Committee have estimated the going-concern value of SPI by analyzing projected cash flows and distributions assuming that SPI were operated as an independent stand-alone entity and its securities or assets sold at the end of the holding period under three scenarios: Scenario #1 -- a five-year holding period, with shares of SPI liquidated in securities markets at an FFO multiple ranging from 8.5 to 10.5; Scenario #2 -- a 10-year holding period, with shares of SPI liquidated in securities markets at an FFO multiple ranging from 8.5 to 10.5; and Scenario #3 - -- a 10-year holding period with the property portfolios of SPI liquidated in private real estate markets at the terminal value projected by the appraiser in the portfolio appraisal and the net proceeds resulting from the liquidation of the properties and other remaining assets of SPI paid out to SPI Shareholders in liquidation distributions. Dividends and sale proceeds per share of SPI Common Stock were discounted in the projections at rates ranging from 12.0% to 13.0%. Scenario #3 of the going-concern analysis assumes SPI's properties are sold in a single transaction after a 10-year holding period. Should the assets be liquidated over time, even at prices equal to those projected, distributions to SPI Shareholders out of SPI's cash flow from operations might be reduced because relatively fixed costs, such as general and administrative expenses, are not proportionately reduced with the liquidation of assets. However, for simplification purposes, the sales are assumed to occur concurrently. The estimated value of SPI on a going-concern basis is not intended to reflect the distributions payable to each of its shareholders if its assets were to be sold at the current fair market value. LIQUIDATION VALUES. Since one of the alternatives available to the SPI Board of Directors is to proceed with a liquidation of SPI, and the corresponding distribution of the net liquidation proceeds to SPI Shareholders, the SPI Board of Directors and SPI Special Committee have estimated the liquidation value of SPI assuming that SPI's real estate portfolio were sold at the fair market value, based upon the Wilson real estate portfolio appraisal (excluding for these purposes any pre-merger distributions that might be made to SPI Shareholders). This alternative assumes non-real estate assets are sold at their book value (such assets, excluding cash, representing less than 2% of the value of SPI), a termination fee of $3,905,800 is paid to PSI under the Advisory Agreement, SPI incurs selling costs at the time of liquidation (state and local transfer taxes, real estate commissions and legal and other closing costs) of $1,239,000 and the remaining net liquidation proceeds are distributed among SPI Shareholders in proportion to their share ownership. The liquidation analysis assumes that SPI's portfolio is sold in a single transaction at its portfolio appraised value. Should the assets be liquidated over time, even at prices equal to those projected, distributions to SPI Shareholders out of SPI's cash flow from operations might be reduced because SPI's relatively fixed costs, such as general and administrative expenses, are not proportionately reduced with the liquidation of assets. However, for simplification purposes, the sales are assumed to occur concurrently. Applying these procedures, the SPI Board of Directors and SPI Special Committee arrived at the liquidation value set forth in the table. The real estate portfolio appraisals set forth, subject to the specified assumptions, limitations and qualifications, Wilson's professional opinion as to the market value of SPI's real estate portfolio as of February 29, 1996. While the portfolio appraisals are not necessarily indicative of the price at which the assets would sell, market value generally seeks to estimate the prices at which the real estate assets would sell if disposed of in an arm's length transaction between a willing buyer and a willing seller, each having access to relevant information regarding the historical revenues and expenses of the properties. The real estate portfolio appraisals assume that SPI's assets are disposed of in an orderly manner and are not sold in forced or distressed sales where sellers might be expected to dispose of their interests at substantial discounts to the actual fair market value. See "-- Real Estate Appraisal by Wilson." DISTRIBUTION COMPARISON. The SPI Board of Directors and Special Committee have considered the potential impact of the Merger upon distributions that would be made to SPI Shareholders who exchange their SPI Common Stock for PSI Common Stock. Based on a market price of PSI Common Stock of $21 and the current regular quarterly 31 distribution rate for PSI ($.22 per share) and SPI ($.08 per share), SPI Shareholders would receive approximately $.003 (4%) less in regular quarterly distributions per share of SPI Common Stock after the Merger from PSI than before the Merger from SPI and approximately $.001 less per share in regular quarterly distributions for each increase in the market price of PSI Common Stock above $21 of $.25 (1.2%). These estimates are based upon the actual distributions made by SPI and PSI (not upon the amounts that might have been distributed by them based upon their cash flow from operations). In evaluating this estimate, SPI Shareholders should bear in mind that a number of factors affect the level of distributions. These factors include the distributable income generated by operations, the principal and interest payments on debt, if any, capital expenditure levels (in excess of normal expenditures for ongoing maintenance and repairs), and the corporate policy with respect to cash distributions. A comparison of the current distribution levels of PSI with those of SPI does not show how the Merger might affect a SPI Shareholder's distribution level over a number of years. REAL ESTATE PORTFOLIO APPRAISAL BY WILSON Wilson was engaged by SPI and PSI to appraise the real estate portfolio of SPI and has delivered a written report of its analysis, based upon the review, analysis, scope and limitations described therein, as to the fair market value of the portfolio of real estate assets of SPI as of February 29, 1996 (the "Appraisal"). SPI and PSI selected Wilson to provide the Appraisal because of its experience and reputation in connection with appraising mini-warehouses, its familiarity with SPI's properties and its appraisal of the properties of five other REITs in connection with their mergers with PSI. The consideration to be paid by PSI to SPI Shareholders in the Merger is based on the Appraisal. The Appraisal, which contains a description of the assumptions and qualifications made, matters considered and limitations on the review and analysis, is set forth as Appendix B and should be read in its entirety. Certain of the material assumptions, qualifications and limitations to the Appraisal are described below. EXPERIENCE OF WILSON. Wilson was founded by Charles R. Wilson in 1976, who has specialized in the appraisal of mini-warehouses since 1972. Wilson has conducted real estate appraisals on a variety of property types and uses throughout the United States for owners, banks and thrift organizations, insurance companies and other financial institutions. Wilson appraised over 200 mini-warehouses in 1995. Mr. Wilson founded Self Storage Data Services, Inc. ("SSDS") in 1993 for the purpose of tracking and publishing income and expense trends in the mini- warehouse industry. The SSDS data base now contains over 23,600 facilities nationwide. Mr. Wilson, recognized as a leading authority on mini-warehouses, has spoken extensively and has written several articles on the subject of mini- warehouses. SUMMARY OF METHODOLOGY. At the request of SPI and PSI, Wilson evaluated SPI's portfolio of real estate which consists of six operating facilities owned by SPI, one operating facility on leased land and one vacant parcel of land. In valuing the properties, Wilson considered the applicability of all three commonly recognized approaches to value: the cost approach, the income approach and the sales comparison approach. The type and age of a property, market conditions and the quantity and quality of data affect the applicability of each approach in a specific appraisal situation. Wilson did not consider the cost approach to be applicable to SPI's properties. The income approach estimates a property's capacity to produce income through an analysis of the rental market, operating expenses and net income. Net income may then be processed into a value estimate through either (or a combination) of two methods: direct capitalization or yield capitalization, i.e., a discounted cash flow analysis. The sales comparison approach is based upon the principle of substitution, i.e., that an informed purchaser would pay no more for a property than the cost of acquiring an existing property with the same utility. The sales comparison approach establishes what typical investors in the marketplace are willing to pay for comparable properties. The cost approach is based on the estimated market value of the site as if vacant plus the depreciated replacement cost of the existing improvements. The cost approach was not considered appropriate in the case of SPI since today's investors do not rely upon the cost approach in making investment decisions. 32 While the Appraisal was prepared for SPI's entire portfolio, Wilson analyzed the individual SPI properties by (a) reviewing each property's previous four years' operating statements, (b) reviewing information submitted to the appraiser by on-site managers which included competitive rental and occupancy surveys, subject facility descriptions, area trends and other factors, which were verified by Wilson through telephone calls and other sources; (c) developing information from a variety of sources about market conditions for each individual property that included population, employment and housing trends within the neighborhood; and (d) considering published data on median income and expense benchmarks on comparable facilities. To determine any significant differences in quality among the various properties, Wilson considered such variables as property income growth patterns and potential, quality of location and construction, tenant appeal, property appearance, security and potential competition. Wilson also interviewed management personnel responsible for SPI's properties to discuss competitive conditions, area economic trends affecting the properties, historical operating revenues and expenses, and occupancy rates in competitive facilities. These interviews included ascertaining information on items of deferred maintenance, planned capital improvements and other factors affecting the physical condition of the properties. Representatives of Wilson performed site inspections on all eight of SPI's properties between January 29, 1996 and February 29, 1996. Each of the properties had been appraised by Wilson previously. Wilson then determined the value of each property in the portfolio relying heavily upon the income approach. The results of the six operating facilities owned by SPI were verified using a direct capitalization technique applying overall capitalization rates derived directly from the marketplace. To define the occupancy and rental rates and expense escalators to be used in developing cash flow projections, Wilson reviewed the acquisition criteria and projection parameters in use in the marketplace by major mini-warehouse investors, owners and operators, appraisers and financing sources, including PSI. Further, Wilson interviewed various sources in local markets to identify sales of mini- warehouses within the past 24 months in order to derive certain valuation indicators. Sources for data concerning such transactions included local appraisers, property owners, real estate brokers, and others. Wilson also reviewed information compiled by management identifying sales and acquisitions of mini-warehouses in local markets and assembled and reviewed available data on bulk sale transactions. Analysis of such information included consideration of net operating income and sales prices per square foot, capitalization rates, and various other property and transaction characteristics. In addition, in the case of the most recent bulk acquisition by PSI, Wilson performed site visits and individual property reviews and reconciliations of the portfolio purchased with the SPI portfolio. Wilson valued the vacant parcel of land based upon comparable sales in the San Diego market. Wilson valued the facility located on leased land by applying a discounted cash flow analysis, using projections of cash flow developed using the methodology discussed below, over the remaining term of the ground lease, including all remaining extension options. No residual value was utilized in the valuation of the facility located on leased land. In valuing the other six facilities owned by PSI, Wilson applied a discounted cash flow analysis, and projections of cash flow for each property (assuming no indebtedness) were developed for a ten-year period ending February 2006. The first year's scheduled gross income was estimated taking into consideration each property's current rent structure and the rental rates in competitive facilities. Also included in the income estimate were trends in ancillary income from late fees and rental concessions. Wilson then made an analysis of each subject's occupancy history, took into consideration the occupancy level of competitive facilities and estimated an occupancy level for each property in the portfolio. Estimated expenses were based upon each property's actual operating history as well as the actual experience of several other mini-warehouses within each given market. Expenses were deducted from effective gross income to derive a net operating income for each property. Consideration was given to and adjustment made to reflect capital expenditures and replacement reserves. Income and expense growth rates were based on projection parameters currently being used by property investors as well as upon local, regional and historical trends. Growth rates for income and expenses utilized in the projections were 3%. Wilson then used terminal capitalization rates that ranged from 10.00% to 10.25% to capitalize each property's eleventh year net income into a residual value at the end of the holding period, assuming normal cost 33 of disposing of the properties. The ten yearly cash flows were then discounted to present worth using discount rates ranging from 12.5% to 12.75% for SPI's properties, again depending upon local market and property conditions. The indicated value based upon the income approach is $23,500,000 for SPI's properties. In applying the sales comparison approach to the SPI properties, Wilson relied most heavily on 27 properties which were sold during the past seven months. In addition, Wilson analyzed 85 sales which transferred during the past 12 months. Using a regression analysis, a statistically significant correlation was derived between each property's net income and its sales price per square foot. Wilson determined the value of the six operating facilities owned by SPI based upon the properties' net income per square foot, using the regression analysis. Wilson then added to this result the value of the property on leased land and vacant parcel of land to arrive at the value based on the sales comparison approach. The indicated value by the sales comparison approach ranged between $20,930,000 to $23,520,000 for SPI's properties. Wilson reconciled the values indicated from the direct sales comparison and income approaches to arrive at a final value conclusion. Wilson gave primary emphasis to the income approach, an emphasis deemed appropriate based on acquisition criteria currently employed in the mini-warehouse market. Based on the valuation methodology described above, Wilson assigned a market value of $23,500,000 to SPI's portfolio of real property assets. ASSUMPTIONS, LIMITATIONS AND QUALIFICATIONS OF THE APPRAISAL. The Appraisal reflects Wilson's valuation of SPI's real estate portfolio as of February 29, 1996 in the context of the information available on such date. Events occurring after February 29, 1996 and before the closing of the Merger could affect the properties or assumptions used in preparing the Appraisal. Wilson has no obligation to update the Appraisal on the basis of subsequent events; however, Wilson has informed SPI and PSI that, as of the date of this Proxy Statement and Prospectus, Wilson is not aware of any event or change in conditions, since February 29, 1996, that may have caused a material change in the value of SPI's portfolio of real estate since that date. The Appraisal is subject to certain general and specific assumptions and limiting conditions and is in conformity with the Departure Provisions of Uniform Standards of Professional Appraisal Practice. Among other limitations, the Appraisal (i) did not consider the effect of easements, restrictions and other similar items on the value of SPI's properties, (ii) assumed that the properties comply with local building codes and zoning ordinances and (iii) did not involve the physical inspections of competing properties. See Appendix B for a discussion of the specific assumptions, limitations and qualifications of the Appraisal. COMPENSATION AND MATERIAL RELATIONSHIPS. Wilson is being paid an aggregate fee of $21,800 for preparation of the Appraisal, which fee will include reimbursement for all of Wilson's related out-of-pocket expenses. Wilson is also entitled to indemnification against certain liabilities. The fee was negotiated with Wilson and payment is not dependent upon completion of the Merger or the value reported. As one of the nation's leading appraisers of mini-warehouses, since 1976, Wilson has continuously prepared appraisals for PSI and its affiliates, including appraisals of the properties of five prior REITs in connection with their mergers with PSI, and is expected to continue to prepare appraisals for PSI. FAIRNESS OPINION FROM STANGER Stanger was engaged by SPI through the SPI Special Committee to deliver a written summary of its determination as to the fairness of the consideration to be received in the Merger, from a financial point of view, to the public shareholders of SPI. The full text of the opinion, which contains descriptions of the assumptions and qualifications made, matters considered and limitations on the review and opinion, is set forth in Appendix C to this Proxy Statement and Prospectus and should be read in its entirety. Certain of the material assumptions, qualifications and limitations to the fairness opinion are set forth below. The summary set forth below does not purport to be a complete description of the analysis to be used by Stanger in rendering the fairness opinion. Arriving at a fairness opinion is a complex analytical process not necessarily susceptible to partial analysis or amenable to summary description. 34 Except for certain assumptions, described more fully below, which SPI advised Stanger that it would be reasonable to make, it imposed no conditions or limitations on the scope of Stanger's investigation or with respect to the methods and procedures to be followed in rendering the fairness opinion. SPI has agreed to indemnify Stanger against certain liabilities arising out of its engagement to prepare and deliver the fairness opinion. EXPERIENCE OF STANGER. Stanger, founded in 1978, has provided information, research, investment banking and consulting services to clients throughout the United States, including major New York Stock Exchange firms and insurance companies and over 70 companies engaged in the management and operation of partnerships and real estate investment trusts. The investment banking activities of Stanger include financial advisory services, asset and securities valuations, industry and company research and analysis, litigation support and expert witness services, and due diligence investigations in connection with both publicly registered and privately placed securities transactions. Stanger, as part of its investment banking business, is regularly engaged in the valuation of businesses and their securities in connection with mergers, acquisitions, reorganizations and for estate, tax, corporate and other purposes. In particular, Stanger's valuation practice principally involves partnerships, partnership securities and the assets typically owned through partnerships including, but not limited to, oil and gas reserves, real estate, cable television systems and equipment leasing assets. SUMMARY OF MATERIALS CONSIDERED. In the course of Stanger's analysis to render its opinion regarding the Merger, Stanger: (i) reviewed this Proxy Statement and Prospectus; (ii) reviewed SPI's and PSI's annual reports on Form 10-K for the three fiscal years ending December 31, 1993, 1994 and 1995; (iii) reviewed the Appraisal and discussed with management of SPI and Wilson the methodologies and procedures employed in preparing the Appraisal; (iv) reviewed information regarding purchases and sales of self-storage properties by PSI or any affiliated entities over the past two years, and other information available relating to acquisition criteria for self-storage properties; (v) reviewed estimates prepared by SPI, and based in part on the Appraisal, of the current net liquidation value per common share of SPI's assets and projections of cash flow from operations, dividend distributions and going-concern values for SPI; (vi) discussed with certain members of management of SPI and PSI conditions in self-storage property markets, conditions in the market for sales/acquisitions of properties similar to those owned by SPI, current and projected operations and performance, and the financial condition and future prospects of SPI and PSI; (vii) reviewed historical market prices, trading volume and dividends for SPI and PSI Common Stock; and (viii) conducted other studies, analyses, inquiries and investigations as Stanger deemed appropriate. SUMMARY OF ANALYSIS. The following is a summary of certain financial and comparative analyses reviewed by Stanger in connection with and in support of its fairness opinion. The summary of the opinions and analysis of Stanger set forth in this Proxy and Prospectus is qualified in its entirety by reference to the full text of such opinion. Review of Appraisals. In preparing its opinion, Stanger relied upon the Appraisal of SPI's portfolio of properties which was prepared as of February 29, 1996 by Wilson, an independent appraiser. Stanger reviewed the Appraisal rendered by Wilson, reviewed a sample of supporting documentation for the Appraisal and discussed with Wilson its experience and qualifications and the appraisal methodologies utilized. Stanger observed that the Appraisal was certified by a Member of the Appraisal Institute and was conducted utilizing the income approach to valuation, applying the discounted cash flow method to establish a value for each individual operating property and the sales comparison approach, except the operating property located on leased land. The vacant land parcel was valued using only the sales comparison approach. In addition, Stanger observed that in the course of conducting the Appraisal, Wilson confirmed certain parameters utilized based upon interviews conducted by Wilson of major buyers, owners and managers of self-storage properties, and data collected by Wilson relating to capitalization rates and net operating income per square foot for actual sales transactions in the marketplace for mini-warehouse properties which occurred during the seven months preceding the date of the Appraisal. Stanger observed that the effective capitalization rate utilized in the Appraisal was approximately 9.6% for the properties of SPI (excluding the vacant land) and approximately 9.2% for the properties excluding the Hillside, New Jersey property which is subject to a ground lease which expires in the year 2011, based on net operating income (before non-recurring expenses) generated for the 12 months prior to the date of the Appraisal. Based on net operating 35 income projected to be generated during the 12 months subsequent to the Appraisal date, the effective capitalization rate utilized in the Appraisal was approximately 10.4% for SPI's properties (excluding the vacant land) and approximately 10.0% for the properties (excluding the vacant land and the Hillside, New Jersey property). Stanger further observed that among properties acquired by PSI or affiliated entities from third-parties during the prior 24 months, stabilized capitalization rates for such purchases averaged approximately 10.0%. In addition, capitalization rates among transactions involving self-storage properties tracked by Self Storage Data Services, Inc., an affiliate of Wilson, averaged approximately 10.0% on the prior seven-month period. Lower capitalization rates generally reflect higher sales prices for income-producing properties. Review of Liquidation Analysis. Stanger reviewed an analysis prepared by management of SPI of the estimated value of SPI based upon liquidation of its portfolio on a property-by-property basis utilizing estimates prepared by SPI and information provided by Wilson. The property-by-property liquidation analysis assumed each property could be sold within an estimated marketing period of six months at the appraised value as reported in the Appraisal, to an independent third-party buyer. Costs of such property sales by SPI to independent third-parties were estimated by SPI to total approximately $1,239,000 and were comprised of estimates of $299,000 in state and local transfer taxes, $705,000 in commissions and $235,000 in legal and other closing costs. Such amounts were based on prevailing transfer tax rates in the locale of each property and on estimates of SPI based on its knowledge of real estate transactions. Stanger observed that the estimated net proceeds from such liquidation, assuming no Required REIT Distributions (prior to the date of liquidation), a reduction of $3,905,800 representing the termination fee payable to PSI under the Advisory Agreement, and the associated dissolution of SPI and distribution of all remaining assets was $6.45 per share, versus the consideration offered in the Merger of $7.31 cash per share of SPI Common Stock, or the equivalent of $7.31 of PSI Common Stock per share of SPI Common Stock, based on the average closing price of PSI Common Stock on the NYSE during the 20 consecutive trading days ending on the fifth trading day prior to the meeting of SPI Shareholders. Stanger also observed that, based on a legal opinion rendered by Heller, Ehrman, White & McAuliffe dated March 18, 1996, PSI would have the right pursuant to the Advisory Agreement to receive either a termination fee (upon sixty days' notice) or a sales fee subordinated to certain return thresholds to shareholders based on the net proceeds from the Merger. Based upon an analysis prepared by SPI, the estimated termination fee would total approximately $3,900,000 and the estimated sales fee would total approximately $2,270,000. Stanger noted that PSI has chosen to be paid the lesser of the two amounts to which it would be entitled in the Merger. Stanger also observed that Wilson concluded that no premium or discount is appropriate for the bulk acquisition of an assembled portfolio in self-storage property markets today. Stanger reviewed information on bulk purchases and sales of self-storage properties transacted by PSI, PSMI or affiliates during 1993 through February 1996 and reviewed available information concerning bulk purchases of self-storage properties by independent third parties. Stanger observed that PSI, PSMI or affiliated entities have transacted nine bulk purchases of property portfolios during the period reviewed excluding the properties associated with the prior mergers of five REITs with PSI. These transactions involved affiliated entities and a total of 71 properties with an aggregate value of approximately $215 million. Specifically, the transactions included the sale of: (1) a three-property portfolio by a private limited partnership affiliated with PSMI in November 1993 (at a capitalization rate of approximately 10.2%); (2) a twelve-property portfolio in which PSMI has an interest by an unaffiliated party in December 1993 (at a capitalization rate of approximately 10.5% for the owner's interest); (3) a three-property portfolio in which PSMI has an interest by an unaffiliated party in December 1993 (at a capitalization rate of approximately 10.5% for the owner's interest); (4) a two- property portfolio by a private limited partnership affiliated with PSMI in October 1993 (at a capitalization rate of approximately 10.7%); (5) a seven- property portfolio by a private limited partnership affiliated with PSMI in June 1994 (at a capitalization rate of approximately 10.7%); (6) a three-property portfolio by a private limited partnership affiliated with PSMI in June 1994 (at a capitalization rate of approximately 10.1%); (7) a three-property portfolio by a private limited partnership affiliated with PSMI in December 1994 (at a capitalization rate of approximately 10.0%); (8) a ten-property portfolio by PSI in February 1996 (at a stabilized capitalization rate of approximately 9.9%); and (9) a 28-property portfolio in which PSI acquired the limited partnership interests of an affiliated institutional partnership in February 1996 (at a capitalization rate of approximately 9.76%). Stanger observed that, in regard to 36 the most recent portfolio acquisition by PSI, Wilson performed a reconciliation of the price paid for the acquired properties with the appraised value of the portfolio of SPI. In the course of such reconciliation, Wilson performed site inspections of each of the acquired properties, reviewed demographic data for each local market, reviewed operating information and discussed the properties with the management of PSI. Among these transactions, capitalization rates averaged approximately 10%. Review of Going Concern Analysis. Stanger reviewed financial analyses and projections prepared by the management of SPI concerning estimated cash flows and dividend distributions from continued operation of SPI as an independent stand-alone entity and estimated sales proceeds from the liquidation of the shares of SPI or the portfolio of properties owned by SPI. The analysis incorporated estimates of revenues and operating expenses for each of the properties, capital expenditures, entity-level general and administrative costs, and cash flow distributions and proceeds from sale of either the securities of SPI or the properties owned by SPI during projection periods of up to 10 years. The analysis and projections assumed, among other things, that (i) net operating income for SPI would grow at a compound annual rate of approximately 3.0% over the 10-year projection period; (ii) general and administrative expenses would increase at an average rate of 3.0% per annum over the projection period; and (iii) in the scenario involving sale of the properties in private real estate markets (as described below), such sales would occur at the terminal value projected by the appraiser in the independent Appraisal. The projections evaluated the going-concern value of SPI under three scenarios: Scenario #1 -- a five-year holding period, with shares of SPI Common Stock liquidated in securities markets at an FFO multiple ranging from 8.5 to 10.5; Scenario #2 -- a 10-year holding period, with shares of SPI Common Stock liquidated in securities markets at an FFO multiple ranging from 8.5 to 10.5; and Scenario #3 -- a 10-year holding period with the property portfolio of SPI liquidated in private real estate markets at the terminal value projected by the appraiser in the Appraisal and the net proceeds resulting from the liquidation of the properties and other remaining assets of SPI paid out to shareholders in liquidating distributions after payment of the termination fee to PSI under the Advisory Agreement. Dividends and sale proceeds per share of SPI Common Stock were discounted in the projections at rates ranging from 12.0% to 13.0%. Stanger observed that the FFO multiples utilized by management in the projections were consistent with current FFO multiples among publicly traded REITs investing in self-storage facilities and with market capitalization and leverage levels reasonably comparable to those of SPI. This group of publicly traded REITs are all affiliated with PSI, and include Partners Preferred Yield I, II and III, and Public Storage Properties X, XI, XII, XIV, XV, XVI, XVII, XVIII, XIX, and XX. Stanger further observed that the discount rates applied to dividends and sale proceeds were consistent with the historic rates of return produced by equity REITs. Stanger further observed that the estimated values per share of SPI Common Stock on a going-concern basis resulting from the above analysis were as follows for each scenario: Scenario #1 -- $6.29 to $7.27; Scenario #2 -- $6.11 to $6.88; and Scenario #3 -- $6.37 to $6.70, compared with the consideration offered in the Merger of $7.31 per share of SPI Common Stock. The estimated values assigned to the alternative forms of consideration are based on a variety of assumptions that have been made by SPI. While SPI has advised Stanger that it believes it has a reasonable basis for these assumptions, these assumptions may not reflect the actual experience of SPI and such differences could be material. See "-- Comparison of Consideration to be Received in the Merger to Other Alternatives." Review of Market Value. Stanger reviewed historical market prices, trading volume and dividend distributions for SPI Common Stock. In the course of this review, Stanger compared the historical market prices of SPI Common Stock with amounts to be received at the time of the Merger. Stanger observed that the trading price for SPI Common Stock averaged $6.35, $6.28, $6.04 and $5.90, for the respective 20-day, 60-day, 180-day, and 360-day periods preceding the announcement of the proposed Merger, and that the closing price for SPI Common Stock on the last trading day prior to the first announcement of the proposed Merger was $6.63. Stanger further observed that the consideration offered in the Merger, reduced by $431,000, or approximately $.13 per share (which amount represents increases in current net assets projected by management to be generated and retained between the date of the Appraisal and June 30, 1996) represents a premium of 13.0%, 14.3%, 18.8%, 21.7% and 8.4% over the 20-day, 60- day, 37 180-day, 360-day average closing prices and the closing price on the last trading day prior to the announcement of the proposed Merger, respectively. In addition, Stanger observed that the consideration per share of SPI Common Stock offered in the Merger in the form of shares of PSI Common Stock will reflect values established in public securities trading markets equivalent to the cash offer per share of SPI Common Stock. Such value will be based on the average closing prices on the NYSE of PSI Common Stock during the twenty consecutive trading days ending on the fifth trading day prior to the special meeting of shareholders. Distribution/FFO Analysis. Stanger reviewed distributions per share and FFO per share for SPI Shareholders on an equivalent per share basis. Stanger noted that based on a closing price of $21 for PSI Common Stock and the resulting exchange ratio of SPI Common Stock for PSI Common Stock and based on operating results for PSI, regular quarterly distributions per share would decrease by approximately $.003 (4%) for SPI Shareholders receiving PSI Common Stock. Stanger observed that, at the $21 closing price for PSI Common Stock and based on operating results for PSI, FFO per share on a quarterly basis earned by SPI Shareholders on an equivalent per share basis would increase approximately $.02 (15%). Stanger also observed that the historical FFO per share annual growth rate for PSI for the 1992-1995 period was 11.8% compared to a decrease in FFO per share for SPI for the 1992-1995 period. CONCLUSIONS. Based on the foregoing, Stanger concluded that, based upon its analysis and assumptions, and as of the date of the fairness opinions, the consideration to be received in the Merger is fair to the public shareholders of SPI, from a financial point of view. ASSUMPTIONS. In evaluating the Merger, Stanger relied upon and assumed, without independent verification, the accuracy and completeness of all financial and other information contained in the Proxy Statement and Prospectus or that was furnished or otherwise communicated to Stanger. Stanger did not perform an independent appraisal of the assets and liabilities of SPI or PSI and relied upon and assumed the accuracy of the Appraisal. Stanger also relied on the assurances of SPI and PSI that any pro forma financial statements, projections, budgets, or value estimates contained in the Proxy Statement and Prospectus or otherwise provided to Stanger, were reasonably prepared on bases consistent with actual historical experience and reflecting the best currently available estimates and good faith judgments; that no material changes have occurred in the appraised value of the portfolio or the information reviewed between the date of the Appraisal or the date of the other information provided and the date of the opinion; and that SPI and PSI are not aware of any information or facts that would cause the information supplied to Stanger to be incomplete or misleading in any material respect. In connection with preparing the fairness opinion, Stanger was not engaged to, and consequently did not, prepare any written report or compendium of its analysis for internal or external use beyond the analysis set forth in Appendix C. Stanger does not intend to deliver any additional written summary of the analysis. COMPENSATION AND MATERIAL RELATIONSHIPS. For preparing the fairness opinion and related services in connection with the Merger, Stanger is being paid a fee of $60,000. In addition, Stanger will be reimbursed for certain out-of-pocket expenses, including legal fees, up to a maximum of $9,000 and will be indemnified against certain liabilities, including certain liabilities under the federal securities laws. The fee was negotiated with Stanger. Payment of the fee to Stanger is not dependent upon completion of the Merger. During the past two years (1994 to present), Stanger has rendered consulting and related services and provided products to PSI and to PSMI and its affiliates, including a fairness opinion to the public shareholders of five REITs in connection with their mergers with PSI and an analysis used in a 1992 exchange offer involving PSI and three partnerships affiliated with PSMI, and may be engaged in the future. Stanger has received compensation aggregating approximately $235,000 in connection with these services and products since 1994 (exclusive of amounts received in connection with the Merger). LIMITATIONS AND QUALIFICATIONS. Stanger was not requested to, and therefore did not: (i) select the method of determining the consideration offered in the Merger; (ii) make any recommendation to SPI Shareholders whether to approve or reject the Merger or whether to select the cash or Common Stock option in the Merger; or (iii) express any opinion as to the business decision to effect the Merger, alternatives to the Merger or tax factors resulting from 38 the PSMI Merger or relating to PSI's continued qualification as a REIT. Stanger's opinion is based on business, economic, real estate and securities markets, and other conditions as of the date of its analysis. Among the factors considered in the selection of Stanger were Stanger's experience in connection with the mergers of five REITs with PSI, its expertise in real estate transactions and the fee quoted by Stanger. No party other than Stanger was contacted to render an opinion as to the fairness of the Merger to SPI Shareholders, and SPI has neither requested nor received any views, preliminary or otherwise, from any party other than Stanger regarding the fairness of the Merger to SPI Shareholders. THE MERGER AGREEMENT If the Merger is approved by SPI Shareholders and the other applicable conditions to the Merger are satisfied or waived, the Merger will be consummated pursuant to the Merger Agreement which is set forth in Appendix A to, and is incorporated by reference into, this Proxy Statement and Prospectus. As a result of the Merger, all of the assets now held by SPI will be held by PSI upon completion of the Merger. The Merger Agreement contains representations and warranties of SPI and PSI and certain other provisions relating to the Merger. The representations and warranties are extinguished by, and do not survive, the Merger. CONDITIONS TO CONSUMMATION OF THE MERGER. Consummation of the Merger is contingent upon standard conditions, including the following: (i) the Registration Statement shall have been declared effective by the Commission and PSI shall have received all other authorizations necessary to issue PSI Common Stock in exchange for SPI Common Stock and to consummate the Merger; (ii) the Merger Agreement and the Merger shall have been approved and adopted by the requisite vote of the shareholders of SPI, including a majority of the shares of SPI Common Stock voting at the meeting of SPI Shareholders which are not owned by PSI; (iii) receipt by SPI of a legal opinion of Hogan & Hartson L.L.P. that the Merger will qualify as a reorganization under Section 368(a) of the Code (which opinion has been received and is described under "Certain Federal Income Tax Matters"); (iv) the PSI Shares issued to SPI Shareholders shall be listed on the NYSE; (v) the Board of Directors of SPI shall have received a fairness opinion from Stanger (which opinion has been received); (vi) the Board of Directors of PSI shall have approved the Merger (which approval has been received); (vii) the average of the per share closing prices on the NYSE of the PSI Common Stock during the 20 consecutive trading days ending on the fifth trading day prior to the special meeting of SPI Shareholders is not less than $18; and (viii) demands for payment by holders of Dissenting Shares are filed with respect to less than 5% of the outstanding shares of SPI Common Stock. The obligation of PSI to effect the Merger is also subject to it, in its sole discretion, being satisfied as to title to, and the results of an environmental audit of, each property of SPI. Any of these conditions (other than the condition of approval by the SPI Shareholders) may be waived by the board of directors of the corporation benefiting from such condition. AMENDMENT OR TERMINATION. The Merger Agreement provides for amendment or modification thereof by written agreement authorized by the boards of directors of SPI and PSI either before or after shareholder approval, provided that any such amendment or modification made after shareholder approval does not change any of the principal terms of the Merger or the Merger Agreement. The Merger may be abandoned at any time before or after shareholder approval by mutual written consent and may be abandoned by the action of the board of directors of either party if, among other things, the closing of the Merger shall not have occurred on or before March 31, 1997. CONSUMMATION. It is contemplated that the Merger will be consummated by filing the Agreement of Merger (attached as Exhibit A to the Merger Agreement) with the California Secretary of State as soon as practicable after its approval by SPI Shareholders and the satisfaction or waiver of various conditions contained in the Merger Agreement. It is currently contemplated that the Merger will be consummated during 1996. EXCHANGE OF CERTIFICATES. After the Merger, holders of certificates that evidenced outstanding shares of SPI Common Stock that were converted into shares of PSI Common Stock, upon surrender of the certificates to The First National Bank of Boston ("Bank of Boston"), shall be entitled to receive certificates representing the number of whole shares of PSI Common Stock into which the shares of common stock shall have been converted and cash payment in lieu of fractional share interests, if applicable. As soon as practicable after the Merger, Bank of Boston will send a notice and a transmittal form to each holder of record whose common stock shall have been converted into 39 shares of PSI Common Stock, advising of the effectiveness of the Merger and the procedure for surrendering to Bank of Boston certificates evidencing SPI Common Stock in exchange for certificates evidencing PSI Common Stock. HOLDERS OF SPI COMMON STOCK WHO INTEND TO RECEIVE PSI COMMON STOCK IN THE MERGER SHOULD NOT SUBMIT THEIR STOCK CERTIFICATES FOR EXCHANGE UNTIL THEY HAVE RECEIVED THE LETTER OF TRANSMITTAL AND INSTRUCTIONS FROM BANK OF BOSTON WHICH WILL BE MAILED AFTER CONSUMMATION OF THE MERGER. Until surrendered, each outstanding certificate which represents shares of SPI Common Stock that were converted into shares of PSI Common Stock will be deemed for all corporate purposes to evidence ownership of the number of whole shares of PSI Common Stock into which the common stock evidenced thereby were converted. However, until the certificates formerly evidencing SPI Common Stock are surrendered, no dividend payable to holders of record of the PSI Common Stock shall be paid to the holders of such certificates, but upon surrender of the certificates by the holders they will be entitled to receive the dividends (without interest) previously paid with respect to such PSI Common Stock as of any record date on or subsequent to the effectiveness of the Merger. After the Merger, there will be no further registration of transfers of SPI Common Stock on the records of SPI and, if certificates formerly evidencing such shares are presented, they will be cancelled and exchanged for certificates evidencing PSI Common Stock. FRACTIONAL SHARES. No fractional shares of PSI Common Stock will be issued in the Merger. In lieu of any fractional share interests, each holder of SPI Common Stock who would otherwise be entitled to a fractional share of PSI Common Stock will, upon surrender of the certificate representing such common stock, receive a whole share of PSI Common Stock if such fractional share to which such holder would otherwise have been entitled is .5 of a share or more, and such fractional share shall be disregarded if it represents less than .5 of a share; provided that such fractional share shall not be disregarded if it represents .5 of 1% or more of the total number of shares of PSI Common Stock such holder is entitled to receive in the Merger. In such event, the holder will be paid an amount in cash (without interest), rounded to the nearest $.01, determined by multiplying (i) the per share closing price on the NYSE of the PSI Common Stock at the time of effectiveness of the Merger, by (ii) the fractional interest. RESTRICTIONS ON OTHER ACQUISITIONS. SPI has agreed not to initiate, solicit or encourage, directly or indirectly, any inquiries or the making of any proposal with respect to a merger, consolidation, share exchange or similar transaction involving them, or any purchase of all or any significant portion of their assets, or any equity interest in them, other than the transactions contemplated by the Merger Agreement, or engage in any negotiations concerning, or provide any confidential information or data to, or have discussions with, any person relating to such a proposal, provided that the boards of directors on behalf of SPI may furnish or cause to be furnished information and may participate in such discussions and negotiations through its representatives with persons who have sought the same if the failure to provide such information or participation in the negotiations and discussions might cause the members of the boards of directors to breach their fiduciary duty to SPI Shareholders under applicable law as advised by counsel. SPI has agreed to notify PSI immediately if inquiries or proposals are received by, any such information is requested from, or negotiations or discussions are sought to be initiated or continued with them, and to keep PSI informed of the status and terms of any such proposals and any such negotiations or discussions. DISTRIBUTIONS. Pending the Merger, SPI is precluded from declaring or paying any dividend on its common stock or making any other distribution to its shareholders other than (i) regular dividends at a quarterly rate not in excess of $.08 per share, (ii) dividends to shareholders of record of SPI immediately prior to the effectiveness of the Merger equal to the amount by which SPI's estimated net asset value at such date exceeds the estimated net asset value at June 30, 1996 and (iii) Required REIT Distributions. Pending the Merger, PSI is precluding from declaring or paying any dividend on its common stock or making any other distribution to its shareholders other than regular quarterly dividends. See "Determination of Payments to be Received by SPI Shareholders in Connection with the Merger." CASH ELECTION PROCEDURE Each holder of record of SPI Common Stock may make a Cash Election and have its shares of SPI Common Stock converted into the right to receive cash in the Merger. If the aggregate number of shares of SPI Common Stock 40 as to which Cash Elections are made, together with shares of SPI Common Stock owned by Dissenting Shareholders (see "Dissenting Shareholders' Rights of Appraisal"), is 20% or less than the number of shares of SPI Common Stock outstanding as of the record date for the meeting of SPI Shareholders, all such shares as to which Cash Elections are made shall be converted into the right to receive cash in the Merger. If the aggregate number of such shares (together with any Dissenting Shares) is more than 20%, such shares shall be converted into the right to receive cash in the Merger on a pro rata basis, and the balance of such shares shall be converted into PSI Common Stock. For a discussion of the federal income tax consequences to SPI Shareholders receiving both cash and PSI Common Stock in connection with the Merger, see "Certain Federal Income Tax Matters -- The Merger -- SPI Shareholders Receiving Cash and PSI Common Stock." All Cash Elections are to be made on a cash election form (a "Cash Election Form"). Holders of record of shares of SPI Common Stock who hold such shares as nominees, trustees or in other representative capacities (a "Representative") may submit multiple Cash Election Forms, provided that such Representative certifies that each such Cash Election Form covers all the shares of SPI Common Stock held by such Representative for a particular beneficial owner. Any Cash Election Form may be revoked by written notice received by Bank of Boston prior to 5:00 p.m., New York City time, on the last business day before the day of the meeting of shareholders. In addition, all Cash Election Forms will automatically be revoked if Bank of Boston is notified in writing that the Merger has been abandoned. IF A SPI SHAREHOLDER DOES NOT PROPERLY COMPLETE AND RETURN THE CASH ELECTION FORM, HE OR SHE WILL RECEIVE PSI COMMON STOCK IN THE MERGER. A SPI SHAREHOLDER MAY NOT MAKE A CASH ELECTION AS TO LESS THAN ALL OF THE SHARES OF SPI COMMON STOCK OWNED BY SUCH SHAREHOLDER. A Cash Election Form is being sent to SPI Shareholders of record on May 13, 1996. To be effective, a Cash Election Form must be properly completed and signed and must be received by Bank of Boston accompanied by all stock certificates representing shares of SPI Common Stock held by the person submitting such Cash Election Form to which the Cash Election Form relates (or by a guarantee of delivery of such certificates in the form and on the terms set forth in the Cash Election Form (a "Guaranteed Delivery")) no later than 5:00 p.m. New York City time on _______________, 1996. If a Cash Election Form is properly revoked, the certificate or certificates (or any guarantee of delivery) in respect of the SPI Common Stock to which the Cash Election Form relates will be promptly returned by Bank of Boston. Bank of Boston may determine whether or not elections to receive cash have been properly made or revoked, and any such determination shall be conclusive and binding. HOLDERS OF SHARES OF SPI COMMON STOCK THAT WISH TO SUBMIT A CASH ELECTION FORM SHOULD DELIVER THEIR STOCK CERTIFICATES WITH SUCH CASH ELECTION FORM OR PROVIDE FOR, AND COMPLY WITH THE REQUIREMENTS OF, GUARANTEED DELIVERY. ANY HOLDER OF SPI COMMON STOCK WHO DOES NOT SUBMIT A PROPERLY COMPLETED AND SIGNED CASH ELECTION FORM ACCOMPANIED BY THE APPLICABLE STOCK CERTIFICATES (OR PROVIDE FOR, AND COMPLY WITH THE REQUIREMENTS OF, GUARANTEED DELIVERY) WHICH IS RECEIVED BY BANK OF BOSTON PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON _______________, 1996 WILL RECEIVE PSI COMMON STOCK IN THE MERGER. IF PSI OR BANK OF BOSTON DETERMINES THAT ANY PURPORTED CASH ELECTION WAS NOT PROPERLY MADE, SUCH PURPORTED CASH ELECTION WILL BE DEEMED TO BE OF NO FORCE AND EFFECT AND THE HOLDERS OF SPI COMMON STOCK MAKING SUCH PURPORTED CASH ELECTION WILL, FOR PURPOSES HEREOF, RECEIVE PSI COMMON STOCK IN THE MERGER. NEITHER PSI, SPI NOR BANK OF BOSTON WILL BE UNDER ANY OBLIGATION TO NOTIFY ANY PERSON OF ANY DEFECT IN A CASH ELECTION FORM. The tax consequences of receiving cash and/or PSI Common Stock are different. See "Certain Federal Income Tax Matters -- The Merger." CONSEQUENCES TO SPI IF THE MERGER IS NOT COMPLETED If the Merger is not completed, SPI will remain as a separate legal entity and will continue to operate its properties. 41 COSTS OF THE MERGER It is estimated that the total consideration (cash and Common Stock) to be paid by PSI to purchase all of the SPI Common Stock in the Merger and to pay related costs and expenses would be $25,240,000 (less the amount of any Required REIT Distributions) and that the total amount of funds that would be required by PSI to purchase the SPI Common Stock from shareholders making Cash Elections and to pay the cost and expenses of the Merger would be $5,660,000 (assuming maximum Cash Elections and no Required REIT Distributions). These amounts will be paid from PSI's working capital or with funds borrowed under credit facilities with a group of banks for which Wells Fargo Bank, National Association acts as agent. These credit facilities aggregate $125,000,000 and bear interest at LIBOR plus .75% to 1.50%. PSI intends to repay amounts borrowed under these facilities from the public or private placement of securities or from PSI's undistributed cash flow. If the Merger is not completed, all costs incurred in connection with the Merger will be paid by the party incurring such costs, except that PSI and SPI each will pay one-half of the cost of any expenses incurred in connection with the printing of this Proxy Statement and Prospectus and related registration statement, the Appraisal, environmental and structural audits and preparation for real estate closings and filing fees. SPI's share of such costs would be paid from its working capital. If the Merger is completed, all costs incurred in connection with the Merger will be paid by PSI. The following is a statement of certain fees and expenses estimated to be incurred in connection with the Merger (exclusive of amounts paid as a result of Cash Elections). Preclosing Transaction Costs Printing and Mailing $ 120,000 Proxy Solicitation 25,000 Legal 40,000 Real Estate Valuations and Fairness Opinions 88,000 Registration, Listing and Filing Fees 40,000 Accounting 20,000 Other 17,000 --------- Subtotal 350,000 Closing Transaction Costs Transfer Fees 300,000 Legal 20,000 Title endorsements and escrow 85,000 Other 10,000 --------- Subtotal 415,000* --------- TOTAL $ 765,000 =========
- --------------- * Would not be incurred if Merger is not approved. ACCOUNTING TREATMENT The Merger will be treated as a purchase. Accordingly, the assets and liabilities of SPI will be accounted for at fair market value based upon independent appraisals and estimates in PSI's financial statements for periods after the Merger. REGULATORY REQUIREMENTS The Merger is subject to compliance with federal and state securities law requirements. 42 COMPARISON OF SPI COMMON STOCK WITH PSI COMMON STOCK The information below compares certain attributes of the SPI Common Stock with the PSI Common Stock. The effect of the Merger on SPI Shareholders who receive PSI Common Stock in the Merger is set forth in italics below each caption. SPI PSI INVESTMENT OBJECTIVES AND POLICIES The principal investment objectives The investment objectives of PSI are are to provide (i) quarterly cash to maximize FFO allocable of holders distributions from its operations of PSI Common Stock and to increase and (ii) long-term capital gains shareholder value through internal through appreciation in the value of growth and acquisitions. FFO is a properties. supplemental performance measure for equity REITs used by industry analysts. FFO does not take into consideration principal payments on debt, capital improvements, distributions and other obligations of PSI. Accordingly, FFO is not a substitute for PSI's net cash provided by operating activities or net income as a measure of PSI's liquidity or operating performance. An increase in PSI's FFO will not necessarily correspond with an increase in distributions to holders of PSI Common Stock. See "-- Liquidity, Marketability and Distributions." PSI intends to continue its operations for an indefinite period of time and is not precluded from raising new capital, including senior securities that would have priority over its Common Stock (including Common Stock issued in the Merger) as to cash flow, distributions and liquidation proceeds, or from reinvesting cash flow or sale or financing proceeds in new properties, except to the extent such reinvestment precludes PSI from satisfying the REIT distribution requirements. Therefore, PSI Shareholders should expect to be able to liquidate their investment only by selling their shares in the market, and the market value of the Common Stock may not necessarily equal or exceed the market value of PSI's assets or the net proceeds which might be available for distribution upon liquidation if PSI were to liquidate. PSI has grown, and intends to continue to grow, as new investments are made. SPI Shareholders who receive PSI Common Stock in the Merger will be changing their investment from holding an interest in an entity engaged solely in the ownership of mini-warehouses to holding an investment in a fully- integrated real estate company, specializing in all aspects of the mini- warehouse industry. The interest of PSI Shareholders can be diluted through the issuance of additional securities, including securities that would have priority over PSI Common Stock as to cash flow, distributions and liquidation proceeds. PSI has an effective registration statement for preferred stock, common stock and warrants and intends to issue additional securities under this registration statement. There is no assurance that any such securities will be issued. See "Risk Factors and Material Considerations -- Uncertainty Regarding Market Price of Common Stock" and "-- Financing Risks -- Dilution and Subordination." 43 SPI PSI PSI has no plans with respect to a sale or financing of any of SPI's properties. PSI intends to continue to acquire properties from other parties. BORROWING POLICIES Has not incurred borrowings in Subject to certain limitations in acquisition of properties, although PSI's Bylaws, PSI has broad powers to not precluded by organizational borrow in furtherance of its documents. investment objectives. PSI has incurred in the past, and may incur in the future, both short-term and long-term debt to increase its funds available for investment in real estate, capital expenditures and distributions. As of December 31, 1995 (pro forma the PSMI Merger), PSI's ratio of "Debt" (liabilities other than "accrued and other liabilities" and "minority interest" that should, in accordance with GAAP, be reflected on PSI's balance sheet) to "Assets" (PSI's total assets that should, in accordance with GAAP, be reflected on PSI's balance sheet) was approximately 8%. PSI, unlike SPI, has incurred debt in the ordinary course of business and reinvests proceeds from borrowings. The incurrence of debt increases the risk of loss of investment. PROPERTIES (As of December 31, 1995) Six wholly-owned properties and one PSI owns equity interests (directly, joint venture property interest in as well as through general and six states. For the year ended limited partnership interests and December 31, 1995, the weighted capital stock interests) in 1,050 average occupancy level and realized properties in 37 states, including monthly rent per square foot of 273 wholly owned properties. See SPI's mini-warehouses were 91% and "Description of PSI Properties." $.88, respectively. See "Description of SPI's Properties." Because PSI owns substantially more property interests in more states than does SPI, PSI's results of operations are less affected by the profitability or lack of profitability of a single property than are those of SPI and it would be more difficult to liquidate PSI than SPI within a reasonable period of time. LIQUIDITY, MARKETABILITY AND DISTRIBUTIONS SPI Common Stock is traded on the PSI Common Stock is traded on the AMEX. During the 12 months ended NYSE. During the 12 months ended December 31, 1995, the average daily December 31, 1995, the average daily trading volume of SPI Common Stock trading volume of PSI Common Stock was 3,051. SPI has not issued any was 59,432 shares (52,913 shares if securities that have priority over May 1995, during which PSI was its common stock. engaged in a public offering of common stock, is excluded). PSI has issued, and may in the future issue, securities that have priority over PSI Common Stock as to cash flow, distributions and liquidation proceeds. 44 SPI PSI Distributions may be declared by the boards of directors of SPI and PSI out of any funds legally available for that purpose. As REITs, they are required to distribute at least 95% of their ordinary REIT taxable income in order to maintain their qualification as REITs, but, subject to certain limitations and penalties, they can take into account subsequent year distributions for purposes of satisfying this requirement. PSI distributes less than its cash available for distribution (recently distributing amounts approximately equal to its taxable income), permitting it to retain funds for additional investment and debt reduction. A SPI Shareholder who receives PSI Common Stock in the Merger should have an investment for which the market is broader and more active than the market for SPI Common Stock. Distributions of PSI Common Stock are subject, however, to priority of preferred stock. See "Risk Factors and Material Considerations -- Consequences of Loss of Qualification as a REIT," "Distributions and Price Range of PSI Common Stock" and "Distributions and Price Range of SPI Common Stock" for information on trading prices of the SPI and PSI Common Stock. TAXATION SPI and PSI were organized to qualify for taxation as REITs and intend to continue to so qualify. As REITs, they generally are permitted to deduct distributions to their shareholders, which effectively eliminates the "double taxation" (at the corporate and shareholder levels) that typically results when a corporation earns income and distributes that income to shareholders in the form of dividends. Distributions received by SPI and PSI Shareholders generally constitute portfolio income, which cannot offset "passive" income and loss from other investments. VOTING RIGHTS Both SPI and PSI hold annual meetings, with each such meeting on a date within 15 months of the prior annual meeting, at which the shareholders elect the directors, with each shareholder entitled to cast as many votes as there are directors to be elected, multiplied by the number of shares registered in his or her name. Under California law, a majority vote of shareholders is required for (i) the removal of directors, (ii) the dissolution of the company, (iii) the amendment of certain provisions of the organizational documents and (iv) the sale of all or substantially all of the company's assets. MANAGEMENT AND DUTIES SPI is advised by, and its properties PSI is managed by its board of are managed by, PSI, under the directors and executive officers. A general supervision of its majority of the directors of PSI are five-member board of directors, independent directors. consisting of two executive officers of PSI, one other director of PSI and two independent directors. Unlike SPI, PSI is self-advised and self-managed. Under California law, directors are accountable to a corporation and its shareholders as fiduciaries and are required to perform their duties in good faith, in a manner believed to be in the best interests of a corporation and its shareholders and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances. The liability of the directors of SPI and PSI is limited pursuant to the provisions of California law and their organizational documents, which limit a director's liability for monetary damages to the respective corporation or its shareholders for breach of the director's duty of care, where a director fails to exercise sufficient care in carrying out the responsibilities of office. Those provisions would not protect a director who knowingly did something wrong, or otherwise 45 acted in bad faith, nor would they foreclose any other remedy which might be available to the respective corporation or its shareholders, such as the availability of non-monetary relief. In addition, the organizational documents provide SPI and PSI with the authority to indemnify its "agents" under certain circumstances for expenses or liability incurred as a result of litigation. Under California law, "agents" are defined to include directors, officers and certain other individuals acting on a corporation's behalf. SPI and PSI have taken advantage of those provisions and have entered into agreements with the respective corporation's directors and executive officers, indemnifying them to the fullest extent permitted by California law. To the extent that the foregoing provisions concerning indemnification apply to actions arising under the Securities Act, SPI and PSI have been advised that, in the opinion of the Commission, such provisions are contrary to public policy and therefore are not enforceable. RESTRICTIONS ON TRANSFER AND ANTI-TAKEOVER PROVISIONS For SPI to be taxed as a REIT, its For PSI to be taxed as a REIT, PSI common stock must be widely held. Common Stock must be widely held. To To aid SPI in meeting this aid PSI in meeting this requirement, requirement, its board of directors PSI's articles of incorporation is given the power to restrict the contain significant restrictions on transfer of shares of their common the ownership of PSI Common Stock. stock if the transfer could produce PSI is authorized to issue a violation of this requirement. 200,000,000 shares of PSI Common Subject to the rules of the AMEX and Stock, of which approximately applicable provisions of California 73,000,000 shares are currently law, SPI can issue authorized common outstanding, and 50,000,000 shares of and preferred stock without preferred stock, of which shareholder approval. approximately 13,500,000 shares are currently outstanding. Subject to the rules of the NYSE and applicable provisions of California law, PSI can issue authorized common and preferred stock without shareholder approval. See "Description of PSI Capital Stock -- Effects of Issuance of Capital Stock," "-- Ownership Limitations" and "Certain Federal Income Tax Matters -- General Tax Treatment of PSI." Given the ownership level of PSI Common Stock by the Hughes Family, PSI should be in a better position to deter attempts to obtain control in transactions not approved by its board of directors than SPI, and PSI Shareholders could be less likely to benefit from a takeover not approved by its board of directors than would SPI Shareholders in a similar circumstance. LIMITED LIABILITY OF INVESTORS Under California law, shareholders are not generally liable for corporate debts or obligations. The SPI and PSI Common Stock are nonassessable. REVIEW OF SHAREHOLDER LISTS Under applicable law, a shareholder is entitled, upon written demand, to inspect and copy the record of shareholders, at any time during usual business hours, for a purpose reasonably related to his or her interest as a shareholder. 46 APPROVAL OF THE MERGER This Proxy Statement and Prospectus and the enclosed proxy are first being mailed on or about May 21, 1996 to SPI Shareholders in connection with the solicitation by the SPI Board of Directors for use at the special meeting of SPI Shareholders (and at any adjournment) to consider and vote upon the Merger. If a proxy in the accompanying form is properly executed and returned before the voting, the shares represented thereby will be voted in the manner specified on the proxy. If no specification is made, the shares held by SPI Shareholders will be voted in favor of the Merger. A proxy is revocable by delivering a subsequently signed and dated proxy or other written notice to the Secretary of SPI at any time before its exercise. A proxy may also be revoked if the person executing the proxy is present at the meeting and chooses to vote in person. Holders of record at the close of business on May 13, 1996 of the SPI Common Stock will be entitled to receive notice of and to vote at the meeting. On such date, there were 3,348,167 shares of SPI Common Stock outstanding, and each share is entitled to one vote on the Merger. Presence, in person or by proxy, of a majority of the shares of SPI Common Stock constitutes a quorum. As of the record date, PSI beneficially owned ________ shares (approximately ____%) of SPI Common Stock and the directors and executive officers of SPI beneficially owned an additional ______ shares (approximately ____%) of SPI Common Stock. Such parties intend to vote their shares of SPI Common Stock for the Merger. The affirmative vote of a majority of the shares of SPI Common Stock outstanding and entitled to vote on the record date is required under California law to approve the Merger. Accordingly, for these purposes, an abstention or a broker non-vote will have the same effect as a vote against the Merger. SPI has voluntarily imposed the additional condition that the Merger be approved by a majority of the shares of SPI Common Stock voting at the meeting of SPI Shareholders not held by PSI. For these purposes, an abstention or broker non- vote will not be counted as a share voting. 47 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SPI. The following table sets forth information with respect to persons known to SPI to be the beneficial owner of more than 5% of the outstanding shares of SPI Common Stock:
Shares of SPI Common Stock Beneficially Owned ------------------ Number Name and Address of Shares Percent ---------------- --------- ------- PSI 701 Western Avenue, Suite 200 Glendale, California 91201-2397(1) 288,900 8.6% Loeb Partners Corporation Loeb Arbitrage Fund 61 Broadway New York, New York 10006(2) 176,100 5.3%
- -------------- (1) This information is as of May 2, 1996. PSI has sole voting and dispositive power with respect to these shares. (2) This information is based on a Schedule 13D dated April 29, 1996 filed by Loeb Partners Corporation and Loeb Arbitrage Fund. As of April 29, 1996 Loeb Partners Corporation beneficially owned 34,825 shares of SPI Common Stock and Loeb Arbitrage Fund beneficially owned 141,275 shares of SPI Common Stock. Loeb Partners Corporation has sole voting and dispositive power with respect to 23,875 shares and shared voting and dispositive power with respect to 10,950 shares, and Loeb Arbitrage Fund has sole voting and sole dispositive power with respect to 141,275 shares. The following table sets forth information as of May 2, 1996 concerning the beneficial ownership of SPI Common Stock of each director of SPI (including Hughes, the chief executive officer) and of all directors and executive officers of SPI as a group:
Shares of SPI Common Stock Beneficially Owned(1) ---------------------------- Number Name Positions of Shares Percent ---- --------- --------- ------- B. Wayne Hughes Chairman of the Board and Chief Executive Officer 3,000(2) (3) Harvey Lenkin President and Director 700(4) (3) Dann V. Angeloff Director 100(5) (3) Vern O. Curtis Director 1,000 (3) Jack D. Steele Director 1,000 (3) All Directors and Executive Officers as a Group (10 persons) 51,600(2)(4)(5)(6) 1.5%
- --------------- (1) Except as otherwise indicated and subject to applicable community property and similar statutes, the persons listed as beneficial owners of the shares have sole voting and investment power with respect to the shares. (2) Shares held of record by PS Insurance Company, Ltd. as to which Mr. Hughes and Tamara L. Hughes (an adult daughter of Mr. Hughes) share voting and dispositive power. (3) Less than 0.1%. (4) Includes 500 shares and 100 shares, respectively, held by custodians of IRAs for Mr. Lenkin and Mrs. Lenkin as to which each has investment power. 48 (5) Shares held by a custodian of an IRA for Mr. Angeloff as to which he has investment power. (6) Includes shares held of record or beneficially by members of the immediate family of officers of SPI and shares held by custodians of individual retirement accounts for the benefit of officers of SPI (or members of their immediate families). PSI. The following table sets forth information with respect to persons known to PSI to be the beneficial owners of more than 5% of the outstanding shares of PSI Common Stock:
Shares of PSI Common Stock Beneficially Owned --------------------- Number Name and Address of Shares Percent ---------------- ---------- -------- B. Wayne Hughes, B. Wayne Hughes, Jr. Parker Hughes Trust No. 2, Tamara L. Hughes, PS Orangeco, Inc. ("PSOI") 37,280,234 51.0% 600 North Brand Boulevard, Suite 300 Glendale, California 91203-1241 PS Insurance Company, Ltd. ("PSIC") 41 Cedar Avenue Hamilton, Bermuda(1) FMR Corp. 5,468,355 7.5% 82 Devonshire Street Boston, Massachusetts 02109(2)
_______________ (1) This information is as of April 30, 1996. The reporting persons listed above (the "PSI Reporting Persons") have filed a joint Schedule 13D, amended as of March 26, 1996. The number of shares of PSI Common Stock beneficially owned by the PSI Reporting Persons at April 30, 1996 includes 6,522 shares which can be acquired upon conversion of 3,875 shares of 8.25% Convertible Preferred Stock which are beneficially owned by the PSI Reporting Persons. The common stock of PSOI (representing approximately 5% of the equity) is owned one-third each by B. Wayne Hughes, Tamara L. Hughes (an adult daughter of B. Wayne Hughes) and B. Wayne Hughes, Jr. (an adult son of B. Wayne Hughes), and the non-voting preferred stock of PSOI (representing approximately 95% of the equity) is owned by PSI. The stock of PSIC is owned approximately 45% by B. Wayne Hughes, 47% by Tamara L. Hughes and 8% by B. Wayne Hughes, Jr. Tamara L. Hughes is the trustee of Parker Hughes Trust No. 2, an irrevocable trust for the benefit of a minor son of B. Wayne Hughes. Each of the PSI Reporting Persons disclaims the existence of a group within the meaning of Section 13(d)(3) of the Exchange Act. B. Wayne Hughes, Tamara L. Hughes and B. Wayne Hughes, Jr. share voting and dispositive power with respect to the 30,777 shares owned by PSOI, and B. Wayne Hughes and Tamara L. Hughes share voting and dispositive power with respect to the 300,000 shares owned by PSIC. B. Wayne Hughes disclaims beneficial ownership of the shares owned by B. Wayne Hughes, Jr., Parker Hughes Trust No. 2 and Tamara L. Hughes (an aggregate of 17,552,044 shares (exclusive of the shares owned by PSOI and PSIC) or approximately 24.0% of the shares of PSI Common Stock outstanding (or deemed to be outstanding) as of April 30, 1996). Each of the other PSI Reporting Persons disclaims beneficial ownership of the shares owned by any other PSI Reporting Person. (2) This information is as of December 31, 1995 and is based on a Schedule 13G filed by FMR Corp. (except that the percent shown in the table is based on the shares of PSI Common Stock outstanding at April 30, 1996). As of December 31, 1995, FMR Corp. beneficially owned 5,468,355 shares of PSI Common Stock. This number includes 5,136,100 shares beneficially owned by Fidelity Management & Research Company, as a result of its serving as investment adviser to several investment companies registered under Section 8 of the Investment Company Act of 1940, and 332,255 shares beneficially owned by Fidelity Management Trust Company, as a result of its serving as investment manager of various institutional accounts. FMR Corp. has sole voting power with respect to 332,255 shares and sole dispositive power with respect to 5,468,355 shares. 49 The following table sets forth information as of April 30, 1996 concerning the beneficial ownership of PSI Common Stock of each director of PSI (including Hughes, the chief executive officer) and of all directors and executive officers of PSI as a group:
Shares of PSI Common Stock: Beneficially Owned(1) Shares Subject to Options(2) Shares Issuable Upon Conversion of Convertible Preferred Stock(3) ----------------------------------------- Name Positions Number of Shares Percent ---- --------- ---------------- ------- B. Wayne Hughes Chairman of the Board and Chief Executive Officer 19,728,190(1)(4) 27.0% Harvey Lenkin President and Director 583,690(1)(5) 0.8% 10,000(2) * 4,040(3) * ---------- ---- 597,730 0.8% Robert J. Abernethy Director 65,591(1) * 20,833(2) * ---------- ---- 86,424 0.1% Dann V. Angeloff Director 85,810(1)(6) 0.1% 833(2) * ---------- ---- 86,643 0.1% William C. Baker Director 10,000(1) * 20,833(2) * ---------- ---- 30,833 * Uri P. Harkham Director 491,116(1)(7) 0.7% 833(2) * ---------- ---- 491,949 0.7% All Directors and Executive Officers as a Group (14 persons) 21,304,121(1)(4)(5) (6)(7)(8) 29.2% 236,494(2) 0.3% 16,664(3) * ---------- ---- 21,557,279 29.4%
_______________ * Less than 0.1% (1) Shares of PSI Common Stock beneficially owned as of April 30, 1996. Except as otherwise indicated and subject to applicable community property and similar statutes, the persons listed as beneficial owners of the shares have sole voting and investment power with respect to such shares. (2) Represents vested portion, as of April 30, 1996, and portion of which will be vested within 60 days of April 30, 1996, of shares of PSI Common Stock subject to options granted to the named individuals or the group pursuant to PSI's 1990 Stock Option Plan and 1994 Stock Option Plan. (3) Represents shares of PSI Common Stock which can be acquired upon conversion of the shares of 8.25% Convertible Preferred Stock which are beneficially owned as of April 30, 1996 by the named individuals or the group. 50 (4) Includes 19,360,295 shares held of record by the B.W. Hughes Living Trust as to which Mr. Hughes has voting and investment power, 1,414 and 1,409 shares, respectively, held by custodians of IRAs for Mr. Hughes and Mrs. Kathleen Hughes as to which each has investment power, 4,826 shares held by Mrs. Hughes as to which she has investment power and 29,469 shares held by Mrs. Hughes as custodian FBO Parker Hughes Trust dated 3/7/91. Also includes 30,777 shares held of record by PSOI as to which Mr. Hughes, Tamara L. Hughes and B. Wayne Hughes, Jr. share voting and dispositive power and 300,000 shares held of record by PSIC as to which Mr. Hughes and Tamara L. Hughes share voting and dispositive power. (5) Includes 1,000 and 700 shares, respectively, held by custodians of IRAs for Mr. Lenkin and Mrs. Lenkin as to which each has investment power, 300 shares held by Mrs. Lenkin and 500 shares held by Mrs. Lenkin as custodian for a son. Also includes 540,000 shares held of record by the Public Storage, Inc. Profit Sharing Plan and Trust (the "PSI Plan") as to which Mr. Lenkin, as a member of the PSI Plan's Advisory Committee, shares the power to direct voting and disposition and as to which Mr. Lenkin expressly disclaims beneficial ownership. (6) Includes 5,000 shares held by a custodian of an IRA for Mr. Angeloff, 2,185 shares held by Mr. Angeloff as trustee of Angeloff's Children's Trust and 76,625 shares held by Mr. Angeloff as trustee of Angeloff Family Trust. (7) Includes 76,400 shares held by Mr. Harkham as trustee of Jonathan Martin Profit Sharing Plan, 371,179 shares held by Harkham Industries, Inc. (dba Jonathan Martin, Inc.), a corporation wholly owned by Mr. Harkham, 5,300 shares held by Mr. Harkham as trustee of Uri Harkham Trust, 13,172 shares held by Jonathan Martin, Inc. Employee Profit Sharing Plan, 650 and 690 shares, respectively, held by custodians of IRAs for Mr. Harkham and Mrs. Harkham as to which each has investment power, and 1,725, 1,800, 1,700, 1,800 and 1,700 shares, respectively, held by Mr. Harkham as custodian for five of his children. (8) Includes shares held of record or beneficially by members of the immediate family of executive officers of PSI and shares held by custodians of IRAs for the benefit of executive officers of PSI. 51 The following tables set forth information as of April 30, 1996 concerning the remaining security ownership of each director of PSI (including Hughes, the chief executive officer) and of all directors and executive officers of PSI as a group:
Shares of 8.25% Convertible Shares of 10% Cumulative Preferred Stock Preferred Stock, Series A Beneficially Owned(1) Beneficially Owned(1) ------------------------- ------------------------------- Number Number Name of Shares Percent of Shares Percent ---- --------- ------- --------- ------- B. Wayne Hughes -- -- -- -- Harvey Lenkin 2,400(1)(2) 0.1% -- -- Robert J. Abernethy -- -- -- -- Dann V. Angeloff -- -- -- -- William C. Baker -- -- -- -- Uri P. Harkham -- -- -- -- All Directors and Executive Officers as a Group (14 persons) 9,900(1)(2)(3) 0.4% 1,460(1)(3) * Shares of 9.20% Cumulative Shares of Adjustable Rate Preferred Stock, Cumulative Preferred Stock, Series B Series C Beneficially Owned(1) Beneficially Owned(1) ------------------------------ ------------------------- Number Number Name of Shares Percent of Shares Percent ---- --------- ------- --------- ------- B. Wayne Hughes -- -- -- -- Harvey Lenkin -- -- 29,300(1)(4) 2.4% Robert J. Abernethy -- -- -- -- Dann V. Angeloff -- -- -- -- William C. Baker -- -- -- -- Uri P. Harkham -- -- -- -- All Directors and Executive Officers as a Group (14 persons) 4,000(1)(3) 0.2% 29,800(1)(3)(4) 2.5% - ---------------
* Less than 0.1% (1) Shares of PSI 8.25% Convertible Preferred Stock, 10% Cumulative Preferred Stock, Series A, 9.20% Cumulative Preferred Stock, Series B, or Adjustable Rate Cumulative Preferred Stock, Series C, as applicable, beneficially owned as of April 30, 1996. Except as otherwise indicated and subject to applicable community property and similar statutes, the persons listed as beneficial owners of the shares have sole voting and investment power with respect to such shares. (2) Includes 100 shares held by Mrs. Lenkin and 300 shares held by Mrs. Lenkin as custodian for a son. (3) Includes shares held of record or beneficially by members of the immediate family of executive officers of PSI and shares held by custodians of IRAs for the benefit of executive officers of PSI. 52 (4) Shares held of record by the PSI Plan as to which Mr. Lenkin, as a member of the PSI Plan's Advisory Committee, shares the power to direct voting and disposition and as to which Mr. Lenkin expressly disclaims beneficial ownership. As of April 30, 1996, the directors and executive officers of PSI did not own any shares of PSI's 9.50% Cumulative Preferred Stock, Series D, 10% Cumulative Preferred Stock, Series E, 9.75% Cumulative Preferred Stock, Series F, Convertible Participating Preferred Stock, Depositary Shares, each representing 1/1,000 of a Share of 8 7/8% Cumulative Preferred Stock, Series G, Depositary Shares, each representing 1/1,000 of a Share of 8.45% Cumulative Preferred Stock, Series H, Convertible Preferred Stock, Series CC or Class B Common Stock (the Class B Common Stock is owned by Tamara L. Hughes and B. Wayne Hughes, Jr.). SOLICITATION OF PROXIES SPI will pay its cost of soliciting proxies. In addition to solicitation by mail, certain directors, officers and regular employees of SPI and its affiliates may solicit the return of proxies by telephone, telegraph, personal interview or otherwise. SPI may also reimburse brokerage firms and other persons representing the beneficial owners of their common stock for reasonable expenses in forwarding proxy solicitation materials to such beneficial owners. Shareholder Communications Corporation may be retained to assist SPI in solicitation of proxies at an estimated cost of $25,000. 53 DESCRIPTION OF SPI'S PROPERTIES SPI has an interest in seven mini-warehouses. The following table contains information as of December 31, 1995 about SPI's properties. Pursuant to the Merger, these properties would be acquired by PSI.
Date Type of Size No. of Net Rentable Opened/ Location Interest (Acres) Spaces Square Feet Acquired - -------------------- ------------ ------- ------ ------------ -------- Las Vegas, NV Fee 2.60 517 65,310 10/89 Bedford Park, IL Fee 3.02 468 50,325 11/89 Los Angeles, CA Fee 1.04 547 43,700 1/90 Silver Spring, MD Fee 0.73 742 57,450 11/90 Brooklyn, NY Fee 1.73 769 50,200 11/90 Newark, CA Fee 4.12 616 58,042 6/94 Hillside, NJ Leasehold(1) 4.37 840 74,300 9/90 - ---------------
(1) SPI owns an undivided 62.5% interest in the Hillside property. The remaining 37.5% interest is owned by Partners Preferred Yield III, Inc., a REIT that is an affiliate of PSI. The facility is on leased land which is leased from an unrelated third party. The term of the lease is through February 2011 which includes two renewal periods of five years each. Substantially all of SPI's facilities were acquired prior to the time that it was customary to conduct environmental investigations in connection with property acquisitions. During the fourth quarter of 1995, SPI completed environmental assessments of its properties to evaluate the environmental condition of, and potential environmental liabilities of, such properties. These assessments were performed by an independent environmental consulting firm. Based on the assessments, SPI has expensed, as of December 31, 1995, an estimated $99,000 for known environmental remediation requirements. As of the date of this Proxy Statement and Prospectus, each of the properties is generating sufficient revenues to cover its operating expenses. None of the properties is subject to any material mortgage, lien, or any encumbrance other than liens for taxes and assessments not yet due or payable, utility easements or other immaterial liens or encumbrances. Each of the properties will continue to be used for its current purpose. SPI believes each property is adequately covered by insurance. As reflected in the table below, SPI has experienced overall improved property operations:
Years ended December 31, ------------------------------- 1993(1) 1994(1) 1995 --------- --------- ------- Weighted average occupancy level 85% 90% 91% Realized monthly rent per occupied square foot (2) $ .78 $ .87 $ .88 - ---------------
(1) Includes the operations of the Brooklyn, New York property before SPI acquired it in December 1994, the operations of the Las Vegas, Nevada, Bedford Park, Illinois, Los Angeles, California and Silver Spring, Maryland properties before SPI acquired them in July 1993 and the Newark, California property from June 1994, the date of acquisition. 54 (2) Realized monthly rent per occupied square foot represents the actual revenue earned per occupied square foot. SPI believes this is a more relevant measure than the posted rental rates, since posted rates can be discounted through the use of promotions. Additional information is set forth below with respect to each of SPI's properties. Each of them has a book value of at least 10% of SPI's total assets or has accounted for at least 10% of its aggregate gross revenues. The Las Vegas, Nevada property is located on the west side of Eastern Avenue approximately one mile east of the University of Nevada. The property operates in a very competitive market. At December 31, 1995, the property's occupancy level was 87% No tenant occupies 10% or more of the rentable area. Set forth below is a schedule showing the occupancy rate and the rent per square foot for the property for the last three years (includes operations prior to SPI's acquisition of the property in June 1993 through conversion of SPI's First Mortgage Convertible Loan ("FMCL") secured by the property to fee ownership):
Occupancy Annual Scheduled Rate Rent Per Square Foot ---------- -------------------- 1995 91% $7.82 1994 95 7.30 1993 91 6.65 1992 83 5.64 1991 68 5.52
The Bedford Park, Illinois property is located at the corner of Sayre Avenue and 79th Street which is approximately nine miles southwest of downtown Chicago. The area around the property has had a significant supply of mini- warehouse space become available at the time this property opened in 1989. The majority of the supply of mini-warehouse space in this market is being absorbed. No tenant occupies 10% or more of the rentable area. Set forth below is a schedule showing the occupancy rate and the rent per square foot for the property for the last three years (includes operations prior to SPI's acquisition of the property in June 1993 through conversion of SPI's FMCL secured by the property to fee ownership):
Occupancy Annual Scheduled Rate Rent Per Square Foot ---------- -------------------- 1995 97% $7.94 1994 96 7.09 1993 94 6.54 1992 83 6.46 1991 59 6.40
The Los Angeles, California property is located on the northeast corner of the intersection of Manchester Avenue and the Harbor (110) Freeway, approximately seven miles southwest of downtown Los Angeles. Competition in this south central area of Los Angeles is light. The property's rental rates are typically lower than its competitors. No tenant occupies 10% or more of the rentable area. Set forth below is a schedule showing the occupancy rate and the rent per square foot for the property for the last three years (includes operations prior to SPI's acquisition of the property in June 1993 through conversion of SPI's FMCL secured by the property to fee ownership):
Occupancy Annual Scheduled Rate Rent Per Square Foot ---------- -------------------- 1995 89% $10.46 1994 85 10.54 1993 86 11.61 1992 77 12.28 1991 77 13.18
55 The Silver Spring, Maryland property is located on the north side of Burlington Avenue, west of Fenton Street, approximately one-fourth of a mile northeast of Washington, D.C. The population around the property is dense and the property has only one significant competitor located one block away. Rental rates at this facility have remained competitive with the rates offered by its nearby competitor. No tenant occupies 10% or more of the rentable area. Set forth below is a schedule showing the occupancy rate and the rent per square foot for the property for the last three years (includes operations prior to SPI's acquisition of the property in June 1993 through conversion of SPI's FMCL secured by the property to fee ownership):
Occupancy Annual Scheduled Rate Rent Per Square Foot ---------- -------------------- 1995 91% $12.96 1994 88 12.03 1993 73 11.79 1992 51 11.78 1991 25 11.77
The Brooklyn, New York property is located on the intersection of Emerson Avenue and Park Avenue approximately eight and one-half miles southeast of downtown Manhattan. The property consist of three connected multi-story buildings. The property competes with two other competitors within a one mile radius of the property. Rental rates are competitive with the rates offered by its competitors. No tenant occupies 10% or more of the rentable area. Set forth below is a schedule showing the occupancy rate and the rent per square foot for the property for the last three years (includes operations prior to SPI's acquisition of the property in December 1994 through conversion of SPI's FMCL secured by the property to fee ownership):
Occupancy Annual Scheduled Rate Rent Per Square Foot ---------- -------------------- 1995 89% $12.05 1994 87 10.61 1993 69 9.96 1992 41 9.58 1991 13 10.89
The Newark, California property is located at the northeast corner of the intersection of Jarvis Avenue and Fircrest Street approximately 35 miles southeast of San Francisco. The property consist of five single story buildings. There are five competitors located within a three mile radius of the property. The rental rates charged at this property are competitive with those charged at the competitor's properties. No tenant occupies 10% or more of the rentable area. Set forth below is a schedule showing the occupancy rate and the rent per square foot for the property for the last two years (the property was acquired in June 1994):
Occupancy Annual Scheduled Rate Rent Per Square Foot ---------- -------------------- 1995 83% $8.95 1994 78 8.62 1993 90 8.28 1992 90 8.24 1991 89 8.18
The Hillside, New Jersey property is located at 669 Glenwood Avenue. The nearest intersection is North Union Avenue. The property is visible from the Garden State Parkway. The property is in a predominately dense residential and light industrial community with no competitors within the immediate market. The property consist of 840 units in single story buildings. No tenant occupies 10% or more of the rentable area. Set forth below is a schedule showing the occupancy rate and the rent per square foot for the property for the last three years: 56
Occupancy Annual Scheduled Rate Rent Per Square Foot --------- --------------------- 1995 98% $13.60 1994 96 12.91 1993 96 12.62 1992 91 12.43 1991 89 13.09
57 DESCRIPTION OF PSI'S PROPERTIES At December 31, 1995, PSI had equity interests (through direct ownership, as well as general and limited partnership interests and stock ownership interests) in 1,050 facilities (273 of which were wholly-owned) located in 37 states. These facilities consist of 1,016 mini-warehouses and 34 business parks. None of PSI's current investments involves 10% or more of PSI's total assets or gross revenues. In the opinion of management of PSI, the facilities in which PSI has invested are adequately insured. The following table reflects the geographic diversification of PSI's mini- warehouses ("Mini") and business parks ("BP"):
At December 31, 1995 -------------------------------------------- Net Rentable Square Feet Number of Facilities (in thousands) ----------------------- ------------------ Mini(2) BP Mini BP ------------- ------- -------- ------- California: Southern 146 16 9,419 1,434 Northern 129 4 7,211 291 Texas 109 5 7,092 670 Florida 81 -- 4,491 -- Illinois 62 -- 3,899 -- Colorado 36 -- 2,275 -- Washington 36 1 2,228 28 Georgia 33 -- 1,727 -- New Jersey 32 -- 1,846 -- Maryland 31 -- 1,772 -- Virginia 28 3 1,921 213 New York 27 -- 1,584 -- Ohio 27 -- 1,651 -- Oregon 25 1 1,232 40 Nevada 22 -- 1,410 -- Pennsylvania 18 -- 1,227 -- Other states (22 states) 174 4 9,734 406 ------ -- ------- ------ Totals 1,016 34 60,719 3,082 ====== == ======= ======
As reflected in the table below, PSI has experienced overall improved property operations:
Years ended December 31, ------------------------ 1993 1994 1995 ---- ---- ---- Weighted average occupancy level 87.0% 89.2% 90.1% Realized monthly rent per occupied square foot (1)(2) $.64 $.68 $.70
- --------------- (1) Mini-warehouses owned throughout the periods. (2) Realized monthly rent per occupied square foot represents the actual revenue earned per occupied square foot. PSI believes this is a more relevant measure than the posted rental rates, since posted rates can be discounted through the use of promotions. 58 DISTRIBUTIONS AND PRICE RANGE OF PSI COMMON STOCK The PSI Common Stock has been listed on the NYSE since October 19, 1984. The following table sets forth the distributions paid per share on the PSI Common Stock in the periods indicated below and the reported high and low sales prices on the NYSE composite tape for the applicable periods.
DISTRIBUTIONS CALENDAR PERIODS HIGH LOW PAID(1) ---------------- ------- ------- ------------- 1994: First quarter 16 13 1/2 $.21 Second quarter 16 3/4 13 3/8 .21 Third quarter 15 3/4 14 1/4 .21 Fourth quarter 15 13 .22 1995: First quarter 17 1/8 13 1/2 .22 Second quarter 17 1/8 15 1/4 .22 Third quarter 18 3/4 16 3/8 .22 Fourth quarter 19 3/4 17 3/8 .22 1996: First quarter 21 7/8 18 7/8 .22 Second quarter
_______________ (1) For GAAP purposes, all distributions were from investment income. As of April 30, 1996, there were approximately 14,436 record holders of PSI Common Stock. On March 1, 1996, the last full trading day prior to the first public announcement of the proposed Merger, the closing price of the Common Stock of PSI was $21 1/2. On _______________, 1996, the last full trading day prior to the date of this Proxy Statement and Prospectus, the closing price was $_____. Holders of PSI Common Stock are entitled to receive distributions when, as and if declared by the board of directors out of any funds legally available for that purpose. PSI, as a REIT, is required to distribute annually at least 95% of its "real estate investment trust taxable income," which, as defined by the relevant tax statutes and regulations, is generally equivalent to net taxable ordinary income. Under certain circumstances, PSI can rectify a failure to meet this distribution requirement by paying dividends after the close of a particular taxable year. See "Certain Federal Income Tax Matters -- General Tax Treatment of PSI." PSI's revolving credit facility with a commercial bank restricts PSI's ability to pay distributions in excess of "Funds from Operations" for the prior four fiscal quarters less scheduled principal payments and less capital expenditures. Funds from Operations is defined in the loan agreement generally as net income before gain on sale of real estate, extraordinary loss on early retirement of debt and deductions for depreciation, amortization and non-cash charges. Also, unless full dividends on PSI's preferred stock have been paid for all past dividend periods, no dividends may be paid on PSI Common Stock, except in certain instances. 59 DISTRIBUTIONS AND PRICE RANGE OF SPI COMMON STOCK The SPI Common Stock has been listed on the AMEX since October 1990. The following table sets forth the distributions paid per share on SPI Common Stock with respect to the periods indicated below and the reported high and low sales prices on the AMEX composite tape for the applicable periods.
DISTRIBUTIONS CALENDAR PERIODS HIGH LOW PAID(1) ---------------- ---- ---- ------------- 1994: First quarter 5 1/2 4 3/4 $.07 Second quarter 4 15/16 4 3/8 .07 Third quarter 5 1/8 4 1/2 .07 Fourth quarter 5 3/8 4 11/16 .40(2) 1995: First quarter 5 3/4 4 3/4 .08 Second quarter 6 1/8 5 5/16 .08 Third quarter 6 1/8 5 1/2 .08 Fourth quarter 6 3/8 6 .28(2) 1996: First quarter 7 6 3/16 .08 Second quarter
_______________ (1) Distributions paid per share of SPI Common Stock with respect to the applicable periods. Actual payment was made 15 days after end of quarter. For GAAP purposes, distributions in 1994 and 1995 were from investment income. (2) Distributions for the fourth quarter of 1994 and 1995 include special distributions of $.32 and $.20, respectively. As of April 30, 1996, there were approximately 963 record holders of SPI's Common Stock. On March 1, 1996, the last full trading day prior to the first public announcement of the proposed Merger, the closing price of SPI Common Stock was $6/5//8. On _______________, 1996, the last full trading day prior to the date of this Proxy Statement and Prospectus, the closing price was $_____. Holders of SPI Common Stock are entitled to receive distributions when, as and if declared by its board of directors out of any funds legally available for that purpose. SPI as a REIT, is required to distribute annually at least 95% of its "real estate investment trust taxable income," which, as defined by the relevant tax statutes and regulations, is generally equivalent to net taxable ordinary income. Under certain circumstances, SPI can rectify a failure to meet this distribution requirement by paying dividends after the close of a particular taxable year. 60 DESCRIPTION OF PSI CAPITAL STOCK PSI is authorized to issue 200,000,000 shares of Common Stock, par value $.10 per share, 7,000,000 shares of Class B Common Stock, par value $.10 per share and 50,000,000 shares of preferred stock, par value $.01 per share. At May 6, 1996, PSI had outstanding 73,042,480 shares of Common Stock (exclusive of shares issuable upon conversion of PSI's convertible stock and shares subject to options), 7,000,000 shares of Class B Common Stock and 13,484,080 shares of preferred stock. COMMON STOCK The following description of PSI Common Stock sets forth certain general terms and provisions of PSI Common Stock. The statements below describing PSI Common Stock are in all respects subject to and qualified in their entirety by reference to the applicable provisions of the PSI's Articles of Incorporation and Bylaws. PSI Shareholders 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 PSI Common Stock and purchases of shares thereof by PSI will be subject to certain restrictions if PSI fails to pay dividends on outstanding preferred stock. See "-- Preferred Stock." Upon any liquidation, dissolution or winding up of PSI, holders of PSI 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 PSI and the preferential amounts owing with respect to any outstanding preferred stock. Holders of PSI 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 PSI at a subsequent date. Each outstanding share of PSI Common Stock entitles the holder to one vote on all matters presented to shareholders for a vote, with the exception that shareholders have cumulative voting rights with respect to the election of the Board of Directors, in accordance with California law. Cumulative voting entitles each PSI Shareholder to cast as many votes as there are directors to be elected multiplied by the number of shares registered in his or her name. A PSI Shareholder may cumulate the votes for directors by casting all of the votes for one candidate or by distributing the votes among as many candidates as the PSI Shareholder chooses. PSI Shareholders have no preemptive or other rights to subscribe for or purchase additional shares of PSI Common Stock. All outstanding shares of PSI Common Stock are fully paid and nonassessable. Under California law, if PSI is liquidated, subject to the rights of any holders of preferred stock, each outstanding share is entitled to participate pro rata in the assets remaining after payment of, or adequate provision for, all known debts and liabilities of PSI. OWNERSHIP LIMITATIONS For PSI 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, PSI's Articles of Incorporation and Bylaws provide certain restrictions on the shares of capital stock that any PSI Shareholder may own. PSI's Articles of Incorporation and Bylaws provide that, subject to certain exceptions, no holder may own, or be deemed to own by virtue of the attribution provisions of the Code, more than (A) 2.0% of the outstanding shares of all common stock of PSI, or (B) 9.9% of the outstanding shares of each class or series of shares of preferred stock of PSI. The Articles of Incorporation and Bylaws provide, however, that no person shall be deemed to exceed the ownership limit solely by reason of the beneficial ownership of shares of any class of stock to the extent that such shares of stock were beneficially owned by such person (including the Hughes Family) at the time of the PSMI Merger. This ownership limitation is necessary in order to assist in preserving PSI's REIT status in view of the Hughes Family's substantial ownership interest in PSI. See "Certain Federal Income Tax Considerations -- Tax Treatment of PSI." PSI's Board of Directors, in its sole and absolute discretion, may grant an exception to the ownership limits to any person so requesting, so long as (A) the Board of Directors has determined that, after giving effect to (x) an acquisition by such person of beneficial ownership (within the meaning of the Code) of the maximum amount of capital 61 stock of PSI permitted as a result of the exception to be granted and (y) assuming that the four other persons who would be treated as "individuals" for the purposes of Section 542(a)(2) of the Code and who would beneficially own the largest amounts of stock of PSI (determined by value) beneficially own the maximum amount of capital stock of PSI permitted under the ownership limits (or any waivers of the ownership limits granted with respect to such persons), PSI 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 PSI's capital stock if such ownership or acquisition (i) would cause more than 50% in value of PSI'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 PSI's stock being beneficially owned by less than 100 persons (determined without reference to any rules of attribution), or (iii) would otherwise result in PSI's failing to qualify as a REIT. PSI's Articles of Incorporation and Bylaws provide that, if any holder of PSI's capital stock purports to transfer shares to a person or there is a change in the capital structure of PSI and either the transfer or the change in capital structure would result in PSI failing to qualify as a REIT, or such transfer or the change in capital structure would cause the transferee to hold shares in excess of the applicable ownership limit, then the stock being transferred (or in the case of an event other than a transfer, the stock beneficially owned) which would cause one or more of the restrictions on ownership or transfer to be violated shall be automatically transferred to a trust for the benefit of a designated charitable beneficiary. The purported transferee of such shares shall have no right to receive dividends or other distributions with respect to such shares and shall have no right to vote such shares. Any dividends or other distributions paid to such purported transferee prior to the discovery by PSI that the shares have been transferred to a trust shall be paid to the trustee of the trust for the benefit of the charitable beneficiary upon demand. The trustee of the trust will have all rights to dividends with respect to shares of stock held in trust, which rights will be exercised for the exclusive benefit of the charitable beneficiary. Any dividends or distributions paid over to the trustee will be held in trust for the charitable beneficiary. The trustee shall designate a transferee of such stock so long as such shares of stock would not violate the restrictions on ownership or transfer in the Articles of Incorporation or Bylaws in the hands of such designated transferee. Upon the sale of such shares, the purported transferee shall receive the lesser of (A)(i) the price per share such purported transferee paid for the stock in the purported transfer that resulted in the transfer of the shares to the trust, or (ii) if the transfer or other event that resulted in the transfer of the shares of the trust was not a transaction in which the purported transferee gave full value for such shares, a price per share equal to the market price on the date of the purported transfer or other event that resulted in the transfer of the shares to the trust and (B) the price per share received by the trustee from the sale or other disposition of the shares held in the trust. CLASS B COMMON STOCK The Class B Common Stock (i) does not participate in distributions until the later to occur of Funds from Operations ("FFO") per Common Share (as defined below by PSI), aggregating $1.80 during any period of four consecutive calendar quarters, or January 1, 2000; thereafter, the Class B Common Stock 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 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 FFO per Common Share aggregating $3.00 during any period of four consecutive calendar quarters or 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 PSI's pro-rata share of depreciation and amortization of unconsolidated equity interests and amortization of assets acquired in the PSMI Merger, including property management agreements and goodwill), and (ii) less FFO attributable to minority interest. FFO is a supplemental performance 62 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 PSI, FFO represents amounts attributable to its shareholders after deducting amounts attributable to the minority interests and before deductions for the amortization of property management agreements and goodwill. FFO does not take into consideration scheduled principal payments on debt, capital improvements, distributions and other obligations of PSI. Accordingly, FFO is not a substitute for PSI'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. PREFERRED STOCK PSI is authorized to issue 50,000,000 shares of preferred stock, $.01 par value per share. PSI's Articles of Incorporation provide that the preferred stock may be issued from time to time in one or more series and give the Board of Directors broad authority to fix the dividend and distribution rights, conversion and voting rights, if any, redemption provisions and liquidation preferences of each series of preferred stock. At May 6, 1996, PSI had 11 series of preferred stock outstanding: eight series of senior preferred stock (the "Senior Preferred Stock") and three 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 proportionate stated value of $25.00 per share, (ii) in preference to the holders of shares of the Common Stock and any other capital stock ranking junior to the Senior Preferred Stock as to payment of dividends (including both series of convertible preferred stock), provides for cumulative quarterly dividends calculated as a percentage of the proportionate stated value (ranging from 8.45% to 10% per year in the case of the seven 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 PSI at a proportionate cash redemption price of $25.00 per share, plus accrued and unpaid dividends (on and after June 30, 1999 in the case of the adjustable rate 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 PSI, the holders of each of the series of Senior Preferred Stock will be entitled to receive out of PSI's assets available for distribution to stockholders, 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), proportionate liquidating distributions in the amount of $25.00 per share, plus all accrued and unpaid dividends. Except as expressly required by law and in certain other limited circumstances, the holders of the Senior Preferred Stock are not entitled to vote. The consent of holders of at least 66 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 PSI, 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). 63 The second 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. The third 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 of $1,916,038 per quarter, (iii) is convertible at the option of the holder at any time into Common Stock at a conversion price of 35.014 shares of Common Stock for each share of such convertible preferred stock (subject to adjustment under certain circumstances) and (iv) on March 31, 2000 will be automatically converted into Common Stock at the conversion price described above. In the event of any voluntary or involuntary liquidation, dissolution or winding up of PSI, the holders of the convertible preferred stock will be entitled to receive out of PSI's assets available for distribution to stockholders, 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, (ii) a minimum liquidation preference of $31,200,000, plus all accrued and unpaid dividends, in the case of the second series of convertible preferred stock and (iii) a minimum liquidation preference of $58,955,000, plus all accrued and unpaid dividends, in the case of the third 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. EFFECTS OF ISSUANCE OF CAPITAL STOCK The issuance of PSI Common Stock and the issuance of preferred stock with special voting rights could be used to deter attempts by a single shareholder or group of shareholders to obtain control of PSI in transactions not approved by the Board of Directors. PSI has no intention to issue PSI Common Stock or the preferred stock for such purposes. 64 DISSENTING SHAREHOLDERS' RIGHTS OF APPRAISAL Pursuant to Chapter 13 of the California General Corporation Law ("Chapter 13"), a holder of shares of SPI Common Stock may, in some instances, be entitled to require SPI to purchase his or her shares for cash at their fair market value as of the day before the first announcement of the terms of the Merger, excluding any appreciation or depreciation in consequence of the Merger. The general terms of the Merger were first announced on March 4, 1996. The following is a brief summary of the procedures to be followed by a SPI Shareholder in order to perfect his or her right, if any, to payments under Chapter 13 and is qualified in its entirety by reference to the text of Chapter 13 attached to this Proxy Statement and Prospectus as Appendix D, to which reference is hereby made for a definitive statement of the rights of dissenting shareholders (the "Dissenting Shareholders") and the procedures to be followed. Shares of SPI Common Stock will qualify as Dissenting Shares only if demands for payment are filed with respect to 5% or more of the outstanding shares of SPI Common Stock. This 5% requirement is applicable because SPI Common Stock is listed on the AMEX, a national securities exchange certified by the California Commissioner of Corporations, as provided in Section 1300(b)(1) of Chapter 13. A Dissenting Shareholder who wishes to require SPI to purchase his or her shares of SPI Common Stock must: (1) vote against the Merger any or all of the shares of SPI Common Stock entitled to be voted (shares of SPI Common Stock not voted are not considered to be voted against the Merger and will not be counted toward the 5% minimum for Dissenters' Rights to exist); provided that if a SPI Shareholder votes part of the shares entitled to be voted in favor of the Merger, and fails to specify the number of shares voted, it is conclusively presumed under California law that such shareholder's approving vote is with respect to all shares entitled to be voted; (2) make written demand upon SPI or its transfer agent at the addresses listed below, which is received not later than the date of the meeting of shareholders, setting forth the number of shares of SPI Common Stock demanded to be purchased by SPI and a statement as to claimed fair market value of such shares at March 1, 1996; and (3) submit for endorsement, within 30 days after the date on which the notice of approval of the Merger by SPI Shareholders described below is mailed to such shareholders, to SPI or its transfer agent at the addresses listed below, the certificates representing any shares in regard to which demand for purchase is being made, or to be exchanged for certificates of appropriate denominations so endorsed, with a statement that the shares are Dissenting Shares. The statement of fair market value in clause (2) above will constitute an offer by the Dissenting Shareholder to sell his or her shares at a price equal to such fair market value. Neither a vote against approval of the Merger nor the giving of a proxy directing a negative vote will be sufficient to constitute the demand described in clause (2) above. A proxy which fails to include instructions with respect to approval of the Merger will be voted in favor of the Merger. Accordingly, shares covered by such a proxy will not be Dissenting Shares. In addition, a vote in favor of the Merger, or a failure to vote at all, will nullify any previously filed written demand for payment. If the holders of 5% or more of the outstanding shares of SPI Common Stock have made demands for payment on or prior to the date of the meeting of SPI Shareholders to approve the Merger, and have voted against the Merger at the meeting, within 10 days after the date of the approval of the Merger, SPI will mail to each Dissenting Shareholder who holds SPI Common Stock a notice of such approval together with a statement of the price determined by SPI to represent the fair market value of Dissenting Shares, a copy of certain sections of Chapter 13, and a brief description of the procedure to be followed if the shareholder desires to exercise Dissenter's Rights. The statement of price will constitute an offer by SPI to purchase at the price stated therein any Dissenting Shares. If SPI and the Dissenting Shareholder agree that any shares of common stock of SPI are Dissenting Shares and agree upon the price of the shares, the Dissenting Shareholder will be entitled to the agreed price plus interest thereon at the legal rate on judgments from the date of such agreement. Subject to the provisions of the California 65 General Corporation Law, payment of the fair market value of the Dissenting Shares will be made within 30 days after such agreement or within 30 days after any statutory or contractual conditions to the Merger are satisfied, whichever is later. If SPI denies that the shares are Dissenting Shares or if SPI and the Dissenting Shareholder fail to agree upon the fair market value of the shares, then the Dissenting Shareholder, within six months after the date on which notice of approval of the Merger by SPI Shareholders is mailed to such shareholder, and not thereafter, may file a complaint in the Superior Court of Los Angeles County, California, requiring the court to determine whether the shares are Dissenting Shares, or the fair market value of the Dissenting Shares, or both, or may intervene in any pending action for the appraisal of any shares of SPI Common Stock. The court will direct payment of the appraised value of the shares, together with interest thereon at the legal rate on judgments from the date on which the judgment was entered, by SPI to the shareholder upon the surrender of the certificates representing such shares to SPI. The costs of the proceeding shall be apportioned as the court considers equitable, but if the appraisal exceeds the price offered by SPI, it shall pay the costs, and if the appraisal is more than 125% of the price offered by SPI, SPI may be required to pay attorneys' and other fees and interest at the legal rate on judgments from the date the shareholder complied with Sections 1300-1302 of Chapter 13. A Dissenting Shareholder may not withdraw demand for purchase of Dissenting Shares without SPI's consent. Written demands for payment and submissions for endorsement must be addressed to Storage Properties, Inc., 701 Western Avenue, Suite 200, Glendale, California 91201-2397, attention: Investor Services Department or to SPI's transfer agent, The First National Bank of Boston, 150 Royall Street, Mail Stop 45-02-53, Canton, Massachusetts 02021. Any reference to "Dissenting Shareholder" in this section "Dissenting Shareholders' Rights of Appraisal" means the recordholder of Dissenting Shares of SPI and includes a transferee of record. A shareholder receiving cash upon the exercise of rights of appraisal may recognize gain or loss for income tax purposes. See "Certain Federal Income Tax Matters." SPI Shareholders are entitled, upon written demand, to inspect and copy the record of SPI Shareholders at any time during usual business hours to communicate with other SPI Shareholders with respect to the Merger. 66 CERTAIN FEDERAL INCOME TAX MATTERS The following discussion summarizes the material federal income tax considerations of the Merger and the subsequent ownership and disposition of shares of PSI Common Stock that are generally applicable to SPI Shareholders. SPI and PSI do not plan to obtain any rulings from the Internal Revenue Service ("IRS") concerning tax issues with respect to the Merger or the qualification of SPI or PSI as REITs. Thus, no assurance can be provided that the statements set forth herein (which do not bind the IRS or the courts) will not be challenged by the IRS or will be sustained if so challenged. Hogan & Hartson L.L.P., counsel to SPI, has reviewed the following discussion and is of the opinion that this discussion fairly summarizes the material federal income tax considerations to a SPI Shareholder as a result of the Merger and the subsequent ownership of PSI Common Stock. This discussion and such opinion are based on the Code, applicable Treasury Regulations, judicial decisions, and IRS rulings, certain factual assumptions related to the ownership and operation of SPI and PSI and certain representations made by SPI, PSI and certain shareholders of SPI. There can be no assurance that the legal authorities on which this discussion is based will not change, perhaps retroactively, that the factual assumptions underlying this discussion will be accurate, or that there will not be a change in the future in the circumstances of SPI and PSI that would affect this discussion. BECAUSE THIS DISCUSSION DOES NOT DEAL WITH ALL ASPECTS OF FEDERAL TAXATION, AND THE TAX CONSEQUENCES WILL NOT BE THE SAME FOR ALL SPI SHAREHOLDERS, SPI SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH SPECIFIC REFERENCE TO THEIR OWN TAX SITUATIONS, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL, AND FOREIGN TAX LAWS. THE MERGER The Merger is intended to be a "reorganization" for federal income tax purposes, and accordingly no gain or loss will be recognized by SPI or PSI in connection with the Merger; and no gain or loss will be recognized by SPI Shareholders who receive solely PSI Common Stock in exchange for their SPI Common Stock in the Merger (but all SPI Shareholders will recognize ordinary income in the amount of any Required REIT Distributions made to them). No rulings have been or will be requested from the IRS regarding the Merger or any other aspect of the matters discussed in this Proxy Statement and Prospectus. Hogan & Hartson L.L.P., counsel to SPI, has rendered an opinion that the Merger will constitute a reorganization under Section 368(a) of the Code, based on certain factual assumptions and representations made by SPI, PSI and certain SPI Shareholders. Of particular importance are certain assumptions and representations relating to the "continuity of interest" requirement discussed below. Continuity of Interest Assumption. To qualify as a reorganization, among other requirements, the Merger must satisfy a "continuity of interest" test, under which the historic SPI Shareholders (shareholders who purchase shares in anticipation of the Merger may not be included for this purpose) must continue to retain a meaningful ownership interest in PSI after the Merger. Generally, this test will be considered satisfied if historic SPI Shareholders exchange at least 50% of SPI's Common Stock for PSI Common Stock in the Merger, and the SPI Shareholders do not at the time of the Merger plan to dispose of that PSI Common Stock. Management of SPI and PSI have represented that they are not aware of any plan on the part of SPI Shareholders that would cause this test not to be satisfied. Based upon this representation, Hogan & Hartson has assumed, for purposes of its opinion, that the Merger will constitute a reorganization, and that the continuity of interest test will be satisfied in the Merger. Reorganization Consequences to SPI and PSI. As a result of reorganization treatment, SPI and PSI will not recognize gain or loss because of the Merger. PSI will also succeed to the assets, liabilities, and tax attributes of SPI. Accordingly, following the Merger, PSI will hold the properties of SPI with a carryover tax basis, determined by reference to the historic basis of those assets in the hands of SPI. The tax basis will not be increased by any cash expended by PSI pursuant to the Cash Elections or to satisfy dissenter's rights, or by the amount of any gain reportable by those SPI Shareholders who may be taxable as a result of the transaction. Exchange of SPI Common Stock Solely for PSI Common Stock. As a result of reorganization treatment (i) no gain or loss will be recognized by SPI Shareholders who exchange their SPI Common Stock solely for PSI Common Stock pursuant to the Merger (but see "Required REIT Distributions" below), and (ii) such a shareholder's aggregate tax basis in the PSI Common Stock received will be the same as the aggregate tax basis of the shares of SPI Common 67 Stock surrendered, and (iii) provided such SPI Common Stock is held as a capital asset at the Effective Time, the holding period of the PSI Common Stock will include the holding period of the surrendered SPI Common Stock. SPI Shareholders Receiving Only Cash. A SPI Shareholder who exchanges SPI Common Stock only for cash (whether pursuant to and subject to the conditions of the Cash Election, or as a result of the exercise of dissenters' rights) will be taxed on the difference between such shareholder's adjusted basis in his or her SPI Common Stock and the amount of cash received. This generally would produce capital gain or loss, depending on the relationship between the cash received and the tax basis of the shares surrendered (it is possible that dividend treatment might apply in some circumstances if the shareholder is actually or constructively related to continuing shareholders of PSI). SPI Shareholders Receiving Cash and PSI Common Stock. As a result of reorganization treatment (i) a SPI Shareholder who, pursuant to the Merger and subject to the conditions of the Cash Election, exchanges SPI Common Stock for a combination of PSI Common Stock and cash will not recognize any loss realized on such exchange, and (ii) such shareholder will recognize gain only to the extent of the lesser of the amount of cash received or the excess of the fair market value of the PSI Common Stock and cash received over such shareholder's tax basis in the SPI Common Stock surrendered. The recognized gain will be treated as capital gain (provided the common stock is held as a capital asset at the Effective Time). The aggregate tax basis of the PSI Common Stock received will be the same as the aggregate tax basis of the SPI Common Stock surrendered for the PSI Common Stock, reduced by the amount of cash received and increased by the amount of gain recognized, if any. The holding period of the PSI Common Stock will include the holding period of the SPI Common Stock surrendered for the PSI Common Stock, provided that the SPI Common Stock is held as a capital asset at the Effective Time. Required REIT Distributions. The Required REIT Distributions would not be treated as cash paid in exchange for the SPI Common Stock, but rather as a dividend taxable to all recipients as ordinary income. Cash Received in Lieu of Fractional Shares of PSI Common Stock. SPI Shareholders that receive cash in lieu of a fractional share of PSI Common Stock pursuant to the Merger will recognize capital gain or loss equal to the difference between the tax basis allocable to the fractional share and the cash paid for it, provided that the SPI Common Stock is held as a capital asset at the Effective Time. Failure to Qualify for Reorganization Treatment. In the event that the Merger does not qualify as a reorganization, the Merger likely would be treated as a taxable sale by SPI of its assets and a contemporaneous liquidation. SPI presumably would not incur a federal income tax liability as a result of this deemed sale because of the contemporaneous deemed liquidating distribution. SPI Shareholders would recognize income or loss equal to the difference between the tax basis of PSI Common Stock and the sum of the fair market value of the PSI Common Stock and the cash received in exchange for SPI Common Stock, but some of the income could be ordinary income. SPI Shareholders receiving PSI Common Stock would have a tax basis in those shares equal to the fair market value of the shares at the time of the Merger, and the holding period would not include the period during which their SPI Common Stock were held. PSI would receive a basis in the properties acquired from SPI equal to their fair market value. OPINION OF COUNSEL Hogan & Hartson L.L.P., counsel to SPI, has rendered an opinion to SPI to the effect that (i) for federal income tax purposes, the Merger will constitute a reorganization under Section 368(a) of the Code, (ii) PSI will continue to qualify as a REIT following the PSMI Merger so long as (A) PSI continues to meet the stock ownership and gross income requirements applicable to REITs and (B) either PSMI at the time of the PSMI Merger was not considered to have any current or accumulated earnings and profits for tax purposes or PSI made distributions prior to the end of 1995 in an amount sufficient to eliminate such earnings and profits, and (iii) the discussion under the heading "Certain Federal Income Tax Matters" fairly summarizes the federal income tax considerations that are material to SPI Shareholders as a result of the Merger and the subsequent ownership of PSI Common Stock (the "Opinion of Counsel"). Hogan & Hartson has not opined that PSI will continue to meet the stock ownership and gross income requirements applicable to REITs following the PSMI Merger or that PSMI did not have current or accumulated earnings and profits at the time of the PSMI Merger, due to the numerous factual determinations and future events that bear on those conclusions. The Opinion of Counsel is based upon certain extensive and detailed representations as to 68 factual and legal matters made by PSI and SPI that relate both to the qualification of PSI as a REIT and to the qualification of the Merger as a reorganization, and specific representations regarding the expected continued ownership of PSI Common Stock to be received in the Merger. In addition, as discussed above, the Opinion of Counsel expressly assumes, based upon certain representations of the management of PSI and SPI that the "continuity of interest" requirement necessary for the Merger to qualify as a reorganization will be satisfied. See "The Merger -- Continuity of Interest Assumption" and "The Merger -- Failure to Qualify for Reorganization Treatment." The Opinion of Counsel also makes certain customary assumptions regarding the accuracy and completeness of documents reviewed by counsel and representations relied upon by counsel and as to the consummation of the Merger in accordance with the terms of the Merger Agreement. The Opinion of Counsel states that the conclusion set forth therein could be adversely affected if any of these representations or assumptions is incorrect or incomplete at the time that the Merger is consummated. The Opinion of Counsel only represents counsel's best judgment, based upon the underlying representations and assumptions, regarding the application of relevant provisions of the Code and interpretations thereof, as set forth in existing judicial decisions, administrative regulations and published rulings and procedures of the Internal Revenue Service. The Opinion of Counsel is not binding upon the Internal Revenue Service or the courts, and there can be no assurance that the Internal Revenue Service would not seek to assert a contrary position. Also, there cannot be any assurance that future legislative, judicial or administrative changes (which could be retroactive in effect) will not adversely affect the conclusions reached in the Opinion of Counsel. Finally, the Opinion of Counsel is expressly limited to the specific conclusions described in the first sentence of this section and does not purport to address any other federal, state, local or foreign tax consequences that may result from the Merger or any other transaction (including the tax consequences of the Merger as applied to specific shareholders of SPI (or classes of shareholders of SPI); the tax consequences of the Merger to SPI or PSI (including whether any entity will recognize any gain in the Merger and PSI's adjusted tax basis in the assets of SPI acquired in the Merger); the application of the "golden parachute" provisions, the alternative minimum tax provisions, and any other provisions of the Code (other than Section 368(a) of the Code) to the Merger and/or participants therein; and whether shareholders of SPI who have provided or will provide services to SPI or PSI will recognize compensation income, either as a result of the Merger or otherwise). GENERAL TAX TREATMENT OF PSI If certain detailed conditions imposed by the Code and the related regulations are met, an entity, such as PSI, 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 PSI of being treated as a REIT for federal income tax purposes is that this enables PSI 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. PSI elected to be taxed as a REIT beginning with its fiscal year ending December 31, 1981. That election will continue in effect until it is revoked or terminated. PSI believes that it has qualified during each of the past five fiscal years, and currently qualifies, as a REIT. While PSI 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 PSI, no assurance can be given by PSI that PSI will so qualify for any particular year. The following is a very brief overview of certain of the technical requirements that PSI must meet on an ongoing basis in order to continue to qualify as a REIT: 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 the PSMI Merger on PSI's Qualification as a REIT -- Violation of Ownership Limitations." 2. PSI's gross income must meet three income tests: (a) at least 75% of the gross income must be derived from specified real estate sources; 69 (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 PSI 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. PSI 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 PSI, or an owner of 10% or more of PSI, directly or constructively owns 10% or more of such tenant (a "Related Party Tenant"). PSI 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." PSI 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," PSI 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 PSI derives no revenue. The "independent contractor" requirement, however, does not apply to the extent the services provided by PSI 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 PSI believes may not be provided by PSI directly without jeopardizing the qualification of rent as "rents from real property" will be performed by "independent contractors." See "-- Consequences of the PSMI Merger on PSI's Qualification as a REIT -- PSI's Assumption of Management Activities With Respect to PSI's Properties," "-- Consequences of the PSMI Merger on PSI's Qualification as a REIT -- Nonqualifying Income," and "-- Consequences of the PSMI Merger on PSI's Qualification as a REIT -- Acquisition of Affiliated Partnership Interests in the PSMI Merger" for a discussion of specific aspects of the PSMI Merger that may impact upon PSI's ability to satisfy the 95% gross income test following the PSMI Merger. 3. Generally, 75% by value of PSI's investments must be in real estate, mortgages secured by real estate, cash, or government securities (including its allocable share of real estate assets held by any partnerships in which PSI owns an interest). Not more than 25% of PSI'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 PSI may not exceed 5% of the value of PSI's total assets, and PSI 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 PSI acquires securities of an issuer. PSI believes that it satisfies these tests. In this regard, however, the 10% voting stock prohibition will preclude PSI from controlling the operations of PSCP and the Lock/Box Company (in which PSI 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, Inc. ("PSCC") (in which PSI will own a less than 10% equity interest) and may preclude PSI from exercising its rights of first refusal with respect to the corporations owning the Canadian operations and the reinsurance business. 4. PSI must distribute to its shareholders in each taxable year an amount at least equal to 95% of PSI's "REIT Taxable Income" (which is generally equivalent to net taxable ordinary income). Under certain circumstances, PSI can rectify a failure to meet the 95% distribution test by paying dividends after the close of a particular taxable year. PSI in years prior to 1990 made distributions in excess of its REIT Taxable Income. During 1990, PSI reduced its distributions to its shareholders to permit PSI to make an optional reduction in short-term borrowings (which 70 previously had been used to fund distributions to its Shareholders). As a result, distributions paid by PSI in 1990 were less than 95% of PSI's REIT Taxable Income for 1990. PSI 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, and PSI expects to satisfy the distribution requirement for 1995 by attributing distributions in 1996 to the 1995 taxable income. PSI 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 PSI will be required to attribute distributions to the prior year will depend on PSI's operating results and the level of distributions as determined by the Board of Directors. Reliance on subsequent year distributions could cause PSI to be subject to certain penalty taxes. In that regard, if PSI 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, PSI 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). PSI intends to comply with this 85% distribution requirement in an effort to minimize any excise tax. Any distributions required to be made by PSI in order to eliminate any accumulated earnings and profits of PSMI would not be counted in determining whether PSI satisfies the 95% distribution test and could adversely impact upon PSI's ability to satisfy the 95% distribution test. See "-- Consequences of the PSMI Merger on PSI'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 PSMI Merger on PSI's Qualification as a REIT -- Acquisition of Affiliated Partnership Interests in the PSMI Merger." Applicable Federal Income Tax. For years in which PSI qualifies as a REIT, PSI generally will be taxable only on its undistributed income. Certain penalty taxes can apply if PSI delays distributions until after the close of a taxable year. Moreover, a confiscatory tax of 100% can apply to income derived by PSI from sales of "dealer" property. If PSI fails to meet either the 75% or 95% source of income tests described above, but still qualifies for REIT status under the reasonable cause exception to those tests, a 100% tax is imposed equal to the amount obtained by multiplying (i) the greater of the amount, if any, by which it failed either the 75% or the 95% income tests, times (ii) the fraction that its REIT Taxable Income represents of PSI's gross income (excluding capital gain and certain other items). It should be noted that PSI is not required to distribute its net capital gain. However, to the extent that PSI does not declare a capital gain dividend, that gain will be taxable to PSI at normal corporate rates, and PSI will be subject to a 4% non-deductible excise tax to the extent that it does not distribute 95% of its capital gain. PSI also will be subject to the minimum tax on tax preference items (excluding items specifically allocable to its shareholders). Under the "Built-in Gain Rules" of IRS Notice 88-19, 1988-1 C.B. 486, PSI will be subject to a corporate level tax if it disposes of any of the assets acquired in the PSMI Merger at any time during the 10-year period beginning on the closing date of the PSMI Merger (the "Restriction Period"), assuming PSI 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 PSI 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 on the Closing Date of the assets disposed of and (b) the selling price of such assets over (ii) PSI's adjusted basis in such assets at the time of the PSMI Merger (such excess being referred to as the "Built-in Gain"). PSI 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 PSI 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 PSMI Merger at regular corporate tax rates and PSI, as the successor to PSMI in the PSMI Merger, would succeed to the liability for that tax. Termination of REIT Election. For any taxable year that PSI fails to qualify as a REIT, it would be taxed at the usual corporate rates on all of its taxable income, whether or not it makes any distributions to its shareholders. Those taxes would reduce the amount of cash available to PSI for distribution to its shareholders. As a result, failure 71 of PSI to qualify during any taxable year as a REIT could have a material adverse effect upon PSI and its shareholders, unless certain relief provisions are available. PSI's election to be treated as a REIT will terminate automatically if PSI fails to meet the qualification requirements described above. If a termination (or a voluntary revocation) occurs, unless certain relief provisions apply, PSI will not be eligible to elect REIT status again until the fifth taxable year that begins after the first year for which PSI's election was terminated (or revoked). If PSI loses its REIT status, but later qualifies and elects to be taxed as a REIT again, PSI may face significant adverse tax consequences. Immediately prior to the effectiveness of the election to return to REIT status, PSI would be treated as if it disposed of all of its assets in a taxable transaction, triggering taxable gain with respect to PSI's appreciated assets. (PSI 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.) PSI 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. CONSEQUENCES OF THE PSMI MERGER ON PSI'S QUALIFICATION AS A REIT In light of the unique federal income tax requirements applicable to REITs, the PSMI Merger could have adverse consequences on PSI's continued qualification as a REIT, as discussed in greater detail below. Hogan & Hartson L.L.P. is of the opinion that PSI will continue to qualify as a REIT following the PSMI Merger so long as (A) PSI has met at all times since the PSMI 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) such merger was not considered to have any current or accumulated earnings and profits for tax purposes or PSI made 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 L.L.P., however, has not opined that PSI will continue to meet the stock ownership and gross income requirements applicable to REITs following the PSMI Merger or that PSMI did not have current or accumulated earnings and profits at the time of the PSMI Merger, due to the numerous factual determinations and future events that bear on those conclusions. PSI's Assumption of Management Activities With Respect to its Properties. Because of the unique federal income tax requirements attributable to REITs, a number of federal income tax issues must be addressed in connection with the PSMI Merger that are unique to PSI's status as a REIT. One issue is whether PSI 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 PSI -- Technical Requirements for Taxation as a REIT." Failure to satisfy these tests would result in the disqualification of PSI as a REIT. See "-- Tax Treatment of PSI -- Termination of REIT Election." As a result of the PSMI Merger, PSI "self-manages" the Properties it owns. PSI received a private letter ruling from the IRS to the effect that, should PSI acquire PSMI and assume and perform the management activities of its Properties, such property management activities by PSI would not adversely affect the characterization of PSI's rents from the Properties as rents from real property. The ruling is based on PSI's description of those management activities to be performed in connection with its own Properties, 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. PSI must meet several annual gross income tests to retain its REIT qualification. See "-- Tax Treatment of PSI -- Technical Requirements for Taxation as a REIT." Under the 95% gross income test, PSI 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." 72 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 PSI as a dealer). After the merger with PSMI, PSI assumed and performs property management activities for the various partnerships and REITs in which PSI has an interest that own Properties, as well as for various other entities that own mini- warehouse properties and/or business parks. PSI receives management fees from such partnerships, REITs, and other owners in exchange for the performance of such management activities. The gross income received by PSI from these property management activities with respect to Properties owned by other entities (including the REITs in which PSI has an ownership interest) and advisory services rendered to such other entities will be treated as income not qualifying under the 95% test ("Nonqualifying Income"). See "-- Acquisition of Affiliated Partnership Interests in the PSMI Merger." If there were no change in current revenues of PSI through acquisitions or otherwise and no other action by PSI to reduce its nonqualifying income (for example, through the prepayment of management fees described below), PSI 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, PSI 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 PSI's existing acquisition program, additional assets may be acquired by it during 1996 that would generate additional qualifying income, thereby lowering the percentage of total Nonqualifying Income recognized by it. Finally, to the extent that PSI acquires properties following the PSMI Merger for which it assumed management responsibilities in connection with the PSMI Merger (such as the merger with SPI), 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 PSI to satisfy these gross income requirements. Moreover, increases in other Nonqualifying Income may similarly affect these calculations. If PSI determines at any time during the year that the receipt of third-party management fees could adversely affect its ability to satisfy the 95% 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. PSI 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 does not jeopardize its qualification as a REIT. If such deferral is not possible, however, PSI would reduce the fees without condition or deferral (reduction estimated at $1.5 million, assuming no growth and no acquisition of properties other than in the Merger). Although this measure would reduce PSI's gross income (and correspondingly its net profits), it would effectively reduce PSI's overall Nonqualifying Income and preserve its REIT status. PSI 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, in December 1995, certain Properties pre-paid to PSI approximately $4.5 million of management fees that PSI otherwise would have been expected to receive for 1996 discounted to compensate for early payment. Pre-payment of management fees reduced the percentage of Nonqualifying Income received by PSI in taxable years subsequent to such prepayment. Hogan & Hartson L.L.P. delivered an 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 PSI 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 PSI 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 PSI's gross income resulted in it failing the 95% test for a taxable year ending after the PSMI Merger, PSI'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 PSI and assuming no acquisition or development of additional assets, PSI estimates that it would not be able to satisfy the 95% gross income test unless it were to take further steps to reduce management fees for those years (for example by deferring the payment of those fees until later years or by disposing of a portion of its 73 management business, including possibly to a taxable corporation in which PSI would own substantially all of the economic interests but none of the voting stock). Finally, PSI and the various other owners of mini-warehouses and business parks for which PSI performs management activities (the "Owners") have entered into an agreement (the "Administrative and Cost-Sharing Agreement") with PSCC pursuant to which PSCC provides the Owners and PSI certain administrative and cost-sharing services in connection with the operation of the Properties and the performance of certain administrative functions. Such services include the provisions of corporate office space and certain equipment, personnel required for the operation and maintenance of the properties, and corporate or partnership administration. Each of the Owners and PSI 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 PSI under the management agreement for the management of the Properties owned by the Owners. PSI 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 PSI for purposes of the 95% test. If PSI fails to meet the 95% 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, PSI 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. PSI intends to conduct its operations and affairs so that it meets the 95% test for each taxable year. PSI also intends to operate so that, in the event it were to fail to meet the 95% 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% test (including by receiving opinions of counsel where appropriate). There can be no assurance, however, that if PSI were unable to satisfy the 95% test, the IRS would necessarily agree that PSI had operated in a manner that qualifies for the "good cause" exception. Furthermore, even if PSI's REIT status were not terminated because of the "good cause" exception, PSI still would be subject to an excise tax on any excess nonqualifying income. Generally, if PSI fails the 95% 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 PSI's taxable income (computed without its distribution deduction) and the denominator of which would be PSI's gross income from all sources. This excise tax would have the general effect of causing PSI to pay all net profits generated from this excess nonqualifying income to the IRS. Violation of Ownership Requirements. For PSI 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. Following the PSMI Merger, the value of the outstanding capital stock held by the Hughes Family was 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 PSI. In order to assist PSI 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 PSI or more than 9.9% of the outstanding shares of each class or series of shares of preferred stock of PSI. (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 PSMI Merger.) However, even with these ownership limitations, there still could be a 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. Therefore, to further assist PSI in meeting the ownership restrictions, the Hughes Family entered into an agreement with PSI for the benefit of PSI and certain designated charitable beneficiaries restricting their acquisition of additional shares of PSI's capital stock and providing that if, at any time, for any reason, more than 50% in value of PSI's outstanding stock otherwise would be considered owned by five or fewer individuals, then a number of shares of PSI Common Stock 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 74 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 PSI (a private letter ruling is legally binding only with respect to the taxpayer to whom it was issued) or contend that PSI failed to enforce these various arrangements and, hence, there can be no absolute assurance that these arrangements will necessarily preserve PSI's REIT status. No private letter ruling has been sought by PSI from the IRS on 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. Under Treasury regulations, 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, any accumulated earnings and profits of PSMI and its predecessors (including earnings and profits resulting from transactions undertaken in contemplation of the PSMI Merger or from the PSMI Merger itself) carried over to PSI in the PSMI Merger and PSI would have been 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 PSI as a REIT (unless the "deficiency dividend" procedures described below apply and PSI complies with those procedures). The amount of any accumulated earnings and profits of PSMI acquired by PSI was based on the consolidated earnings and profits of PSMI (including each of its predecessors) through and including the date of the PSMI Merger ("Consolidated Accumulated Earnings"). As a condition to the merger with PSMI, PSI received a study prepared by PSMI of the earnings and profits of PSMI and its subsidiaries that showed, taking into account projected income of PSMI and its affiliates to and including the time of the PSMI Merger and distributions to the PSMI shareholders made at or prior to the time of the PSMI Merger, PSMI had no Consolidated Accumulated Earnings at the time of the PSMI Merger. The determination of the accumulated earnings and profits acquired by PSI in the PSMI 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 PSMI 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, 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 earnings and profits. Although not free from doubt, it appears pursuant to the recently finalized Treasury regulations that PSI may be able to use certain "deficiency dividend" procedures 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, PSI 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, PSI 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, PSI would cease to qualify as a REIT effective for its taxable year in which the PSMI Merger occurs) or, alternatively, that even if the procedure is available, PSI cannot qualify as a REIT for the taxable year in which the PSMI Merger occurred (but it could qualify as a REIT for subsequent years). Acquisition of Affiliated Partnership Interests in the PSMI Merger. In the PSMI Merger, PSI acquired interests in various partnerships that own and operate Properties. PSI, for purposes of satisfying its REIT asset and 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 PSI'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 75 partnership and the items of gross income of the partnership will retain their same character in the hands of PSI 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 PSI for purposes of determining its REIT qualification. It is expected that substantially all of the properties of the partnerships will constitute real estate assets and generate qualified rental income for these REIT qualification purposes. The acquisition of these partnership interests in the PSMI Merger created several issues regarding PSI's satisfaction of the 95% gross income test. First, PSI 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. PSI 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 PSI's prepayment of management fees set 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 PSI, either rejecting the approach set forth in the private letter rulings mentioned above or contending that PSI's situation is distinguishable from those addressed in the private letter rulings (for example, because PSI does not have a "substantial" interest in the partnerships). Second, PSI will acquire interests in certain of these partnerships that entitles PSI 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 PSI'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 PSI and the percentage of the management fees paid to PSI that are disregarded in determining PSI's Nonqualifying Income. For example, if PSI 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 PSI's interest only contributed 1% of the total capital contributed to the partnership), PSI'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 PSI's ability to satisfy the 95% gross income test. In determining its "capital interest" in the various partnerships in which PSI acquired an interest in the PSMI Merger, PSI 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 PSI "capital interests." If that were to occur, it could adversely affect PSI's ability to satisfy the 95% gross income test following the PSMI Merger. TAXATION OF PSI SHAREHOLDERS Distributions generally will be taxable to PSI Shareholders as ordinary income to the extent of PSI's earnings and profits. For this purpose, earnings and profits of PSI first will 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 the preferred stock will be taxable in full as dividends to the holders of the 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 PSI as capital gain dividends generally will be taxed as long-term capital gain to shareholders, to the extent that the distributions do not exceed PSI'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 PSI, whether characterized as ordinary income or as capital gain, are not eligible for the 70% dividends received deduction for corporations. If PSI should realize a loss, shareholders will not be permitted to deduct any share of that loss. Future regulations may require that the shareholders take into account, for purposes of computing their individual alternative minimum tax liability, certain tax preference items of PSI. 76 PSI may distribute cash in excess of its net taxable income. Upon distribution of such cash by PSI to shareholders (other than as a capital gain dividend), if all of PSI'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 PSI may, upon the sale of the capital stock, realize a higher taxable gain or a smaller loss because the basis of PSI 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 PSI 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," PSI will be required to deduct and withhold from any dividends payable to the shareholder a tax of 31%. These rules may apply when a shareholder fails to supply a correct taxpayer identification number, or when the IRS notifies PSI that the shareholder is subject to the rules or has furnished an incorrect taxpayer identification number. PSI 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 PSI does not qualify as a REIT, distributions by PSI 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 PSI'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 PSI 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. FOREIGN INVESTORS. The rules governing United States income, gift and estate taxation of foreign entities and individuals who are neither citizens nor residents of the United States are complex. They depend not only upon United States federal and state income, gift and estate tax principles, but also upon the treaties, if any, between the United States and the country of the nonresident investor. Therefore, any prospective foreign investor is urged to consult its own tax advisor with respect to both the United States and foreign tax consequences of owning stock of PSI. The following discussion sets forth several points that may be relevant to particular foreign investors. It assumes that any such investor holds the stock of PSI as an investment and not in connection with the conduct of a U.S. trade or business. Ordinary dividends generally will be subject to withholding at the source, at a 30% rate (which may be reduced under applicable treaties if the shareholder satisfies all pertinent requirements). Capital gain dividends may be subject to such withholding at a 35% rate if they relate to dispositions of U.S. real property interests (including the sale or disposition prior to maturity of loans where interest is based upon a "participation" in the income or appreciation from real property). Such dispositions would generally include the sale (but not the retirement) of profit-sharing loans relating to U.S. real property. In addition, such capital gain dividends (net of the amount of regular income tax) may be subject to a 30% branch tax in the hands of any foreign corporate recipients. Such tax may be reduced or eliminated in the case of a corporation that is a resident of a country with which the U.S. has a tax treaty, provided that a majority of such corporation's ultimate shareholders are residents of the country in question and that various filing requirements are satisfied. Investors may be able to obtain a partial refund of taxes withheld in respect of capital gain distributions by filing a nonresident U.S. tax return. Because only a minority of PSI Shareholders are expected to be foreign taxpayers, PSI should qualify as a "domestically-controlled REIT." Accordingly, a foreign taxpayer will not be subject to U.S. tax from gains recognized upon disposition of capital stock (unless the shareholder was present in the U.S. for more than 183 days in the year of sale and certain other requirements are met). Upon the death of a foreign individual 77 shareholder, the investor's stock in PSI will be treated as part of the investor's U.S. estate for purposes of the U.S. estate tax, except as may be otherwise provided in an applicable estate tax treaty. STATE AND LOCAL TAXES The tax treatment of PSI Shareholders in states having taxing jurisdiction over them may differ from the federal income tax treatment. Accordingly, no discussion of state taxation of PSI Shareholders is provided nor is any representation made as to the tax status of PSI in such states. All investors should consult their own tax advisors as to the treatment of PSI under the respective state tax laws applicable to them. LEGAL OPINIONS David Goldberg, senior vice president and general counsel of PSI, will deliver an opinion to the effect that the shares of Common Stock of PSI to be issued in the Merger will be validly issued, fully paid and nonassessable. Mr. Goldberg owns 67,229 shares of PSI Common Stock, 1,000 shares of PSI convertible preferred stock and 500 shares of PSI Senior Preferred Stock and has options to acquire an additional 62,500 shares of PSI Common Stock. Mr. Goldberg also owns 7,000 shares of SPI Common Stock. Hogan & Hartson L.L.P., Washington, D.C., has rendered an opinion to the effect that the discussion under "Certain Federal Income Tax Matters" fairly summarizes the material federal income tax considerations to a SPI Shareholder as a result of the Merger, and the subsequent ownership of PSI Common Stock, as well as to the effect that each of the Merger will constitute a reorganization under Section 368(a) of the Code (based on certain factual assumptions and representations made by SPI, PSI and certain SPI Shareholders). Hogan & Hartson L.L.P. has performed certain legal services on behalf of PSI, including the representation of PSI in the PSMI Merger. EXPERTS The consolidated financial statements of PSI appearing in PSI's Annual Report (Form 10-K), as amended by a Form 10-K/A (Amendment No. 2) dated May 14, 1996, for the year ended December 31, 1995 and incorporated by reference in this Proxy Statement and Prospectus have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports with respect thereto and incorporated herein by reference. Such financial statements are incorporated herein by reference in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. The financial statements of SPI for the year ended December 31, 1995 appearing in this Proxy Statement and Prospectus and in the Annual Report on Form 10-K of SPI have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports included herein. Such financial statements are included herein in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. INDEPENDENT AUDITORS It is anticipated that representatives of Ernst & Young LLP, which has acted as the independent auditors of PSI and SPI since their respective organization, will be in attendance at the special meeting of SPI Shareholders with the opportunity to make a statement if they desire to do so and to respond to any appropriate inquiries of shareholders or their representatives. SHAREHOLDER PROPOSALS Any proposal that a SPI Shareholder wishes to submit for consideration for inclusion in the proxy statement for the 1996 annual meeting of shareholders must be received by SPI no later than July 1, 1996. Shareholder proposals should be addressed to: 701 Western Avenue, Suite 200, Glendale, California 91201-2397. 78 GLOSSARY The following are definitions of certain terms used in this Proxy Statement and Prospectus: "Merger." The merger of SPI with and into PSI. "PSI." Public Storage, Inc., a REIT organized as a California corporation (formerly Storage Equities, Inc.). "PSI Common Stock." Shares of Common Stock, par value $.10 per share, of PSI. "PSI Shareholder." A holder of shares of Common Stock of PSI. "PSMI." Public Storage Management, Inc., a California corporation, which, together with its affiliates, was merged into Storage Equities, Inc. on November 16, 1995. "SPI." Storage Properties, Inc., a REIT organized as a California corporation. "SPI Common Stock." Shares of Common Stock, par value $.05 per share, of SPI. "SPI Shareholder." A holder of shares of SPI Common Stock. "REIT." A real estate investment trust. 79 Appendix A AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is entered into as of this 4th day of March, 1996, by and between PUBLIC STORAGE, INC., a California corporation ("PSI"), and STORAGE PROPERTIES, INC., a California corporation ("SPI"). A. The parties intend that this Agreement shall constitute a Plan of Reorganization for purposes of Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended. The Plan of Reorganization provides for the merger of SPI with and into PSI in accordance with the applicable provisions of the General Corporation Law of California (the "GCLC") and an Agreement of Merger substantially in the form attached hereto as Exhibit A ("Merger Agreement"). B. PSI and SPI believe that it is in the best interests of such corporations and their respective shareholders to enter into and complete this Agreement and they have approved this Agreement and the transactions contemplated hereby. NOW, THEREFORE, the parties agree as follows: 1. ADOPTION OF PLAN. The parties hereby adopt the Plan of Reorganization hereinafter set forth. 2. THE MERGER. 2.1 COMPLETION OF THE MERGER. At the Effective Time (as defined below), SPI will be merged with and into PSI (the "Merger") in accordance with the terms, conditions and provisions of this Agreement and the Merger Agreement. The Merger shall become effective at the time at which the Merger Agreement, together with the requisite Officers' Certificates of PSI and SPI, are filed with the California Secretary of State in accordance with the GCLC (the "Effective Time"). PSI and SPI are sometimes collectively referred to herein as the "Constituent Corporations" and PSI, as the surviving corporation of the Merger, is sometimes referred to herein as the "Surviving Corporation." 2.2 EFFECT OF THE MERGER. At the Effective Time: 2.2.1 CONSTITUENT CORPORATIONS. The separate corporate existence of SPI shall cease and the Surviving Corporation shall thereupon succeed, without other transfer, to all the rights and property of SPI and shall be subject to all the debts and liabilities of SPI in the same manner as if the Surviving Corporation had itself incurred them; all rights of creditors and all liens upon the property of each of the Constituent Corporations shall be preserved unimpaired, provided that such liens upon property of SPI shall be limited to the property affected thereby immediately prior to the Effective Time; and any action or proceeding pending by or against SPI may be prosecuted to judgment, which shall bind the Surviving Corporation, or the Surviving Corporation may be proceeded against or substituted in its place. 2.2.2 ARTICLES AND BYLAWS. The Articles of Incorporation and the Bylaws of PSI, as then amended, shall continue to be the Articles of Incorporation and the Bylaws of the Surviving Corporation until changed as provided by law and their respective provisions. 2.2.3 OFFICERS AND DIRECTORS. The officers and directors of PSI shall continue as officers and directors of the Surviving Corporation until their successors are elected and qualified as provided by law and in accordance with the Articles of Incorporation and Bylaws of the Surviving Corporation. 2.3 CONVERSION OF SPI SHARES. The manner of converting the outstanding shares of Common Stock ($.05 par value) of SPI (the "SPI Shares") into cash and/or shares of Common Stock ($.10 par value) of PSI (the "PSI Shares") shall be as follows: A-1 2.3.1 CASH ELECTION. At the Effective Time, subject to Sections 2.6 and 6.8 hereof, each SPI Share as to which a cash election has been made in accordance with the provisions of Section 2.5 hereof and has not been revoked, relinquished or lost pursuant to Section 2.5 hereof (the "Cash Election Shares") shall be converted into and shall represent the right to receive $7.31 in cash (the "Cash Election Price"). As soon as practicable after the Effective Time, the registered holders of Cash Election Shares shall be paid the cash to which they are entitled hereunder in respect of such Cash Election Shares. 2.3.2 SHARE EXCHANGE. At the Effective Time, subject to Sections 2.4, 2.5, 2.7 and 6.8 hereof, each SPI Share (other than Cash Election Shares) shall be converted into that number of PSI Shares equal to, rounded to the nearest thousandth, the quotient (the "Conversion Number") derived by dividing $7.31 by the average of the per share closing prices on the New York Stock Exchange, Inc. (the "NYSE") of PSI Shares during the 20 consecutive trading days ending on the fifth trading day prior to the meeting of shareholders of SPI provided for in Section 6.2 hereof. If, prior to the Effective Time, PSI should split or combine the PSI Shares, or pay a stock dividend, the Conversion Number will be appropriately adjusted to reflect such action. 2.4 NO FRACTIONAL SHARES. Notwithstanding any other term or provision of this Agreement, no fractional PSI Shares and no certificates or script therefor, or other evidence of ownership thereof, will be issued in the Merger. In lieu of any such fractional share interests, each holder of SPI Shares who would otherwise be entitled to such fractional share will, upon surrender of the certificate representing such SPI Shares, receive a whole PSI Share if such fractional share to which such holder would otherwise have been entitled is .5 of a PSI Share or more, and such fractional share shall be disregarded if it represents less than .5 of a PSI Share; provided, however, that, such fractional share shall not be disregarded if such fractional share to which such holder would otherwise have been entitled represents .5 of 1% or more of the total number of PSI Shares such holder is entitled to receive in the Merger. In such event, such holder shall be paid an amount in cash (without interest), rounded to the nearest $.01, determined by multiplying (i) the per share closing price on the NYSE of the PSI Shares at the Effective Time by (ii) the factional interest. 2.5 PROCEDURE FOR CASH ELECTION. At the time of the mailing of the Proxy Statement and Prospectus provided for in Section 6.5 hereof, PSI will send to each holder of record of SPI Shares at the record date for SPI meeting of shareholders referred to in Section 6.2 hereof a cash election form (the "Form of Election") providing such holder with the option to elect to receive the Cash Election Price with respect to all or any portion of such holder's SPI Shares. Any such election to receive the cash payment contemplated by Section 2.3.1 hereof shall have been properly made only if The First National Bank of Boston (the "Exchange Agent") shall have received at its designated office, by 5:00 p.m., New York time, on the last business day preceding the day of such meeting of shareholders, a Form of Election properly completed and accompanied by certificates for the shares to which such Form of Election relates (or an appropriate guarantee of delivery in a form and on terms satisfactory to PSI), as set forth in such Form of Election. Any Form of Election may be revoked by the person submitting the same to the Exchange Agent only by written notice received by the Exchange Agent prior to 5:00 p.m., New York time, on the last business day before the day of the meeting of shareholders referred to in Section 6.2 hereof. In addition, all Forms of Election shall automatically be revoked if the Exchange Agent is notified in writing by the parties hereto that the Merger has been abandoned. If a Form of Election is revoked pursuant to this Section 2.5, the certificate or certificates or any guarantee of delivery in respect of the SPI Shares to which such Form of Election relates shall be promptly returned to the person submitting the same to the Exchange Agent. The Exchange Agent may determine whether or not elections to receive cash have been properly made or revoked pursuant to this Section 2.5, and any such determination shall be conclusive and binding. If the Exchange Agent determines that any election to receive cash was not properly or timely made, the SPI Shares covered thereby shall not be treated as Cash Election Shares, and shall be converted in the Merger as provided in Section 2.3.2 hereof. The Exchange Agent may, with the mutual agreement of PSI and SPI, establish such procedures, not inconsistent with this Section 2.5, as may be necessary or desirable to implement this Section 2.5. 2.6 PROCEDURE FOR PRORATION. 2.6.1 NO PRORATION. If the aggregate number of Cash Election Shares and Dissenting Shares (as defined below) is 20% or less than the number of SPI Shares outstanding as of the record date for the meeting of shareholders of SPI referred to in Section 6.2, then each Cash Election Share shall be converted in the Merger into the right to receive the Cash Election Price. A-2 2.6.2 PRORATION. If the aggregate number of Cash Election Shares and Dissenting Shares exceeds 20%, then each Cash Election Share shall be converted in the Merger into the right to receive cash or into PSI Shares as follows: the number of Cash Election Shares owned by a holder of SPI Shares that shall be converted into the right to receive the Cash Election Price shall equal the number obtained by multiplying (i) (A) 20% of outstanding SPI Shares less (B) the number of Dissenting Shares (as hereinafter defined), if any, by (ii) a fraction of which the numerator shall be the number of Cash Election Shares owned by such holder and the denominator shall be the aggregate number of Cash Election Shares. The balance of such Cash Election Shares shall be converted into PSI Shares in accordance with the provisions of Section 2.3.2 hereof. Notwithstanding the foregoing, PSI, in its sole discretion, may allow Cash Election Shares to receive the Cash Election Price even if the aggregate number of Cash Election Shares and Dissenting Shares exceeds 20% (but not 50%) of the number of SPI Shares outstanding as of the record date for the meeting of shareholders of SPI referred to in Section 6.2. 2.7 DISSENTING SHARES. SPI Shares held by a holder who has demanded and perfected his right to an appraisal of such shares in accordance with Section 1300 et seq. of the GCLC and who has not effectively withdrawn or lost his right to appraisal ("Dissenting Shares") shall not be converted into or represent the right to receive cash and/or PSI Shares, but the holder thereof shall be entitled only to such rights as are granted by Section 1300 et seq. of the GCLC. Each holder of Dissenting Shares who becomes entitled to payment for SPI Shares pursuant to these provisions of the GCLC shall receive payment therefor from the Surviving Corporation in accordance therewith. If any holder of SPI Shares who demands appraisal in accordance with Section 1300 et seq. of the GCLC shall effectively withdraw with the consent of the Surviving Corporation or lose (through failure to perfect or otherwise) his right to appraisal with respect to SPI Shares, such SPI Shares shall automatically be converted into the right to receive PSI Shares pursuant to Section 2.3.2 hereof. 2.8 PSI SHARES UNAFFECTED. The Merger shall effect no change in any of the outstanding PSI Shares and no outstanding PSI shares shall be converted or exchanged as a result of the Merger, and no cash shall be exchangeable, and no securities shall be issuable, with respect thereto. 2.9 CANCELLATION OF SHARES HELD OR OWNED BY PARTIES. At the Effective Time, any SPI Shares owned by PSI shall be cancelled and retired and no shares shall be issuable, and no cash shall be exchangeable, with respect thereto. 2.10 EXCHANGE OF CERTIFICATES. After the Effective Time, each holder of a certificate theretofore evidencing outstanding SPI Shares which were converted into PSI Shares pursuant hereto, upon surrender of such certificate to the Exchange Agent or such other agent or agents as shall be appointed by the Surviving Corporation, shall be entitled to receive a certificate representing the number of whole PSI Shares into which the SPI Shares theretofore represented by the certificate so surrendered shall have been converted as provided in Section 2.3.2 hereof and cash payment in lieu of fractional share interests, if any, as provided in Section 2.4 hereof. As soon as practicable after the Effective Time, the Exchange Agent will send a notice and a transmittal form to each holder of SPI Shares of record at the Effective Time whose stock shall have been converted into PSI Shares, advising such holder of the effectiveness of the Merger and the procedure for surrendering to the Exchange Agent certificates evidencing SPI Shares in exchange for certificates evidencing PSI Shares. 2.11 STATUS UNTIL SURRENDERED. Until surrendered as provided in Section 2.10 hereof, each outstanding certificate which, prior to the Effective Time, represented SPI Shares (other than Cash Election Shares and Dissenting Shares, if any) will be deemed for all corporate purposes to evidence ownership of the number of whole PSI Shares into which the SPI Shares evidenced thereby were converted. However, until such outstanding certificates formerly evidencing SPI Shares are so surrendered, no dividend payable to holders of record of PSI Shares shall be paid to the holders of such outstanding certificates in respect of SPI Shares, but upon surrender of such certificates by such holders there shall be paid to such holders the amount of any dividends (without interest) theretofore paid with respect to such whole PSI Shares as of any record date on or subsequent to the Effective Time and the amount of any cash (without interest) payable to such holder in lieu of fractional share interests pursuant to Section 2.4 hereof. 2.12 TRANSFER OF SHARES. After the Effective Time, there shall be no further registration of transfers of SPI Shares on the records of SPI and, if certificates formerly evidencing such shares are presented to the Surviving A-3 Corporation, they shall be cancelled and exchanged for certificates evidencing PSI Shares and cash in lieu of fractional share interests as herein provided. 3. CLOSING. 3.1 TIME AND PLACE OF CLOSING. If this Agreement is approved by the shareholders of SPI, a meeting (the "Closing") shall take place as promptly as practicable thereafter at which the parties will exchange certificates and other documents as required by this Agreement. Such Closing shall take place at such time and place as PSI may designate. The date of the Closing shall be referred to as the "Closing Date." 3.2 EXECUTION AND FILING OF MERGER AGREEMENT. At or before the Closing and after shareholder approval by SPI, PSI and SPI shall execute and deliver the Merger Agreement, together with the requisite Officers' Certificates, for filing with the California Secretary of State. The Merger Agreement, together with the requisite Officers' Certificates, shall be duly filed with the California Secretary of State in accordance with the GCLC as soon as practicable following the Closing. 4. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF SPI. SPI represents, warrants and agrees with PSI that: 4.1 AUTHORIZATION. Subject to approval of this Agreement by the shareholders of SPI, (i) the execution, delivery and performance of this Agreement by SPI has been duly authorized and approved by all necessary corporate action of SPI, and (ii) SPI has necessary corporate power and authority to enter into this Agreement, to perform its obligations hereunder and to complete the transactions contemplated hereby. 4.2 ORGANIZATION AND RELATED MATTERS. SPI is a corporation duly organized, existing and in good standing under the laws of the State of California with all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as and where now owned, leased, operated or carried on, as the case may be; and is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the property owned, leased or operated by it or the nature of the business carried on by it requires such qualification and where the failure to so qualify would have a material adverse effect on the business, properties, results of operations or financial condition of SPI. SPI has no direct or indirect equitable or beneficial interest in any other corporation. 4.3 CAPITAL STOCK. The authorized capital stock of SPI consists solely of (i) 100 million shares of Common Stock ($.05 par value), 3,348,167 of which were issued and outstanding as of January 31, 1996 and (ii) 10 million shares of Preferred Stock ($.05 par value), none of which were issued and outstanding as of January 31, 1996. All of the issued and outstanding shares of Common Stock of SPI have been duly and validly authorized and issued, and are fully paid and nonassessable. There are no options or agreements to which SPI is a party or by which it is bound calling for or requiring the issuance of any of SPI's capital stock. 4.4 CONSENTS AND APPROVALS; NO VIOLATION. Assuming approval of the Merger and of this Agreement by the shareholders of SPI, neither the execution and delivery of this Agreement nor the consummation by SPI of the transactions contemplated hereby will: (i) conflict with or result in any breach of any provision of its Articles of Incorporation or Bylaws; (ii) require any consent, waiver, approval, authorization or permit of, or filing with or notification to, any governmental or regulatory authority, except (A) in connection with the applicable requirements, if any, of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), (B) pursuant to the applicable requirements of the federal securities laws and the rules and regulations promulgated thereunder, (C) the filing of the Merger Agreement and Officers' Certificates pursuant to the GCLC and appropriate documents with the relevant authorities of other states in which SPI is authorized to do business, (D) in connection with any state or local tax which is attributable to the beneficial ownership of SPI's real property, (E) as may be required by any applicable state securities or takeover laws, or (F) where the failure to obtain such consent, approval, authorization or permit, or to make such filing or notification, would not in the aggregate have a material adverse effect on SPI or adversely affect the ability of SPI to consummate the transactions contemplated hereby; (iii) result in a violation or breach of, or constitute a default (or give rise to any right of termination, cancellation or acceleration) under any of the terms, conditions or provisions of any note, license, mortgage, agreement or other instrument or obligation to which SPI is a party or any of its A-4 properties or assets may be bound, except for such violations, breaches and defaults which, in the aggregate, would not have a material adverse effect on SPI or adversely affect the ability of SPI to consummate the transactions contemplated hereby; or (iv) assuming the consents, approvals, authorizations or permits and filings or notifications referred to in this Section 4.4 are duly and timely obtained or made, violate any order, writ, injunction, decree, statute, rule or regulation applicable to SPI or its properties or assets, except for violations which would not in the aggregate have a material adverse effect on SPI or adversely affect the ability of SPI to consummate the transactions contemplated hereby. 4.5 LITIGATION. There is no litigation, proceeding or governmental investigation which, individually or in the aggregate, is or may be material and adverse, pending or, to the knowledge of SPI, threatened against SPI or involving any of its properties or assets. 4.6 SEC REPORTS. Since January 1, 1993, SPI has filed all forms, reports and documents with the Securities and Exchange Commission ("SEC") required to be filed by it pursuant to the federal securities laws and the rules and regulations promulgated by the SEC thereunder, all of which complied in all material respects with all applicable requirements of the federal securities laws and such rules and regulations (collectively, the "SPI SEC Reports"). None of the SPI SEC Reports, including without limitation any financial statements or schedules included therein, at the time filed contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 4.7 FINANCIAL STATEMENTS. The financial statements included in the SPI SEC Reports complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with generally accepted accounting principles applied on a basis consistent with prior periods (except as otherwise noted therein), and present fairly the financial position of SPI as of their respective dates, and the results of operations of SPI for the periods presented therein (subject, in the case of the unaudited interim financial statements, to normal year-end adjustments). 4.8 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since January 1, 1996, the business of SPI has been carried on only in the ordinary and usual course and there has not been any material adverse change in its business, results of operations or financial condition, or any damage or destruction in the nature of a casualty loss, whether covered by insurance or not, that would materially and adversely affect its properties, business or results of operations. 4.9 S-4 REGISTRATION STATEMENT AND PROXY STATEMENT AND PROSPECTUS. None of the information supplied or to be supplied by SPI for inclusion or incorporation by reference in the S-4 Registration Statement or the Proxy Statement and Prospectus (as such terms are defined in Section 6.5 hereof) will (i) in the case of the S-4 Registration Statement, at the time it becomes effective and at the Effective Time, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading, or (ii) in the case of the Proxy Statement and Prospectus, at the time of the mailing of the Proxy Statement and Prospectus and at the time of the meetings of the shareholders of SPI, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. 4.10 INSURANCE. All material insurance of SPI is currently in full force and effect and SPI has reported all claims and occurrences to the extent required by such insurance. 4.11 DISCLOSURE. The representations and warranties by SPI in this Agreement and any certificate or document delivered by it pursuant hereto do not and will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained herein or therein not misleading. 5. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF PSI. PSI hereby represents, warrants and agrees with SPI that: 5.1 AUTHORIZATION. Subject to approval of this Agreement by the Board of Directors of PSI, (i) the execution, delivery and performance of this Agreement by PSI has been duly authorized and approved by all necessary A-5 corporate action of PSI, and (ii) PSI has all necessary corporate power and authority to enter into this Agreement, to perform its obligations hereunder and to complete the transactions contemplated hereby. 5.2 ORGANIZATION AND RELATED MATTERS. PSI is a corporation duly organized, existing and in good standing under the laws of the State of California, with all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as and where now owned, leased, operated or carried on, as the case may be; and is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the property owned, leased or operated by it or the nature of the business carried on by it requires such qualification and where the failure to so qualify would have a material adverse effect on the business, properties, results of operations or financial condition of PSI. 5.3 CAPITAL STOCK. The authorized capital stock of PSI consists solely of (i) 200,000,000 shares of Common Stock ($.10 par value), 71,518,796 of which were issued and outstanding as of January 31, 1996, (ii) 7,000,000 shares of Class B Common Stock ($.10 par value), all of which are issued and outstanding and (iii) 50,000,000 shares of Preferred Stock ($.01 par value), 13,450,850 of which were issued and outstanding as of January 31, 1996. All of the issued and outstanding shares of Common Stock, Class B Common Stock and Preferred Stock of PSI have been duly and validly authorized and issued, and are fully paid and nonassessable. Other than options under PSI's employee stock option plan and PSI's convertible capital stock and as provided in this Agreement, there are no options or agreements to which PSI is a party or by which it is bound calling for or requiring the issuance of any of PSI's capital stock. Upon approval of this Agreement by the Board of Directors of PSI, the issuance of the PSI Shares in the Merger will have been duly and validly authorized and, when issued and delivered as provided in this Agreement, the PSI Shares will be duly and validly issued, fully paid and nonassessable; and the shareholders of PSI have no preemptive rights with respect to any shares of capital stock of PSI. 5.4 CONSENTS AND APPROVALS; NO VIOLATION. Assuming the approval of the Merger and this Agreement by the Board of Directors of PSI, neither the execution and delivery of this Agreement nor the consummation by PSI of the transactions contemplated hereby will: (i) conflict with or result in any breach of any provision of its Articles of Incorporation or Bylaws; (ii) require any consent, waiver, approval, authorization or permit of, or filing with or notification to, any governmental or regulatory authority, except (A) in connection with the applicable requirements, if any, of the HSR Act, (B) pursuant to the applicable requirements of the federal securities laws and the rules and regulations promulgated thereunder, (C) the filing of the Merger Agreement and Officers' Certificates pursuant to the GCLC and appropriate documents with the relevant authorities of other states in which PSI is authorized to do business, (D) in connection with any state or local tax which is attributable to the beneficial ownership of SPI's real property, (E) as may be required by any applicable state securities or takeover laws, or (F) where the failure to obtain such consent, approval, authorization or permit, or to make such filing or notification, would not in the aggregate have a material adverse effect on PSI or adversely affect the ability of PSI to consummate the transactions contemplated hereby; (iii) result in a violation or breach of, or constitute a default (or give rise to any right of termination, cancellation or acceleration) under any of the terms, conditions or provisions of any note, license, mortgage, agreement or other instrument or obligation to which PSI is a party or any of its properties or assets may be bound, except for such violations, breaches and defaults which, in the aggregate, would not have a material adverse effect on PSI or adversely affect the ability of PSI to consummate the transactions contemplated hereby; or (iv) assuming the consents, approvals, authorizations or permits and filings or notifications referred to in this Section 5.4 are duly and timely obtained or made, violate any order, writ, injunction, decree, statute, rule or regulation applicable to PSI or its properties or assets, except for violations which would not in the aggregate have a material adverse effect on PSI or adversely affect the ability of PSI to consummate the transactions contemplated hereby. 5.5 LITIGATION. There is no litigation, proceeding or governmental investigation which, individually or in the aggregate, is or may be material and adverse, pending or, to the knowledge of PSI, threatened against PSI or involving any of its properties or assets. 5.6 SEC REPORTS. Since January 1, 1993, PSI has filed all forms, reports and documents with the SEC required to be filed by it pursuant to the federal securities laws and the rules and regulations promulgated by the SEC thereunder, all of which complied in all material respects with all applicable requirements of the federal securities laws and such rules and regulations (collectively, the "PSI SEC Reports"). None of the PSI SEC Reports, including A-6 without limitation any financial statements or schedules included therein, at the time filed contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 5.7 FINANCIAL STATEMENTS. The financial statements included in PSI's SEC Reports complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with generally accepted accounting principles applied on a basis consistent with prior periods (except as otherwise noted therein), and present fairly the financial position of PSI as of their respective dates, and the results of operations of PSI for the periods presented therein (subject, in the case of the unaudited interim financial statements, to normal year-end adjustments). 5.8 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since January 1, 1996, the business of PSI has been carried on only in the ordinary and usual course and there has not been any material adverse change in its business, results of operations or financial condition, or any damage or destruction in the nature of a casualty loss, whether covered by insurance or not, that would materially and adversely affect its properties, business or results of operations. 5.9 S-4 REGISTRATION STATEMENT AND PROXY STATEMENT AND PROSPECTUS. None of the information supplied or to be supplied by PSI for inclusion or incorporation by reference in the S-4 Registration Statement or the Proxy Statement and Prospectus (as those terms are defined in Section 6.5 hereof) will (i) in the case of the S-4 Registration Statement, at the time it becomes effective and at the Effective Time, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading, or (ii) in the case of the Proxy Statement and Prospectus, at the time of the mailing of the Proxy Statement and Prospectus and at the time of the meetings of the shareholders of SPI, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. 5.10 INSURANCE. All material insurance of PSI is currently in full force and effect and PSI has reported all claims and occurrences to the extent required by such insurance. 5.11 DISCLOSURE. The representations and warranties by PSI in this Agreement and any certificate or document delivered by it pursuant hereto do not and will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained herein or therein not misleading. 6. COVENANTS AND AGREEMENTS. 6.1 ORDINARY COURSE. Except as contemplated by this Agreement, during the period from the date of this Agreement to the Effective Time, each of PSI and SPI will carry on its business in the ordinary course in substantially the same manner as heretofore conducted and use all reasonable efforts to: (a) preserve intact its present business, organization and goodwill, (b) maintain all permits, licenses and authorizations required by applicable laws, and (c) keep available the services of its present employees and preserve its relationships with customers, suppliers, lenders, lessors, governmental entities and others having business or regulatory dealings with it. SPI will not issue any capital stock or debt securities convertible into capital stock. Each of PSI and SPI will promptly notify the other of any event or occurrence not in the ordinary and usual course of business or which may have a material adverse effect on the properties or financial condition of such party. 6.2 MEETING OF SHAREHOLDERS. SPI will take all action necessary in accordance with applicable law to convene a meeting of its shareholders as promptly as practicable to consider and vote upon approval of this Agreement, it being understood that the principal terms of the Agreement must be approved by the affirmative vote of (i) a majority of the outstanding SPI Shares entitled to vote at the SPI shareholders meeting and (ii) a majority of the SPI Shares voting at the meeting of SPI shareholders not held by PSI. 6.3 TAX REPORTING. Each of PSI and SPI agrees to report the Merger for federal and state income tax purposes, as a reorganization of the type described in Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended. A-7 6.4 ACQUISITION PROPOSALS. SPI will not initiate, solicit or encourage, directly or indirectly, any inquiries or the making of any proposal with respect to a merger, consolidation, share exchange or similar transaction involving SPI, or any purchase of all or any significant portion of the assets of SPI, or any equity interest in SPI, other than the transactions contemplated hereby (an "Acquisition Proposal"), or engage in any negotiations concerning, or provide any confidential information or data to, or have any discussions with, any person relating to an Acquisition Proposal; provided, however, that the Board of Directors on behalf of SPI may furnish or cause to be furnished information and may participate in such discussions and negotiations through its representatives with persons who have sought the same if the failure to provide such information or participate in such negotiations and discussions might cause the members of the Board of Directors to breach their fiduciary duty to SPI's shareholders under applicable law as advised by counsel. SPI will notify PSI immediately if any such inquiries or proposals are received by, any such information is requested from, or any such negotiations or discussions are sought to be initiated or continued with SPI, and will keep PSI informed of the status and terms of any such proposals and any such negotiations or discussions. 6.5 REGISTRATION AND PROXY STATEMENTS. PSI and SPI will promptly prepare and file with the SEC a preliminary proxy statement in connection with the vote of shareholders of SPI with respect to the Merger. PSI will, as promptly as practicable, prepare and file with the SEC a registration statement on Form S-4 (the "S-4 Registration Statement"), containing a proxy statement/prospectus, in connection with the registration under the Securities Act of 1933, as amended (the "Securities Act") of the PSI Shares to be issued to holders of SPI Shares in the Merger (such proxy statement/prospectus, together with any amendments thereof or supplements thereto, in the form or forms to be mailed to the shareholders of SPI, being herein called the "Proxy Statement and Prospectus"). PSI and SPI will each use its best efforts to have or cause the S-4 Registration Statement to be declared effective as promptly as practicable, and also will take any other action required to be taken under federal or state securities laws, and SPI will use its best efforts to cause the Proxy Statement and Prospectus to be mailed to its shareholders at the earliest practicable date. SPI agrees that if at any time prior to the Effective Time any event with respect to SPI should occur which is required to be described in an amendment of, or a supplement to, the Proxy Statement and Prospectus or the S-4 Registration Statement, such event shall be so described, and such amendment or supplement shall be promptly filed with the SEC and, as required by law, disseminated to the shareholders of SPI and (ii) the Proxy Statement and Prospectus will (with respect to SPI) comply as to form in all material respects with the requirements of the federal securities laws. PSI agrees that (i) if at any time prior to the Effective Time any event with respect to PSI should occur which is required to be described in an amendment of, or a supplement to, the Proxy Statement and Prospectus or the S-4 Registration Statement, such event shall be so described, and such amendment or supplement shall be promptly filed with the SEC and, as required by law, disseminated to the shareholders of SPI and (ii) the Proxy Statement and Prospectus will (with respect to PSI) comply as to form in all material respects with the requirements of the federal securities laws. 6.6 BEST EFFORTS. Each of PSI and SPI shall: (i) promptly make its respective filings and thereafter make any other required submissions under all applicable laws with respect to the Merger and the other transactions contemplated hereby; and (ii) use its best efforts to promptly take, or cause to be taken, all other actions and do, or cause to be done, all other things necessary, proper or appropriate to consummate and make effective the transactions contemplated by this Agreement as soon as practicable. 6.7 REGISTRATION AND LISTING OF PSI SHARES. PSI will use its best efforts to register the PSI Shares under the applicable provisions of the Securities Act and to cause the PSI Shares to be listed for trading on the NYSE upon official notice of issuance. 6.8 DISTRIBUTIONS. SPI will not, at any time prior to the Effective Time, declare or pay any cash distribution on its capital stock or make any other distribution of assets to its shareholders, except (i) regular quarterly dividends on its Common Stock at a quarterly rate not in excess of $.08 per share, (ii) pre-Merger cash distributions to shareholders of record immediately prior to the Effective Time in an aggregate amount equal to the amount by which the estimated Net Asset Value of SPI (as defined below) as of the Effective Time exceeds the estimated Net Asset Value of SPI as of June 30, 1996 and (iii) additional pre-Merger cash distributions required to satisfy SPI's REIT distribution requirements (the number of PSI Shares issued in the Merger and the amount receivable upon Cash Elections would be reduced on a pro rata basis in an aggregate amount equal to such additional distributions). For this purpose, the Net Asset Value of SPI is the sum of (a) the fair market value of SPI's real estate assets as determined by appraisal by Charles R. Wilson & Associates, Inc. as of January 31, 1996, and (b) the book value of SPI's non-real estate assets as A-8 of the date of determination and less (c) SPI's liabilities as of the date of determination and less (d) the amount payable to PSI under the Advisory Agreement dated June 23, 1989 as applicable to a disposition of SPI's properties. The determination of book value and liabilities shall be from SPI's financial statements prepared in accordance with generally accepted accounting principles on a basis consistent with prior periods. PSI shall not, at any time prior to the Effective Time, declare, set aside or make payment of any cash distributions or distribution of assets to its shareholders except for regular quarterly dividends. 7. CONDITIONS. 7.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective obligations of each party to consummate the transactions contemplated by this Agreement are subject to the fulfillment at or prior to the Closing of each of the following conditions, any or all of which may be waived in whole or in part, to the extent permitted by applicable law: 7.1.1 SHAREHOLDER APPROVAL. This Agreement and the transactions contemplated hereby shall have been duly approved by the shareholders of SPI as contemplated by Section 6.2. 7.1.2 BOARD APPROVAL. This Agreement and the transactions contemplated hereby shall have been duly approved by the Board of Directors of PSI. 7.1.3 GOVERNMENTAL AND REGULATORY CONSENTS. All filings required to be made prior to the Effective Time with, and all consents, approvals, permits and authorizations required to be obtained prior to the Effective Time from, governmental and regulatory authorities in connection with the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby (including the expiration of the waiting period requirements of the HSR Act) shall have been made or obtained (as the case may be) without material restrictions, except where the failure to obtain such consents, approvals, permits and authorizations could not reasonably be expected to have a material adverse effect on either PSI or SPI. 7.1.4 LITIGATION. No court or governmental or regulatory authority of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, judgment, decree, injunction or other order (whether temporary, preliminary or permanent) or taken any action which prohibits the consummation of the transactions contemplated by this Agreement; provided, however, that the party invoking this condition shall use its best efforts to have any such judgment, decree, injunction or other order vacated. 7.1.5 REGISTRATION STATEMENT. The S-4 Registration Statement shall have been declared effective and no stop order suspending effectiveness shall have been issued, no action, suit, proceeding or investigation by the SEC to suspend the effectiveness thereof shall have been initiated and be continuing, and all necessary approvals under federal and state securities laws relating to the issuance or trading of the PSI Shares shall have been received. 7.1.6 LISTING OF PSI SHARES ON NYSE. The PSI Shares shall have been approved for listing on the NYSE upon official notice of issuance. 7.1.7 SPI FAIRNESS OPINION. The Board of Directors of SPI shall have received the opinion of Robert A. Stanger & Co., Inc. in form and substance satisfactory to it to the effect that the consideration to be received by the shareholders of SPI in the Merger is fair to such shareholders from a financial point of view, and such opinion shall not have been withdrawn or revoked. 7.1.8 TAX OPINION. The Board of Directors of PSI and SPI shall have received a legal opinion of Hogan & Hartson L.L.P. that the Merger will qualify as a tax-free reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended. 7.2 CONDITIONS TO OBLIGATIONS OF PSI. The obligations of PSI to consummate the transactions contemplated by this Agreement are subject to the fulfillment at or prior to the Closing of the following conditions, which may be waived in whole or in part by PSI to the extent permitted by applicable law: A-9 7.2.1 ACCURACY OF REPRESENTATIONS; PERFORMANCE OF AGREEMENTS. Each of the representations and warranties of SPI contained in this Agreement shall be true and correct in all material respects at and as of the Closing Date as if made at and as of the Closing Date (except to the extent they relate to a particular date) and SPI shall have performed or complied with all agreements and covenants required by this Agreement to be performed or complied with by it at or prior to the Closing. 7.2.2 CERTIFICATE OF OFFICERS. PSI shall have received such certificates of officers of SPI as PSI may reasonably request in connection with the Closing, including a certificate satisfactory to it of the Chief Executive Officer and the Chief Financial Officer of SPI, to the effect that, to the best of their knowledge, all representations and warranties of SPI contained in this Agreement are true and correct in all material respects at and as of the Closing Date as if made at and as of the Closing Date, and SPI has performed or complied with all agreements and covenants required by this Agreement to be performed or complied with by it at or prior to the Closing. 7.2.3 TITLE TO PROPERTIES; ENVIRONMENTAL AUDITS. PSI in its sole discretion shall be satisfied as to the status of title to (including the existence and effect of liens and encumbrances), and the results of an environmental audit of, each of the real properties owned by SPI. 7.2.4 TRADING PRICE OF PSI SHARES. The average of the per share closing prices of the PSI Shares on the NYSE during the 20 consecutive trading days ending on the fifth trading day prior to the meeting of shareholders of SPI provided for in Section 6.2 hereof (the "Average PSI Share Price") shall be not less than $18. 7.2.5 DISSENTING SHARES. The number of Dissenting Shares shall be less than 5% of the outstanding SPI Shares. 7.3 CONDITIONS TO OBLIGATIONS OF SPI. The obligations of SPI to consummate the transactions contemplated by this Agreement are subject to the fulfillment at or prior to the Closing of the following conditions, which may be waived in whole or in part by SPI to the extent permitted by applicable law. 7.3.1 ACCURACY OF REPRESENTATIONS; PERFORMANCE OF AGREEMENTS. Each of the representations and warranties of PSI contained in this Agreement shall be true and correct in all material respects at and as of the Closing Date as if made at and as of the Closing Date (except to the extent they relate to a particular date) and PSI shall have performed or complied in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by it at or prior to the Closing. 7.3.2 CERTIFICATE OF OFFICERS. SPI shall have received such certificates of officers of PSI as SPI may reasonably request in connection with the Closing, including a certificate satisfactory to it of the Chief Executive Officer and the Chief Financial Officer of PSI, to the effect that, to the best of their knowledge, all representations and warranties of PSI contained in this Agreement are true and correct in all material respects at and as of the Closing Date as if made at and as of the Closing Date, and PSI has performed or complied with all agreements and covenants required by this Agreement to be performed or complied with by it at or prior to the Closing. 8. TERMINATION. 8.1 TERMINATION BY MUTUAL CONSENT. This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time, before or after shareholder approval, by the mutual written consent of PSI and SPI. 8.2 TERMINATION BY EITHER PSI OR SPI. This Agreement may be terminated and the Merger may be abandoned by action of the Board of Directors of either PSI or SPI if (i) the Merger shall not have been consummated by March 31, 1997 (provided that the right to terminate this Agreement under this Section 8.2(i) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of or resulted in the failure of the Merger to occur on or before such date); (ii) any court of competent jurisdiction in the United States or some other governmental body or regulatory authority shall have issued an order, decree or ruling or taken any other action permanently restraining, enjoining or otherwise prohibiting the Merger and such order, decree, ruling or other action shall A-10 have become final and nonappealable; or (iii) the shareholders of SPI shall have failed to approve this Agreement and the transactions contemplated hereby at its meeting of shareholders. 8.3 TERMINATION BY PSI. This Agreement may be terminated by PSI and the Merger may be abandoned at any time prior to the Effective Time, if (i) SPI shall have failed to comply in any material respect with any of the covenants, conditions or agreements contained in this Agreement to be complied with or performed by SPI at or prior to such date of termination, which failure to comply has not been cured within five business days following notice to SPI of such failure to comply, or (ii) any representation or warranty of SPI contained in this Agreement shall not be true in all material respects when made, which inaccuracy or breach (if capable of cure) has not been cured within five business days following notice to SPI of the inaccuracy or breach, or on and as of the Closing as if made on and as of the Closing Date. 8.4 TERMINATION BY SPI. This Agreement may be terminated by SPI and the Merger may be abandoned at any time prior to the Effective Time, before or after shareholder approval, if (i) PSI shall have failed to comply in any material respect with any of the covenants, conditions or agreements contained in this Agreement to be complied with or performed by PSI at or prior to such date of termination, which failure to comply has not been cured within five business days following notice to PSI of such failure to comply, or (ii) any representation or warranty of PSI contained in this Agreement shall not be true in all material respects when made, which inaccuracy or beach (if capable of cure) has not been cured within five business days following notice to PSI of the inaccuracy or breach, or on and as of the Closing as if made on and as of the Closing Date. 8.5 EFFECT OF TERMINATION AND ABANDONMENT. In the event of termination of this Agreement and abandonment of the Merger pursuant to this Section 8, no party (or any directors, officers, employees, agents or representatives of any party) shall have any liability or further obligation to any other party or any person who controls a party within the meaning of the Securities Act, except as provided in Section 9.1 and except that nothing herein will relieve any party from liability for any breach of this Agreement. 9. MISCELLANEOUS. 9.1 PAYMENT OF EXPENSES. If the Merger is consummated, the Surviving Corporation shall pay all the expenses incident to preparing for, entering into and carrying out this Agreement and the consummation of the transactions contemplated hereby. If the Merger is not consummated, each of PSI and SPI shall pay its own expenses, except that they shall each pay 50% of any expenses incurred in connection with the printing of the S-4 Registration Statement and the Proxy Statement and Prospectus, the real estate appraisals and environmental audits of SPI's properties and preparation for real estate closings, and any filing fees under the HSR Act, the Securities Act and the Securities Exchange Act of 1934, as amended. 9.2 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. The respective representations and warranties of PSI and SPI contained herein or in any certificate or document delivered pursuant hereto shall expire with and be terminated and extinguished by the effectiveness of the Merger and shall not survive the Effective Time. The sole right and remedy arising from a misrepresentation or breach of warranty, or from the failure of any of the conditions to be met, shall be the termination of this Agreement by the other party. This Section 9.2 shall not limit any covenant or agreement of the parties, which by its terms contemplates performance after the Effective Time. 9.3 MODIFICATION OR AMENDMENT. The parties may modify or amend this Agreement by written agreement authorized by the Boards of Directors and executed and delivered by officers of the respective parties; provided, however, that after approval of this Agreement by the shareholders of SPI, no amendment shall be made which changes any of the principal terms of the Merger or this Agreement, without the approval of such shareholders. 9.4 WAIVER OF CONDITIONS. The conditions to each of the parties' obligations to consummate the Merger are for the sole benefit of such party and may be waived by such party in whole or in part to the extent permitted by applicable law. A-11 9.5 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California, without giving effect to the principles of conflict of laws thereof. 9.6 INTERPRETATION. This Agreement has been negotiated by the parties and is to be interpreted according to its fair meaning as if the parties had prepared it together and not strictly for or against any party. Each of the capitalized terms defined in this Agreement shall, for all purposes of this Agreement (and whether defined in the plural and used in the singular, or vice versa), have the respective meaning assigned to such term in the Section in which such meaning is set forth. References in this Agreement to "parties" or a "party" refer to parties to this Agreement unless expressly indicated otherwise. At each place in this Agreement where the context so requires, the masculine, feminine or neuter gender includes the others and the singular or plural number includes the other. "Including" means "including without limitation." 9.7 HEADINGS. The descriptive headings contained in the Sections and subsections of this Agreement are for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. 9.8 PARTIES IN INTEREST. This Agreement, and the rights, interests and obligations created by this Agreement, shall bind and inure to the benefit of the parties and their respective successors and permitted assigns, and shall confer no right, benefit or interest upon any other person, including shareholders of the respective parties. 9.9 NOTICES. All notices or other communications required or permitted under this Agreement shall be in writing and shall be delivered personally or sent by U.S. mail, postage prepaid, addressed as follows or such other address as the party to be notified has furnished in writing by a notice given in accordance with this Section 9.9: If to PSI: Public Storage, Inc. 600 North Brand Boulevard, Suite 300 Glendale, California 91203-1241 Attention: Harvey Lenkin President If to SPI: Storage Properties, Inc. 600 North Brand Boulevard, Suite 300 Glendale, California 91203-1241 Attention: B. Wayne Hughes Chief Executive Officer Any such notice or communication shall be deemed given as of the date of delivery, if delivered personally, or on the second day after deposit with the U.S. Postal Service, if sent by U.S. mail. 9.10 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which shall be considered one and the same agreement. 9.11 ASSIGNMENT. No rights, interests or obligations of either party under this Agreement may be assigned or delegated without the prior written consent of the other party. 9.12 ENTIRE AGREEMENT. This Agreement, including the Merger Agreement, embodies the entire agreement and understanding between the parties pertaining to the subject matter hereof, and supersedes all prior agreements, understandings, negotiations, representations and discussions, whether written or oral. A-12 9.13 SEVERABLE PROVISIONS. If any of the provisions of this Agreement may be determined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions, and any partially enforceable provisions to the extent enforceable, shall nevertheless be binding and enforceable. 9.14 FURTHER ACTION. If at any time after the Effective Time, the Surviving Corporation shall determine that any assignments, transfers, deeds or other assurances are necessary or desirable to vest, perfect or confirm, of record or otherwise, in the Surviving Corporation, title to any property or rights of SPI, the officers of either Constituent Corporation are fully authorized in the name of SPI or otherwise to execute and deliver such documents and do all things necessary and proper to vest, perfect or confirm title to such property or rights in the Surviving Corporation. IN WITNESS WHEREOF, the parties have entered into this Agreement as of the date first above written. PUBLIC STORAGE, INC. By: /s/ HARVEY LENKIN -------------------------------- Harvey Lenkin President STORAGE PROPERTIES, INC. By: /s/ B. WAYNE HUGHES -------------------------------- B. Wayne Hughes Chief Executive Officer A-13 Exhibit A to Appendix A AGREEMENT OF MERGER THIS AGREEMENT OF MERGER ("Agreement") is entered into as of this _____ day of _____________, 1996, by and between PUBLIC STORAGE, INC., a California corporation ("PSI"), and STORAGE PROPERTIES, INC., a California corporation ("SPI"), with reference to the following: A. PSI was incorporated in 1980 under the laws of California, and on the date hereof its authorized capital stock consists of 200,000,000 shares of Common Stock, $.10 par value (the "PSI Shares"), ___________ of which are issued and outstanding, 7,000,000 shares of Class B Common Stock, all of which are issued and outstanding and 50,000,000 shares of Preferred Stock ($.01 par value), __________ of which are issued and outstanding. B. SPI was incorporated in 1989 under the laws of California, and on the date hereof its authorized capital stock consists of 100,000,000 shares of Common Stock, $.05 per value (the "SPI Shares"), 3,348,167 of which are issued and outstanding and 10,000,000 shares of Preferred Stock, $.05 par value, none of which are issued and outstanding. C. PSI and SPI have entered into an Agreement and Plan of Reorganization dated as of March 4, 1996 (the "Plan"), setting forth certain representations, warranties, conditions and agreements pertaining to the Merger (as defined below). D. The Boards of Directors of PSI and SPI have approved the Plan and this Agreement of Merger, and the requisite shareholder approval has been obtained. NOW, THEREFORE, the parties agree as follows: ARTICLE I --------- 1.1 THE MERGER. At the Effective Time (as defined below), SPI will be merged with and into PSI (the "Merger") and PSI shall be the surviving corporation. PSI and SPI are sometimes collectively referred to herein as the "Constituent Corporations" and PSI, as the surviving corporation of the Merger, is sometimes referred to herein as the "Surviving Corporation." 1.2 EFFECTIVE TIME. The Merger shall become effective at the time at which this Agreement, together with the requisite Officers' Certificates of PSI and SPI, are filed with the California Secretary of State (the "Effective Time"). 1.3 EFFECT OF THE MERGER. At the Effective Time: (a) The separate corporate existence of SPI shall cease and the Surviving Corporation shall thereupon succeed, without other transfer, to all the rights and property of SPI and shall be subject to all the debts and liabilities of SPI in the same manner as if the Surviving Corporation had itself incurred them; all rights of creditors and all liens upon the property of each of the Constituent Corporations shall be preserved unimpaired, provided that such liens upon property of SPI shall be limited to the property affected thereby immediately prior to the Effective Time; and any action or proceeding pending by or against SPI may be prosecuted to judgment, which shall bind the Surviving Corporation, or the Surviving Corporation may be proceeded against or substituted in its place. E.A-1 (b) The Articles of Incorporation and the Bylaws of PSI, as then amended, shall continue to be the Articles of Incorporation and the Bylaws of the Surviving Corporation until changed as provided by law and their respective provisions. (c) The officers and directors of PSI shall continue as officers and directors of the Surviving Corporation until their successors are elected and qualified as provided by law and in accordance with the Articles of Incorporation and Bylaws of the Surviving Corporation. ARTICLE II ---------- 2.1 CONVERSION OF SPI SHARES. The manner of converting the outstanding SPI Shares into cash and/or PSI Shares shall be as follows: (a) At the Effective Time, subject to Section 2.6 of the Plan, each SPI Share as to which a cash election has been made in accordance with the provisions of Section 2.5 of the Plan and has not been revoked, relinquished or lost pursuant to Section 2.5 of the Plan (the "Cash Election Shares") shall be converted into and shall represent the right to receive $_______ in cash (the "Cash Election Price"). As soon as practicable after the Effective Time, the registered holders of Cash Election Shares shall be paid the cash to which they are entitled hereunder in respect of such Cash Election Shares. (b) At the Effective Time, subject to Sections 2.4, 2.5 and 2.7 of the Plan, each SPI Share (other than Cash Election Shares) shall be converted into __________ PSI Shares. 2.2 NO FRACTIONAL SHARES. Notwithstanding any other term or provision of this Agreement or the Plan, no fractional PSI Shares and no certificates or script therefor, or other evidence of ownership thereof, will be issued in the Merger. In lieu of any such fractional share interests, each holder of SPI Shares who would otherwise be entitled to such fractional share will, upon surrender of the certificate representing such SPI shares, receive a whole PSI Share if such fractional share to which such holder would otherwise have been entitled is .5 of an PSI Share or more, and such fractional share shall be disregarded if it represents less than .5 of an PSI Share; provided, however, that, such fractional share shall not be disregarded if such fractional share to which such holder would otherwise have been entitled represents .5 of 1% or more of the total number of PSI Shares such holder is entitled to receive in the Merger. In such event, such holder shall be paid an amount in cash (without interest), rounded to the nearest $.01, determined by multiplying (i) the per share closing price on the New York Stock Exchange, Inc. of the PSI Shares at the Effective Time by (ii) the fractional interest. 2.3 DISSENTING SHARES. SPI Shares held by a holder who has demanded and perfected his right to an appraisal of such shares in accordance with Section 1300 et seq. of the General Corporation Law of California (the "GCLC") and who has not effectively withdrawn or lost his right to appraisal ("Dissenting Shares") shall not be converted into or represent the right to receive cash and/or PSI Shares, but the holder thereof shall be entitled only to such rights as are granted by Section 1300 et seq. of the GCLC. Each holder of Dissenting Shares who becomes entitled to payment for SPI Shares pursuant to these provisions of the GCLC shall receive payment therefor from the Surviving Corporation in accordance therewith. If any holder of SPI Shares who demands appraisal in accordance with Section 1300 et seq. of the GCLC shall effectively withdraw with the consent of the Surviving Corporation or lose (through failure to perfect or otherwise) his right to appraisal with respect to SPI Shares, such SPI Shares shall automatically be converted into the right to receive PSI Shares pursuant to Section 2.1(b) hereof. 2.4 PSI SHARES UNAFFECTED. The Merger shall effect no change in any of the PSI Shares and no outstanding PSI shares shall be converted or exchanged as a result of the Merger, and no cash shall be exchangeable and no securities shall be issuable, with respect thereto. 2.5 CANCELLATION OF SHARES HELD OR OWNED BY PARTIES. At the Effective Time, any SPI Shares owned by PSI shall be cancelled and retired and no shares shall be issuable, and no cash shall be exchangeable, with respect thereto. E.A-2 2.6 EXCHANGE OF CERTIFICATES. After the Effective Time, each holder of a certificate theretofore evidencing outstanding SPI Shares which were converted into PSI Shares pursuant hereto, upon surrender of such certificate to First National Bank of Boston (the "Exchange Agent") or such other agent or agents as shall be appointed by the Surviving Corporation, shall be entitled to receive a certificate representing the number of whole PSI Shares into which the SPI Shares theretofore represented by the certificate so surrendered shall have been converted and cash payment in lieu of fractional share interests, if any. As soon as practicable after the Effective Time, the Exchange Agent will send a notice and a transmittal form to each holder of SPI Shares of record at the Effective Time whose stock shall have been converted into PSI Shares, advising such holder of the effectiveness of the Merger and the procedure for surrendering to the Exchange Agent certificates evidencing SPI Shares in exchange for certificates evidencing PSI Shares. 2.7 STATUS UNTIL SURRENDERED. Until surrendered as provided in Section 2.6 hereof, each outstanding certificate which, prior to the Effective Time, represented SPI Shares (other than Cash Election Shares and Dissenting Shares, if any) will be deemed for all corporate purposes to evidence ownership of the number of whole PSI Shares into which the SPI Shares evidenced thereby were converted. However, until such outstanding certificates formerly evidencing SPI Shares are so surrendered, no dividend payable to holders of record of PSI Shares shall be paid to the holders of such outstanding certificates in respect of SPI Shares, but upon surrender of such certificates by such holders there shall be paid to such holders the amount of any dividends (without interest) theretofore paid with respect to such whole PSI Shares as of any record date on or subsequent to the Effective Time and the amount of any cash (without interest) payable to such holder in lieu of fractional share interests. 2.8 TRANSFER OF SHARES. After the Effective Time, there shall be no further registration of transfers of SPI Shares on the records of SPI and, if certificates formerly evidencing such shares are presented to the Surviving Corporation, they shall be cancelled and exchanged for certificates evidencing PSI Shares and cash in lieu of fractional share interests as herein provided. ARTICLE III ----------- 3.1 HEADINGS. The descriptive headings contained in the Sections of this Agreement are for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. 3.2 PARTIES IN INTEREST. This Agreement, and the rights, interests and obligations created by this Agreement, shall bind and inure to the benefit of the parties and their respective successors and permitted assigns, and shall confer no right, benefit or interest upon any other person, including shareholders of the respective parties. 3.3 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which shall be considered one and the same agreement. 3.4 FURTHER ACTION. If at any time after the Effective Time, the Surviving Corporation shall determine that any assignments, transfers, deeds or other assurances are necessary or desirable to vest, perfect or confirm, of record or otherwise, in the Surviving Corporation, title to any property or rights of SPI, the officers of either Constituent Corporation are fully authorized in the name of SPI or otherwise to execute and deliver such documents and do all things necessary and proper to vest, perfect or confirm title to such property or rights in the Surviving Corporation. 3.5 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California, without giving effect to the principles of conflict of laws thereof. E.A-3 3.6 ABANDONMENT OF MERGER. The Constituent Corporations have the power to abandon the Merger by mutual written consent prior to the filing of this Agreement with the California Secretary of State. IN WITNESS WHEREOF, the parties have entered into this Agreement as of the date first above written. PUBLIC STORAGE, INC. By: _________________________________ Harvey Lenkin President By: _________________________________ Obren B. Gerich Assistant Secretary STORAGE PROPERTIES, INC. By: _________________________________ B. Wayne Hughes Chairman of the Board of Directors and Chief Executive Officer By: _________________________________ Obren B. Gerich Secretary E.A-4 APPENDIX B APPRAISAL OF A EIGHT-PROPERTY PORTFOLIO NATIONWIDE PREPARED FOR STORAGE PROPERTIES INC., and PUBLIC STORAGE INC. 600 NORTH BRAND BOULEVARD 3RD FLOOR GLENDALE, CALIFORNIA PREPARED BY CHARLES R. WILSON & ASSOCIATES, INC. 199 SOUTH LOS ROBLES AVENUE SUITE 540 PASADENA, CALIFORNIA 91101 FEBRUARY 1996 March 29, 1996 STORAGE PROPERTIES INC., and PUBLIC STORAGE INC. 600 North Brand Boulevard, 3rd Floor Glendale, California 91221 Re: Market Value Appraisal Eight-Property Portfolio Job File No. 960018 Self-Storage - ------------ 20302 4425 South Eastern Avenue Las Vegas, NV 20303 6990 West 79th Street Burbank, IL 20304 365 West Manchester Boulevard Los Angeles, CA 20305 7800 Fenton Street Silver Springs, MD 20306 35360 Fircrest Street Newark, CA 20307 72 Emerson Place Brooklyn, NY 26001 669 Glenwood Avenue (Leasehold Interest) Hillside, NJ (62.5% Interest) Vacant Land - ----------- Carmel Mountain Ranch APN 313-549-07-00 San Diego, CA Gentlemen: According to your request and authorization, we have prepared a limited appraisal of the above-referenced portfolio described in the attached document, entitled Property Identification and Classification, and formed an opinion of their Fee Simple and Leasedhold Market Value. The accompanying appraisal report, of which this letter is a part, briefly describes each property and method of appraisal. This report is presented in a restricted format and cannot be fully understood without additional information supporting the appraisal, which has been retained in the working files of the appraiser. PURPOSE OF APPRAISAL - -------------------- The purpose of the appraisal is to estimate the aggregate market value of the portfolio in connection with a proposed merger with Public Storage Inc. (PSI). Market Value Appraisal Storage Properties Inc. Page -2- This report, presented in a restricted format, is intended for use only by the clients or their advisors. It may be referred to in solicitation materials and distributed to the shareholders of Storage Properties Inc. (SPI) and PSI, in connection with the proposed merger. SCOPE OF ASSIGNMENT ------------------- The accompanying report describes the appraisal process undertaken. In accordance with our agreement, the scope of this assignment has been limited, as described herein, but is in conformity with the Departure Provision of Uniform Standards of Professional Appraisal Practice (USPAP). The client must consider the value may be impacted to the degree there is a departure from specific USPAP Guidelines. However, this valuation analysis has utilized the two most appropriate approaches to value. We did not consider the Cost Approach to be applicable. Based upon our contact with knowledgeable self storage investors, owners and managers little reliance is placed upon the Cost Approach, particularly as to properties the age and type of those included in the portfolio. Therefore, we have employed both the Income and Sales Comparison Approaches. We have relied most heavily on the Income Approach which is supported by actual market data found in the Sales Comparison Approach. In our opinion, we have performed all actions necessary to ensure an accurate valuation of the portfolio. Your attention is directed to the Assumptions and Limiting Conditions and description of the appraisal process set forth on the accompanying pages which are an integral part our report. Only the summary conclusions are presented in this report. VALUE CONCLUSIONS ----------------- Aggregate Market Value The market value estimate set forth herein is a gross value estimate and does not include either a premium or a discount a potential buyer may assign to a portfolio of properties as a result of its size. Based on our experience with buyers and sellers of properties of the type included in the portfolio, it would be inappropriate to assign either a premium or discount. Furthermore, the market value estimate herein assumes that the properties would be disposed of in an orderly manner, allowing sufficient time for exposure of each property on the open market. Based upon the analysis made, it is our opinion that the Fee Simple and Leasehold Market Value of the Portfolio, as of February 29, 1996, is: TWENTY-THREE MILLION, FIVE HUNDRED THOUSAND DOLLARS --------------------------------------------------- ($23,500,000) Sincerely CHARLES R. WILSON & ASSOCIATES, INC. /s/ CHARLES R. WILSON Charles R. Wilson, MAI, CRE State of California Certification #AG002172 NATURE OF ASSIGNMENT AND DEFINITIONS This report sets forth a summary of the analysis and valuation conclusions. In accordance with our agreement, the Limited Appraisal presented in a restricted report format represents a departure from a full narrative appraisal but has been prepared in conformity with the Departure Provision of the Uniform Standards of Professional Appraisal Practice Guidelines. PROPERTY IDENTIFICATION AND CLASSIFICATION The subject properties are located in eight separate locations in six states and are specifically identified by street address below:
Net No. Rentable SF Units ----------- ----- Self-Storage - ------------ 20302 4425 So. Eastern Ave., Las Vegas, NV......... 64,740 517 20303 6990 West 79th Street Burbank, IL............ 50,525 471 20304 365 West Manchester Bl., Los Angeles, CA..... 43,150 547 20305 7800 Fenton St., Silver Springs, MD.......... 57,625 813 20306 35360 Fircrest Street, Newark, CA............ 58,582 619 20307 72 Emerson Place, Brooklyn, NY............... 49,745 792 26001 669 Glenwood Avenue, Hillside, NJ /(1)/...... 74,200 840 ------- ------ TOTAL ...................................................... 398,567 4,599 Vacant Land - ----------- Carmel Mountain Ranch APN 313-549-07-00..................... 118,962 Sq.Ft.
/(1)/ Valuation includes only 62.5% interest in the leasehold estate. PURPOSE, FUNCTION AND SCOPE OF THE APPRAISAL The purpose of this appraisal is to estimate the Fee Simple and Leasehold Market Value of the portfolio and to present a summary of conclusions. The function of this appraisal is for use only by our clients, Storage Properties Inc., and their advisors in connection with the proposed merger with and into Public Storage Inc. The scope of this assignment is in accordance with an agreement between Charles R. Wilson & Associates, Inc. and SPI. In connection with this portfolio valuation, the following actions have been taken as described more fully in the section entitled Valuation Methodology. . Inspections were conducted by Charles R. Wilson, MAI/CRE or a representative of Charles R. Wilson & Associates, Inc. . Physical descriptive information was provided by the subject's on-site managers and from previous appraisals of the subject properties performed by Charles R. Wilson & Associates, Inc. . Demographic information including population trends, household income, employment, average housing prices and rental rates was obtained from Scan/US. . A rental survey of competitive facilities was provided by on-site managers of the subject facilities. The information was verified by phone calls and other sources. . Self Storage Data Services, Inc. (SSDS), an affiliate company of Charles R. Wilson & Associates, Inc., provided operating income and expense information on facilities nationwide from its database of over 23,600 self storage facilities. . Historical income and expense information on each of the subject properties was provided by PSI, the property manager, and compared to the operating information found in the SSDS database. . In the cash flow analysis, the actual operating history of each of the subject properties was evaluated based on the experience of Charles R. Wilson & Associates, Inc., which have appraised over 200 self storage facilities during the past 12 months. . Discount rates, capitalization rates, and growth rates for income and expenses were derived from data on actual sales of similar properties, surveys of self storage operators/investors throughout the United States, and our market experience over the past twenty years. Surveying self storage investor's criteria is an ongoing function of Charles R. Wilson & Associates, Inc., and SSDS, Inc. . The Sales Comparison Approach is based on 27 sales of self storage facilities which have occurred since August 1995. In addition, we have analyzed the trend in 85 sales which have transferred during the past 12 months. . One of the subject properties is a vacant parcel. This parcel was appraised using the sales comparison approach. It is currently in escrow for $619,700.00. PROPERTY RIGHTS APPRAISED The property rights appraised consist of the Fee Simple Estate and Leasehold Interest. Due to the short-term, month-to-month tenancies in the facilities, and the fact that rents are at market levels, a Fee Simple Interest is appropriate for the six operating facilities. One facility is located on leased land, thus the leasehold interest. According to the Appraisal Institute, Dictionary of Real Estate Appraisal, 3nd Edition, 1993, p. 140, "Fee Simple Estate" is defined as: "Absolute ownership unencumbered by any other interest or estate; subject only to the limitations of governmental powers of taxation, eminent domain, police power, and, escheat." "Leasehold Estate" is defined on page 204 as: "The interest held by the lessee (the tenant or renter) through a lease conveying the rights of use and occupancy for a stated term under certain conditions." MARKET VALUE DEFINITION The following Market Value definition is based on Uniform Standards of Professional Appraisal Practice regulations and standards. "Market Value" means the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: 1. Buyer and seller are typically motivated; 2. Buyer and seller are well informed or well advised, and acting in what they consider their own best interest; 3. A reasonable time is allowed for exposure on the open market; 4. Payment is made in cash in U.S. dollars or in terms of financial arrangements comparable thereto; and 5. The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale. Source: Office of the Comptroller of the Currency under 12 CRF, part 34, Subpart C-Appraisals, 34.43 Definitions [f]. VALUATION METHODOLOGY Analysis and Valuation of the subject properties involved determining the highest and best use of the sites, estimating the value of the subjects by current appraisal theory, and reconciling to a final estimate of value. The term "highest and best use," as used in this report, is defined as follows: "The reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value." SOURCE: Appraisal Institute, The Dictionary of Real Estate Appraisal, 3rd Edition, 1993, p. 171. In considering the highest and best use of the properties in this portfolio, we believe that each facility is producing net operating income in excess of a reasonable land value. Therefore, we have concluded that the Highest and Best Use of each property, as improved and as if vacant, is its existing use as a self storage facility. No other use would warrant their removal or alteration from their current and intended use. This valuation analysis has considered all appropriate approaches to value, namely: the Cost, Income, and Sales Comparison Approach. The Cost Approach is based upon the proposition that the informed purchaser would pay no more than the cost of producing a substitute property with the same utility as the subject property. The Cost Approach is particularly applicable when the property being appraised involves relatively new improvements which represent the highest and best use of the land and when relatively unique or specialized improvements are located on the site and for which there exists no comparable properties in the marketplace. The Income Capitalization Approach is a procedure in appraisal analysis which converts the anticipated benefits (dollar income or amenities) to be derived from the ownership of property into a value estimate. The Income Capitalization Approach is widely applied in appraising income producing properties. Anticipated future income and/or reversions are discounted to a present worth figure through the capitalization process. The Sales Comparison Approach is based upon the principle that an informed purchaser would pay no more for a property than the cost of acquiring an existing property with the same utility. This approach is applicable when an active market provides sufficient quantities of reliable data which can be verified from authoritative sources. The Sales Comparison Approach is relatively unreliable in an inactive market or in estimating the value of properties for which no real comparable sales data is available. In all instances, we considered the Income and Sales Comparison Approaches to be most applicable for the subject properties. Based on our contact with property buyers and sellers and others knowledgeable of recent transactions, today's investors do not rely on the Cost Approach, particularly as to properties the age and type of those included in the portfolio. Therefore, we have employed both the Income and Sales Comparison Approaches to value the six operating facilities. We employed the Income Approach to value the one operating facility located on leased land, and the Sale Comparison Approach to value the vacant land parcel. Inspections were made of each property and interviews with property management personnel were conducted to learn of any deferred maintenance items that needed correcting, any known environmental conditions, as well as general information on the overall condition of the property. Questionnaires were completed by each on-site manager concerning performance of the subject property and market competitors. Demographic information on each market was reviewed to gain insight about local economic trends. Consideration has been given to significant variations in quality among the various portfolio of properties including: property income potential, quality of location and construction, tenant appeal, access, viability and potential competition. VALUATION ANALYSIS Income Approach - --------------- The Income Approach utilized both direct and yield capitalization. In both instances, the analysis was premised upon a survey of competitive properties in order to determine market rental rates, occupancy, and expense levels. In addition, we reviewed each property's previous four year's operating statement. Ancillary income included: late fees, administrative fees, lock sales, packing material sales, etc. Rental concessions if any were analyzed and taken into consideration. Utilizing the SSDS database of operating statistics, the actual operating experience of self storage facilities in each subject's market area were compared to the subjects' actual expenses to determine the reasonableness of each item of expense. Stabilized levels of income and expenses were determined. Using direct capitalization, the net operating income was capitalized into a value estimate using overall capitalization rates derived directly from the market (see Sales Comparison Approach below). Trailing overall capitalization rates in the market generally ranged from slightly less than 9% to over 10.5%. In applying yield capitalization, we studied acquisition criteria of investors in self storage, and analyzed recent sales for valuation indicators such as overall capitalization rates, effective gross rent multipliers and prices being paid per square foot. We also consulted published sources of investment criteria for other types of real estate. A ten-year discounted cash flow analysis of the self storage facilities, ending on February 29, 2006 was prepared. Using the investment criteria discussed above, the income and expenses were increased 3% annually based on local market conditions. Real estate taxes for the California properties are based on a sale and reassessment as of the date of value and increased at 2% per annum, per California law. The residual value was determined by capitalizing the eleventh year income at a terminal capitalization rate between 10.00% and 10.25% and then deducting 3% for sales costs. The yearly cash flows and the properties' residual values were discounted to present worth using a discount rate between 12.50% and 12.75%. The indicated value of the portfolio based upon the Income Approach is $23,500,000. Sales Comparison Approach - ------------------------- In the Sales Comparison Approach, we relied most heavily upon an analysis of 27 sales of self storage properties which occurred during the past 7 months. The sales were analyzed on the basis of effective gross rent multipliers, overall capitalization rates and sales price per square foot of net rentable area. A regression analysis of the relationship between net operating income and sales price per square foot was prepared. The value conclusion derived in the Income Approach was compared to the conclusions derived from the Sales Comparison Approach to determine the reasonableness of the value conclusion by the Income Approach. Differences in time of sale, location, and physical characteristics between the sale comparables and each subject property were taken into consideration. Based upon the portfolio's net income per square foot, using the regression analysis, the indicated value (after adding the the value of the leasehold interest in the ground leased property and the value of the vacant parcel) ranged between $20,930,000 to $23,520,000 rounded. Value Conclusion - ---------------- Considering that the departure provision has been invoked, it is our opinion that we have performed actions necessary to develop an opinion as to the market value of the portfolio. The value conclusion from both approaches was then reconciled into our final value conclusion of $23,500,000. Most weight was given the Income Approach, as this is the methodology employed by today's investors in self storage. GENERAL ASSUMPTIONS & LIMITING CONDITIONS Standards Rule ("S.R.") 2-1 of the "Standards of Professional Practice" of the Appraisal Institute requires the appraiser to "clearly and accurately disclose any extraordinary assumption or limiting condition that directly affects an appraisal analysis, opinion, or conclusion." In compliance with S.R. 2-1, and to assist the reader in interpreting this report, such assumptions and limiting conditions are set forth as follows: 1. The date of value to which the conclusions and opinions expressed in this report apply is set forth in the letter of transmittal. Further, the dollar amount of any value opinion rendered in this report is based upon the purchasing power of the American dollar existing on that date. 2. The appraiser assumes no responsibility for economic or physical factors which may affect the opinions in the report which occur after the date of the letter transmitting the report. 3. Forecasts of anticipated revenue and expenses were based on our analysis of market trends, economic conditions, and historical operating results of the properties. Such forecasts are dependent on assumptions as to future economic, social and political conditions, as well as market related activity. They represent our opinion of current investor attributes and motivations applicable to the class of property appraised, and no warranty or representation that these forecasts will materialize is implied. 4. The information furnished by others is believed to be reliable. However, no warranty is given for its accuracy. 5. No opinion as to title is rendered. Data related to ownership and legal description was obtained from public records and is considered reliable. Title is assumed to be marketable and free and clear of all liens, encumbrances, easements and restrictions except those specifically discussed in the report. The properties are appraised assuming they will be under responsible ownership and competent management, and available for their highest and best use. 6. The appraiser reserves the right to make such adjustments to the analyses, opinions and conclusions set forth in this report as may be required by consideration of additional data or more reliable data that may become available. 7. The appraiser assumes no responsibility for hidden or unapparent conditions of the properties, subsoil, or structures that render them more or less valuable. No responsibility is assumed for arranging for engineering studies that may be required to discover them. 8. The properties are appraised assuming that all applicable zoning and use regulations and restrictions have been complied with, unless otherwise stated. 9. The properties are appraised assuming that all required licenses, certificates of occupancy, consents, or other legislative or administrative authority from any local, state, or national government or private entity or organization have been, or can be, obtained or renewed for any use on which the value estimate contained in this report is based, unless otherwise stated. 10. No engineering survey has been made by the appraiser. Except as specifically stated, data relative to size and area was taken from sources considered reliable, and no encroachment of real property improvements is considered to exist. 11. No soil tests or environmental studies were available. It is assumed that there are no sub-surface, toxic waste or building material hazards in or on the properties that would adversely affect their existing or potential use. 12. Unless specifically stated, this appraisal does not take into consideration the possibility of the existence of asbestos, PCB transformers, or other toxic, hazardous, or contaminated substances and/or underground storage tanks (hazardous material), or the cost of encapsulation or removing thereof. 13. No opinion is expressed as to the value of subsurface oil, gas or mineral rights or whether the properties are subject to surface entry for the exploration or removal of such materials except as is expressly stated. 14. Maps, plats and exhibits included in this report are for illustration only as an aid in visualizing matters discussed within the report. They should not be considered as surveys or relied upon for any other purpose, nor should they be removed from, reproduced, or used apart from this report. 15. No opinion is intended to be expressed for matters which require legal expertise or specialized investigation or knowledge beyond that customarily employed by real estate appraisers. 16. Except as consented to in the letter of transmittal, possession of this report, or a copy of it, does not carry with it the right of publication. It may not be used for any purpose by any person other than the party to whom it is addressed without the written consent of the appraiser, and in any event only with proper written qualification and only in its entirety. 17. Testimony or attendance in court or at any other hearing is not required by reason of rendering this appraisal, unless such arrangements are made a reasonable time in advance relative to such additional employment. 18. Disclosure of the contents of this appraisal report is governed by the By- Laws and Regulations of the Appraisal Institute. 19. Except as consented to in the letter of transmittal, neither all nor any part of the contents of this report (especially any conclusions as to value, the identity of the appraisers, or any reference to the Appraisal Institute, or the MAI or SRA designation) shall be disseminated to the public through advertising media, public relations media, news media, sales media, or any other public means of communication without the prior written consent and approval of the author. SPECIFIC ASSUMPTIONS AND LIMITING CONDITIONS 1. The physical description and current condition of each subject property was based upon a combination of previous appraisals, inspections by representatives of Charles R. Wilson & Associates, Inc., and information provided by Storage Properties Inc., and Public Storage Inc. Charles R. Wilson & Associates, Inc., assumes no responsibility for the soundness of structural members nor for the condition of mechanical equipment, plumbing or electrical components. 2. Pursuant to the Engagement Agreement, the content of the appraisal report has been limited as presented herein. This report is not intended to meet the requirements of Title XI of the Federal Financial Institutions Reform, Recovery and Enforcement Act of 1989. Therefore, federally regulated institutions should not rely on this report for financing purposes. 3. The portfolio valuation reported herein does not reflect any premium or discount a potential buyer may assign to the portfolio of properties as a result of its size. Neither a premium nor a discount is appropriate based on our experience with buyers and sellers of self storage facilities. 4. This valuation analysis assumes that capitalization and discount rates used in the market for valuing individual properties are appropriate to apply to a portfolio's cash flow for the purpose of estimating the portfolio's fair market value. 5. This valuation covers only the real properties described herein and only applies to the valuation problems as stated and does not include consideration of mineral rights or related right of entry, nor personal property or the removal thereof. Values reported herein are not intended to be valid in any other context, nor are any conclusions as to unit values applicable to any other property or utilization than that specifically identified herein. No value has been assigned to any personal property, fixtures or intangible items that are not real property, except for that equipment and personal property considered usual and incidental to the operation of the facilities such as golf carts, office supplies, computer systems, etc. 6. This report invokes the Departure Provision as follows: Standard Rule 1-2 (c), states that the appraiser must, "consider easements, restrictions, encumbrances, reservations, covenants, contracts, declarations, special assessments, ordinances, or other items of a similar nature". The effect of any easements, encumbrances, and similar items were not taken into consideration in this valuation analysis. We were not provided copies of title reports, deed restrictions or similar items nor are we aware of any restrictions or similar items existing that could have an impact on our valuation of the portfolio. At the request of the clients, this valuation analysis does not consider any such restrictions. Standard Rule 1-3 (a), states that the appraiser must "consider the effect on use and value of the following factors: existing land use regulations, reasonably probable modification of such land use regulations, economic demand, the physical adaptability of the property, neighborhood trends, and the highest and best use of the property". City and county officials were not interviewed and thus it is assumed that each property complies with city and county building codes and zoning ordinances. Standard Rule 1-4 (a) states the appraiser must "collect, verify, analyze and reconcile: ...(iv) such comparable rental data, adequately identified and described, as are available to estimate the market rental of the property being appraised;..." Each on-site manager provided the appraiser with competition surveys. The rental rates were verified and used to determine market rent, however, no physical inspections were made of competing facilities. 7. For properties located in California, real estate taxes used in the Income Approach are adjusted to reflect a fair sale as is standard practice in California in compliance with Proposition 13. CERTIFICATION The appraiser certifies, to the best of his knowledge and belief, that: - - The statements of fact contained in this report are true and correct. - - The reported analyses, opinions and conclusions are limited only by the reported assumptions and limiting conditions and are the appraisers' personal, unbiased professional analyses, opinions and conclusions. - - The appraiser has no present or prospective interest in the property that is the subject of this report and no personal interest or bias with respect to the parties involved. - - The appraisers' compensation is not contingent upon the reporting of a predetermined value or direction in value that favors the cause of the client, the amount of the value estimate, the attainment of a stipulated result, or the occurrence of a subsequent event. - - Receipt of the appraisal assignment was not based upon a requested minimum value, a specific value or approval of a loan. - - The appraiser's analyses, opinions, and conclusions were developed and this report has been prepared in conformity with the agreement between Charles R. Wilson & Associates, Inc., and Public Storage Properties Inc. The appraisers have relied upon the departure provisions of Uniform Standards of Professional Appraisal Practice (USPAP). - - The use of this report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. - - As of the effective date of this report, March 29, 1996, Charles R. Wilson, MAI/CRE has completed the requirements of the continuing education program of the Appraisal Institute. - - Inspections of the properties in this portfolio were made by Charles R. Wilson, MAI, CRE or a representative of Charles R. Wilson & Associates, Inc., between January 29, 1996 and February 29, 1996. - - Our firm's analyses, opinions and conclusions were not developed nor is this report intended to comply with the appraisal related mandates within Title XI of the Federal Financial Institution's Reform, Recovery and Enforcement Act of 1989 (FIRREA). - - The date of this report, March 29, 1996, indicates that the perspective of the appraisers on the market conditions as of the effective date of the appraisal. - - The appraiser's estimate of aggregate As Is Market Value for the portfolio as of February 29, 1996 in Fee Simple estate is: $23,500,000. - - The appraisers have extensive experience in appraising properties similar to the portfolio. Respectfully submitted, CHARLES R. WILSON & ASSOCIATES, INC. /s/ CHARLES R. WILSON - ------------------------------ Charles Ray Wilson, MAI, CRE State of California Certification No. AG002172 [LETTERHEAD OF ROBERT A. STANGER & CO., INC.] APPENDIX C The Special Committee of The Board of Directors of Storage Properties, Inc. 701 Western Avenue Glendale, CA 91201 Gentlemen: We have been advised that Storage Properties, Inc. ("SPI") is entering into a transaction (the "Transaction") in which SPI will be merged with Public Storage, Inc. ("PSI"), an affiliated, publicly traded real estate investment trust. In the Transaction, the shareholders of SPI will be asked to approve the merger of SPI into PSI and the conversion of outstanding shares of SPI Common Stock Series A (other than shares held by shareholders of SPI who have properly exercised dissenters rights under California law ("Dissenting Shares")) into newly issued shares of PSI Common Stock or, at the option of the SPI shareholders with respect to up to 20% of the outstanding SPI Common Stock, or 669,633 shares of SPI less any Dissenting Shares, cash (collectively, the "Consideration"). We have been further advised that each share of SPI Common Stock, other than Dissenting Shares held by SPI shareholders, will be converted into $7.31 (the net asset value per share of SPI Common Stock based on an independent appraisal of SPI's properties) in cash or shares of PSI Common Stock with an equivalent market value based on average closing prices on the New York Stock Exchange of PSI Common Stock during the twenty consecutive trading days ending on the fifth trading day prior to the special meeting of the shareholders of SPI. We also have been advised that (i) cash distributions will be made to the shareholders of SPI prior to the consummation of the Transaction to the extent required to cause SPI's net asset value as of the date of the Transaction to be substantially equivalent to the estimate of SPI's net asset value as of June 30, 1996 contained in the Joint Proxy Statement and Prospectus filed with the Securities and Exchange Commission dated May 15, 1996, and (ii) if additional cash distributions are required to satisfy SPI's REIT distribution requirements and are paid to SPI shareholders prior to the consummation of the Transaction, the Consideration would be reduced to reflect such additional cash distributions. SPI has formed a Special Committee of the Board of Directors to consider certain matters relating to the Transaction, and the Special Committee has requested that Robert A. Stanger & Co., Inc. ("Stanger") provide its opinion as to the fairness to the public shareholders of SPI, from a financial point of view, of the Consideration to be received in the Transaction. 1 In the course of our review to render this opinion, we have, among other things: . Reviewed the Joint Proxy Statement and Prospectus related to the Transaction and filed with the Securities and Exchange Commission on May 15, 1996; . Reviewed SPI's and PSI's annual reports to shareholders filed with the SEC on Form 10-K for the three fiscal years ending December 31, 1993, 1994 and 1995, which reports SPI's management and PSI's management have indicated to be the most current financial statements available; . Reviewed the PSI pro forma financial statements and pro forma schedules prepared by SPI's management and PSI's management; . Reviewed the MAI-certified portfolio appraisal of the eight properties owned by SPI dated March 29, 1996 performed by Charles R. Wilson & Associates, Inc. (the "Appraisal"), and discussed with management of SPI and the appraiser the methodologies and procedures employed in preparing the Appraisal; . Reviewed information regarding purchases and sales of self-storage properties by PSI or any affiliated entities during the prior 24-month period and other information available relating to acquisition criteria for self-storage properties; . Reviewed internal financial analyses and forecasts prepared by SPI, and based in part on the Appraisal, of the current net liquidation value per common share of SPI's assets and projections of cash flow from operations, dividend distributions and going-concern values for SPI; . Discussed with members of senior management of SPI and PSI conditions in self-storage property markets, conditions in the market for sales/acquisitions of properties similar to those owned by SPI, current and projected operations and performance, financial condition and future prospects of SPI and PSI; . Reviewed historical market prices, trading volume and dividends for SPI and PSI Common Stock; and . Conducted other studies, analyses, inquiries and investigations as we deemed appropriate. In rendering this fairness opinion, we have relied upon and assumed, without independent verification, the accuracy and completeness of all financial and other information contained in the Joint Proxy Statement and Prospectus or that was furnished or otherwise communicated to us by SPI and PSI. We have not performed an independent appraisal of the assets and liabilities of SPI or PSI and have relied upon and assumed the accuracy of the appraisals performed by Charles R. Wilson & Associates, the estimate of potential environmental liability provided by 2 ENSR consulting and Engineering and the legal opinion rendered by the law firm of Heller Ehrman White & McAuliffe concerning the interpretation of certain termination and fee provisions of the Advisory Agreement between SPI and PSI. We have also relied on the assurance of SPI and PSI that any pro forma financial statements, projections, budgets, estimates of environmental liability, or value estimates contained in the Joint Proxy Statement and Prospectus or otherwise provided to us, were reasonably prepared on bases consistent with actual historical experience and reflecting the best currently available estimates and good faith judgments; that no material changes have occurred in the appraised value of the properties or the information reviewed between the date of the Appraisal or the date of the other information provided and the date of this letter; and that SPI and PSI are not aware of any information or facts that would cause the information supplied to us to be incomplete or misleading in any material respect. We have not been requested to, and therefore did not: (i) select the method of determining the Consideration offered in the Transaction; (ii) make any recommendation to the shareholders of SPI or PSI with respect to whether to approve or reject the Transaction or whether to select the cash or Common Stock option in the Transaction; or (iii) express any opinion as to the business decision to effect the Transaction, alternatives to the Transaction, or tax factors resulting from the merger of PSMI into PSI or relating to PSI's continued qualifications as a REIT. Our opinion is based on business, economic, real estate and securities markets, and other conditions as of the date of our analysis and addresses the Transaction in the context of information available as of the date of our analysis. Events occurring after that date may materially affect the assumptions used in preparing the opinion. Based upon and subject to the foregoing, and in reliance thereon, it is our opinion that as of the date of this letter the Consideration to be received in the Transaction is fair to the public shareholders of SPI, from a financial point of view. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. We have advised the Board of Directors of SPI that our entire analysis must be considered as a whole and that selecting portions of our analysis and the factors considered by us, without considering all analyses and facts, could create an incomplete view of the evaluation process underlying this opinion. Yours truly, /s/ Robert A. Stanger & Co., Inc. Robert A. Stanger & Co., Inc. Shrewsbury, NJ May 15, 1996 3 Appendix D GENERAL CORPORATION LAW OF CALIFORNIA CHAPTER 13 DISSENTERS' RIGHTS (S) 1300. RIGHT TO REQUIRE PURCHASE - "DISSENTING SHARES" AND "DISSENTING SHAREHOLDER" DEFINED. (a) If the approval of the outstanding shares (Section 152) of a corporation is required for a reorganization under subdivisions (a) and (b) or subdivision (e) or (f) of Section 1201, each shareholder of the corporation entitled to vote on the transaction and each shareholder of a subsidiary corporation in a short-form merger may, by complying with this chapter, require the corporation in which the shareholder holds shares to purchase for cash at their fair market value of the shares owned by the shareholder which are dissenting shares as defined in subdivision (b). The fair market value shall be determined as of the day before the first announcement of the terms of the proposed reorganization or short-form merger, excluding any appreciation or depreciation in consequence of the proposed action, but adjusted for any stock split, reverse stock split or share dividend which becomes effective thereafter. (b) As used in this chapter, "dissenting shares" means shares which come within all of the following descriptions: (1) Which were not immediately prior to the reorganization or short-form merger either (A) listed on any national securities exchange certified by the Commissioner of Corporations under subdivision (o) of Section 25100 or (B) listed on the list of OTC margin stocks issued by the Board of Governors of the Federal Reserve System, and the notice of meeting of shareholders to act upon the reorganization summarizes this section and Sections 1301, 1302, 1303 and 1304; provided, however, that this provision does not apply to any shares with respect to which there exists any restriction on transfer imposed by the corporation or by any law or regulation; and provided, further, that this provision does not apply to any class of shares described in subparagraph (A) or (B) if demands for payment are filed with respect to 5 percent or more of the outstanding shares of that class. (2) Which were outstanding on the date for the determination of shareholders entitled to vote on the reorganization and (A) were not voted in favor of the reorganization or, (B) if described in subparagraph (A) or (B) of paragraph (1) (without regard to the provisos in that paragraph), were voted against the reorganization, or which were held of record on the effective date of a short-form merger; provided, however, that subparagraph (A) rather than subparagraph (B) of this paragraph applies in any case where the approval required by Section 1201 is sought by written consent rather than at a meeting. (3) Which the dissenting shareholder has demanded that the corporation purchase at their fair market value, in accordance with Section 1301. (4) Which the dissenting shareholder has submitted for endorsement, in accordance with Section 1302. (c) As used in this chapter, "dissenting shareholder" means the recordholder of dissenting shares and includes a transferee of record. D-1 (S) 1301. DEMAND FOR PURCHASE. (a) If, in the case of a reorganization, any shareholders of a corporation have a right under Section 1300, subject to compliance with paragraphs (3) and (4) of subdivision (b) thereof, to require the corporation to purchase their shares for cash, such corporation shall mail to each such shareholder a notice of the approval of the reorganization by its outstanding shares (Section 152) within 10 days after the date of such approval, accompanied by a copy of Sections 1300, 1302, 1303, 1304 and this section, a statement of the price determined by the corporation to represent the fair market value of the dissenting shares, and a brief description of the procedure to be followed if the shareholder desires to exercise the shareholder's right under such sections. The statement of price constitutes an offer by the corporation to purchase at the price stated any dissenting shares as defined in subdivision (b) of Section 1300, unless they lose their status as dissenting shares under Section 1309. (b) Any shareholder who has a right to require the corporation to purchase the shareholder's shares for cash under Section 1300, subject to compliance with paragraphs (3) and (4) of subdivision (b) thereof, and who desires the corporation to purchase such shares shall make written demand upon the corporation for the purchase of such shares and payment to the shareholder in cash of their fair market value. The demand is not effective for any purpose unless it is received by the corporation or any transfer agent thereof (1) in the case of shares described in clause (i) or (ii) of paragraph (1) of subdivision (b) of Section 1300 (without regard to the provisos in that paragraph), not later than the date of the shareholders' meeting to vote upon the reorganization, or (2) in any other case within 30 days after the date on which the notice of the approval by the outstanding shares pursuant to subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was mailed to the shareholder. (c) The demand shall state the number and class of the shares held of record by the shareholder which the shareholder demands that the corporation purchase and shall contain a statement of what such shareholder claims to be the fair market value of those shares as of the day before the announcement of the proposed reorganization or short-form merger. The statement of fair market value constitutes an offer by the shareholder to sell the shares at such price. (S) 1302. ENDORSEMENT OF SHARES. Within 30 days after the date on which notice of the approval by the outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, the shareholder shall submit to the corporation at its principal office or at the office of any transfer agent thereof, (a) if the shares are certificated securities, the shareholder's certificates representing any shares which the shareholder demands that the corporation purchase, to be stamped or endorsed with a statement that the shares are dissenting shares or to be exchanged for certificates of appropriate denomination so stamped or endorsed or (b) if the shares are uncertificated securities, written notice of the number of shares which the shareholder demands that the corporation purchase. Upon subsequent transfers of the dissenting shares on the books of the corporation, the new certificates, initial transaction statement, and other written statements issued therefor shall bear a like statement, together with the name of the original dissenting holder of the shares. (S) 1303. AGREED PRICE -- TIME FOR PAYMENT. (a) If the corporation and the shareholder agree that the shares are dissenting shares and agree upon the price of the shares, the dissenting shareholder is entitled to the agreed price with interest thereon at the legal rate on judgments from the date of the agreement. Any agreements fixing the fair market value of any dissenting shares as between the corporation and the holders thereof shall be filed with the secretary of the corporation. D-2 (b) Subject to the provisions of Section 1306, payment of the fair market value of dissenting shares shall be made within 30 days after the amount thereof has been agreed or within 30 days after any statutory or contractual conditions to the reorganization are satisfied, whichever is later, and in the case of certificated securities, subject to surrender of the certificates therefor, unless provided otherwise by agreement. (S) 1304. DISSENTER'S ACTION TO ENFORCE PAYMENT. (a) If the corporation denies that the shares are dissenting shares, or the corporation and the shareholder fail to agree upon the fair market value of the shares, then the shareholder demanding purchase of such shares as dissenting shares or any interested corporation, within six months after the date on which notice of the approval by the outstanding shares (Section 152) or notice pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but not thereafter, may file a complaint in the superior court of the proper county praying the court to determine whether the shares are dissenting shares or the fair market value of the dissenting shares or both or may intervene in any action pending on such a complaint. (b) Two or more dissenting shareholders may join as plaintiffs or be joined as defendants in any such action and two or more such actions may be consolidated. (c) On the trial of the action, the court shall determine the issues. If the status of the shares as dissenting shares is in issue, the court shall first determine that issue. If the fair market value of the dissenting shares is in issue, the court shall determine, or shall appoint one or more impartial appraisers to determine, the fair market value of the shares. (S) 1305. APPRAISERS' REPORT -- PAYMENT COSTS. (a) If the court appoints an appraiser or appraisers, they shall proceed forthwith to determine the fair market value per share. Within the time fixed by the court, the appraisers, or a majority of them, shall make and file a report in the office of the clerk of the court. Thereupon, on the motion of any party, the report shall be submitted to the court and considered on such evidence as the court considers relevant. If the court finds the report reasonable, the court may confirm it. (b) If a majority of the appraisers appointed fail to make and file a report within 10 days from the date of their appointment or within such further time as may be allowed by the court or the report is not confirmed by the court, the court shall determine the fair market value of the dissenting shares. (c) Subject to the provisions of Section 1306, judgment shall be rendered against the corporation for payment of an amount equal to the fair market value of each dissenting share multiplied by the number of dissenting shares which any dissenting shareholder who is a party, or who has intervened, is entitled to require the corporation to purchase, with interest thereon at the legal rate from the date on which judgment was entered. (d) Any such judgment shall be payable forthwith with respect to uncertificated securities and, with respect to certificated securities, only upon the endorsement and delivery to the corporation of the certificates for the shares described in the judgment. Any party may appeal from the judgment. (e) The costs of the action, including reasonable compensation to the appraisers to be fixed by the court, shall be assessed or apportioned as the court considers equitable, but, if the appraisal exceeds the price offered by the corporation, the corporation shall pay the costs (including in the discretion of the court attorneys' fees, fees of expert witnesses and interest at the legal rate on judgments from the date of compliance with Sections 1300, 1301 and 1302 if the value awarded by D-3 the court for the shares is more than 125 percent of the price offered by the corporation under subdivision (a) of Section 1301). (S) 1306. DISSENTING SHAREHOLDER'S STATUS AS CREDITOR. To the extent that the provisions of Chapter 5 prevent the payment to any holders of dissenting shares of their fair market value, they shall become creditors of the corporation for the amount thereof together with interest at the legal rate on judgments until the date of payment, but subordinate to all other creditors in any liquidation proceeding, such debt to be payable when permissible under the provisions of Chapter 5. (S) 1307. DIVIDENDS PAID AS CREDIT AGAINST PAYMENT. Cash dividends declared and paid by the corporation upon the dissenting shares after the date of approval of the reorganization by the outstanding shares (Section 152) and prior to payment for the shares by the corporation shall be credited against the total amount to be paid by the corporation therefor. (S) 1308. CONTINUING RIGHTS AND PRIVILEGES OF DISSENTING SHAREHOLDERS. Except as expressly limited in this chapter, holders of dissenting shares continue to have all the rights and privileges incident to their shares, until the fair market value of their shares is agreed upon or determined. A dissenting shareholder may not withdraw a demand for payment unless the corporation consents thereto. (S) 1309. TERMINATION OF DISSENTING SHAREHOLDER STATUS. Dissenting shares lose their status as dissenting shares and the holders thereof cease to be dissenting shareholders and cease to be entitled to require the corporation to purchase their shares upon the happening of any of the following: (a) The corporation abandons the reorganization. Upon abandonment of the reorganization, the corporation shall pay on demand to any dissenting shareholder who has initiated proceedings in good faith under this chapter all necessary expenses incurred in such proceedings and reasonable attorneys' fees. (b) The shares are transferred prior to their submission for endorsement in accordance with Section 1302 or are surrendered for conversion into shares of another class in accordance with the articles. (c) The dissenting shareholder and the corporation do not agree upon the status of the shares as dissenting shares or upon the purchase price of the shares, and neither files a complaint or intervenes in a pending action as provided in Section 1304, within six months after the date on which notice of the approval by the outstanding shares or notice pursuant to subdivision (i) of Section 1110 was mailed to the shareholder. (d) The dissenting shareholder, with the consent of the corporation, withdraws the shareholder's demand for purchase of the dissenting shares. (S) 1310. SUSPENSION OF PROCEEDINGS FOR PAYMENT PENDING LITIGATION. If litigation is instituted to test the sufficiency or regularity of the votes of the shareholders in authorizing a reorganization, any proceedings under Sections 1304 and 1305 shall be suspended until final determination of such litigation. D-4 (S) 1311. EXEMPT SHARES. This chapter, except Section 1312, does not apply to classes of shares whose terms and provisions specifically set forth the amount to be paid in respect to such shares in the event of a reorganization or merger. (S) 1312. ATTACKING VALIDITY OF REORGANIZATION OR MERGER. (a) No shareholder of a corporation who has a right under this chapter to demand payment of cash for the shares held by the shareholder shall have any right at law or in equity to attack the validity of the reorganization or short- form merger, or to have the reorganization or short-form merger set aside or rescinded, except in an action to test whether the number of shares required to authorize or approve the reorganization have been legally voted in favor thereof; but any holder of shares of a class whose terms and provisions specifically set forth the amount to be paid in respect to them in the event of a reorganization or short-form merger is entitled to payment in accordance with those terms and provisions or, if the principal terms of the reorganization are approved pursuant to subdivision (b) of Section 1202, is entitled to payment in accordance with the terms and provisions of the approved reorganization. (b) If one of the parties to a reorganization or short-form merger is directly or indirectly controlled by, or under common control with, another party to the reorganization or short-form merger, subdivision (a) shall not apply to any shareholder of such party who has not demanded payment of cash for such shareholder's shares pursuant to this chapter; but if the shareholder institutes any action to attack the validity of the reorganization or short-form merger or to have the reorganization set aside or rescinded, the shareholder shall not thereafter have any right to demand payment of cash for the shareholder's shares pursuant to this chapter. The court in any action attacking the validity of the reorganization or short-form merger or to have the reorganization or short-form merger set aside or rescinded shall not restrain or enjoin the consummation of the transaction except upon 10-days prior notice to the corporation and upon a determination by the court that clearly no other remedy will adequately protect the complaining shareholder or the class of shareholders of which such shareholder is a member. (c) If one of the parties to a reorganization or short-form merger is directly or indirectly controlled by, or under common control with, another party to the reorganization or short-form merger, in any action to attack the validity of the reorganization or short-form merger or to have the reorganization or short-form merger set aside or rescinded, (1) a party to a reorganization or short-form merger which controls another party to the reorganization or short-form merger shall have the burden of proving that the transaction is just and reasonable as to the shareholders of the controlled party, and (2) a person who controls two or more parties to a reorganization shall have the burden of proving that the transaction is just and reasonable as to the shareholders of any party so controlled. D-5 APPENDIX E REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders Storage Properties, Inc. We have audited the accompanying balance sheets of Storage Properties, Inc. as of December 31, 1995 and 1994, and the related statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Storage Properties, Inc. at December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP February 27, 1996, except for footnote 8 which date is March 4, 1996 Los Angeles, California STORAGE PROPERTIES, INC. BALANCE SHEETS December 31, 1995 and 1994
1995 1994 ------------ ------------ ASSETS ------ Cash and cash equivalents $ 3,608,000 $ 2,241,000 Note receivable - 417,000 Due from affiliate - 899,000 Other assets 169,000 237,000 Unimproved land 578,000 578,000 Real estate facilities, at cost: Land 7,499,000 7,499,000 Buildings 18,419,000 18,275,000 ----------- ------------ 25,918,000 25,774,000 Less: accumulated depreciation (1,965,000) (1,190,000) ----------- ------------ 23,953,000 24,584,000 ----------- ------------ Total assets $28,308,000 $ 28,956,000 =========== ============ LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Accrued and other liabilities $ 284,000 $ 109,000 Dividends payable 937,000 1,339,000 Advance payments from renters 85,000 75,000 Shareholders' equity: Preferred stock, $.05 par value, 10,000,000 shares authorized, none issued and outstanding - - Common stock, $.05 par value, 100,000,000 shares authorized, 3,348,167 issued and outstanding 167,000 167,000 Paid-in-capital 28,898,000 28,898,000 Cumulative net income 14,304,000 12,994,000 Cumulative distributions (16,367,000) (14,626,000) ------------ ------------ Total shareholders' equity 27,002,000 27,433,000 ------------ ------------ Total liabilities and shareholders' equity $ 28,308,000 $ 28,956,000 ============ ============
See Accompanying Notes. STORAGE PROPERTIES, INC. STATEMENTS OF INCOME For each of the three years in the period ended December 31, 1995
1995 1994 1993 ---------- ---------- ---------- REVENUES: Rental income $3,582,000 $2,664,000 $1,433,000 Interest income - affiliate 16,000 841,000 1,997,000 Interest income - other 148,000 52,000 17,000 ---------- ---------- ---------- 3,746,000 3,557,000 3,447,000 ---------- ---------- ---------- COSTS AND EXPENSES: Cost of operations 1,200,000 864,000 472,000 Management fees paid to affiliate 215,000 160,000 86,000 Depreciation and amortization 777,000 612,000 341,000 Environmental cost 99,000 - - General and administrative 145,000 156,000 175,000 ---------- ---------- ---------- 2,436,000 1,792,000 1,074,000 ---------- ---------- ---------- NET INCOME $1,310,000 $1,765,000 $2,373,000 ========== ========== ========== Net income per share $ 0.39 $ 0.53 $ 0.71 ========== ========== ========== Dividends declared per share $ 0.52 $ 0.61 $ 0.69 ========== ========== ========== Weighted average common shares 3,348,167 3,348,167 3,348,167 ========== ========== ==========
See Accompanying Notes. STORAGE PROPERTIES, INC. STATEMENTS OF SHAREHOLDERS' EQUITY For the years ended December 31, 1995, 1994 and 1993
Common Cumulative Cumulative Total Stock Common Paid-in Net Distributions Shareholders' Outstanding Stock Capital Income Declared Equity ----------- -------- ----------- ----------- ------------- ------------- Balances at December 31, 1992 3,348,167 $167,000 $28,898,000 $ 8,856,000 $(10,274,000) $27,647,000 Net income 2,373,000 2,373,000 Cash distributions declared ($.69 per share) (2,310,000) (2,310,000) --------- -------- ----------- ----------- ------------ ----------- Balances at December 31, 1993 3,348,167 167,000 28,898,000 11,229,000 (12,584,000) 27,710,000 Net income 1,765,000 1,765,000 Cash distributions declared ($.61 per share) (2,042,000) (2,042,000) --------- -------- ----------- ----------- ------------ ----------- Balance at December 31, 1994 3,348,167 167,000 28,898,000 12,994,000 (14,626,000) 27,433,000 Net income 1,310,000 1,310,000 Cash distributions declared ($.52 per share) (1,741,000) (1,741,000) --------- -------- ----------- ----------- ------------ ----------- Balances at December 31, 1995 3,348,167 $167,000 $28,898,000 $14,304,000 $(16,367,000) $27,002,000 ========= ======== =========== =========== ============ ===========
See Accompanying Notes. STORAGE PROPERTIES, INC. STATEMENTS OF CASH FLOWS For each of the three years in the period ended December 31, 1995
1995 1994 1993 ----------- ----------- ----------- Cash flows from operating activities: Net income $ 1,310,000 $ 1,765,000 $ 2,373,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 777,000 612,000 341,000 Amortization of note premium - 20,000 28,000 Decrease in other assets 66,000 41,000 532,000 (Decrease) increase in accrued and other liabilities 175,000 (68,000) 142,000 Increase in advance payments from renters 10,000 3,000 72,000 ----------- ----------- ----------- Total adjustments 1,028,000 608,000 1,115,000 ----------- ----------- ----------- Net cash provided by operating activities 2,338,000 2,373,000 3,488,000 ----------- ----------- ----------- Cash flows from investing activities: Principal payments received on mortgage loans 417,000 1,033,000 1,261,000 Collection of due from affiliate 899,000 - - Proceeds from sale of land - 127,000 - Acquisition of facility - (2,315,000) - Additions to real estate facilities (144,000) (152,000) (10,000) ----------- ----------- ----------- Net cash provided by (used in) investing activities 1,172,000 (1,307,000) 1,251,000 ----------- ----------- ----------- Cash flows from financing activities: Dividends paid to shareholders (2,143,000) (1,105,000) (2,745,000) ----------- ----------- ----------- Net cash used in financing activities (2,143,000) (1,105,000) (2,745,000) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents 1,367,000 (39,000) 1,994,000 Cash and cash equivalents at the beginning of the year 2,241,000 2,280,000 286,000 ----------- ----------- ----------- Cash and cash equivalents at the end of the year $ 3,608,000 $ 2,241,000 $ 2,280,000 =========== =========== =========== Supplemental schedule of non-cash investing and financing activities: Acquisition of land as paydown on first mortgage convertible loan $ - $ 1,155,000 $ - =========== =========== =========== Acquisition of real estate facilities in exchange for first mortgage convertible loans pursuant to purchase options $ - $ 4,566,000 $16,624,000 =========== =========== =========== Receipt of note receivable as proceeds from sale of unimproved land $ - $ 450,000 $ - =========== =========== ===========
See Accompanying Notes. Storage Properties, Inc. Notes to Financial Statements December 31, 1995 1. Description of the Company's Business ------------------------------------- Storage Properties, Inc. (the "Company") is a California corporation and was organized in March 1988 and has elected to qualify as real estate investment trust ("REIT") for Federal income tax purposes. As of December 31, 1995, the Company's principal investments consisted of mini-warehouse facilities operated as self-storage facilities. Mini-warehouse facilities are self-storage facilities offering space for rent, usually on a month-to-month basis. Pursuant to an Advisory Agreement which was entered into in June 1989 (the "Advisory Agreement"), PS Properties Advisors, Inc. ("PSPA") was the Company's investment advisor through August 1995 (in August 1995, PSPA was merged into its parent, PSI Holdings, Inc. ("PSH"), and PSH assumed all of PSPA's rights and obligations under the Advisory Agreement). In November 1995, there were a series of mergers among Public Storage Management, Inc. (which was the Company's mini-warehouse operator pursuant to a Management Agreement), PSH (which was the Company's investment advisor), Public Storage, Inc. and their affiliates (collectively, "PSMI"), culminating in the November 16, 1995 merger (the "PSMI Merger") of PSMI into Storage Equities, Inc., a real estate investment trust organized as a California corporation. In the PSMI Merger, Storage Equities, Inc.'s name was changed to Public Storage, Inc. ("PSI") and PSI assumed all of PSMI's rights and obligations under the Advisory Agreement and the Management Agreement, thereby becoming the Company's investment advisor and the operator of the Company's mini-warehouse properties. (As used herein, the term "Advisor" refers to PSI or PSPA, as the context requires.) 2. Summary of Significant Accounting Policies ------------------------------------------ Income Taxes ------------ The Company has and intends to continue to qualify as a REIT, as defined in Section 856 of the Internal Revenue Code (the Code). As a REIT, the Company is not taxed on that portion of its taxable income which is distributed to its shareholders provided that the Company meets the requirements of the Code. The Company believes it is in compliance with these requirements and, accordingly, no provision for income taxes has been made. Revenue Recognition ------------------- Property rents are recognized as earned. Cash and Cash Equivalents ------------------------- For purposes of financial statement presentation, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Depreciation and Amortization ----------------------------- The Company's buildings are depreciated on the straight-line basis over the their estimated useful lives of 25 years. One of the Company's buildings which is situated on leased premises is depreciated on the straight-line basis over the term of the related ground lease which approximates its useful life. At December 31, 1995, the basis of real estate facilities for Federal income tax purposes (after adjustment for accumulated depreciation of $1,184,000) is $25,395,000. Net Income per Share -------------------- Net income per share is computed using the weighted average common shares outstanding during the periods presented. Storage Properties, Inc. Notes to Financial Statements December 31, 1995 2. Summary of Significant Accounting Policies (continued) ------------------------------------------------------ Environmental Cost ------------------ Substantially all of the Company's facilities were acquired prior to the time that it was customary to conduct environmental investigations in connection with property acquisitions. During the fourth quarter of 1995, the Company completed environmental assessments of its properties to evaluate the environmental condition of, and potential environmental liabilities of such properties. These assessments were performed by an independent environmental consulting firm. Based on the assessments, the Company has expensed, as of December 31, 1995, an estimated $99,000 for known environmental remediation requirements. Although there can be no assurance, the Company is not aware of any environmental contamination of any of it's property sites which individually or in the aggregate would be material to the Company's overall business, financial condition, or results of operations. 3. First Mortgage Convertible Loans -------------------------------- During 1994, the Company had one First Mortgage Convertible Loan ("FMCL") made to the Advisor. The FMCL was comprised of a nonrecourse loan secured by a first priority deed of trust on a property that was developed and operated as a self-storage facility (the "Brooklyn Property") together with a purchase option which entitled the Company to purchase the Brooklyn Property during the period from June 23, 1993 to June 23, 1995 by converting the FMCL into equity ownership in the Brooklyn Property. The FMCL bore interest at 12.25% per annum and had a maturity date of June 23, 1998. Accrued interest was payable quarterly during the Debt Service Guaranty period which ended June 23, 1993 (except where extended by PSI as described below). After expiration of the Debt Service Guaranty, interest on the FMCL would have been payable quarterly out of net property cash flow (as defined) of the Brooklyn Property plus any remaining interest reserve. The Advisor had recourse liability for payment of interest on the FMCL during the Debt Service Guaranty period. In addition, if at the end of June 1993, the annualized net cash flow from the Brooklyn Property for the preceding six months was less than four percent of the original principal of the FMCL, the Advisor was obligated to either (i) prepay all or a portion of the FMCL in an amount such that annualized net cash flow from the Brooklyn Property for the preceding six months provided a four percent yield ("Paydown Amount") or (ii) extend the Debt Service Guaranty through June 1994. Under the original terms of the FMCL, if the Debt Service Guaranty was extended through June 1994, and the Brooklyn Property had not achieved the specified performance level by the end of June 1994, the Advisor would have been obligated to prepay the Paydown Amount on the FMCL. In June 1993, the Advisor extended the Debt Service Guaranty on the FMCL secured by the Brooklyn Property through June 1994. In May 1994, the Advisor and the Company agreed to extend the Debt Service Guaranty to December 31, 1994. In consideration of the extension of the Debt Service Guaranty, the Advisor transferred to the Company unimproved land with an appraised value (based on an independent appraisal) of $1,155,000 which was applied to reduce the balance of the FMCL secured by the Brooklyn Property. The Paydown Amount on the FMCL secured by the Brooklyn Property was determined to be $1,899,000 (in addition to the paydown on the FMCL made in June 1994 through the transfer of the unimproved land), based on the annualized net cash flow from the Brooklyn Property for the six months ending December 31, 1994. In December 1994, the Advisor paid to the Company $1,000,000 towards the Paydown Amount on the FMCL secured by the Brooklyn Property. The balance of $899,000 was reported as Due from Affiliate at December 31, 1994. In February 1995, the $899,000 balance was paid to the Company by the Advisor in addition to accrued interest of $197,000 that was included in Other Assets at December 31, 1994. Effective December 31, 1994, the Company exercised its purchase option with respect the Brooklyn Property, thereby converting the FMCL to equity ownership. The Company's aggregate purchase price for the Brooklyn Property was $4,558,000. The total acquisition cost of the facility of $4,566,000 includes the above purchase price plus $8,000 of unamortized premium on the FMCL. Effective January 1, 1995, the Company began operating and receiving all operating cash flow from the Brooklyn Property and the Advisor has no further obligation with respect to the converted FMCL. Storage Properties, Inc. Notes to Financial Statements December 31, 1995 4. Real Estate Facilities ---------------------- The Company has an undivided 62.5% interest in a mini-warehouse facility in Hillside, New Jersey. The remaining 37.5% interest in the property is owned by an affiliate of PSI. The facility is located on land which is leased from an unrelated party, however, the Company pays its share of property taxes ($69,000 in 1995, $69,000 in 1994 and $67,000 in 1993). The term of the lease is through February 28, 2011 which includes two renewal option periods of 5 years each. Future minimum lease payments (the Company's 62.5% share) with respect to this lease are as follows: 1996 $ 68,000 1997 70,000 1998 70,000 1999 70,000 2000 73,000 Thereafter 792,000 ---------- $1,143,000 ==========
Included in cost of operations for each of the years ended December 31, 1995, 1994 and 1993 is $66,000, $58,000 and $58,000 in rent expense related to this lease. 5. Note Receivable --------------- In September 1994, the Company sold to an unaffiliated party 50% of the unimproved land received from the Advisor for $577,000. The Company did not realize any gain or loss on the sale. The Company received $127,000 in cash and a mortgage note receivable for $450,000. The note bore interest at 9% and provided for monthly principal and interest payments of $14,000 through the maturity of the note in September 1997. The note was paid off in full in April 1995. 6. Shareholders' Equity -------------------- PSI has an obligation (provided that there has not been any substantial liquidation of the Company's investments without PSI's consent) to repurchase the original shares of each original shareholder (at such shareholder's option) for a price equal to the original contribution as reduced by cash distributions from all sources, in the event that the original shareholder has not received cash distributions from all sources equal to his original contribution by no later than June 2003 (the "Capital Repurchase Option") (see Note 7. Advisory and Management Contracts and Obligations). As of December 31, 1995, original shareholders have received cumulative distributions of $5.07 per share. The original contribution of such share was $10.00. For Federal income tax purposes, all distributions declared by the Board of Directors in 1995, 1994 and 1993 were ordinary income. 7. Advisory and Management Contracts and Obligations ------------------------------------------------- Pursuant to the Advisory Agreement, PSI advises the Company with respect to its investments and administers the daily operations of the Company. The Company has a Management Agreement with PSI (as successor-in-interest to Public Storage Management, Inc.). Under the terms of the agreement, PSI operates the mini-warehouse facilities for a fee equal to 6% of the facilities' monthly gross revenue (as defined). Storage Properties, Inc. Notes to Financial Statements December 31, 1995 7. Advisory and Management Contracts and Obligations (continued) ------------------------------------------------------------- In November 1995, the Management Agreement was amended to provide that upon demand from PSI or PSMI made prior to December 15, 1995, the Company agreed to prepay (within 15 days after such demand) up to 12 months of management fees (based on the management fees for the comparable period during the calendar year immediately preceding such prepayment) discounted at the rate of 14% per year to compensate for early payment. In November 1995, the Company prepaid to PSI 8 months of 1996 management fees at a cost of $125,000. The amount is included in other assets in the Balance Sheet at December 31, 1995 and will be amortized as management fee expense in 1996. PSI will be paid an Advisory Fee of 10% of the Company's net cash flow beginning when distributions to shareholders (without regard to the number of shares outstanding) from all sources is equal to 75% of the gross offering proceeds and continuing until distributions to shareholders from all sources equal 100% of the gross offering proceeds; thereafter, PSI will be paid an Advisory Fee of 20% of net cash flow and 20% of cash from sales or refinancing. Gross offering proceeds for which this computation is based are $32,036,000. Through December 31, 1995, the Company has made and declared cumulative cash distributions to shareholders of approximately $16,367,000. Accordingly, the Company will commence paying PSI an advisory fee of 10% of the Company's net cash flow when $7,660,000 in additional distributions to the Company's shareholders have been made. The Advisory Agreement had an initial five-year period (through June 1994); thereafter, the Advisory Agreement is automatically renewed for successive two- year periods, subject to termination, with or without cause, by a majority of the directors on behalf of the Company, or by PSI, upon 60 days written notice. The Advisory Agreement provides for the purchase by the Company of PSI's future interest in the Advisory Fee upon termination of the Advisory Agreement (except under certain limited circumstances). The Capital Repurchase Option (see Note 6. Shareholders' Equity) is a recourse obligation of PSI. PSI has informed the Company that it does not believe that it will have an obligation with respect to the Capital Repurchase Option. 8. SUBSEQUENT EVENT In March 1996, the Company and PSI agreed, subject to certain conditions, to merge. In the merger, the Company would be merged with and into PSI, and each outstanding share of the Company's Common Stock (3,348,167 shares) would be converted, at the election of the shareholders of the Company, into either shares of PSI common stock or with respect to up to 20% of the Company's Common Stock, $7.31 in cash. This dollar amount has been based on the Company's estimated net asset value as of June 30, 1996 (the appraised value of the Company's real estate assets and the estimated book value of the Company's other net assets). The number of shares of PSI common stock will be based on dividing this same dollar amount by the average of the per share closing prices on the New York Stock Exchange for a specified period prior to the Company's shareholders' meeting. In the event of the merger, pre-merger cash distributions would be made to shareholders of the Company to cause the Company's net asset value as of the effective date of the merger to be substantially equivalent to its estimated net asset value as of June 30, 1996. If additional cash distributions are required in order to satisfy the Company's REIT distribution requirements, the number of shares of PSI common stock issued in the merger and the amount receivable upon a cash election would be reduced on a pro rata basis in an aggregate amount equal to such additional distributions. The merger is conditioned on, among other requirements, approval by PSI's board of directors, receipt of a satisfactory fairness opinion by the Company and approval by the shareholders of the Company. It is expected that any merger would close in June or July 1996. PSI owns approximately 4 percent of the Common Stock of the Company. Storage Properties, Inc. Notes to Financial Statements December 31, 1995 9. Quarterly results (unaudited) ----------------------------- The following is a summary of unaudited quarterly results of operations:
Three months ended -------------------------------------------- March June September December 31, 1995 30, 1995 30, 1995 31, 1995 -------- -------- -------- -------- Revenues $907,000 $931,000 $970,000 $938,000 Expenses 582,000 574,000 581,000 699,000 -------- -------- --------- -------- Net income $325,000 $357,000 $389,000 $239,000 ======== ======== ======== ========= Net income per share $ 0.10 $ 0.10 $ 0.12 $ 0.07 ======== ======== ======== ======== Distribution declared per share $ 0.08 $ 0.08 $ 0.08 $ 0.28 ======== ======== ======== ======== Three months ended -------------------------------------------- March June September December 31, 1994 30, 1994 30, 1994 31, 1994 -------- -------- -------- -------- Revenues $812,000 $848,000 $946,000 $951,000 -------- -------- -------- -------- Expenses 418,000 408,000 478,000 488,000 -------- -------- -------- -------- Net income $394,000 $440,000 $468,000 $463,000 ======== ======== ======== ======== Net income per share $ 0.12 $ 0.13 $ 0.14 $ 0.14 ======== ======== ======== ======== Distribution declared per share $ 0.07 $ 0.07 $ 0.07 $ 0.40 ======== ======== ======== ========
APPENDIX F. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF - -------------------------------------------------------------------------- OPERATIONS - ---------- RESULTS OF OPERATIONS - --------------------- YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994 - ------------------------------------------------------------------------- The Company's net income for 1995 compared to 1994 reflects the impact of converting the Brooklyn, New York FMCL to a fee interest in the property in December 1994 and the operations of a property acquisition in June 1994. Effective December 31, 1994, the Company exercised its option to acquire the Brooklyn, New York property in which it held a convertible note receivable from the Advisor. As a result, 1995 income includes operating income from the Brooklyn, New York property compared to interest income on the mortgage note secured by this property. Net income in 1995 was $1,310,000 compared to $1,765,000 in 1994, representing a decrease of $455,000. Net income per share was $.39 in 1995 compared to $.53 in 1994, representing a decrease of $.14 or 26% per share. The decrease in net income is attributable to lower earnings on property operations compared to the interest income that had been earned on the Brooklyn, New York FMCL. Rental income increased $918,000 or 34% from $2,664,000 in 1994 to $3,582,000 in 1995. The improvement is attributable to an increase in occupancy levels and rental rates at the Company's "Same Store" properties (properties owned since June 1993) and the acquisition of an additional properties in June 1994 and the conversion of the Brooklyn property to a fee interest in December 1994. The Company's properties had weighted average occupancy levels of 91% and 90% for 1995 and 1994, respectively. Interest income - affiliate decreased $825,000 from $841,000 in 1994 to $16,000 in 1995 due to the conversion of the Brooklyn, New York FMCL to an equity ownership in the property in December 1994. The $16,000 earned in 1995 represents interest on the balance of the principal paydown amount on the Brooklyn, New York FMCL collected from the Advisor in February 1995. Interest income - other increased $96,000 from $52,000 in 1994 to $148,000 in 1995 as a result of increases in interest rates earned and average cash balances invested. Cost of operations (including management fees paid to affiliate and depreciation and amortization) increased from $1,636,000 in 1994 to $2,192,000 in 1995 due to the acquisition of additional properties in June 1994 and December 1994. Cost of operations (including management fees paid to affiliate and depreciation and amortization) at the Company's "Same Store" properties increased slightly due to repairs and maintenance cost and management fees paid to affiliate resulting from increased rental income. The following table illustrates the operating trends of the Company's mini- warehouse facilities:
For the year ended December 31, ------------------------------- 1995 1994 (1) ----- -------- Weighted average occupancy level 91% 90% Realized monthly rent per occupied square foot (2) $.88 $.87 Operating margin: (3) Before reduction for depreciation expense 60% 61% After reduction for depreciation expense 39% 39% - -------------------
(1) Includes the operations of the Brooklyn, New York property before the Company acquired it in December 1994 and the operations of the Newark, California property from June 1994. (2) Realized rent per square foot represents the actual revenue earned per occupied square foot. Management believes this is a more relevant measure than the posted rental rates, since posted rates can be discounted through the use of promotions. Includes administrative and late fees. (3) Operating margins are based on the Company's operation of the facilities. Operating margin (before reduction for depreciation expense) is computed by dividing rental income less cost of operations by rental income. Operating margin (after reduction for depreciation expense) is computed by dividing rental income less cost of operations and depreciation by rental income. Management believes that the trends in property operations are due to: . Increasing occupancy levels resulting from decreased levels of new supply in the industry and promotion of the Company's facilities by PSI. . Increasing realized rents per square foot of mini-warehouse space resulting from increased demand for space and fewer promotional discounts of scheduled rents required to maintain relatively high occupancies. . Increasing revenues due to increasing realized rents and occupancy levels offset in part by an increase in expenses (primarily management fees and repair and maintenance cost). Substantially all of the Company's facilities were acquired prior to the time that it was customary to conduct environmental investigations in connection with property acquisitions. During the fourth quarter of 1995, the Company completed environmental assessments of its properties to evaluate the environmental condition of, and potential environmental liabilities of such properties. These assessments were performed by an independent environmental consulting firm. Based on the assessments, the Company has expensed, as of December 31, 1995, an estimated $99,000 for known environmental remediation requirements. YEAR ENDED DECEMBER 31, 1994 COMPARED TO THE YEAR ENDED DECEMBER 31, 1993 - ------------------------------------------------------------------------- The Company's income for 1994 reflects the conversion of the majority of its asset base from mortgages to fee interest in the properties and the operations of a property acquisition in June 1994. Effective June 30, 1993, the Company exercised its option to acquire four of five properties in which it held convertible notes receivable from its Advisor. As a result, income for the first six months of 1994 includes the operating income of these properties compared to interest income on the mortgage notes secured by these properties in the same period in 1993. The operations for the last six months of 1994 and 1993 include the operating income of these properties. Net income in 1994 was $1,765,000 compared to $2,373,000 in 1993, representing an decrease of $608,000. Net income per share was $.53 in 1994 compared to $.71 in 1993, representing a decrease of $.18 or 25% per share. The decrease in net income is attributable to lower earnings on property operations compared to the interest income that had been earned on the FMCLs. Interest income from affiliate decreased $1,156,000 from $1,997,000 in 1993 to $841,000 in 1994 as a result of the conversion of $17,788,000 of FMCLs in June 1993 to equity ownership of the facilities that had secured those FMCLs. Other interest income increased $35,000 from 1993 to 1994 primarily as a result of an increase in cash balances that resulted from the Advisor making principal paydowns of the FMCLs in June 1993 and a slight increase in interest rates earned on invested cash balances during 1994 compared to 1993. Depreciation expense increased $271,000 from $341,000 in 1993 to $612,000 in 1994 as a result of a full year of depreciation with respect to the four mini- warehouse facilities acquired in June 1993 and a partial year of depreciation on a facility acquired in June 1994. Depreciation in 1995 is expected to increase as the result of a full year of depreciation on the facilities acquired in June 1994 and December 1994. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Net cash provided by operating activities (net income plus depreciation and amortization) reflects the cash generated from the Company's business before distributions to shareholders and capital expenditures. Net cash provided by operating activities has decreased from $3,488,000 in 1993 to $2,338,000 in 1995 primarily as the result of a decrease in net income attributable to earnings from property operations being lower than the interest income that had been earned on the FMCLs. The Company's Funds From Operations ("FFO") is defined generally by the National Association of Real Estate Investment Trusts ("NAREIT") as net income before loss on early extinguishment of debt, gain on disposition of real estate and non-recurring items (including environmental cost), plus depreciation and amortization. FFO for the years ended December 31, 1995, 1994 and 1993 was $2,186,000, $2,377,000 and $2,714,000, respectively. NAREIT has recently adopted revisions to the definition of funds from operations which will become effective in 1996. The most material impact of the new guidelines will be (i) amortization of deferred financing costs will be treated as an expense - i.e. it will no longer be treated as an add-back to net income and (ii) certain gains on sales of land will be included in funds from operations if deemed to be recurring. These changes will have no impact on the way the Company currently computes its funds from operations. FFO is a supplemental performance measure for equity REITs used by industry analysts. FFO does not take into consideration principal payments on debt, capital improvements, distributions and other obligations of the Company. The only depreciation or amortization that is added to income to derive FFO is depreciation and amortization directly related to physical real estate. All depreciation and amortization reported by the Company relates to physical real estate and does not include any depreciation or amortization related to goodwill, deferred financing costs or other intangibles. FFO is not a substitute for the Company's net cash provided by operating activities or net income, as a measure of liquidity or operating performance. The following table summarizes the Company's ability to make capital improvements to maintain its facilities through the use of cash provided by operating activities. The remaining cash flow is available to the Company for distributions to its shareholders. The deficiency of cash available for distributions in 1995 and 1993 were funded from cash reserves and principal payments received on the FMCLs.
Years ended December 31, ----------------------------------------- 1995 1994 1993 ----------- ----------- ----------- Net income $ 1,310,000 $ 1,765,000 $ 2,373,000 Environmental cost 99,000 - - Depreciation and amortization 777,000 612,000 341,000 ----------- ----------- ----------- Funds from operations (net cash provided by operating activities before changes in working capital components) 2,186,000 2,377,000 2,714,000 Capital improvements to maintain facilities (144,000) (152,000) (10,000) ----------- ----------- ----------- Excess funds available for distributions to shareholders 2,042,000 2,225,000 2,704,000 Cash distributions to shareholders (2,143,000) (1,105,000) (2,745,000) ----------- ----------- ----------- (Deficiency) excess of funds available for optional distributions to shareholders or for investment $ (101,000) $ 1,120,000 $ (41,000) =========== =========== ===========
For 1996, the Company anticipates approximately $130,000 in capital improvements in 1996. During 1995, the Company's property operator commenced a program to enhance the visual appearance of the mini-warehouse facilities managed by it. Such enhancements will include new signs, exterior color schemes, and improvements to the rental offices. Included in the 1996 capital improvement budget are estimated costs of $19,000 for such enhancements. In November 1995, the Management Agreement with PSMI was amended to provide that upon demand from PSI or PSMI made prior to December 15, 1995, the Company agreed to prepay (within 15 days after such demand) up to 12 months of management fees (based on the management fees for the comparable period during the calendar year immediately preceding such prepayment) discounted at the rate of 14% per year to compensate for early payment. In November 1995, the Company prepaid, to PSI, 8 months of 1996 management fees at a cost of $125,000. REIT DISTRIBUTION REQUIREMENT - ----------------------------- As a REIT, the Company is not taxed on that portion of its taxable income which is distributed to its shareholders provided that at least 95% of its taxable income is so distributed. Under certain circumstances, the Company can rectify a failure to meet the 95% distribution test by making distributions after the close of a particular taxable year and attributing those distributions to the prior year's taxable income. The Company has satisfied the REIT distribution requirement for 1994 and 1995 by attributing distributions in 1995 and 1996 to the prior year's taxable income. The extent to which the Company will be required to attribute distributions to the prior year will depend on the Company's operating results (taxable income) and the level of distributions as determined by the Board of Directors. Through June 23, 1993, the Advisor guaranteed that the quarterly distributions to shareholders (including distributions by the Company of capital or borrowed funds to shareholders) would equal $.25 per share, which distribution guaranty has expired. On November 13, 1995, the Company's Board of Directors declared a regular distribution of $.08 per share and a special distribution of $.20 per share which was payable on January 12, 1996 to shareholders of record on December 29, 1995. COLLECTION OF NOTE RECEIVABLE - ----------------------------- In connection with a sale of land to an unaffiliated third party in September 1994, the Company received a $450,000 mortgage note. In April 1995, the note was paid off prior to its maturity. PROPOSED MERGER - --------------- In March 1996, the Company and PSI agreed, subject to certain conditions, to merge. In the merger, the Company would be merged with and into PSI, and each outstanding share of the Company's Common Stock (3,348,167 shares) would be converted, at the election of the shareholders of the Company, into either shares of PSI common stock or with respect to up to 20% of the Company's Common Stock, $7.31 in cash. This dollar amount has been based on the Company's estimated net asset value as of June 30, 1996 (the appraised value of the Company's real estate assets and the estimated book value of the Company's other net assets). The number of shares of PSI common stock will be based on dividing this same dollar amount by the average of the per share closing prices on the New York Stock Exchange for a specified period prior to the Company's shareholders' meeting. In the event of the merger, pre-merger cash distributions would be made to shareholders of the Company to cause the Company's net asset value as of the effective date of the merger to be substantially equivalent to its estimated net asset value as of June 30, 1996. If additional cash distributions are required in order to satisfy the Company's REIT distribution requirements, the number of shares of PSI common stock issued in the merger and the amount receivable upon a cash election would be reduced on a pro rata basis in an aggregate amount equal to such additional distributions. The merger is conditioned on, among other requirements, approval by PSI's board of directors, receipt of a satisfactory fairness opinion by the Company and approval by the shareholders of the Company. It is expected that any merger would close in June or July 1996. PSI owns approximately 4 percent of the Common Stock of the Company. 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 3.15) 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, 1995 and incorporated herein by reference. All other financial statement schedules are omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or the notes thereto. ITEM 22. UNDERTAKINGS. The undersigned Registrant hereby undertakes as follows: 1. To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. S-1 (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. Provided, however, that paragraphs 3.(i) and 3.(ii) do not apply if the registration statement is on Form S-3 or Form S-8, and the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement. 2. That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. 3. To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. 4. That, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. 5. That prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other Items of the applicable form. 6. That every prospectus (i) that is filed pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet the requirements of section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. 7. To respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. 8. Except as permitted by General Instruction H to Form S-4 (in a transaction not covered by General Instruction I), to supply by means of a post- effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions described under Item 20 above, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. S-2 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 14th day of May, 1996. 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 Executive May 14, 1996 _________________________ Officer and Director (principal executive B. Wayne Hughes officer) /s/ HARVEY LENKIN President and Director May 14, 1996 _________________________ Harvey Lenkin /s/ RONALD L. HAVNER, JR. Senior Vice President and Chief May 14, 1996 _________________________ Financial Officer (principal financial Ronald L. Havner, Jr. officer) /s/ JOHN REYES Vice President and Controller (principal May 14, 1996 _________________________ accounting officer) John Reyes /s/ ROBERT J. ABERNETHY Director May 14, 1996 _________________________ Robert J. Abernethy /s/ DANN V. ANGELOFF Director May 14, 1996 _________________________ Dann V. Angeloff /s/ WILLIAM C. BAKER Director May 14, 1996 _________________________ William C. Baker /s/ URI P. HARKHAM Director May 14, 1996 _________________________ Uri P. Harkham
S-3 EXHIBIT INDEX 2.1 Agreement and Plan of Reorganization between Registrant and Storage Properties, Inc. ("SPI") dated as of March 4, 1996 (filed as Appendix A to the Proxy Statement and Prospectus). 3.1 Restated Articles of Incorporation. Filed with Registrant's Registration Statement No. 33-54557 and incorporated herein by reference. 3.2 Certificate of Determination for the 10% Cumulative Preferred Stock, Series A. Filed with Registrant's Registration Statement No. 33-54557 and incorporated herein by reference. 3.3 Certificate of Determination for the 9.20% Cumulative Preferred Stock, Series B. Filed with Registrant's Registration Statement No. 33-54557 and incorporated herein by reference. 3.4 Amendment to Certificate of Determination for the 9.20% Cumulative Preferred Stock, Series B. Filed with Registrant's Registration Statement No. 33-56925 and incorporated herein by reference. 3.5 Certificate of Determination for the 8.25% Convertible Preferred Stock. Filed with Registrant's Registration Statement No. 33-54557 and incorporated herein by reference. 3.6 Certificate of Determination for the Adjustable Rate Cumulative Preferred Stock, Series C. Filed with Registrant's Registration Statement No. 33-54557 and incorporated herein by reference. 3.7 Certificate of Determination for the 9.50% Cumulative Preferred Stock, Series D. Filed with Registrant's Form 8-A/A Registration Statement relating to the 9.50% Cumulative Preferred Stock, Series D and incorporated herein by reference. 3.8 Certificate of Determination for the 10% Cumulative Preferred Stock, Series E. Filed with Registrant's Form 8-A/A Registration Statement relating to the 10% Cumulative Preferred Stock, Series E and incorporated herein by reference. 3.9 Certificate of Determination for the 9.75% Cumulative Preferred Stock, Series F. Filed with Registrant's Form 8-A/A Registration Statement relating to the 9.75% Cumulative Preferred Stock, Series F and incorporated herein by reference. 3.10 Certificate of Determination for the Convertible Participating Preferred Stock. Filed with Registrant's Registration Statement No. 33-63947 and incorporated herein by reference. 3.11 Certificate of Amendment of Articles of Incorporation. Filed with Registrant's Registration Statement No. 33-63947 and incorporated herein by reference. 3.12 Certificate of Determination for the 8-7/8% Cumulative Preferred Stock, Series G. Filed with Registrant's Form 8-A/A Registration Statement relating to the 8-7/8% Cumulative Preferred Stock, Series G and incorporated herein by reference. 3.13 Certificate of Determination for the 8.45% Cumulative Preferred Stock, Series H. Filed with Registrant's Form 8-A/A Registration Statement relating to the 8.45% Cumulative Preferred Stock, Series H and incorporated herein by reference. 3.14 Certificate of Determination for the Convertible Preferred Stock, Series CC. Filed herewith. 3.15 Bylaws, as amended. Filed with Registrant's Registration Statement No. 33-64971 and incorporated herein by reference. 3.16 Amendment to Bylaws adopted on May 9, 1996. Filed herewith. S-4 5.1 Opinion on legality. Filed herewith. 8.1 Opinion on tax matters. Filed herewith. 10.1 Loan Agreement between Registrant and Aetna Life Insurance Company dated as of July 11, 1988. Filed with Registrant's Current Report on Form 8-K dated July 14, 1988 and incorporated herein by reference. 10.2 Amendment to Loan Agreement between Registrant and Aetna Life Insurance Company dated as of September 1, 1993. Filed with Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. 10.3 Credit Agreement by and among Registrant, Wells Fargo Bank, National Association, as agent, and the financial institutions party thereto dated as of May 22, 1995. Filed with Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1995 and incorporated herein by reference. 10.4 Note Assumption and Exchange Agreement by and among Public Storage Management, Inc., Public Storage, Inc., Registrant and the holders of the notes dated as of November 13, 1995. Filed with Registrant's Registration Statement No. 33-64971 and incorporated herein by reference. *10.5 Registrant's 1990 Stock Option Plan. Filed with Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference. *10.6 Registrant's 1994 Stock Option Plan. Filed with Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference. 10.7 Agreement and Plan of Reorganization by and among Public Storage, Inc., Public Storage Management, Inc. and Registrant dated as of June 30, 1995. Filed as Appendix A to Registrant's Proxy Statement dated October 11, 1995 (filed October 13, 1995) and incorporated herein by reference. 10.8 Amendment to Agreement and Plan of Reorganization by and among Public Storage, Inc., Public Storage Management, Inc. and Registrant dated as of November 13, 1995. Filed with Registrant's Current Report on Form 8-K dated November 16, 1995 and incorporated herein by reference. 23.1 Consent of Independent Auditors. Filed herewith. 23.2 Consent of David Goldberg (included in Exhibit 5.1). 23.3 Consent of Hogan & Hartson L.L.P. (included in Exhibit 8.1). 23.4 Consent of Charles R. Wilson & Associates, Inc. Filed herewith. 23.5 Consent of Heller, Ehrman, White & McAuliffe. Filed herewith. 99.1 Proxy card for SPI. Filed herewith. 99.2 Cash Election Form. Filed herewith. 99.3 Real Estate Appraisal Report by Charles R. Wilson & Associates, Inc. dated March 29, 1996 (filed as Appendix B to the Proxy Statement and Prospectus). 99.4 Opinion of Robert A. Stanger & Co., Inc. dated May 15, 1996 (filed as Appendix C to the Proxy Statement and Prospectus). 99.5 Opinion of Heller, Ehrman, White & McAuliffe dated March 18, 1996. Filed herewith. _______________ * Compensatory benefit plan. S-5 EX-3.14 2 CERTIFICATE OF DETERMINATION EXHIBIT 3.14 CERTIFICATE OF DETERMINATION OF PREFERENCES OF CONVERTIBLE PREFERRED STOCK, SERIES CC OF PUBLIC STORAGE, INC. [AS FILED IN THE OFFICE OF THE SECRETARY OF STATE OF THE STATE OF CALIFORNIA APRIL 4, 1996] The undersigned, Harvey Lenkin and Sarah Hass, President and Secretary, respectively, of Public Storage, Inc., a California corporation, do hereby certify: FIRST: The Restated Articles of Incorporation of the corporation authorize the issuance of 50,000,000 shares of stock designated "preferred shares," issuable from time to time in one or more series, and authorize the Board of Directors to fix the number of shares constituting any such series, and to determine or alter the dividend rights, dividend rate, conversion rights, voting rights, right and terms of redemption (including sinking fund provisions), the redemption price or prices and the liquidation preference of any wholly unissued series of such preferred shares, and the number of shares constituting any such series. SECOND: The Board of Directors of the corporation did duly adopt the resolutions attached hereto as Exhibit A and incorporated herein by reference authorizing and providing for the creation of a series of preferred shares to be known as Convertible Preferred Stock, Series CC, consisting of 58,955 shares, no shares of such series having been issued. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. IN WITNESS WHEREOF, the undersigned have executed this certificate this 3rd day of April, 1996. - --- ----- /s/ HARVEY LENKIN ----------------------------------- Harvey Lenkin President /s/ SARAH HASS ----------------------------------- Sarah Hass Secretary EXHIBIT A RESOLUTION OF THE BOARD OF DIRECTORS OF PUBLIC STORAGE, INC. ESTABLISHING A SERIES OF CONVERTIBLE PREFERRED STOCK, SERIES CC RESOLVED, that pursuant to the authority conferred upon the Board of Directors by Article III of the Restated Articles of Incorporation of this Corporation, there is hereby established a series of the authorized preferred shares of this Corporation having a par value of $.01 per share, which series shall be designated "Convertible Preferred Stock, Series CC," and shall consist of 58,955 Shares (in the aggregate, the "Shares," individually, a "Share"), all of which shall have the following rights, preferences and privileges: (a) Dividend Rights. --------------- (1) Dividends shall be payable in cash on each Share when, as and if declared by the Board of Directors, out of funds legally available therefor, on a cumulative basis, for each calendar quarter, commencing with the calendar quarter ending on June 30, 1996. (Each calendar quarter, commencing with the calendar quarter ending on June 30, 1996, may be referred to hereinafter as a "Dividend Period.") (2) The full dividend on each Share for each Dividend Period shall be $32.50. (The full dividend on each Share for the first Dividend Period shall be the same amount as a full dividend for each subsequent Dividend Period, notwithstanding that such Share may not have been outstanding for some or all of the first Dividend Period. The foregoing is subject to the qualification that if the Company pays, for any Dividend Period, a dividend on any Shares which is greater than $32.50 per Share, then the Company will have the right to reduce the amount which will constitute a full dividend on such Shares for any future Dividend Period or Dividend Periods, provided that such reduction does not reduce the cumulative total of all dividends paid on such Shares to less than an amount per Share equal to $32.50 multiplied by the number of Dividend Periods which have elapsed. (3) The dividend, if any, on the Shares for each Dividend Period shall be payable on or before the last day of that Dividend Period; provided, that if any such day shall be a Saturday, Sunday or other day on which banking institutions are closed (any of the foregoing a "Non-Business Day"), then the dividend shall be payable on the next succeeding day which is not a Non-Business Day. The dividend for each Dividend Period shall be paid to the holders of record of the Shares as they appear on the stock register of the Corporation on the last day of that Dividend Period (even if such last day is a Non-Business Day). (4) Unless dividends on all outstanding "Senior Shares" (as hereinafter defined) have been or contemporaneously are paid in full for the latest dividend period ending contemporaneously with or prior to the end of the Dividend Period for which a dividend is to be paid on the Shares, and, to the extent such Senior Shares have cumulative dividend rights, for all prior dividend periods, no dividend or other distribution shall be paid on the Shares for such Dividend Period. The Corporation shall not declare or pay or set apart for payment any dividends for a dividend period on any "Common Shares" (as hereinafter defined), or any other class or series of shares ranking on a parity with, or junior to, the Shares as to dividends, unless a full dividend on the Shares for the latest Dividend Period ending contemporaneously with or prior to the last day of such Dividend Period, and for all prior Dividend Periods, has been or contemporaneously is declared and 2 paid, or declared and a sum sufficient for payment thereof is set apart for payment. When dividends are not paid in full upon the Shares or on any class or series of shares ranking on a parity therewith as to dividends, all dividends declared upon the Shares and any other class or series of shares ranking on a parity therewith as to dividends shall be declared pro rata so that the amount of dividends declared per share on the Shares and on such other series or class of shares shall in all cases bear to each other the same ratio that the cumulative accrued and unpaid dividends per share on the Shares and on such other class or series of shares bears to each other. The foregoing shall not limit distributions on or in respect of any outstanding shares of stock of the Corporation which are paid in Common Shares. (5) The preference as to dividends held by holders of any Shares shall terminate, and no further dividends shall be paid on such Shares, for any Dividend Period ending after the earlier of (i) the Corporation's receipt of notice of exercise of the conversion right as to those Shares as provided for in (h) below and (ii) the date of automatic conversion in accordance with (f) below. (b) Liquidation. ----------- (1) In the event of any voluntary or involuntary liquidation, dissolution, or winding up of the Corporation, (i) The holders of the Shares are not entitled to receive any liquidation payment in respect of the Shares until the respective liquidation preferences in respect of all Senior Shares, if any, have been paid in full; (ii) If the liquidation amount paid with respect to each Share is less than the "Share Liquidation Preference" (as hereinafter defined), or if the liquidation amounts payable with respect to any other shares of the Corporation ranking as to any liquidation distribution on a 3 parity with the Shares are not paid in full, any participation in the distribution of the assets of the Corporation by the holders of the Shares and/or of such other shares will be on a basis which causes the amount paid in respect of each Share to bear the same proportion to the amount paid in respect of each such other share as the Share Liquidation Preference bears to the full liquidation amount to which the holder of such other share would be entitled in the event of full payment; and (iii) Before any distribution of assets is made to holders of Common Shares or any other class or series of shares ranking junior to the Shares upon liquidation, there shall be paid to the holder of the Shares a liquidating distribution on each Share in the amount of the Share Liquidation Preference. After payment of a total liquidation distribution on each Share of the Share Liquidation Preference, the holders of the Shares shall not be entitled to any further participation in any distribution of assets by the Corporation, and their preference as to dividends shall terminate. (2) For purposes of liquidation rights, a reorganization (as defined in Section 181 of the California Corporations Code) or consolidation or merger of the Corporation with or into any other corporation or corporations or a sale of all or substantially all of the assets or the corporation shall be deemed not to be a liquidation, dissolution or winding up of the Corporation. (c) Redemption. ---------- Except as herein specifically provided, the Shares are not redeemable. If the Board of Directors of the Corporation 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 Board of Directors shall have the power to prevent the transfer of 4 and/or to call for redemption of the Shares, if required, in the opinion of the Board of 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 each Share, if so called for redemption, on the date fixed for redemption, shall be the Share Liquidation Preference. From and after the date fixed for redemption by the Board of Directors, the holders of the Shares shall cease to be entitled to any distributions, voting rights, and other benefits with respect to the Shares, other than the right to payment of the redemption price determined as aforesaid. "REIT Provisions of the Internal Revenue Code" shall mean Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. In order to exercise the redemption option set forth above, with respect to the Shares, the Corporation shall give notice of redemption to the record holders of the Shares at least 10 days prior to such redemption date, to the addresses of such holders as the same shall appear on the stock transfer records of the Corporation. Such notice shall state (i) the redemption date and (ii) the place or places where the certificates for the Shares is to be surrendered for payment of the redemption price. (d) Voting Rights. ------------- (1) The record owners of the Shares shall be entitled to the same voting power and rights on a share for share basis as a holder of Common Shares. Except as required by California law and/or as hereinafter specifically provided, the holders of the Shares shall have no right or power to vote the Shares separately as a class. (2) The affirmative vote or consent of the holders of at least a majority of the outstanding Shares, voting separately as a class, will be required for any amendment to the Articles 5 of Incorporation of the Corporation that will adversely alter or change the powers, preferences, privileges or rights of the Shares. (3) If the Corporation shall fail to pay full cumulative dividends on the Shares or any other class of its preferred shares for six (6) quarterly dividend payment periods, whether or not consecutive (a "Dividend Default"), the holders of all outstanding preferred shares and any other holders of capital stock of the Corporation ranking on a parity with the Shares as to dividends and rights to distributions upon liquidation, voting as a single class without regard to series, will be entitled as a group to elect two Directors until full cumulative dividends for all past dividend payment periods on the Shares have been paid or declared and funds therefor set apart for payment. Such right to vote separately as a class to elect Directors shall, when vested, be subject, always, to the same provisions for the vesting of such rights to elect Directors separately as a class in the case of future Dividend Defaults. At any time when such right to elect Directors separately as a class shall have so vested, the Corporation may, and upon the written request of the holders of record of not less than 20% of the total number of the Shares then outstanding shall, call a special meeting of stockholders 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 of the Corporation, provided that the Corporation 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 of the Corporation and the holders of all of the Shares are afforded the opportunity to elect such Directors (or fill any vacancy) at such Annual Meeting of Shareholders. Directors elected as aforesaid shall serve until the next Annual Meeting of Shareholders of the Corporation or until their respective successors shall 6 be elected and qualified. If, prior to the end of the term of any Director elected as aforesaid, a vacancy in the office of such Director shall occur during the continuance of a Dividend Default by reason of death, resignation, or disability, such vacancy shall be filled for the unexpired term by the appointment of a new Director for the unexpired term of such former Director, such appointment to be made by the remaining Director elected as aforesaid. (e) Conversion. ---------- Each Share shall be convertible, at the option of the holder thereof, at any time prior to March 31, 2000 in the manner hereinafter set forth, into 35.014 Common Shares, subject to (g). (f) Mandatory Conversion on March 31, 2000. --------------------------------------- Each Share which has not been converted into Common Shares pursuant to (e), prior to March 31, 2000 shall be automatically converted, on and as of March 31, 2000, into 35.014 Common Shares, subject to (g). (g) If, at the time of conversion of any Shares pursuant to (e) or (f), there are any accumulated unpaid dividends on the Shares being converted for any Dividend Periods ending prior to or contemporaneously with conversion, then the number of Common Shares to be issued upon such conversion of each such Share shall be increased by a number computed by dividing the amount of such accumulated unpaid dividends for each such Share by the average daily "Closing Price" (as hereinafter defined) per Common Share for all trading days during the period of 45 consecutive days ending seven days prior to the date of such conversion. (h) Conversion Procedure. -------------------- To exercise a right of conversion under (e) above, a holder of the Shares to be converted shall deliver to the principal office of the Corporation, at least five business days, and not more than eight 7 business days, prior to the intended conversion date, written notice of the exercise of its right to convert such Shares, addressed to the Chief Financial Officer of the Corporation, specifying the number of Shares to be converted, requesting conversion, and specifying the date of conversion. On the conversion date established pursuant to any of (e) or (f) above, the holder of the Shares to be converted shall surrender the certificates for such Shares, duly endorsed or assigned to the Corporation or in blank, at the principal office of the Corporation or at a bank or trust company appointed by the Corporation for that purpose. (i) Adjustments. ----------- (1) If, on or before conversion of any Share, there occurs the consolidation or merger of the Corporation with or into another corporation, or the sale or conveyance of all or substantially all of the assets of the Corporation to another corporation, and the Corporation is not the acquiring or surviving corporation of such consolidation, merger or sale or conveyance of assets, then, upon conversion, there shall be issued to the holder of such Share upon conversion, in lieu of Common Shares, shares of common stock, or equivalent securities, of the acquiring or surviving corporation, computed in the same manner that the number of Common Shares to be issued upon conversion would have been computed in the absence of such consolidation, merger or sale or conveyance. (2) If, on or before conversion of any Share, the Corporation shall subdivide or combine its outstanding Common Shares into a greater or smaller number of Common Shares, or shall set a record date for the purpose of entitling the holders of any of its Common Shares to receive a dividend or other distribution payable in Common Shares, then in each case the number of shares 8 of Common Stock into which such Share shall be converted shall be appropriately increased or reduced. (j) No Fractional Shares. -------------------- No fractions of Common Shares shall be issued upon conversion. The number of full Common Shares issuable to any one person or entity upon concurrent conversion of any Shares shall be computed on the basis of the aggregate number of Shares being converted and shall be rounded to the nearest whole number. (k) Future Issuance of Certain Shares. --------------------------------- The future issuance of shares of preferred stock on a parity with, or junior to, the Shares as to dividends, and/or as to the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, and the future issuance of Senior Shares (which shall be senior to the Shares as to such matters), shall not require the vote or consent of the holders of the Shares, unless the issuance of such Senior Shares violates any restrictions contained herein or in the Exchange Agreement. (l) Certain Definitions. ------------------- (1) If the Common Shares are listed on one or more exchanges or quoted on the NASDAQ National Market System, the "Closing Price" for a trading day shall be the composite closing price for that day as reported in the Wall Street Journal (Western Edition). If the Common Shares are not so listed or quoted, the "Closing Price" for a trading day shall be the average of the closing bid and asked prices for that day as reported by NASDAQ (or if not reported by NASDAQ, its equivalent) in the Wall Street Journal (Western Edition). 9 (2) "Common Shares" shall mean shares, outstanding as of the date of issuance of the Share, or issued thereafter, of the Corporation's Common Stock, par value $.10 per share (together with any other shares of capital stock into which such shares shall be reclassified or changed). (3) "Senior Shares" shall mean any shares of stock of the Corporation, exclusive of the Shares and the Common Shares, which (i) are outstanding as of the date of issuance of the Shares or (ii) are issued subsequent to the date of issuance of the Shares, and not in violation of the terms of the Exchange Agreement and these Resolutions, on terms which do not provide that they are on a parity with, or junior to, the Shares as to dividends and as to the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation. Senior Shares shall include, but not be limited to, the following series of preferred stock of the Corporation: 10% Cumulative Preferred Stock, Series A; 9.20% Cumulative Preferred Stock, Series B; Adjustable Rate Preferred Stock, Series C; 9.50% Cumulative Preferred Stock, Series D; 10.00% Cumulative Preferred Stock, Series E; 9.75% Cumulative Preferred Stock, Series F; 8.875% Cumulative Preferred Stock, Series G; 8.45% Cumulative Preferred Stock, Series H. The shares of the following series of preferred stock of the Corporation shall not be "Senior Shares," but shall be on a parity with the Shares as to dividends and as to the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation: 10 Convertible Participating Preferred Stock; 8.25% Convertible Preferred Stock. The shares of the Class B Common Stock, par value $.10 per share, of the Corporation shall not be "Senior Shares," but shall be junior to the Shares as to dividends and as to the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation. (4) "Share Liquidation Preference" for any Share means the sum of (i) all accumulated unpaid dividends on that Share for prior Dividend Periods plus (ii) the greater of (A) $1,000.00 or (B) the product of multiplying 35.014 by the average daily Closing Price per Common Share during the period of 45 consecutive days ending seven days prior to liquidation. (5) "Exchange Agreement" means that certain Exchange Agreement and Assignment between the Corporation and Ameritech Pension Trust by State Street Bank and Trust Company as Trustee pursuant to which the Shares are to be issued. ----- 11 EX-3.16 3 BYLAW AMENDMENT Exhibit 3.16 AMENDMENT TO BYLAWS OF PUBLIC STORAGE, INC. ADOPTED BY THE BOARD OF DIRECTORS ON MAY 9, 1996 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 six (6); 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 six (6) 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." EX-5.1 4 OPINION RE LEGALITY EXHIBIT 5.1 DAVID GOLDBERG Senior Vice President and General Counsel 701 Western Avenue, Suite 200 Glendale, California 91201-2397 May 14, 1996 Public Storage, Inc. 701 Western Avenue, Suite 200 Glendale, California 91201-2397 Gentlemen: As Senior Vice President and General Counsel of Public Storage, Inc. (the "Company"), I have examined the Registration Statement on Form S-4, which is expected to be filed by the Company with the Securities and Exchange Commission on or about the date of delivery of this opinion (the "Registration Statement"), which relates to the offer and sale of the Company's common stock, par value $.10 per share (the "Shares"). I am familiar with the proceedings taken or to be taken by the Company relating to the authorization and issuance of the Shares in the manner set forth in the Registration Statement. I have also examined the Company's Restated Articles of Incorporation and Revised Bylaws and have made such other investigation as I have deemed necessary in order to express the opinions contained herein. It is my opinion that: 1. The Company is a corporation duly organized and validly existing in good standing under the laws of the State of California. 2. The Shares, when issued and delivered in the manner and on the terms described in the Registration Statement, will be legally issued, fully paid and nonassessable. I hereby consent to the reference to me under the caption "Legal Opinions" in the Registration Statement and to the filing of this opinion as an exhibit to the Registration Statement or amendments thereto. Very truly yours, /S/ DAVID GOLDBERG DAVID GOLDBERG EX-8.1 5 OPINION ON TAX MATTERS Exhibit 8.1 May 14, 1996 Storage Properties, Inc. 600 N. Brand Blvd. Glendale, California 91203-1241 Ladies and Gentlemen: This opinion is being delivered to you in accordance with Section 7.1.7 of the Agreement and Plan of Reorganization by and among Public Storage, Inc., a California corporation ("PSI") and Storage Properties, Inc., a California corporation ("SPI"), dated March 4, 1996 (the "Merger Agreement"). Pursuant to the Merger Agreement, SPI will merge with and into PSI (the "Merger"). Except as otherwise provided, capitalized terms referred to herein have the meanings set forth in the Merger Agreement and in the Proxy Statement and Prospectus that is a part of the Registration Statement filed with the Securities and Exchange Commission on or about the date of delivery of this opinion (the "Proxy Statement and Prospectus"). All section references, unless otherwise indicated, are to the Internal Revenue Code of 1986, as amended (the "Code"). We have acted as special tax counsel to SPI in connection with the Merger. As such, and for the purpose of rendering this opinion, we have examined and are relying upon (without any independent investigation or review thereof) the truth and accuracy, at all relevant times, of the statements, covenants, representations and warranties contained in the following documents (including all exhibits and schedules thereto): 1. The Merger Agreement; 2. Representations made to us by PSI; 3. Representations made to us by SPI; 4. The Proxy Statement and Prospectus; and Storage Properties, Inc. May 14, 1996 Page 2 5. Such other instruments and documents related to the formation, organization and operation of PSI and SPI or to the consummation of the Merger and the transactions contemplated thereby as we have deemed necessary or appropriate. In connection with rendering this opinion, we have assumed or obtained representations (and are relying thereon, without any independent investigation or review thereof) that: 1. Original documents (including signatures) are authentic, documents submitted to us as copies conform to the original documents, and there has been (or will be by the Effective Time of the Merger) due execution and delivery of all documents where due execution and delivery are prerequisites to effectiveness thereof. 2. The Merger will be effective under the applicable state law. 3. The continuity of interest requirement as specified in Treas. Reg. (S) 1.368-1(b) and as interpreted in certain Internal Revenue Service rulings and federal judicial decisions will be satisfied. 4. No outstanding indebtedness of SPI or PSI has or will represent equity for tax purposes; no outstanding equity of SPI or PSI has represented or will represent indebtedness for tax purposes. Based on our examination of the foregoing items and subject to the assumptions, exceptions, limitations and qualifications set forth herein, we are of the opinion (1) that for federal income tax purposes, the Merger will constitute a "reorganization" as defined in Section 368(a) of the Code, (2) that PSI 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 PSI (the "PSMI Merger") SO LONG AS (A) PSI has met at all times since the PSMI 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 PSMI Merger was not considered to have any current or accumulated earnings and profits for tax purposes or PSI made distributions prior to the end of 1995 in an amount sufficient to eliminate such earnings and profits, and (3) that the discussion under the heading "Certain Federal Income Tax Matters" in the Proxy Statement and Prospectus fairly summarizes the federal income tax considerations that are material to a SPI Shareholder. Storage Properties, Inc. May 14, 1996 Page 3 In addition to the assumptions set forth above, this opinion is subject to the exceptions, limitations and qualifications set forth below: 1. This opinion represents and is based upon our best judgment regarding the application of relevant current provisions of the Code and interpretations of the foregoing as expressed in existing judicial decisions, administrative regulations and published rulings and procedures. Our opinion is not binding upon the Internal Revenue Service or the courts, and the Internal Revenue Service is not precluded from asserting a 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. Nevertheless, we undertake no responsibility to advise you of any new developments in the application or interpretation of the federal income tax laws. 2. This opinion addresses only the specific tax opinion set forth above, and does not address any other federal, state, local or foreign tax consequences that may result from the Merger or any other transaction (including any transaction undertaken in connection with the Merger). In particular, we express no opinion regarding, among other things: (i) whether and the extent to which any SPI Shareholder who has provided or will provide services to SPI or PSI will have compensation income under any provision of the Code and the effects of such compensation income, including but not limited to the effect upon the basis and holding period of the PSI Common Stock received by any such shareholder in the Merger; (ii) the potential application of the "golden parachute" provisions (Sections 280G, 3121(v)(2) and 4999) of the Code, the alternative minimum tax provisions (Sections 55, 56 and 57) of the Code or Sections 305, 306, 357, and 708 of the Code, or the regulations promulgated thereunder; (iii) the tax consequences of the Merger to SPI or PSI, including without limitation the recognition of any gain after application of any provision of the Code, as well as the regulations promulgated thereunder and judicial interpretations thereof; (iv) the basis of any equity interest in SPI acquired by PSI in the Merger; and Storage Properties, Inc. May 14, 1996 Page 4 (v) the tax consequences of the Merger (including the opinion set forth above) as applied to specific SPI Shareholders and/or holders of options or warrants for SPI stock or that may be relevant to particular classes of SPI Shareholders and/or holders of options or warrants for SPI stock, including but not limited to dealers in securities, corporate shareholders subject to the alternative minimum tax, foreign persons, and holders of shares acquired upon exercise of stock options or in other compensatory transactions. 3. No opinion is expressed as to any transaction other than the Merger as described in the Merger Agreement or to any transaction whatsoever, including the Merger, if all the transactions described in the Merger Agreement are not consummated in accordance with the terms of such Merger Agreement and without waiver or breach of any material provision thereof or if all of the representations, warranties, statements and assumptions upon which we relied are not true and accurate at all relevant times. In the event any one of the statements, representations, warranties or assumptions upon which we have relied to issue this opinion is incorrect, our opinion might be adversely affected and may not be relied upon. 4. This opinion is intended solely for the purposes set forth in Section 7.1.8 of the Merger Agreement; it may not be relied upon for any other purpose or by any other person or entity, and may not be made available to any other person or entity without our prior written consent. We hereby consent to the filing of this opinion letter as Exhibit 8.1 to the Registration Statement and to the reference to this firm under the captions "Legal Opinions" and "Certain Federal Income Tax Matters" in the Proxy Statement and Prospectus. In giving the consent, we do not thereby admit that we are an "expert" within the meaning of the Securities Act of 1933, as amended. Very truly yours, s/ Hogan & Hartson L.L.P. HOGAN & HARTSON L.L.P. EX-23.1 6 CONSENT OF INDEPENDENT AUDITORS Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" in the Registration Statement on Form S-4 (No. 333- ) with respect to Public Storage, Inc.'s registration of common stock and in the related Proxy Statement and Prospectus of Public Storage, Inc. and Storage Properties, Inc. and to the incorporation by reference therein of our report dated February 26, 1996 with respect to the consolidated financial statements and schedules of Public Storage, Inc. in its Annual Report on Form 10-K, as amended by a Form 10-K/A (Amendment No. 2) dated May 14, 1996, for the year ended December 31, 1995 filed with the Securities and Exchange Commission, and to the use of our report dated February 27, 1996, except for Note 8, for which the date is March 4, 1996 with respect to the financial statements and schedules of Storage Properties, Inc. included in the Registration Statement and Proxy Statement and Prospectus. ERNST & YOUNG LLP Los Angeles, California May 14, 1996 EX-23.4 7 CONSENT OF CHARLES R. WILSON & ASSOCIATES Exhibit 23.4 CONSENT OF CHARLES R. WILSON & ASSOCIATES, INC. We hereby consent to the references to our firm under "The Merger -- Real Estate Portfolio Appraisal by Wilson" in the Proxy Statement and Prospectus which is a part of this Registration Statement and to the other references to our firm therein. /s/ Charles R. Wilson & Associates, Inc. May 14, 1996 Pasadena, California EX-23.5 8 CONSENT OF HELLER EHRMAN Exhibit 23.5 Consent of Heller Ehrman White & McAuliffe We hereby consent to the reference to our firm in "The Merger-Fairness Opinion from Stanger - Review of Liquidation Analysis" in the Proxy Statement and Prospectus which is a part of this Registration Statement and to the filing of our opinion letter dated March 18, 1996 as Exhibit 99.5 to this Registration Statement. In giving this consent, we do not thereby admit that we are an "expert" within the meaning of the Securities Act of 1933, as amended. \s\ Heller Ehrman White & McAuliffe May 14, 1996 Los Angeles, California EX-99.1 9 PROXY CARD Exhibit 99.1 STORAGE PROPERTIES, INC. 701 Western Avenue, Suite 200 Glendale, California 91201-2397 THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS The undersigned hereby appoints B. Wayne Hughes and Harvey Lenkin, or either of them, with power of substitution, as Proxies, to appear and vote, as designated below, all the shares of Common Stock of Storage Properties, Inc. ("SPI") held of record by the undersigned on _______________, 1996, at the Special Meeting of Shareholders to be held on _______________, 1996, and any adjournments thereof. In their discretion, the Proxies are authorized to vote upon such other business as may properly come before the meeting. THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN THE MANNER DIRECTED. IN THE ABSENCE OF ANY DIRECTION, THE SHARES WILL BE VOTED FOR THE PROPOSED MERGER AND THE PROPOSED AMENDMENT TO BYLAWS. [X] Please mark votes as in this example. 1. PROPOSED MERGER. To consider and vote upon an Agreement and Plan of Reorganization between SPI and Public Storage, Inc. described in the accompanying Proxy Statement and Prospectus. [_] FOR [_] AGAINST [_] ABSTAIN 2. Other matters: In their discretion, the Proxies are authorized to vote upon such other business as may properly come before the meeting. The undersigned acknowledges receipt of the Notice of Special Meeting of Shareholders and Proxy Statement and Prospectus dated _______________, 1996. PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD IN THE ENCLOSED ENVELOPE TO THE FIRST NATIONAL BANK OF BOSTON, SHAREHOLDER SERVICES, MAIL STOP 45-02-53, 150 ROYALL STREET, CANTON, MASSACHUSETTS 02021. Dated: ____________________, 1996 _____________________________________ Signature _____________________________________ Signature if held jointly Please sign exactly as your name appears. Joint owners should each sign. Trustees and others acting in a representative capacity should indicate the capacity in which they sign. EX-99.2 10 CASH ELECTION FORM Exhibit 99.2 CASH ELECTION FORM TO ACCOMPANY CERTIFICATES REPRESENTING SHARES OF COMMON STOCK OF STORAGE PROPERTIES, INC. Please read and follow carefully the instructions set forth below, which set forth the requirements that need to be complied with in order to make an effective election. Nominees, trustees or other persons who hold shares of Storage Properties, Inc. ("SPI") Common Stock, par value $.05 per share ("SPI Common Stock"), in a representative capacity are directed to Instruction F(4). TO BE EFFECTIVE, THIS CASH ELECTION FORM, PROPERLY COMPLETED AND SIGNED IN ACCORDANCE WITH THE ACCOMPANYING INSTRUCTIONS, TOGETHER WITH CERTIFICATES FOR THE SPI COMMON STOCK COVERED HEREBY (UNLESS DELIVERY IS GUARANTEED IN BOX E BELOW IN ACCORDANCE WITH INSTRUCTION A), MUST BE RECEIVED BY THE FIRST NATIONAL BANK OF BOSTON ("BANK OF BOSTON") NAMED BELOW, AT THE APPROPRIATE ADDRESS SET FORTH BELOW, NO LATER THAN THE ELECTION DEADLINE (AS DEFINED IN INSTRUCTION A). DELIVERIES MADE TO ADDRESSES OTHER THAN THE ADDRESS FOR BANK OF BOSTON SET FORTH BELOW DO NOT CONSTITUTE VALID DELIVERIES AND BANK OF BOSTON WILL NOT BE RESPONSIBLE THEREFOR. HOLDERS OF SPI COMMON STOCK WHO INTEND TO RECEIVE PUBLIC STORAGE, INC. ("PSI") COMMON STOCK IN THE MERGER SHOULD NOT SUBMIT THIS CASH ELECTION FORM AND SHOULD NOT SUBMIT THEIR STOCK CERTIFICATES FOR EXCHANGE UNTIL THEY HAVE RECEIVED THE LETTER OF TRANSMITTAL AND INSTRUCTIONS FROM BANK OF BOSTON WHICH WILL BE MAILED AFTER THE CONSUMMATION OF THE MERGER. This Cash Election Form is to be executed and returned to Bank of Boston at the following address:
BY MAIL OR FOR BY HAND BY OVERNIGHT COURIER FOR INFORMATION DUPLICATE COPIES OF MATERIAL The First National Bank of Boston BancBoston Trust Company The First National Bank of Boston Shareholder Communications Shareholder Service of New York Corporate Agency & Reorganization Corporation P.O. Box 1889 55 Broadway 150 Royall Street (800) 733-8481, Mail Stop 45-02-53 3rd Floor Mail Stop 45-02-53 extension 432 Boston, MA 02105 New York, NY 10006 Canton, MA 02021 (617) 575-3120
Delivery of this instrument to an address other than as set forth above will not constitute a valid delivery. The accompanying instructions should be read carefully before this Cash Election Form is completed. PLEASE READ CAREFULLY THE ACCOMPANYING INSTRUCTIONS Ladies and Gentlemen: This Cash Election Form is being delivered in connection with the merger (the "Merger") of SPI with and into Public Storage, Inc. ("PSI"), pursuant to the Agreement and Plan of Reorganization dated as of March 4, 1996, between PSI and SPI (the "Merger Agreement"). The undersigned, subject to the Election and Allocation Procedures (as defined below) and the other terms and conditions set forth in this Cash Election Form, including the documents incorporated herein by reference, hereby (a) surrenders the certificate(s) (the "Certificates") representing the shares of SPI Common Stock listed in Box A (Certificate Information) and (b) elects (an "Election"), as indicated below, upon consummation of the Merger to have each of the shares of SPI Common Stock represented by the Certificates converted into the right to receive $7.31 in cash (subject to adjustment as described in the Merger Agreement), without interest (a "Cash Election"). If the Depositary has not received your properly completed Cash Election Form, accompanied by your stock Certificates, by the Election Deadline (as defined in Instruction A) (unless Box E (Guaranty of Delivery) has been properly completed and such Certificates are received by Bank of Boston by the Guaranteed Delivery Deadline), you will receive PSI Common Stock in the Merger. The undersigned hereby certifies that this Election covers all of the shares of SPI Common Stock registered in the name of the undersigned and either (i) beneficially owned by the undersigned, or (ii) owned by the undersigned in a representative or fiduciary capacity for a particular beneficial owner or for one or more beneficial owners, except as otherwise permitted pursuant to Instruction F(4). An SPI Shareholder may not make a cash election as to less than all of the shares of SPI Common Stock beneficially owned by such shareholder. This Election is subject to the terms and conditions set forth in the Merger Agreement and the Proxy Statement and Prospectus, dated _______________, 1996 (the "Proxy Statement and Prospectus") furnished to shareholders of SPI, in connection with the Merger, all of which are incorporated herein by reference. Receipt of the Proxy Statement and Prospectus, including the Merger Agreement attached as Appendix A thereto, is hereby acknowledged. Copies of the Proxy Statement and Prospectus are available from Bank of Boston upon request (see Instruction G(10)). It is understood that because pursuant to the Merger Agreement the number of shares of SPI Common Stock to be converted into the right to receive cash in the Merger are subject to limitations, no assurance can be given that an Election by any given shareholder, including this Election by the undersigned, can be accommodated. Rather, the Election by each holder of SPI Common Stock, including this Election by the undersigned, will be subject to the results of the election and allocation procedures set forth in the Merger Agreement and described in the Proxy Statement and Prospectus (the "Election and Allocation Procedures"). 1 INSTRUCTIONS The Execution Section of this Cash Election Form should be properly filled in, dated and signed, torn off and delivered, together with all stock Certificates representing SPI Common Stock currently held by you (unless delivery is guaranteed in Box E in accordance with Instruction A), to Bank of Boston at the appropriate address set forth on the front of this Cash Election Form. Please read and follow carefully the instructions regarding completion of this Cash Election Form set forth below. If you have any questions concerning this Cash Election Form or require any information or assistance, see Instruction G(1). HOLDERS OF SPI COMMON STOCK WHO INTEND TO RECEIVE PSI COMMON STOCK IN THE MERGER SHOULD NOT SUBMIT THIS CASH ELECTION FORM AND SHOULD NOT SUBMIT THEIR STOCK CERTIFICATES FOR EXCHANGE UNTIL THEY HAVE RECEIVED THE LETTER OF TRANSMITTAL AND INSTRUCTIONS FROM BANK OF BOSTON WHICH WILL BE MAILED AFTER THE CONSUMMATION OF THE MERGER. A. TIME IN WHICH TO ELECT In order for an Election to be effective, Bank of Boston must receive a properly completed Cash Election Form, accompanied by all stock Certificates representing SPI Common Stock currently held by you, NO LATER THAN 5:00 P.M., NEW YORK CITY TIME, ON THE LAST BUSINESS DAY BEFORE THE DAY OF THE MEETING OF SHAREHOLDERS OF SPI (the "Election Deadline"). If all other conditions set forth in the Merger Agreement have been met or, if permissible, waived, the effective time of the Merger (the "Effective Time") could occur on the same day approval of the Merger by shareholders of SPI is obtained. THUS, SHAREHOLDERS ARE URGED TO DELIVER A PROPERLY COMPLETED CASH ELECTION FORM, ACCOMPANIED BY STOCK CERTIFICATES (OR A PROPER GUARANTY OF DELIVERY, AS DESCRIBED BELOW), NO LATER THAN 5:00 P.M., NEW YORK CITY TIME, ON _______________, 1996, IN ORDER TO ASSURE THAT THEIR CASH ELECTION FORM WILL BE RECEIVED BY THE ELECTION DEADLINE. As soon as the date on which the effective time of the Merger is anticipated to occur is determined, SPI and PSI will publicly announce such date, although no assurance can be given that the Effective Time will occur on such date. Persons whose stock Certificates are not immediately available may also make an Election by completing this Cash Election Form and having Box E (Guaranty of Delivery) properly completed and duly executed by a member of a registered national securities exchange or of the National Association of Securities Dealers, Inc. or a commercial bank or trust company having an office or correspondent in the United States (subject to the condition that the Certificates, the delivery of which is thereby guaranteed, are in fact delivered to Bank of Boston no later than 5:00 p.m., New York City Time, on the third business day after the Election Deadline (the "Guaranteed Delivery Deadline")). IF BANK OF BOSTON HAS NOT RECEIVED YOUR PROPERLY COMPLETED CASH ELECTION FORM, ACCOMPANIED BY YOUR STOCK CERTIFICATES, BY THE ELECTION DEADLINE (UNLESS BOX E (GUARANTY OF DELIVERY) HAS BEEN PROPERLY COMPLETED AND SUCH CERTIFICATES ARE RECEIVED BY BANK OF BOSTON BY THE GUARANTEED DELIVERY DEADLINE), YOU WILL RECEIVE PSI COMMON STOCK IN THE MERGER. For instructions regarding changes or revocations of Elections and the time in which such changes or revocations can be made, see Instructions F(1) and F(2) below. B. ELECTIONS This Cash Election Form provides for your Election, subject to the Election and Allocation Procedures and the other terms and conditions set forth hereunder and in the documents incorporated herein by reference, upon consummation of the Merger to have each of the shares of SPI Common Stock covered by this Cash Election Form converted into the right to receive $7.31 in cash (subject to adjustment as described in the Merger Agreement), without interest (a "Cash Election"). You should understand that your Election is subject to certain terms and conditions that are set forth in the Merger Agreement and described in the Proxy Statement and Prospectus. The Merger Agreement is included as Appendix A to the Proxy Statement and Prospectus. Copies of the Proxy Statement and Prospectus may be requested from Bank of Boston at the address and telephone number set forth on the first page of this Cash Election Form (see Instruction G(10)). The delivery of this Cash Election Form to Bank of Boston constitutes acknowledgement of the receipt of the Proxy Statement and Prospectus. EACH HOLDER OF SPI COMMON STOCK IS STRONGLY ENCOURAGED TO READ THE PROXY STATEMENT AND PROSPECTUS IN ITS ENTIRETY AND TO DISCUSS THE CONTENTS THEREOF, THE MERGER AND THIS CASH ELECTION FORM WITH HIS OR HER PERSONAL FINANCIAL AND TAX ADVISORS PRIOR TO DECIDING WHETHER TO ELECT CASH. THE TAX CONSEQUENCES TO A HOLDER OF SPI COMMON STOCK WILL VARY DEPENDING UPON A NUMBER OF FACTORS. FOR CERTAIN INFORMATION REGARDING THE FEDERAL INCOME TAX CONSEQUENCES OF AN ELECTION, SEE "CERTAIN FEDERAL INCOME TAX MATTERS -- THE MERGER" IN THE PROXY STATEMENT AND PROSPECTUS. C. CASH ELECTION By completing and submitting the Cash Election Form, you are electing, subject to the Election and Allocation Procedures and the other terms and conditions set forth in this Cash Election Form, including the documents incorporated herein by reference, to receive cash for all of the shares of SPI Common Stock covered by this Cash Election Form. D. RECEIPT OF PSI COMMON STOCK HOLDERS OF SPI COMMON STOCK WHO INTEND TO RECEIVE PSI COMMON STOCK IN THE MERGER SHOULD NOT SUBMIT THIS CASH ELECTION FORM AND SHOULD NOT SUBMIT THEIR STOCK CERTIFICATES FOR EXCHANGE UNTIL THEY HAVE RECEIVED THE LETTER OF TRANSMITTAL AND INSTRUCTIONS FROM BANK OF BOSTON WHICH WILL BE MAILED AFTER THE CONSUMMATION OF THE MERGER. E. FAILURE TO MAKE EFFECTIVE CASH ELECTION If you have failed to make an effective Cash Election, or if your Election is deemed by Bank of Boston or PSI to be defective in any way, or if your Cash Election Form is not accompanied by your Certificates (unless Box E (Guaranty of Delivery) has been properly completed and such Certificates are received by Bank of Boston by the Guaranteed Delivery Deadline), you will receive PSI Common Stock in the Merger. F. SPECIAL CONDITIONS (1) REVOCATION OF ELECTION. An election may be revoked by the person or persons making such election by a written notice signed and dated by such person or persons and received by Bank of Boston prior to the Election Deadline, identifying the name of the registered holder of the SPI Common Stock subject to such Election and the serial numbers shown on the Certificates representing such SPI Common Stock. Any person or persons who have effectively revoked an Election may, by a signed and dated written notice 2 to Bank of Boston, request the return of the stock Certificates submitted to Bank of Boston and such Certificates will be returned to such person or persons (at the shareholder's risk) within five business days of receipt of such request. (2) NULLIFICATION OF ELECTION. All Cash Election Forms will be void and of no effect if the Merger is not consummated, and Certificates submitted therewith shall be promptly returned to the persons submitting the same. (3) ELECTIONS SUBJECT TO ALLOCATION. All Elections are subject to the Election and Allocation Procedures set forth in the Merger Agreement and described in the Proxy Statement and Prospectus under the caption "The Merger -- General" and to the other terms and conditions set forth thereunder and hereunder, including the documents incorporated herein by reference. (4) SHARES HELD BY NOMINEES, TRUSTEES OR OTHER REPRESENTATIVES. Holders of record of shares of SPI Common Stock who hold such shares as nominees, trustees or in other representative or fiduciary capacities (a "Representative") may submit one or more Cash Election Forms covering the aggregate number of shares of SPI Common Stock held by such Representative for the beneficial owners for whom the Representative is making an Election, provided, that such Representative certifies that each such Cash Election Form covers all the shares of SPI Common Stock held by such Representative for a particular beneficial owner. Any Representative who makes an Election or a Non-Election may be required to provide Bank of Boston with such documents and/or additional certifications, if requested, in order to satisfy Bank of Boston that such Representative holds such shares of SPI Common Stock for a particular beneficial owner of such shares. If any shares held by a Representative are not covered by an effective Cash Election Form, they will be exchanged for PSI Common Stock. G. GENERAL (1) EXECUTION AND DELIVERY. In order to make an effective Election, you must correctly fill in the Execution Section of this Cash Election Form. After dating and signing it, you are responsible for its delivery, accompanied by all stock Certificates representing SPI Common Stock currently held by you or a proper Guaranty of Delivery of such stock Certificates pursuant to Instruction A, to Bank of Boston at the address set forth on the front of this Cash Election Form by the Election Deadline. YOU MAY CHOOSE ANY METHOD TO DELIVER THIS CASH ELECTION FORM; HOWEVER, YOU ASSUME ALL RISK OF NON-DELIVERY. IF YOU CHOOSE TO USE THE MAIL, WE RECOMMEND THAT YOU USE REGISTERED MAIL, RETURN RECEIPT REQUESTED, AND THAT YOU PROPERLY INSURE ALL STOCK CERTIFICATES. DELIVERY OF STOCK CERTIFICATES WILL BE DEEMED EFFECTIVE AND RISK OF LOSS WITH RESPECT TO SUCH CERTIFICATES SHALL PASS ONLY WHEN SUCH CERTIFICATES ARE ACTUALLY RECEIVED BY BANK OF BOSTON. (2) SIGNATURES. Except as otherwise permitted below, you must sign this Cash Election Form exactly the way your name appears on the face of your Certificates. If the shares are owned by two or more persons, each must sign exactly as his or her name appears on the face of the Certificates. If shares of SPI Common Stock have been assigned by the registered owner, this Cash Election Form should be signed in exactly the same way as the name of the assignee appearing on the Certificates or transfer documents. See Instructions G(5)(a) and G(5)(b). (3) NOTICE OF DEFECTS; RESOLUTION OF DISPUTES. None of SPI, PSI and Bank of Boston will be under any obligation to notify you or anyone else that Bank of Boston has not received a properly completed Cash Election Form or that any Cash Election Form submitted is defective in any way. Any and all disputes with respect to Cash Election Forms or to Elections made in respect of SPI Common Stock (including but not limited to matters relating to the Election Deadline, time limits, defects or irregularities in the surrender of any stock Certificate, effectiveness of any Elections and computations of allocations) will be resolved by PSI and its decision will be conclusive and binding on all concerned. PSI may delegate this function to Bank of Boston in whole or in part. PSI or Bank of Boston shall have the absolute right in its sole discretion to reject any and all Cash Election Forms and surrenders of stock Certificates which are deemed by either of them to be not in proper form or to waive any immaterial irregularities in any Cash Election Form or in the surrender of any stock Certificate. Surrenders of stock Certificates will not be deemed to have been made until all defects or irregularities that have not been waived have been cured. (4) ISSUANCE OF PAYMENT CHECK(S). If the Payment Check(s) are to be issued in the name of the registered holder(s) as inscribed on the surrendered Certificate(s), no guarantee of the signature on the Cash Election Form is required. For corrections in name and change in name not involving changes in ownership, see Instruction G(5)(c). (5) ISSUANCE OF PAYMENT CHECK(S) IN DIFFERENT NAMES. If the Payment Check(s) are to be issued in the name of someone other than the registered holder(s) of the surrendered Certificate(s), you must follow the guidelines below. Note that in each circumstance listed below, shareholder(s) must have signature(s) guaranteed in Box C and complete Box F. (a) ENDORSEMENT AND GUARANTEE. The Certificate(s) surrendered must be properly endorsed (or accompanied by appropriate stock powers properly executed) by the registered holder(s) of such Certificate(s) to the person who is to receive the Payment Check(s). The signature(s) of the registered holder(s) on the endorsement or stock powers must correspond with the name(s) written upon the face of the Certificate(s) in every particular and must be medallion guaranteed by an eligible guarantor institution as defined below. DEFINITION OF ELIGIBLE GUARANTOR INSTITUTION Generally an eligible guarantor institution, as defined in Rule 17Ad-15 of the regulations of the Securities and Exchange Commission, means: (i) Banks (as that term is defined in Section 3(a) of the Federal Deposit Insurance Act); (ii) Brokers, dealers, municipal securities dealers, municipal securities brokers, government securities dealers, and government securities brokers, as those terms are defined under the Securities Exchange Act of 1934; (iii) Credit unions (as that term is defined in Section 19(b)(1)(A) of the Federal Reserve Act); (iv) National securities exchanges, registered securities associations, clearing agencies, as those terms are used under the Securities Exchange Act of 1934; and (v) Savings associations (as that term is defined in Section 3(b) of the Federal Deposit Insurance Act). 3 (b) TRANSFEREE'S SIGNATURE. The Cash Election Form must be signed by the transferee or assignee or his or her agent, and should not be signed by the transferor or assignor. See Box B (Sign Here). The signature of such transferee or assignee must be medallion guaranteed by an eligible guarantor institution as provided in Instruction G(5)(a). (c) CORRECTION OF OR CHANGE IN NAME. For a correction of name or for a change in name which does not involve a change in ownership, proceed as follows. For a change in name by marriage, etc., the Cash Election Form should be signed, e.g., "Mary Doe, now by marriage Mary Jones." For a correction in name, the Cash Election Form should be signed, e.g., "James E. Brown, incorrectly inscribed as J.E. Brown." The signature in each case should be guaranteed in the manner described in Instruction G(5)(a) above and Box F should be completed. You should consult your own tax advisor as to any possible tax consequences resulting from the issuance of Payment Check(s) in a name different from that of the registered holder(s) of the surrendered Certificate(s). (6) SUPPORTING EVIDENCE. In case any Cash Election Form, certificate endorsement or stock power is executed by an agent, attorney, administrator, executor, guardian, trustee or any person in any other fiduciary or representative capacity, or by an officer of a corporation on behalf of the corporation, there must be submitted (with the Cash Election Form, surrendered Certificate(s), and/or stock powers) documentary evidence of appointment and authority to act in such capacity (including court orders and corporate resolutions when necessary), as well as evidence of the authority of the person making such execution to assign, sell or transfer the Certificate(s). Such documentary evidence of authority must be in form satisfactory to Bank of Boston. (7) SPECIAL MAILING INSTRUCTIONS. The Payment Check(s) will be mailed to the address of the registered holder(s) as indicated in Box A (Certificate Information), unless instructions to the contrary are given in Box G (Special Mailing Instructions). (8) LOST CERTIFICATES. If you are not able to locate your Certificate(s) representing SPI Common Stock, you should contact Bank of Boston, SPI's transfer agent, at (617) 575-3120. In such event, the transfer agent will forward additional documentation which the shareholder must complete in order to effectively surrender such lost or destroyed Certificate(s). There will be a cost to replace lost Certificates. (9) FEDERAL INCOME TAX WITHHOLDING. Under Federal income tax law, Bank of Boston is required to file a report with the Internal Revenue Service disclosing any payments of cash being made to each holder of Certificates formerly representing shares of SPI Common Stock pursuant to the Merger Agreement. In order to avoid backup withholding of Federal income tax on any cash received upon the surrender of Certificate(s), a holder thereof must, unless an exemption applies, provide Bank of Boston with his or her correct taxpayer identification number ("TIN") on Substitute Form W-9, which is part of this Cash Election Form (Box D), and certify, under penalties of perjury, that such number is correct and that such holder is not otherwise subject to backup withholding. If the correct TIN and certifications are not provided, a $50 penalty may be imposed by the Internal Revenue Service and payments made for surrender of Certificate(s) may be subject to backup withholding of 31%. In addition, if a holder makes a false statement that results in no imposition of backup withholding, and there was no reasonable basis for making such a statement, a $500 penalty may also be imposed by the Internal Revenue Service. Backup withholding is not an additional Federal income tax. Rather, the Federal income tax liability of a person subject to backup withholding will be reduced by the amount of such tax withheld. If backup withholding results in an overpayment of income taxes, a refund may be obtained from the Internal Revenue Service. The TIN that must be provided on the Substitute Form W-9 is that of the registered holder(s) of the Certificate(s) at the effective time of the Merger. The TIN for an individual is his or her social security number. The box in Part II of the Substitute Form W-9 may be checked if the person surrendering the Certificates has not been issued a TIN and has applied for a TIN or intends to apply for a TIN in the near future. If the box in Part II has been checked, the person surrendering the Certificate(s) must also complete the Certificate of Awaiting Taxpayer Identification Number below in order to avoid backup withholding. Notwithstanding that the box in Part II is checked (and the Certificate of Awaiting Taxpayer Identification Number is completed), Bank of Boston will withhold 31% on all cash payments with respect to surrendered Certificate(s) made prior to the time it is provided with a properly certified TIN. Exempt persons (including, among others, corporations) are not subject to backup withholding. A foreign individual may qualify as an exempt person by submitting Form W-8 or a substitute Form W-8, signed under penalties of perjury, certifying to such person's exempt status. A form of such statement can be obtained from Bank of Boston. A Certificate holder should consult his or her tax advisor as to such holder's qualification for an exemption from backup withholding and the procedure for obtaining such exemption. The signature and date provided on the Substitute Form W-9 will serve to certify that the TIN and withholding information provided in this Cash Election Form are true, correct and complete. (10) QUESTIONS AND REQUESTS FOR INFORMATION OR ASSISTANCE. If you have any questions or need assistance to complete this Cash Election Form, please contact Shareholder Communications Corporation at (800) 733-8481, extension 432 (individual holders), or (212) 805-7000 (banks and brokers). You may also obtain additional copies of the Cash Election Form and the Proxy Statement and Prospectus from Bank of Boston at the addresses and telephone number set forth on the first page of this Cash Election Form. H. DELIVERY OF PAYMENT CHECKS As soon as practicable after the Merger becomes effective, Bank of Boston will make the allocations of cash to be received by holders of SPI Common Stock or their designees in accordance with the Election and Allocation Procedures. Bank of Boston will thereafter issue and mail to you a check for any cash to which you are entitled, provided you have delivered the required Certificates for your SPI Common Stock in accordance with the terms and conditions hereof, including the documents incorporated herein by reference. If you do not submit an effective Cash Election Form, Bank of Boston will forward to you, as soon as practicable after the Merger becomes effective, a Letter of Transmittal for you to use to send in your stock Certificates for shares of SPI Common Stock, containing appropriate instructions for surrendering such Certificates at that time. After Bank of Boston receives your stock Certificates with a properly completed Letter of Transmittal, it will issue and mail to you a certificate or certificates for PSI Common Stock to which you are entitled (and, if applicable, a check in lieu of a fractional share), provided you have delivered the required Certificates for your SPI Common Stock in accordance with the terms and conditions of the Letter of Transmittal, including the documents incorporated therein by reference. DO NOT ENCLOSE YOUR PROXY CARD RELATING TO THE SPECIAL MEETING WITH THIS CASH ELECTION FORM, YOUR PROXY CARD SHOULD BE RETURNED IN THE POSTAGE-PAID ENVELOPE ENCLOSED WITH THE PROXY STATEMENT AND PROSPECTUS FOR THAT PURPOSE. 4 CASH ELECTION FORM EXECUTION SECTION BOX A - -------------------------------------------------------------------------------- CERTIFICATE INFORMATION List below the certificates to which this Cash Election Form relates. (Attach additional sheets if necessary.) Name and Address of Registered Holder(s) as Shown on the Number of Shares Share Records Represented by (Fill in, if Blank) Certificate Number Each Certificate - ------------------------------ ------------------ ---------------- __________________ ________________ __________________ ________________ __________________ ________________ __________________ ________________ Total Shares: ================ - -------------------------------------------------------------------------------- CERTIFICATE HOLDER(S) SIGN HERE The undersigned hereby represents and warrants that the undersigned has full power and authority to complete and deliver this Cash Election Form and to deliver for surrender and cancellation the above-described Certificate(s) delivered herewith and that the rights represented by the Certificate(s) are free and clear of all liens, restrictions, charges and encumbrances and are not subject to any adverse claim. The undersigned will, upon request, execute any additional documents necessary or desirable to complete the surrender of the Certificate(s) surrendered herewith. All authority herein conferred shall survive the death or incapacity of the undersigned and all obligations of the undersigned hereunder shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned. Delivery of the Certificate(s) for surrender and cancellation may be revoked only in accordance with Instruction F(2). BOX B - -------------------------------------------------------------------------------- SIGN HERE To be completed by all person(s) surrendering certificates and executing this Cash Election Form. Signature(s): _____________________________________________________________ _____________________________________________________________ Date: ___________________ Telephone Number: _____________________________ Must be signed by registered holder(s) exactly as name(s) appear(s) on stock Certificate(s) or by person(s) authorized to become registered holders by documents transmitted herewith. If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or in any other fiduciary or representative capacity, please provide the following information. (See Instruction G(6)). Name(s): __________________________________________________________________ __________________________________________________________________ Capacity (Full Title): ____________________________________________________ Address: __________________________________________________________________ __________________________________________________________________ - -------------------------------------------------------------------------------- BOX C - -------------------------------------------------------------------------------- SIGNATURE GUARANTEE To be completed only if required by Instruction G(5). Your signature must be MEDALLION GUARANTEED by an eligible financial institution. Note: a notarization by a notary public is not acceptable. FOR USE BY FINANCIAL INSTITUTION ONLY. PLACE MEDALLION GUARANTEE IN SPACE BELOW. - -------------------------------------------------------------------------------- E-1 CASH ELECTION FORM EXECUTION SECTION (CONTINUED) IMPORTANT TAX INFORMATION PLEASE PROVIDE YOUR SOCIAL SECURITY OR OTHER TAXPAYER IDENTIFICATION NUMBER ON THIS SUBSTITUTE FORM W-9 AND CERTIFY THAT YOU ARE NOT SUBJECT TO BACKUP WITHHOLDING. FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY CASH PAYMENTS MADE TO YOU PURSUANT TO THE MERGER. IF THE BOX IN PART 3 OF THE SUBSTITUTE FORM W-9 IS CHECKED, THE "CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER" BELOW MUST BE COMPLETED.
BOX D - ------------------------------------------------------------------------------------------------------------------------------------ PART 1 - PLEASE PROVIDE YOUR TIN IN Social Security Number or THE BOX AT RIGHT AND CERTIFY BY Employer Identification Number SUBSTITUTE SIGNING AND DATING BELOW. _______________________________ Form W-9 ------------------------------------------------------------------------------------------------------ Department of the Treasury PART 2 - Check the box if you are not subject to backup withholding because (1) you have Internal Revenue Service not been notified that you are subject to backup withholding as a result of failure to report all interest or dividends or (2) the Internal Revenue Service has notified you that you are no longer subject to backup withholding. [_] ------------------------------------------------------------------------------------------------------ Payer's Request for Taxpayer Certification - Under penalties of perjury, I certify PART 3 - Identification Number (TIN) that the information provided on this form is true, correct and complete. Awaiting TIN [_] ------------------------------------------- Signature: __________________________________________________ Date: __________________________________________________________ - ----------------------------------------------------------------------------------------------------------------------------------- CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER I certify under penalties of perjury that a taxpayer identification number has not been issued to me, and either (a) I have mailed or delivered an application to receive a taxpayer identification number to the appropriate Internal Revenue Service Center or Social Security Administration Office or (b) I intend to mail or deliver an application in the near future. I understand that if I do not provide a taxpayer identification number by the time of payment, 31% of any cash payment made to me will be withheld, but that such amount will be refunded to me if I then provide a Taxpayer Identification Number within sixty (60) days. Signature: _______________________________________________________________ Date: __________________________________________________ - ----------------------------------------------------------------------------------------------------------------------------------- BOX E - ------------------------------------------------------------------------------------------------------------------------------------ GUARANTY OF DELIVERY To be used only if Certificates are not surrendered herewith. (See instruction A.) The undersigned (check appropriate boxes below) guarantees to deliver to Bank of Boston at the appropriate address set forth above the Certificates for shares of SPI Common Stock submitted with this Cash Election Form no later than 5:00 p.m., New York City Time, on the third business day after the Election Deadline (as defined in Instruction A). [_] A member of a registered national Firm: _______________________________________________________ securities exchange Authorized Signature: _______________________________________________________ [_] A member of the National Association Address: _______________________________________________________ of Securities Dealers, Inc. _______________________________________________________ [_] A commercial bank or trust company Telephone Number: _______________________________________________________ in the United States - ------------------------------------------------------------------------------------------------------------------------------------ SPECIAL PAYMENT AND MAILING INSTRUCTIONS The undersigned understands that the check issued as payment in cash (such checks being referred to herein as "Payment Checks") with respect to the SPI Common Stock surrendered will be issued in the same name(s) as the Certificate(s) surrendered and will be mailed to the address of the registered holder(s) indicated above, unless otherwise indicated in Box F or Box G below. If Box F is completed, the signature of the undersigned must be guaranteed as set forth in Instruction G(5). BOX F - ------------------------------------------------------------------------------------------------------------------------------------ SPECIAL PAYMENT INSTRUCTIONS To be completed only if the Payment Check(s) is (are) to be issued in the name(s) of someone other than the registered holder(s) set forth above. Signature must be guaranteed. (See Instruction G(5).) Name: ______________________________________________________________________________________ Address: ______________________________________________________________________________________ ______________________________________________________________________________________ Social Security Number or Employer Identification Number: ______________________________________________________________________________________ - ------------------------------------------------------------------------------------------------------------------------------------ BOX G - ------------------------------------------------------------------------------------------------------------------------------------ SPECIAL MAILING INSTRUCTIONS To be completed only if the Payment Check(s) is (are) to be issued to the registered holder(s) and mailed to an address other than that of the registered holder(s) set forth above. (See Instruction G(7).) Address: __________________________________________________________________________________________________ __________________________________________________________________________________________________ - ------------------------------------------------------------------------------------------------------------------------------------
E-2 EX-99.5 11 OPINION OF HELLER EHRMAN Exhibit 99.5 [LETTERHEAD OF HELLER EHRMAN WHITE & McAULIFFE] March 18, 1996 Special Committee of the Board of Directors Mr. Jack D. Steele Mr. Vern O. Curtis Storage Properties, Inc. 600 No. Brand Boulevard Glendale, California 91221 Public Storage, Inc. 600 No. Brand Boulevard Glendale, California 91221 Re: Merger of Storage Properties, Inc. ("SPI") into Public Storage, Inc. ("PSI") Ladies and Gentlemen: You have requested our opinion concerning the interpretation of certain of the termination and fee provisions under the Advisory Agreement dated June 23, 1989 (the "Advisory Agreement") between SPI and PS Properties Advisors, Inc. (the "Advisor") in connection with the merger of SPI into PSI (the "Merger"). The defined terms used in the Advisory Agreement have the meanings given to those terms in the SPI prospectus dated June 23, 1989 (the "Prospectus"). PSI manages its own properties and SPI's retention of the Advisor will conclude at the time of the Merger. Because the Advisor has previously merged into PSI, any fee payable to the Advisor in connection with the Merger would be paid by a reduction in the shares of PSI that the shareholders of SPI would otherwise receive. Certain of the officers and directors of PSI are also officers and directors of SPI. PSI and SPI may be considered affiliates of each other. Each of PSI and SPI are California corporations. We assume that the transaction will satisfy the "interested person" requirements of California Corporations Code (S) 310. Consistent with that assumption, we understand that (i) SPI's board has formed a special committee of its "outside" directors to consider this transaction (the "Special Committee"), (ii) the Special Committee has received appraisals and favorable fairness opinions from one or more qualified experts concerning the Merger, (iii) SPI has imposed as a condition to the Merger that the holders of a majority of the shares of SPI voting at the shareholders meeting not held by PSI approve the Merger, and (iv) any proxy materials received by the SPI shareholders will disclose the payment to PSI resulting from the Advisory Agreement. Storage Properties, Inc. Special Committee, Board of Directors, Public Storage, Inc. March 18, 1996 Page 2 TERMINATION RIGHTS SPI and the Advisor each have the right to terminate the Advisory Agreement without breach under (S) 18, upon 60 days' written notice: "This Agreement shall continue in force until the fifth anniversary of the date of this Agreement[/1/], and thereafter shall be automatically extended for successive two-year periods year to year unless terminated with or without cause, by a majority of the Board of Directors upon 60 days' written notice. This Agreement may be terminated by the Advisor on 60 days written notice." This provision does not place any limitations on the right of either party to terminate, other than the 60 day notice provision. APPLICATION OF FEE PROVISION The Advisory Agreement provides two possible formulas for the payment of fees upon the conclusion of the Advisor's services at the time of the Merger. In the event of the "termination" of the Advisory Agreement under Section 18, Section 20 of the Advisory Agreement provides a formula for SPI to purchase the Advisor's future interest in payments under the Advisory Fee (the "Termination Fee"). We understand and assume that the amount that would be payable under this provision would exceed the amount payable as 20% of Cash From Sales or Refinancing, as discussed below. As discussed above, the Advisor has the absolute right to trigger the payment of this fee at any time, upon 60 days notice. Section 11(c) of the Advisory Agreement has an alternative fee provision. It provides that after certain thresholds have been met, "the Advisory Fee shall equal 20% of Net Cash Flow and 20% of Cash from Sales or Refinancing" (the "Sales Fee"). The Prospectus defines "Cash from Sales or Refinancing" as follows: "... net proceeds to the Company from all sales, exchanges and financings of Company properties, less payment of indebtedness relating to such properties and adequate cash reserves from such net proceeds for other obligations of the Company for which there is no provision (other than payment of the Advisory Fee)." The Merger should activate the application of the Sales Fee payable with respect - -------------------- /1/ The Advisory Agreement was entered into on June 23, 1989 and the five year period therefore expired on June 23, 1994. Storage Properties, Inc. Special Committee, Board of Directors, Public Storage, Inc. March 18, 1996 Page 3 to Cash from Sales or Refinancing. The Merger will not generate any cash. The shareholders of SPI will receive stock in PSI. Although the name of the defined term "Cash from Sales or Refinancing" uses the word "cash," the definition itself does not use that word and does not require the existence of cash. Instead it refers to "proceeds" of specified events and would apply to any consideration received by SPI upon any of the specified events. The events specified in the defined term "Cash from Sales or Refinancing" do not specifically include a merger. Nevertheless, the defined term should apply to a merger transaction. The substance of a stock merger is the exchange of the assets of the disappearing company for stock in the surviving company and the distribution of that stock to the shareholders of the disappearing company. The definition of Cash from Sales or Refinancing provides for the payment of this fee to the Advisor upon material financial events. Because the substance of the merger is the same as the substance of the specific financial events named in the definition, a court should interpret the reference in the definition to an "exchange" or a "sale" to include a merger. The events specified in the defined term "Cash from Sales or Refinancing" do not specifically include a transaction with an affiliate. Nevertheless, the defined term should apply to a transaction with an affiliate, provided that the conditions of California Corporations Code (S) 310(a)(1) or California Corporations Code (S) 310(a)(2), or both, are satisfied. CONCLUSION The Advisor has the right to terminate the Advisory Agreement and demand the Termination Fee provided for in Section 20 of the Agreement. The Termination Fee would exceed the Sales Fee. A court should hold that, unless PSI triggers the Termination Fee, the Advisor is entitled to the Sales Fee in connection with the Merger, taking into account the fact that PSI may be considered an affiliate of SPI. Very truly yours, /s/ Heller Ehrman White & McAuliffe cc: Robert A. Stanger & Co., Inc. -----END PRIVACY-ENHANCED MESSAGE-----