Filed pursuant to Rule 424(b)(2)
File No. 333-21991
SUBJECT TO COMPLETION, DATED NOVEMBER 24, 1997
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED FEBRUARY 26, 1997
[Storage USA logo]
$200,000,000
SUSA Partnership , L.P.
$100,000,000 % Notes due December 1,
$100,000,000 % Debentures due December 1,
SUSA Partnership, L.P., a Tennessee limited partnership (the
"Partnership"), will issue % Notes due December 1, (the "Notes"), and %
Debentures due December 1, (the "Debentures," and together with the Notes,
the "Securities"), offered hereby (the "Offering") in the aggregate principal
amounts of $100,000,000 each. Interest on the Securities is payable
semi-annually in arrears on June 1 and December 1 of each year, commencing June
1, 1998. The Notes mature on December 1, , and the Debentures mature on
December 1, . The Securities are redeemable at any time at the option of the
Partnership, in whole or in part, at a redemption price equal to the sum of (i)
the principal of the Securities being redeemed plus accrued interest to the
redemption date and (ii) the Make-Whole Amount, if any. See "Description of
Securities -- Optional Redemption." The Securities will not be entitled to the
benefits of any sinking fund. The Securities are unsecured obligations of the
Partnership and will rank pari passu with each other and with all unsecured and
unsubordinated indebtedness of the Partnership and will be effectively
subordinated to all secured indebtedness of the Partnership. As of September
30, 1997, the Partnership had outstanding $234.9 million of unsecured,
unsubordinated indebtedness, $39.9 million of secured indebtedness and $994.8
million in unencumbered assets. On a pro forma basis, after giving effect to
the completion of the Offering and application of the net proceeds from the
Offering as described herein, as of September 30, 1997, the Partnership would
have had outstanding $400.0 million of unsecured, unsubordinated indebtedness,
$39.9 million of secured indebtedness and $1,168.2 million in unencumbered
assets.
The Notes and Debentures each will be represented by a single Global Note
(each, a "Global Note") registered in the name of the nominee of The Depository
Trust Company ("DTC"). Beneficial interests in a Global Note will be shown on,
and transfers thereof will be effected only through, records maintained by DTC
and its participants. Except as described in "Description of Securities --
Book-Entry System," Securities will not be issued in definitive form. The
Securities will be issued only in denominations of $1,000 and integral
multiples thereof. See "Description of Securities -- Same-Day Settlement and
Payment."
---------------
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 SUPPLEMENT OR THE PROSPECTUS TO WHICH
IT RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------
<TABLE>
<CAPTION>
Initial Public Underwriting Proceeds to
Offering Price (1) Discount(2) Partnership(1)(3)
-------------------- -------------- ------------------
<S> <C>
Per Note ......... % % %
Total ............ $ $ $
Per Debenture ...... % % %
Total ............ $ $ $
</TABLE>
- ---------
(1) Plus accrued interest, if any, from December 1, 1997.
(2) The Partnership has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting."
(3) Before deducting estimated expenses of $225,000 payable by the Partnership.
---------------
The Securities offered hereby are offered by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that the
Securities will be ready for delivery in book-entry form only through the
facilities of DTC in New York, New York, on or about , 1997, against payment
therefor in immediately available funds.
Goldman, Sachs & Co.
First Chicago Capital Markets, Inc.
Morgan Stanley Dean Witter
---------------
The date of this Prospectus Supplement is November , 1997.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT.
<PAGE>
[LOGO]
[Map showing Storage USA locations in the United States]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
FORWARD-LOOKING INFORMATION
This Prospectus Supplement and the accompanying Prospectus, including
documents incorporated by reference herein and therein, may contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). These
statements are identified by words such as "expect," "anticipate," "should" and
words of similar import. Forward-looking statements are inherently subject to
risks and uncertainties, many of which cannot be predicted with accuracy and
some of which might not even be anticipated. Future events and actual results,
financial and otherwise, may differ materially from the results discussed in
the forward-looking statements. Factors that might cause such a difference
include, but are not limited to, those discussed in this Prospectus Supplement,
the accompanying Prospectus and the Partnership's filings with the Securities
and Exchange Commission.
S-2
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by the detailed
information and consolidated financial statements, including the notes thereto,
appearing elsewhere in this Prospectus Supplement or the accompanying
Prospectus or incorporated herein or therein by reference. Capitalized terms
used in this Prospectus Supplement Summary have the meanings set forth
elsewhere in this Prospectus Supplement or the accompanying Prospectus. All
references to the "Partnership" include SUSA Partnership, L.P., those entities
owned or controlled by SUSA Partnership, L.P. and predecessors of SUSA
Partnership, L.P., unless the context indicates otherwise.
THE PARTNERSHIP
The Partnership is engaged in the business of owning, managing, acquiring,
developing and franchising self-storage facilities. At November 24, 1997, the
Partnership owned 348 facilities containing 22.7 million net rentable square
feet and managed for others 32 facilities containing an additional 2.0 million
net rentable square feet in 31 states and the District of Columbia, making it
the second largest operator of self-storage facilities in the United States.
The facilities are located in or near major metropolitan areas, operate under
the Storage USA(R) name and offer low-cost, easily accessible and enclosed
storage space for personal and business use. Average physical and economic
occupancy for the facilities owned by the Partnership at September 30, 1997,
were 87% and 80%, respectively. Average weighted annual rent per square foot
for these facilities was $9.91.
The Partnership is a fully integrated organization that has expertise in
acquisition, development, construction and management of self-storage
facilities and has approximately 1300 employees. Its sole general partner is
Storage USA, Inc. (the "Company"), which is a publicly-held, self-managed and
self-advised real estate investment trust (a "REIT"). The Company conducts all
of its activities through the Partnership and its subsidiaries, and at
September 30, 1997, it owned an approximate 91% interest in the Partnership.
The Partnership's primary business objectives are to increase its cash
flow from operations and the value of the Partnership's facilities. The
Partnership plans to achieve these objectives through the strategies discussed
below, including improving the operations of its facilities and selectively
expanding its portfolio of facilities through acquisition and development. The
Partnership believes that it is distinguishable from most of its competitors by
its access to capital markets, the management information systems it has
developed, the skilled personnel it has gathered and trained for managing
self-storage facilities and its expertise in acquiring and developing
self-storage facilities in diverse locales with potential for increased
occupancy and rental rates.
Self-Storage Facilities
The Partnership's self-storage facilities offer customers fully-enclosed
units, which are for their exclusive use and to which they control access by
furnishing their own locks. The facilities generally contain 400 to 1,000 units
varying in size from 25 to 400 square feet. The majority of the Partnership's
tenants are individuals, ranging from high-income homeowners to college
students, who typically store furniture, appliances and other household and
personal items. Commercial users range from sales representatives and
distributors who store inventory to small businesses that typically store
equipment, records and seasonal items. The facilities generally have a diverse
tenant base of 500-600 tenants, with no single tenant occupying more than one
to two percent of the net rentable square feet of a facility.
The Partnership's self-storage facilities are located near major business
and residential areas, and generally are clearly visible and easily accessible
from major traffic arteries. They generally are protected by computer-
controlled access gates, door alarm systems and video cameras. These facilities
typically are constructed of one-story masonry or tilt-up concrete walls, with
an individual roll-up door for each storage space and with removable steel
interior walls to permit reconfiguration and to protect items from damage.
Sites have wide drive aisles to accommodate most vehicles. The Partnership's
facilities are designed to be aesthetically pleasing, are kept clean and in
good repair by friendly, trained managers, and are open for service during
hours and on days convenient to tenants and prospective tenants. At most of the
facilities, a property manager lives in an apartment located on site.
Climate-controlled space is offered in many of the facilities for storing items
that are sensitive to extreme humidity or temperature. Some of the facilities
provide paved secure storage areas for recreational vehicles, boats and
commercial vehicles. All facilities offer reception of deliveries for
commercial customers.
S-3
<PAGE>
Internal Growth Strategy
The Partnership's internal growth strategy is to pursue an active leasing
policy (which includes aggressively marketing available space and renewing
existing leases at higher rents per square foot). As a result of its internal
growth strategy, the Partnership has historically received premium rents, while
achieving high occupancy levels and increasing profitability. By implementing
this strategy for the 149 facilities owned by the Partnership since January 1,
1996, the Partnership, for the nine months ended September 30, 1997, increased
revenue and net operating income by 5.6% and 9.3%, respectively, over revenue
and net operating income achieved by the Partnership in the same period of the
prior year. See "The Partnership -- Internal Growth Strategy."
External Growth Strategy
The Partnership's external growth strategy is designed to increase the
number of facilities owned by the Partnership either by acquiring suitably
located, under-performing facilities that offer upside potential due to low
occupancy rates or non-premium pricing, or by developing and constructing new
self-storage facilities in favorable markets. In pursuing acquisition
opportunities, the Partnership seeks to add facilities in those metropolitan
areas in which the Partnership operates and selectively to enter new markets
that have desirable characteristics such as a growing population and a
concentration of multifamily dwellings. With respect to its development effort,
the Partnership's current strategy is to develop facilities in those markets in
which it currently operates. The Partnership intends to acquire or develop
facilities that are near residential areas, clearly visible to consumer
traffic, easily accessible for entrance and exit and attractively designed. See
"The Partnership -- External Growth Strategy."
Since the closing of the Company's initial public offering on March 23,
1994 (the "IPO"), the Partnership has purchased 305 self-storage facilities
containing 19.2 million net rentable square feet for an aggregate purchase
price of approximately $983.4 million. The Partnership also has completed
construction of five new facilities and expansions to 10 facilities,
collectively containing 0.6 million square feet, since the IPO.
Capital Strategy
The Partnership and the Company intend to maintain a conservative capital
structure designed to enhance access to capital and to facilitate earnings
growth. Since the IPO, the Company has issued $312.0 million of its Common
Stock in four public offerings and $252.5 million of its Common Stock in a
series of direct placements with Security Capital U.S. Realty ("USRealty"), an
affiliate of Security Capital Group, pursuant to the strategic alliance
discussed below. See "The Partnership -- Strategic Alliance with Security
Capital U.S. Realty." The Company contributes the proceeds of sales of its
Common Stock to the Partnership in exchange for additional units of interest in
the Partnership ("Units"). In October 1996, the Partnership issued to the
public $100.0 million of its unsecured 7.125% Senior Notes due November 1,
2003, and in June 1997, the Partnership issued to the public $100.0 million of
its unsecured 8.20% Senior Notes due June 1, 2017. In addition, since the IPO,
the Partnership has issued 2.7 million Units valued at approximately $91.8
million in consideration for the acquisition of 92 self-storage facilities.
The Partnership has available $115.0 million in unsecured revolving lines
of credit with a group of commercial banks, under which it had borrowed
approximately $80.5 million at November 24, 1997. The Partnership also has
available a $75.0 million bridge loan with a commercial bank that matures in
March 1998, under which it had drawn the entire principal amount at November
24, 1997. The Partnership anticipates that the bridge loan will be converted
into an increase of $75.0 million to one of its unsecured revolving lines of
credit. At September 30, 1997, the Partnership also had mortgage loans
outstanding of $39.9 million that were secured by 18 properties. The debt
policy of the Company and the Partnership, which is subject to change at the
discretion of the Company's Board of Directors, is to limit total indebtedness
to the lesser of 50% of total assets at cost or that amount that will sustain a
minimum debt service coverage ratio of 3:1. The Company expects to continue to
comply with these internal debt limitations.
S-4
<PAGE>
RECENT DEVELOPMENTS
From January 1, 1997 through November 24, 1997, the Partnership acquired
109 facilities located in 19 states and which contain 6.6 million net rentable
square feet for an aggregate purchase price of approximately $310.0 million.
Included in these acquisitions is the Partnership's acquisition on November 11,
1997, of a portfolio of 38 self-storage facilities containing 1.9 million net
rentable square feet for an aggregate purchase price of approximately $79.4
million. These 38 self-storage facilities are located in Arizona (5), Indiana
(20), Kentucky (4), Ohio (8), and Tennessee (1). At November 24, 1997, the
Partnership had contracts to acquire eight additional facilities containing 0.6
million net rentable square feet for an aggregate purchase price of
approximately $43.3 million, which contracts the Partnership expects will close
by January 1998. The Partnership also has under construction or in development
1.7 million net rentable square feet contained in 18 new facilities and in
expansions to 18 existing facilities.
On November 20, 1997, the Company entered into an agreement with USRealty,
that, among other things, increased the limitation applicable to the ownership
of the Company's Common Stock by USRealty from 37.5% to 42.5% of the outstanding
shares. For additional information regarding the strategic alliance, see "The
Partnership -- Strategic Alliance with Security Capital U.S. Realty."
On August 28, 1997, William J. Razzouk was appointed president and chief
operating officer of the Company. Mr. Razzouk previously served as President of
America OnLine, Inc. and Executive Vice President - Worldwide Customer
Operations of Federal Express Corporation.
SUMMARY FINANCIAL AND OPERATING DATA
The Partnership's consolidated operating and other data is presented on an
historical basis for the nine months ended September 30, 1997 and 1996, for the
years ended December 31, 1996 and 1995, and for the period from March 24, 1994
through December 31, 1994, and on a pro forma basis for the nine months ended
September 30, 1997, and the year ended December 31, 1996. The Partnership's
consolidated balance sheet data is presented on an historical and pro forma
basis as of September 30, 1997. Pro forma operating and other data is presented
as if the following transactions had been completed on January 1, 1996: (i) the
completion of the Offering and the application of the net proceeds therefrom as
described in "Use of Proceeds;" (ii) the acquisition of 191 facilities acquired
subsequent to January 1, 1996, and the pending acquisition of the eight
facilities under contract; (iii) the sale of $100.0 million in aggregate
principal amount of 7.125% Senior Notes due November 1, 2003, in October 1996;
(iv) the sale by the Company of $58.3 million of Common Stock in a public
offering in March 1997; (v) the sale by the Company of $32.0 million of Common
Stock to USRealty in March 1997; (vi) the sale of $100.0 million in aggregate
principal amount of 8.20% Senior Notes due June 1, 2017, in June 1997; and
(vii) the sale by the Company of $220.5 million of Common Stock to USRealty
during 1996. Pro forma balance sheet data is presented as if the completion of
the Offering of both the Notes and the Debentures and the application of the
net proceeds therefrom, the acquisition of 37 facilities acquired in the fourth
quarter of 1997 and the pending acquisition of the eight facilities under
contract had been completed on September 30, 1997.
The summary financial and operating data should be read in conjunction
with the consolidated financial statements of the Partnership and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included or incorporated by reference herein.
S-5
<PAGE>
SUSA PARTNERSHIP, L.P.
Summary Financial and Operating Data
(dollars in thousands)
<TABLE>
<CAPTION>
Unaudited
Nine Months
Ended September 30,
-------------------------------------
Pro Forma Actual Actual
1997(1) 1997 1996
------------ ------------ -----------
<S> <C>
Operating Data:
Rental income ........................... $ 133,838 $ 113,267 $ 73,396
Management income ..................... 0 0 560
Other income ........................... 2,484 2,213 1,170
---------- ---------- ---------
Total revenues ........................ 136,322 115,480 75,126
---------- ---------- ---------
Property operations and maintenance ... 32,661 28,359 19,933
Taxes ................................. 11,040 9,403 6,163
General and administrative ............ 5,496 4,656 3,067
Depreciation and amortization ......... 17,057 14,002 8,813
---------- ---------- ---------
Total operating expenses ............... 66,254 56,420 37,976
---------- ---------- ---------
Interest expense ........................ (23,464) (11,604) (5,848)
Interest income ........................ 880 880 506
---------- ---------- ---------
Income before minority interest and gain
on investment ........................ 47,484 48,336 31,808
Gain on investment ..................... 0 2,569 288
---------- ---------- ---------
Income before minority interest ......... 47,484 50,905 32,096
Minority interest ..................... (250) (250) (140)
---------- ---------- ---------
Net income ........................... $ 47,234 $ 50,655 $ 31,956
========== ========== =========
<CAPTION>
Year Ended
December 31, 1996
------------------------- Year Ended March 24, 1994
Unaudited December 31, to December 31,
Pro Forma(1) Actual 1995 1994
-------------- ---------- ------------- ----------------
<S> <C>
Operating Data:
Rental income ........................... $ 168,967 $105,091 $ 66,455 $ 24,667
Management income ..................... 485 701 1,072 707
Other income ........................... 2,581 1,517 480 460
---------- -------- --------- ---------
Total revenues ........................ 172,033 $107,309 $ 68,007 25,834
---------- -------- --------- ---------
Property operations and maintenance ... 42,470 28,029 $ 18,471 6,851
Taxes ................................. 13,368 8,903 4,900 1,686
General and administrative ............ 6,106 4,122 2,568 1,374
Depreciation and amortization ......... 21,783 12,618 8,586 2,882
---------- -------- --------- ---------
Total operating expenses ............... 83,727 53,672 34,525 12,793
---------- -------- --------- ---------
Interest expense ........................ (29,192) (8,244) (3,004) (1,404)
Interest income ........................ 687 687 166 658
---------- -------- --------- ---------
Income before minority interest and gain
on investment ........................ 59,801 46,080 30,644 12,295
Gain on investment ..................... 0 288 0 0
---------- -------- --------- ---------
Income before minority interest ......... 59,801 46,368 30,644 12,295
Minority interest ..................... (157) (157) (224) (158)
---------- -------- --------- ---------
Net income ........................... $ 59,644 $46,211 $ 30,420 $ 12,137
========== ======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
As of September 30, 1997
--------------------------
Unaudited
Pro Forma(1) Actual
-------------- -----------
<S> <C>
Balance Sheet Data:
Investment in storage facilities, at cost ...... $1,201,165 $1,065,683
Total assets ................................. 1,245,459 1,072,049
Total liabilities .............................. 479,515 314,444
Partners' capital .............................. 765,944 757,605
</TABLE>
<TABLE>
<CAPTION>
Unaudited
Nine Months
Ended September 30,
-----------------------------------------
Pro Forma Actual Actual
1997(1) 1997 1996
------------- ------------- -------------
<S> <C>
Other Data:
FFO(2) .................................... $ 63,617 $ 61,414 $ 40,056
Cash flow provided by (used in)(3):
Operating activities ..................... 64,541 43,191 40,738
Investing activities ..................... (298,213) (171,070) (195,887)
Financing activities ..................... 293,756 130,435 155,497
EBIDA(4) ................................. 88,005 73,942 46,469
Ratio of earnings to fixed charges(5) ...... 2.82 4.68 5.55
Ratio of funds from operations before
fixed charges to fixed charges(6) ...... 3.47 5.48 6.86
Number of facilities at end of period ...... 349 304 215
Occupancy rate at end of period ............ 87% 89%
<CAPTION>
Year Ended
December 31, 1996
---------------------------- Year Ended March 24, 1994
Unaudited December 31, to December 31,
Pro Forma(1) Actual 1995 1994
-------------- ------------- ------------- ----------------
<S> <C>
Other Data:
FFO(2) .................................... $ 80,827 $ 58,229 $ 38,053 $ 17,868
Cash flow provided by (used in)(3):
Operating activities ..................... 81,584 59,758 37,775 17,828
Investing activities ..................... (565,862) (276,880) (217,168) (264,888)
Financing activities ..................... 449,221 215,669 178,917 250,338
EBIDA(4) ................................. 110,776 66,942 42,234 16,581
Ratio of earnings to fixed charges(5) ...... 2.88 5.73 7.73 9.38
Ratio of funds from operations before
fixed charges to fixed charges(6) ...... 3.57 6.98 9.46 11.33
Number of facilities at end of period ...... 349 242 159 96
Occupancy rate at end of period ............ 86% 88% 87%
</TABLE>
- ---------
(1) See "SUSA Partnership, L.P. Pro Forma Financial Information."
(2) Funds from Operations ("FFO") means net income, computed in accordance with
generally accepted accounting principles ("GAAP"), excluding gains
(losses) from debt restructuring and sales of property, plus depreciation
and amortization and after adjustments for unconsolidated partnerships and
joint ventures. Management generally considers FFO to be a useful
financial performance measurement of an equity REIT because, together with
net income and cash flows, FFO provides investors with an additional basis
to evaluate the ability of a REIT to incur and service debt and to fund
acquisitions and other capital expenditures. FFO does not represent net
income or cash flows from operations as defined by GAAP and does not
necessarily indicate that cash flows will be sufficient to fund cash
needs. It should not be considered as an alternative to net income as an
indicator of the Partnership's operating performance or to cash flows as a
measure of liquidity. FFO does not measure whether cash flow is sufficient
to fund all cash needs including principal amortization, capital
improvements and distributions to shareholders. FFO also does not
represent cash flows generated from
S-6
<PAGE>
operating, investing or financing activities as defined under GAAP. Further,
funds from operations statistics as disclosed by other REITs may not be
comparable to the Partnership's calculation of FFO.
(3) Reflects the Partnership's cash flows and pro forma cash flows from
operating, investing and financing activities. Pro forma cash flows from
operating activities represents pro forma net income before minority
interest plus pro forma depreciation and amortization; and does not
include any adjustments for changes in working capital items. Pro forma
cash used in investing activities represents actual cash used in investing
activities for the nine months ended September 30, 1997, and the year
ended December 31, 1996, adjusted for the acquisition of 45 facilities
(including the pending acquisition of eight facilities under contract) in
the fourth quarter of 1997 with cash of $127.1 million and 109 facilities
with cash of $288.7 million, respectively. Pro forma cash provided by
financing activities represents actual cash provided by financing
activities for the nine months ended September 30, 1997, adjusted for (i)
the completion of the Offering and (ii) the repayment of line credit
borrowings of $34.9 million, and for the year ended December 31, 1996,
adjusted for (i) the completion of the Offering, (ii) net proceeds from
offerings of Common Stock by the Company in 1997 of $89.3 million, (iii)
net proceeds from offerings of debt by the Partnership in 1997 of $98.7
million and (iv) the repayment of line of credit borrowings of $152.7
million. This unaudited pro forma cash flow data is not necessarily
indicative of what actual cash flows would have been assuming the
transactions had been completed as of the beginning of each of the periods
presented, nor does it purport to represent cash flows from operating,
investing and financing activities for future periods.
(4) EBIDA means earnings before interest expense, depreciation, amortization
and minority interests. EBIDA is computed as income from operations before
minority interest and gain plus interest expense, depreciation and
amortization. The Partnership believes that in addition to cash flows and
net income, EBIDA is a useful financial performance measurement for
assessing the operating performance of an equity REIT because, together
with net income and cash flows, EBIDA provides investors with an
additional basis to evaluate the ability of a REIT to incur and service
debt and to fund acquisitions and other capital expenditures. To evaluate
EBIDA and the trends it depicts, the components of EBIDA, such as rental
revenues, rental expenses, real estate taxes and general and
administrative expenses, should be considered. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
included or incorporated by reference herein. Excluded from EBIDA are
financing costs such as interest as well as depreciation and amortization,
each of which can significantly affect a REIT's results of operations and
liquidity and should be considered in evaluating a REIT's operating
performance. Further, EBIDA does not represent net income or cash flows
from operating, financing and investing activities as defined by GAAP and
does not necessarily indicate that cash flows will be sufficient to fund
cash needs. It should not be considered as an alternative to net income as
an indicator of the Partnership's operating performance or to cash flows
as a measure of liquidity.
(5) The ratio of earnings to fixed charges is computed as income (loss) from
operations, before extraordinary items, plus fixed charges (excluding
capitalized interest) divided by fixed charges. Fixed charges consist of
interest costs including amortization of debt discount and deferred
financing fees, whether capitalized or expensed and the interest component
of rental expense.
(6) The ratio of FFO before fixed charges to fixed charges is calculated as FFO
plus fixed charges (consisting primarily of interest expense), excluding
amortization of debt discount and deferred financing fees, divided by
fixed charges. The Partnership believes that in addition to the ratio of
earnings to fixed charges, this ratio provides a useful measure of a
REIT's ability to service its debt because of the exclusion of non-cash
items such as depreciation and amortization from the definition of FFO.
This ratio differs from a GAAP-based ratio of earnings to fixed charges
and should not be considered as an alternative to that ratio. Further,
funds from operations statistics as disclosed by other REITs may not be
comparable to the Partnership's calculation of FFO.
S-7
<PAGE>
THE OFFERING
For a more complete description of the terms of the Securities specified
in the following summary, including definitions of capitalized terms not
otherwise provided, see "Description of Securities" in this Prospectus
Supplement and "Description of Debt Securities" in the accompanying Prospectus.
Securities Offered ............ $100,000,000 aggregate principal amount of %
Notes due December 1, .
$100,000,000 aggregate principal amount of %
Debentures due December 1, .
Maturity........................ The Notes mature on December 1, , and the
Debentures on December 1, .
Interest Payment Dates ......... Interest on the Securities is payable
semi-annually in arrears on June 1 and
December 1 of each year, commencing June 1,
1998.
Optional Redemption ............ The Securities are redeemable at any time
at the option of the Partnership, in whole or
in part, at a redemption price equal to the
sum of (i) the principal amount of the
Securities being redeemed plus accrued
interest to the redemption date and (ii) the
Make-Whole Amount, if any. See "Description
of Securities -- Optional Redemption."
Ranking ..................... The Securities are unsecured obligations of
the Partnership and will rank pari passu with
each other and with all other unsecured and
unsubordinated indebtedness of the
Partnership and will be effectively
subordinated to all secured debt of the
Partnership. As of September 30, 1997, the
Partnership had outstanding $234.9 million of
unsecured, unsubordinated indebtedness, $39.9
million of secured indebtedness and $994.8
million in unencumbered assets. On a pro
forma basis, as of September 30, 1997, after
giving effect to the completion of the
Offering and application of the net proceeds
from the Offering as described in "Use of
Proceeds," the Partnership would have had
outstanding $400.0 million of unsecured,
unsubordinated indebtedness, $39.9 million of
secured indebtedness and $1,168.2 million in
unencumbered assets.
Use of Proceeds ............... The net proceeds to the Partnership from
the Offering will be used to repay
outstanding debt incurred in connection with
the acquisition of self-storage facilities,
to acquire additional self-storage
facilities and for general corporate
purposes. See "Use of Proceeds." The
offerings of the Notes and the Debentures
are not contingent upon one another and in
the event the offering of only one of the
tranches closes, the Partnership will use
the net proceeds to repay outstanding debt
incurred in connection with the acquistion
of self-storage facilities. In the event the
offering of either of the Notes or the
Debentures does not close, the Partnership
believes that it will be able to meet its
short-term financing needs.
S-8
<PAGE>
Limitations on Incurrence
of Indebtedness ............... The Securities contain various covenants,
including the following:
(1) The Partnership will not incur any
Indebtedness, if, after giving effect
thereto, the aggregate principal amount of
all outstanding Indebtedness of the
Partnership is greater than 60% of the sum
of (i) Total Assets as of the end of the
Partnership's fiscal quarter ended
immediately prior to the incurrence of such
Indebtedness and (ii) the increase in Total
Assets since the end of such fiscal quarter,
including any increase in Total Assets
resulting from the incurrence of such
additional Indebtedness (such increase,
together with the Total Assets, is referred
to as "Adjusted Total Assets"). On a pro
forma basis, after giving effect to the
application of the net proceeds from the
Offering, as described in "Use of Proceeds,"
such percentage would have been 34.2% of
Adjusted Total Assets as of September 30,
1997.
(2) The Partnership will not incur any
Secured Indebtedness if, after giving effect
thereto, the aggregate amount of all
outstanding Secured Indebtedness is greater
than 40% of the Partnership's Adjusted Total
Assets. On a pro forma basis, after giving
effect to the application of the net
proceeds from the Offering as described in
"Use of Proceeds," such percentage would
have been 3.2% of Adjusted Total Assets as
of September 30, 1997.
(3) The Partnership will not incur any
Indebtedness if the Consolidated Income
Available for Debt Service for the four
consecutive fiscal quarters most recently
ended prior to the date of the incurrence of
such Indebtedness, on a pro forma basis,
would be less than 1.5 times the Annual
Service Charge on all Indebtedness
outstanding immediately after the incurrence
of such additional Indebtedness.
(4) The Partnership will maintain Total
Unencumbered Assets of not less than 150% of
the aggregate outstanding principal amount
of Unsecured Indebtedness. After giving
effect to the application of the net
proceeds from the Offering as described in
"Use of Proceeds," Total Unencumbered Assets
would have been 292% of the aggregate
outstanding principal amount of Unsecured
Indebtedness as of September 30, 1997.
S-9
<PAGE>
THE PARTNERSHIP
The Partnership is engaged in the business of owning, managing, acquiring,
developing and franchising self-storage facilities. At November 24, 1997, the
Partnership owned 348 facilities containing 22.7 million net rentable square
feet and managed for others 32 facilities containing an additional 2.0 million
net rentable square feet in 31 states and the District of Columbia, making it
the second largest operator of self-storage facilities in the United States.
The facilities are located in or near major metropolitan areas, operate under
the Storage USA(R) name and offer low-cost, easily accessible and enclosed
storage space for personal and business use. Average physical and economic
occupancy for the facilities owned by the Partnership at September 30, 1997,
were 87% and 80%, respectively. Physical occupancy is computed by dividing the
total net rentable square feet occupied as of the date computed by the total
net rentable square feet for the facilities in a particular location. Economic
occupancy is computed by dividing the expected income by the gross potential
income. Gross potential income is defined as the sum of all units available to
rent, multiplied by the market rental rate applicable to those units as of the
date computed. Expected income is defined as the sum of all units rented as of
the date computed, multiplied by the rental rate per the existing leases
applicable to those units as of the date computed. Rent per square foot for the
facilities owned by the Partnership at September 30, 1997, was $9.91. Rent per
square foot is the annualized result obtained by dividing gross potential
income by total net rentable square feet available on a given date.
The Partnership is a fully integrated organization that has expertise in
acquisition, development, construction and management of self-storage
facilities and has approximately 1300 employees. Its sole general partner is
Storage USA, Inc. (the "Company"), which is a publicly-held, self-managed and
self-advised REIT. The Company conducts all of its activities through the
Partnership and its subsidiaries, and at September 30, 1997, it owned an
approximate 91% interest in the Partnership.
The Partnership's primary business objectives are to increase its cash
flow from operations and the value of the Partnership's facilities. The
Partnership plans to achieve these objectives through the strategies discussed
below, including improving the operations of its facilities and selectively
expanding its portfolio of facilities through acquisition and development. The
Partnership believes that it is distinguishable from most of its competitors by
its access to capital markets, the management information systems it has
developed, the skilled personnel it has gathered and trained for managing
self-storage facilities, and its expertise in acquiring and developing
self-storage facilities in diverse locales with potential for increased
occupancy and rental rates.
Self-Storage Facilities
The Partnership's self-storage facilities offer customers fully-enclosed
units, which are for their exclusive use and to which they control access by
furnishing their own locks. The facilities generally contain 400 to 1,000 units
varying in size from 25 to 400 square feet. The majority of the Partnership's
tenants are individuals, ranging from high-income homeowners to college
students, who typically store furniture, appliances and other household and
personal items. Commercial users range from sales representatives and
distributors who store inventory to small businesses that typically store
equipment, records and seasonal items. The facilities generally have a diverse
tenant base of 500-600 tenants, with no single tenant occupying more than one
to two percent of the net rentable square feet of a facility.
The Partnership's self-storage facilities are located near major business
and residential areas, and generally are clearly visible and easily accessible
from major traffic arteries. They are generally protected by computer-
controlled access gates, door alarm systems and video cameras. These facilities
are typically constructed of one-story masonry or tilt-up concrete walls, with
an individual roll-up door for each storage space and with removable steel
interior walls to permit reconfiguration and to protect items from damage.
Sites have wide drive aisles to accommodate most vehicles. The Partnership's
facilities are designed to be aesthetically pleasing, are kept clean and in
good repair by friendly, trained managers, and are open for service during
hours and on days convenient to tenants and prospective tenants. At most of the
facilities, a property manager lives in an apartment located on site.
Climate-controlled space is offered in many of the facilities for storing items
that are sensitive to extreme humidity or temperature. Some of the facilities
provide paved secure storage areas for recreational vehicles, boats and
commercial vehicles. All facilities offer reception of deliveries for
commercial customers.
S-10
<PAGE>
The following table sets forth the location, total rentable square footage
and the physical and economic occupancy rates of the Partnership's self-storage
facilities as of September 30, 1997.
<TABLE>
<CAPTION>
Rentable
Number of Square Physical Rent per Economic
Market Facilities Feet Occupancy Square Foot Occupancy
- ---------------------------------- ------------ ------------ ----------- ------------- ----------
<S> <C>
Alabama, Birmingham ............ 2 110,612 88.80% $ 7.93 84.90%
Arizona/Tucson .................. 14 826,343 83.10 9.05 78.10
Baltimore/Washington D.C. area.... 22 1,437,362 89.50 14.21 82.80
California, Northern ............ 19 1,144,357 91.50 12.40 82.10
California, Southern ............ 56 4,452,314 88.00 9.35 80.40
Colorado/Denver ............... 2 158,005 80.50 8.65 78.50
Connecticut/New England ......... 6 464,945 90.80 9.54 83.10
Florida/Central ............... 5 416,879 82.80 9.15 74.40
Florida/Southern ............... 23 1,763,535 82.60 12.42 77.10
Georgia/Atlanta ............... 6 418,667 78.40 8.30 73.00
Illinois/Chicago ............... 1 76,116 65.70 9.07 56.60
Indiana/Indianapolis ............ 1 52,050 91.30 4.37 86.10
Kansas City ..................... 6 305,675 93.30 8.19 89.60
Kentucky/Louisville ............ 2 118,496 58.50 7.30 44.90
Massachusetts/New England ...... 12 693,830 94.30 9.80 86.80
Michigan/Detroit ............... 6 362,352 96.00 8.84 93.30
Michigan/Flint .................. 1 78,000 69.20 6.25 55.90
Nevada/Las Vegas ............... 8 590,662 86.10 8.32 80.60
New Jersey/Philadelphia ......... 13 847,899 90.30 15.35 84.90
New Mexico/Albuquerque ......... 10 502,487 73.40 8.41 65.70
New York/New York ............... 6 316,545 89.80 10.64 85.10
North Carolina/Charlotte ...... 2 137,584 89.90 8.00 82.40
North Carolina/Raleigh-Durham ... 4 271,160 77.50 6.26 72.80
Ohio/Akron ..................... 3 157,960 84.40 5.86 77.00
Ohio/Cleveland .................. 5 251,005 78.60 6.18 72.70
Oklahoma/Oklahoma City ......... 10 590,412 88.40 5.48 81.50
Oklahoma/Tulsa .................. 6 359,142 87.00 6.69 81.80
Oregon/Portland ............... 3 205,035 89.10 10.66 82.20
Pennsylvania/Philadelphia ...... 9 578,100 89.10 11.47 81.70
Tennessee/Memphis ............... 13 670,179 80.40 8.99 73.40
Tennessee/Nashville ............ 11 812,423 85.30 8.82 78.40
Texas/Dallas .................. 10 850,965 87.90 7.70 81.70
Texas/Houston .................. 3 166,080 87.90 8.68 85.00
Utah/Salt Lake City ............ 3 196,635 84.70 7.19 80.80
Washington/Vancouver ............ 1 62,550 95.50 7.69 90.70
---- ----------- ------ -------- -------
Total/Average .................. 304 20,446,361 86.50% $ 9.91 80.30%
==== ===========
</TABLE>
Internal Growth Strategy
The Partnership's internal growth strategy is to pursue an active leasing
policy (which includes aggressively marketing available space and renewing
existing leases at higher rents per square foot). As a result of its internal
growth strategy, the Partnership has historically received premium rents, while
achieving high occupancy levels and increasing profitability. By implementing
this strategy for the 149 facilities owned by the Partnership since January 1,
1996, the Partnership, for the nine months ended September 30, 1997, increased
revenue and net operating income by 5.6% and 9.3%, respectively, over revenue
and net operating income achieved by the Partnership in the same period of the
prior year.
o Aggressive Leasing -- The Partnership seeks to increase its revenues by
increasing and maintaining the occupancy in its facilities through the use
of sales and marketing programs that are customized for each location by
facility managers who have substantial authority and effective incentives.
The facility managers
S-11
<PAGE>
are trained to market both phone-in and walk-in prospective tenants.
Emphasis is placed on conversion from the initial telephone call to an
on-site visit and from the on-site visit to a rental.
o Regularly Scheduled Rent Increases -- The Partnership has historically
increased rents in all of its facilities at least once a year regardless
of the occupancy level. As a facility nears 100% occupancy, the
Partnership typically increases rents more frequently.
o Guaranteed Customer Satisfaction -- The Partnership requires its
employees to be customer satisfaction-oriented. In the Partnership's
"Total Storage Satisfaction Guaranteed" program, the facility managers
have authority to resolve most customer problems through rent rebates or
cash reimbursements without obtaining prior approval from Partnership
management.
o Trained Facility Managers -- The Partnership carefully selects and
thoroughly trains managers of its self-storage facilities. To hire
outgoing, personable, sales-oriented people capable of implementing these
programs, the Partnership uses personality profiles and personal
interviews to screen applicants during the recruiting process. Training
programs feature facility operations and marketing manuals, sales and
marketing programs, telephone communication, and computer and daily
facility operations (unit rental, retail sales, facility maintenance,
security systems and financial duties). The Partnership's formal training
programs are followed by on-the job training (supervised by a regional
manager) and a three-step, self-administered certification program. The
Partnership conducts monthly telephone surveys in which "mystery shoppers"
hired by the Partnership call each facility posing as prospective
customers. These telephone calls are recorded and graded by management for
policy compliance and sales skills.
o Integrated Management Information Systems -- To maintain appropriate
controls and enhance operational efficiencies, the Partnership has
installed at each facility computer systems with comprehensive facilities
management software. Weekly operating results are transmitted
electronically from each of these facilities to the Partnership's
headquarters. These systems allow the Partnership to monitor closely
manager performance and market response to the Partnership's rental
structure.
External Growth Strategy
The Partnership's external growth strategy is designed to increase the
number of facilities owned by the Partnership either by acquiring suitably
located, under-performing facilities that offer upside potential due to low
occupancy rates or non-premium pricing, or by developing and constructing new
self-storage facilities in favorable markets. In pursuing acquisition
opportunities, the Partnership seeks to add facilities in those metropolitan
areas in which the Partnership operates and selectively to enter new markets
that have desirable characteristics such as a growing population and a
concentration of multifamily dwellings. With respect to its development effort,
the Partnership's current strategy is to develop facilities in those markets in
which it currently operates. The Partnership intends to acquire or develop
facilities that are near residential areas, clearly visible to consumer
traffic, easily accessible for entrance and exit and attractively designed.
Acquisitions
Since the IPO, the Partnership has purchased 305 self-storage facilities
containing 19.2 million net rentable square feet for an aggregate purchase
price of approximately $983.4 million. Management believes that there are
several factors that favor its acquisition policy:
o Fragmented Industry Ownership -- The Partnership believes that there are
approximately 26,000 self-storage facilities in the United States with
approximately 1,008.0 million net rentable square feet. At September 30,
1997, the 10 largest operators of self-storage facilities owned
approximately 3,200 or 12% of all facilities in the United States.
Management believes this fragmented ownership offers opportunities for
acquisitions, including opportunities resulting from the necessity of sale
by some smaller operators who cannot obtain refinancing, the desire of
some smaller operators to sell their facilities to obtain retirement funds
or to seek alternative investments, and the inability of other smaller
operators to obtain funds with which to compete for acquisitions as timely
and inexpensively as the Partnership.
o Operating Efficiencies -- The Partnership believes that a significant
percentage of self-storage properties are owned by smaller operators and
historically have been operated less efficiently than the Partnership's
facilities. The Partnership believes it has developed an expertise in
improving the performance of such properties.
S-12
<PAGE>
o Demand for Tax Deferral -- In several of its acquisitions, the
Partnership has financed a portion of the sales price through the issuance
of Units, permitting the sellers to at least partially defer taxation of
capital gains. The Partnership believes that its ability to offer Units as
a form of consideration is a key element in its ability to successfully
negotiate with sellers of self-storage facilities. Since the IPO, the
Partnership has issued 2.7 million Units valued at approximately $91.8
million in consideration for the acquisition of 92 self-storage facilities.
o Property Assimilation -- The Partnership's integrated management
information systems allow it to quickly and efficiently assimilate its
acquisition targets. All of the Partnership's facilities are
electronically linked to a central computer system, which allows
management to control an increased number of facilities with minimal
additional human resources. Management expects the data systems, together
with its track record of managing or developing facilities in new areas of
the country, to assist in integrating future facilities into the
Partnership. Commonly, the Partnership is able to retrain existing
managers of acquired facilities and rapidly realize operating
improvements.
Development
Management believes that there are factors that favor its facilities
development strategy. These factors include:
o Development Expertise -- The Partnership has recently taken advantage of
its in-house development capability to selectively develop new facilities
in areas where suitable acquisitions may not be available. The development
activities consist primarily of additions to existing facilities and
construction of new facilities. Since 1985, the Partnership and its
predecessor organizations have developed and constructed 26 facilities, 20
of which the Partnership owns. At September 30, 1997, the Partnership had
under construction or in development approximately 1.7 million net
rentable square feet contained in 18 new facilities and in expansions to
18 existing facilities.
o Development Capital -- The Partnership has a proven ability to access
various forms of capital that differentiates it from most competitors,
particularly since capital for the construction of new self-storage
facilities (traditionally funded by savings and loan associations) has
been less available in recent years.
Capital Strategy
The Partnership and the Company intend to maintain a conservative capital
structure designed to enhance access to capital and to facilitate earnings
growth. Since the IPO the Company has issued $312.0 million of its Common Stock
in four public offerings and $252.5 million of its Common Stock in a series of
direct placements with USRealty, an affiliate of Security Capital Group,
pursuant to the strategic alliance discussed below. The Company contributes the
proceeds of sales of its Common Stock to the Partnership in exchange for
additional Units. In October 1996, the Partnership issued to the public $100.0
million of its unsecured 7.125% Senior Notes due November 1, 2003, and in June
1997, the Partnership issued to the public $100.0 million of its unsecured
8.20% Senior Notes due June 1, 2017. In addition, since the IPO, the
Partnership has issued 2.7 million Units valued at approximately $91.8 million
in consideration for the acquisition of 92 self-storage facilities.
The Partnership has available $115.0 million in unsecured revolving lines
of credit with a group of commercial banks under which it had borrowed
approximately $80.5 million as of November 24, 1997. The Partnership also has
available a $75.0 million bridge loan with a commercial bank that matures in
March 1998, under which it had drawn the entire principal amount at November
24, 1997. The Partnership anticipates that the bridge loan will be converted
into an increase of $75.0 million to one of its unsecured revolving lines of
credit. At September 30, 1997, the Partnership also had mortgage loans
outstanding of $39.9 million that were secured by 18 properties. The debt
policy of the Company and the Partnership, which is subject to change at the
discretion of the Company's Board of Directors, is to limit total indebtedness
to the lesser of 50% of total assets at cost or that amount that will sustain a
minimum debt service coverage ratio of 3:1. The Company expects to continue to
comply with these internal debt limitations.
S-13
<PAGE>
Strategic Alliance with Security Capital U.S. Realty
On March 1, 1996, the Company entered into a Stock Purchase Agreement with
USRealty. Under the Stock Purchase Agreement, USRealty purchased 7,028,754
shares of the Company's Common Stock for an aggregate initial investment of
$220.5 million. On March 27, 1997, USRealty purchased an additional $32.0
million in Common Stock directly from the Company. Through September 30, 1997,
USRealty had purchased an additional 3,157,091 shares of the Company's Common
Stock on the open market and owned a total of 10,185,845 shares, or 37%, of the
Company's outstanding Common Stock as of September 30, 1997. Pursuant to a
waiver granted by the Company's Board of Directors, USRealty and its affiliates
may acquire up to 42.5% of the Company's Common Stock. Pursuant to the terms of
a Strategic Alliance Agreement entered into by the Company with USRealty in
connection with the Stock Purchase Agreement, USRealty has placed three of its
nominees on the Company's Board of Directors.
The Partnership believes that the alliance with USRealty has provided it
with access to significant additional financial and strategic resources not
otherwise readily available to it, thereby enhancing its short-term and long-
term growth prospects and better positioning it to capitalize on opportunities
as the REIT industry matures. The Partnership believes that it has also
benefited significantly from its affiliation with USRealty and access to
USRealty's market knowledge, operating experience and research capabilities.
Other Developments
In June 1996, the Partnership formed Storage USA Franchise Corp.
("Franchise Corp."), in which the Partnership has a 97.5% interest. Franchise
Corp. offers the Partnership's systems, expertise and a registered trademark to
third parties under a franchise program that the Partnership believes to be
unique in the self-storage industry. The Partnership does not anticipate that
the franchise program will have a material impact on its operating results in
the near term.
S-14
<PAGE>
MANAGEMENT
The Partnership is managed by its sole general partner, the Company. The
Company's Board of Directors consists of 10 members, five of whom are
independent directors. Certain information regarding the directors and
executive officers of the Company and Franchise Corp. is set forth below.
<TABLE>
<CAPTION>
Name Age Positions and Offices Held
- ----------------------------- ----- -----------------------------------------------------------------------------
<S> <C>
Dean Jernigan ............ 52 Chairman of the Board of Directors and Chief Executive Officer
William J. Razzouk ......... 49 President, Chief Operating Officer and Director
Dennis A. Reeve ............ 48 Chief Financial Officer
Douglas Chamberlain ...... 50 Executive Vice President, Construction
Karl Haas .................. 46 Executive Vice President, Management
Morris J. Kriger ......... 59 Executive Vice President, Acquisitions
Jesse B. Morgan ............ 48 Executive Vice President, Development
Carol Shipley ............ 40 Senior Vice President, Management
Richard B. Stern ......... 46 Senior Vice President, Development
Christopher P. Marr ...... 33 Senior Vice President, Finance and Accounting
David M. Levenfeld ......... 40 Vice President, Development
Terry Corona ............... 36 Vice President, Acquisition
Ethele Hilliard ............ 50 Co-Chairman, Chief Operating Officer, Franchise Corp.
John R. Erickson ......... 37 Co-Chairman, Chief Investment Officer, Franchise Corp.
C. Ronald Blankenship ...... 47 Director: Chairman and Trustee PTR, Chairman of the REIT, Manager and
Managing Director, Security Capital Group
Howard P. Colhoun ......... 61 Director (1): General Partner, Emerging Growth Partners
Alan Graf, Jr. ............ 44 Director (1): Executive Vice President, and Chief Financial Officer, Federal
Express
Mark Jorgensen ............ 56 Director (1): Consultant to pension fund industry
John P. McCann ............ 51 Director (1): President, Chief Executive Officer and Director, United
Dominion Realty Trust, Inc.
Caroline McBride ............ 43 Director: Managing Director, Security Capital Investment Research, Inc.
William D. Sanders ......... 56 Director: Chairman of the Board and Chief Executive Officer, Security
Capital Group
Harry J. Thie ............ 54 Director (1): Senior Researcher, Rand Corporation
</TABLE>
- ---------
(1) Independent director.
RECENT DEVELOPMENTS
From January 1, 1997 through November 24, 1997, the Partnership acquired
109 facilities located in 19 states and which contain 6.6 million net rentable
square feet for an aggregate purchase price of approximately $310.0 million.
Included in these acquisitions is the Partnership's acquisition on November 11,
1997, of a portfolio of 38 self-storage facilities containing 1.9 million net
rentable square feet for an aggregate purchase price of approximately $79.4
million. These 38 self-storage facilities are located in Arizona (5), Indiana
(20), Kentucky (4), Ohio (8), and Tennessee (1). At November 24, 1997, the
Partnership had contracts to acquire eight additional facilities containing 0.6
million net rentable square feet for an aggregate purchase price of
approximately $43.3 million, which contracts the Partnership expects will close
by January 1998. The Partnership also has under construction or in development
1.7 million net rentable square feet contained in 18 new facilities and in
expansions to 18 existing facilities.
On November 20, 1997, the Company entered into an agreement with USRealty,
that, among other things, increased the limitation applicable to the ownership
of the Company's Common Stock by USRealty from 37.5% to 42.5% of the outstanding
shares. For additional information regarding the strategic alliance, see "The
Partnership -- Strategic Alliance with Security Capital U.S. Realty."
On August 28, 1997, William J. Razzouk was appointed president and chief
operating officer of the Company. Mr. Razzouk previously served as President of
America OnLine, Inc. and Executive Vice President - Worldwide Customer
Operations of Federal Express Corporation.
S-15
<PAGE>
USE OF PROCEEDS
The net proceeds to the Partnership from the sale of the Securities
offered hereby are expected to be approximately $198.3 million. The Partnership
will use $155.5 million of the net proceeds from the Offering to retire debt
incurred to finance the acquisition of self-storage facilities under certain
revolving credit facilities with a current weighted average effective annual
interest rate of 7.1% and under a $75.0 million bridge loan with a maturity of
March 1998 and a current effective annual interest rate of 7.1%. The remaining
$42.8 million will be used to acquire certain self-storage facilities and for
general corporate purposes. Pending any such uses, the net proceeds may be
invested in short-term, income-producing investments. The offerings of the
Notes and the Debentures are not contingent upon one another and, in the event
the offering of only one of the tranches closes, the Partnership will use the
net proceeds to repay outstanding debt incurred to finance the acquisition of
self-storage facilities. In the event the offering of only one tranche closes,
the Partnership believes that it will be able to meet its short-term financing
needs.
RATIO OF EARNINGS TO FIXED CHARGES
The Partnership's ratio of earnings to fixed charges for the nine months
ended September 30, 1997, was 4.68 and for the year ended December 31, 1996,
was 5.73. See "Ratios of Earnings to Fixed Charges" in the accompanying
Prospectus. On a pro forma basis after giving effect to the sale of the
Securities and the application of the net proceeds as described above, the
Partnership's ratio of earnings to fixed charges for the nine months ended
September 30, 1997, would have been 2.82 and for the year ended December 31,
1996, would have been 2.88 (in each case, assuming all acquisitions, borrowings
and other fundings occurred at the beginning of the respective period). In the
event the offering of only one of the two tranches of Securities is closed, the
Partnership's ratio of earnings to fixed charges on a pro forma basis would
have been 2.97 and 3.05, respectively, for the nine months ended September 30,
1997, and the year ended December 31, 1996.
S-16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Partnership as of
September 30, 1997, and as adjusted to give effect to the Offering and
application of the net proceeds therefrom as described in "Use of Proceeds."
The capitalization table should be read in conjunction with the consolidated
financial statements of the Partnership included or incorporated by reference
herein.
<TABLE>
<CAPTION>
As of September 30, 1997
--------------------------------------
Actual(1) As Adjusted(2)
-------------------- ---------------
(in thousands)
<S> <C>
Debt:
$75.0 million line of credit ...... $ 25,000 $ --
$40.0 million line of credit ...... 9,929 --
Mortgage notes payable ............ 39,864 39,864
7.125% Notes due 2003 ............ 100,000 100,000
8.20% Notes due 2017 ............ 100,000 100,000
% Notes due .................. -- 100,000
% Debentures due ............ -- 100,000
----------- -----------
Total debt ........................ 274,793 439,864
Minority interest .................. 1,986 1,986
Partners' equity .................. 757,605 765,944
----------- -----------
Total capitalization ............... $1,034,384 $1,207,794
=========== ===========
</TABLE>
- ---------
(1) Does not include an additional $75.0 million borrowed under a bridge loan
that was entered into subsequent to September 30, 1997, and an additional
$45.6 million borrowed under the lines of credit subsequent to September
30, 1997.
(2) Assumes the completion of the Offering of the both Notes and the
Debentures. In the event only one of the tranches closes, the amount
outstanding under the Partnership's lines of credit would be $63.8 million,
as adjusted.
SUMMARY FINANCIAL AND OPERATING DATA
The Partnership's consolidated operating and other data is presented on an
historical basis for the nine months ended September 30, 1997 and 1996, for the
years ended December 31, 1996 and 1995, and for the period from March 24, 1994,
through December 31, 1994, and on a pro forma basis for the nine months ended
September 30, 1997, and the year ended December 31, 1996. The Partnership's
consolidated balance sheet data is presented on an historical and pro forma
basis as of September 30, 1997. Pro forma operating and other data is presented
as if the following transactions had been completed on January 1, 1996: (i) the
completion of the Offering and the application of the net proceeds therefrom as
described in "Use of Proceeds;" (ii) the acquisition of 191 facilities acquired
subsequent to January 1, 1996, and the pending acquisition of eight facilities
under contract; (iii) the sale of $100.0 million in aggregate principal amount
of 7.125% Senior Notes due November 1, 2003, in October 1996; (iv) the sale by
the Company of $58.3 million of Common Stock in a public offering in March
1997; (v) the sale by the Company of $32.0 million of Common Stock to USRealty
in March 1997; (vi) the sale of $100.0 million in aggregate principal amount of
8.20% Senior Notes due June 1, 2017, in May 1997; and (vii) the sale by the
Company of $220.5 million of Common Stock to USRealty during 1996. Pro forma
balance sheet data is presented as if the completion of the Offering of both
the Notes and the Debentures and the application of the net proceeds therefrom,
the acquisition of 37 facilities acquired in the fourth quarter of 1997 and the
pending acquisition of eight facilities under contract had been completed on
September 30, 1997.
The summary financial and operating data should be read in conjunction
with the consolidated financial statements of the Partnership and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included or incorporated by reference herein.
S-17
<PAGE>
SUSA PARTNERSHIP, L.P.
Summary Financial and Operating Data
(dollars in thousands)
<TABLE>
<CAPTION>
Unaudited
Nine Months
Ended September 30,
-------------------------------------
Pro Forma Actual Actual
1997(1) 1997 1996
------------ ------------ -----------
<S> <C>
Operating Data:
Rental income ........................... $ 133,838 $ 113,267 $ 73,396
Management income ........................ 0 0 560
Other income .............................. 2,484 2,213 1,170
---------- ---------- ---------
Total revenues ........................... 136,322 115,480 75,126
---------- ---------- ---------
Property operations and maintenance ...... 32,661 28,359 19,933
Taxes .................................... 11,040 9,403 6,163
General and administrative ............... 5,496 4,656 3,067
Depreciation and amortization ............ 17,057 14,002 8,813
---------- ---------- ---------
Total operating expenses ............... 66,254 56,420 37,976
---------- ---------- ---------
Interest expense ........................ (23,464) (11,604) (5,848)
Interest income ........................... 880 880 506
---------- ---------- ---------
Income before minority interest and gain
on investment ........................... 47,484 48,336 31,808
Gain on investment ........................ 0 2,569 288
---------- ---------- ---------
Income before minority interest ......... 47,484 50,905 32,096
Minority interest ........................ (250) (250) (140)
---------- ---------- ---------
Net income .............................. $ 47,234 $ 50,655 $ 31,956
========== ========== =========
<CAPTION>
Year Ended
December 31, 1996
------------------------- Year Ended March 24, 1994
Unaudited December 31, to December 31,
Pro Forma(1) Actual 1995 1994
-------------- ---------- ------------- ----------------
<S> <C>
Operating Data:
Rental income ........................... $ 168,967 $105,091 $ 66,455 $ 24,667
Management income ........................ 485 701 1,072 707
Other income .............................. 2,581 1,517 480 460
---------- -------- --------- ---------
Total revenues ........................... 172,033 107,309 68,007 25,834
---------- -------- --------- ---------
Property operations and maintenance ...... 42,470 28,029 18,471 6,851
Taxes .................................... 13,368 8,903 4,900 1,686
General and administrative ............... 6,106 4,122 2,568 1,374
Depreciation and amortization ............ 21,783 12,618 8,586 2,882
---------- -------- --------- ---------
Total operating expenses ............... 83,727 53,672 34,525 12,793
---------- -------- --------- ---------
Interest expense ........................ (29,192) (8,244) (3,004) (1,404)
Interest income ........................... 687 687 166 658
---------- -------- --------- ---------
Income before minority interest and gain
on investment ........................... 59,801 46,080 30,644 12,295
Gain on investment ........................ 0 288 0 0
---------- -------- --------- ---------
Income before minority interest ......... 59,801 46,368 30,644 12,295
Minority interest ........................ (157) (157) (224) (158)
---------- -------- --------- ---------
Net income .............................. $ 59,644 $46,211 $ 30,420 $ 12,137
========== ======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
As of September 30, 1997
----------------------------
Unaudited
Pro Forma(1) Actual
-------------- -----------
<S> <C>
Balance Sheet Data:
Investment in storage facilities, at cost ...... $1,201,165 $1,065,683
Total assets .................................... 1,245,459 1,072,049
Total liabilities .............................. 479,515 314,444
Partners' capital .............................. 765,944 757,605
</TABLE>
<TABLE>
<CAPTION>
Unaudited
Nine Months
Ended September 30,
-----------------------------------------
Pro Forma Actual Actual
1997(1) 1997 1996
------------- ------------- -------------
<S> <C>
Other Data:
FFO(2) ....................................... $ 63,617 $ 61,414 $ 40,056
Cash flow provided by
(used in)(3):
Operating activities ..................... 64,541 43,191 40,738
Investing activities ..................... (298,213) (171,070) (195,887)
Financing activities ..................... 293,756 130,435 155,497
EBIDA(4) .................................... 88,015 73,942 46,469
Ratio of earnings to fixed charges(5) ...... 2.82 4.68 5.55
Ratio of funds from operations before fixed
charges to fixed charges(6) ............... 3.47 5.48 6.86
Number of facilities at end of period ...... 349 304 215
Occupancy rate at end of period ............ 87% 89%
<CAPTION>
Year Ended
December 31, 1996
---------------------------- Year Ended March 24, 1994
Unaudited December 31, to December 31,
Pro Forma(1) Actual 1995 1994
-------------- ------------- ------------- ----------------
<S> <C>
Other Data:
FFO(2) ....................................... $ 80,827 $ 58,229 $ 38,053 $ 17,868
Cash flow provided by
(used in)(3):
Operating activities ..................... 81,584 59,758 37,775 17,828
Investing activities ..................... (565,862) (276,880) (217,168) (264,888)
Financing activities ..................... 449,221 215,669 178,917 250,338
EBIDA(4) .................................... 110,776 66,942 42,234 16,581
Ratio of earnings to fixed charges(5) ...... 2.88 5.73 7.73 9.38
Ratio of funds from operations before fixed
charges to fixed charges(6) ............... 3.57 6.98 9.46 11.33
Number of facilities at end of period ...... 349 242 159 96
Occupancy rate at end of period ............ 86% 88% 87%
</TABLE>
- ---------
(1) See "SUSA Partnership, L.P. Pro Forma Financial Information."
(2) Funds from Operations ("FFO") means net income, computed in accordance
with generally accepted accounting principles ("GAAP"), excluding gains
(losses) from debt restructuring and sales of property, plus depreciation
and amortization and after adjustments for unconsolidated partnerships and
joint ventures. Management generally considers FFO to be a useful financial
performance measurement of an equity REIT because, together with net income
and cash flows, FFO provides investors with an additional basis to evaluate
the ability of a REIT to incur and service debt and to fund acquisitions
and other capital expenditures. FFO does
S-18
<PAGE>
not represent net income or cash flows from operations as defined by GAAP
and does not necessarily indicate that cash flows will be sufficient to
fund cash needs. It should not be considered as an alternative to net
income as an indicator of the Partnership's operating performance or to
cash flows as a measure of liquidity. FFO does not measure whether cash
flow is sufficient to fund all cash needs including principal amortization,
capital improvements and distributions to shareholders. FFO also does not
represent cash flows generated from operating, investing or financing
activities as defined under GAAP. Further, funds from operations statistics
as disclosed by other REITs may not be comparable to the Partnership's
calculation of FFO.
(3) Reflects the Partnership's cash flows and pro forma cash flows from
operating, investing and financing activities. Pro forma cash flows from
operating activities represents pro forma net income before minority
interest plus pro forma depreciation and amortization; and does not include
any adjustments for changes in working capital items. Pro forma cash used
in investing activities represents actual cash used in investing activities
for the nine months ended September 30, 1997, and the year ended December
31, 1996 adjusted for the acquisition of 45 facilities (including the
pending acquisition of eight facilities under contract) in the fourth
quarter of 1997 with cash of $127.1 million and 109 facilities with cash of
$288.7 million, respectively. Pro forma cash provided by financing
activities represents actual cash provided by financing activities for the
nine months ended September 30, 1997, adjusted for (i) the completion of
the Offering and (ii) the repayment of line credit borrowings of $34.9
million, and for the year ended December 31, 1996, adjusted for (i) the
completion of the Offering, (ii) net proceeds from offerings of Common
Stock by the Company in 1997 of $89.3 million, (iii) net proceeds from
offerings of debt by the Partnership in 1997 of $98.7 million and (iv) the
repayment of line of credit borrowings of $152.7 million. This unaudited
pro forma cash flow data is not necessarily indicative of what actual cash
flows would have been assuming the transactions had been completed as of
the beginning of each of the periods presented, nor does it purport to
represent cash flows from operating, investing and financing activities for
future periods.
(4) EBIDA means earnings before interest expense, depreciation, amortization
and minority interests. EBIDA is computed as income from operations before
minority interest and gain plus interest expense, depreciation and
amortization. The Partnership believes that in addition to cash flows and
net income, EBIDA is a useful financial performance measurement for
assessing the operating performance of an equity REIT because, together
with net income and cash flows, EBIDA provides investors with an additional
basis to evaluate the ability of a REIT to incur and service debt and to
fund acquisitions and other capital expenditures. To evaluate EBIDA and the
trends it depicts, the components of EBIDA, such as rental revenues, rental
expenses, real estate taxes and general and administrative expenses, should
be considered. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included or incorporated by reference
herein. Excluded from EBIDA are financing costs such as interest as well as
depreciation and amortization, each of which can significantly affect a
REIT's results of operations and liquidity and should be considered in
evaluating a REIT's operating performance. Further, EBIDA does not
represent net income or cash flows from operating, financing and investing
activities as defined by GAAP and does not necessarily indicate that cash
flows will be sufficient to fund cash needs. It should not be considered as
an alternative to net income as an indicator of the Partnership's operating
performance or to cash flows as a measure of liquidity.
(5) The ratio of earnings to fixed charges is computed as income (loss) from
operations, before extraordinary items, plus fixed charges (excluding
capitalized interest) divided by fixed charges. Fixed charges consist of
interest costs including amortization of debt discount and deferred
financing fees, whether capitalized or expensed and the interest component
of rental expense.
(6) The ratio of FFO before fixed charges to fixed charges is calculated as
FFO plus fixed charges (consisting primarily of interest expense),
excluding amortization of debt discount and deferred financing fees,
divided by fixed charges. The Partnership believes that in addition to the
ratio of earnings to fixed charges, this ratio provides a useful measure of
a REIT's ability to service its debt because of the exclusion of non-cash
items such as depreciation and amortization from the definition of FFO.
This ratio differs from a GAAP-based ratio of earnings to fixed charges and
should not be considered as an alternative to that ratio. Further, funds
from operations statistics as disclosed by other REITs may not be
comparable to the Partnership's calculation of FFO.
S-19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Due to the substantial number of facilities acquired from September 30,
1996, to September 30, 1997, management believes that it is meaningful and
relevant in understanding the present and ongoing operations of the Partnership
to compare certain information using occupancy and per square foot information.
The following are definitions of terms used throughout this discussion in
analyzing the Partnership's business. Physical Occupancy is defined as the
total net rentable square feet rented as of the date computed divided by the
total net rentable square feet available. Gross Potential Income is defined as
the sum of all units available to rent at a facility multiplied by the market
rental rate applicable to those units as of the date computed. Expected Income
is defined as the sum of the monthly rent being charged for the rented units at
a facility as of the date computed. Economic Occupancy is defined as the
Expected Income divided by the Gross Potential Income. Rent Per Square Foot is
defined as the annualized result of dividing Gross Potential Income on the date
computed by total net rentable square feet available. Direct Property Operating
Costs is defined as the costs incurred in the operation of a facility, such as
utilities, real estate taxes, and on-site personnel. Indirect Property
Operations Cost is defined as costs incurred in the management of all
facilities, such as accounting personnel and management level operations
personnel. Net Operating Income ("NOI") is defined as total property revenues
less Direct Property Operating Costs.
Nine Months Ended September 30, 1997, Compared to Nine Months Ended September
30, 1996.
In the first nine months of 1997, the Partnership reported growth in
revenue, NOI and net income, respectively, of $40.4 million, $28.7 million and
$18.7 million over the same period of 1996. Management contracts were
transferred to Storage USA Franchise Corp., an unconsolidated subsidiary, on
January 1, 1997, and the Partnership's proportionate share of the management
fee revenue is included in other income at September 30, 1997. Management
income for the nine months ended September 30, 1997, was $588 thousand, a $28
thousand increase over the same period in 1996. The increase is due to the
addition of 13 management contracts since October 1, 1996, partially offset by
the acquisition of 15 facilities in June 1996 that were managed by the
Partnership during the first six months of 1996.
Other income primarily reflects sales of lock and packaging products,
truck rentals, and equity investment in an unconsolidated subsidiary (including
management income). Other income, net of management income, increased primarily
due to the increase in the number of properties owned, resulting in incremental
growth in the revenue from these ancillary services and to a lesser extent,
rental income on cellular tower and billboard leases.
Cost of property operations and maintenance was $28.4 million for the nine
months ended September 30, 1997, representing a $8.4 million increase over the
first nine months of 1996. Cost of property operations and maintenance was
24.6% of revenues for the nine months ended September 30, 1997, and 26.5% for
the nine months ended September 30, 1996. The decline as a percentage of
revenues is explained by same store revenues increasing 5.6% while same store
expenses decreased 2.9% as a result of the Partnership's cost control policies.
Tax expense increased from $6.2 million or 8.2% of revenues for the nine
months ended September 30, 1996, to $9.4 million or 8.1% of revenue for the
nine months ended September 30, 1997. The slight decrease as a percentage of
revenues, is attributable to the acquisition of facilities in areas with real
estate taxes that are lower as a percentage of revenues than the average for
the Partnership and the exchange of several properties in high tax areas.
General and administrative expense increased from $3.1 million to $4.7
million for the first nine months of 1997 from the comparable nine months of
1996. As a percentage of revenues, this category of expense decreased from 4.1%
for the nine months ended September 30, 1996, to 4.0% for the nine months ended
September 30, 1997. The Partnership expects that the gross expense will grow as
the Partnership expands its administration, development and acquisition,
management information systems, and human resource departments, in connection
with its ongoing growth strategy.
Depreciation expense increased to $14.0 million for the nine months ended
September 30, 1997, from $8.8 million for the comparable period in 1996,
reflecting the increase in the number of facilities owned. The Partnership has
acquired or placed in service approximately $237.0 million in depreciable
assets since October 1, 1996.
S-20
<PAGE>
Interest expense for the nine months ended September 30, 1997, was $ 11.6
million as compared to $5.8 million for the comparable period in 1996. The
majority of the increase is due to the issuance of $100.0 million in notes
payable at 7.125% in October 1996 and $100.0 million in notes payable at 8.20%
in June 1997. The remaining interest expense represents weighted average
borrowings of $37.1 million under the Partnership's lines of credit at a
weighted average interest rate of 7.1% and $39.9 million in mortgages payable
at a weighted average interest rate of 9.9%.
Interest income was $880 thousand for the nine months ended September 30,
1997, as compared to $506 thousand for the nine months ended September 30,
1996. Interest income represents earnings on overnight deposits, amounts
outstanding under the 1995 Employee Stock Purchase and Loan Plan and loans to
franchisees. The increase in interest income was primarily due to interest
earned on loans to franchisees consummated during the past year.
The Partnership recognized a gain on the exchange of self-storage
facilities during the first nine months of 1997. In connection with the
exchange agreement with another self-storage REIT, the Partnership received
eight self-storage facilities with a book value of $9.4 million and $10.2
million cash in exchange for six self-storage facilities with a book value of
$17.0 million. As a result of this exchange, the Partnership recognized a $2.6
million gain on the monetary portion of the transaction. This exchange was
accounted for tax purposes under Section 1031 of the Code, and as such the gain
is not recognized for income tax purposes.
Liquidity and Capital Resources
Cash provided from operating activities grew to $43.2 million for the nine
months ended September 30, 1997, from $40.7 million for the nine months ended
September 30, 1996. This increase is primarily a result of the Partnership's
net income growing $18.7 million or 59%, over the same nine month period in the
prior year, primarily as a result of the increase in number of facilities owned
and the improvement of operations at owned facilities. The increase in net
income was partially offset by an increase in other assets. Other assets
increased primarily due to investments in and loans to franchisees.
During the first nine months of 1997, the Partnership acquired 65
facilities totaling 4.3 million square feet at an aggregate cost of $206.9
million, which includes the issuance of 827,000 Units valued at $30.9 million,
and the assumption of $4.9 million in mortgages. During the first nine months
of 1997, the Partnership placed in service three development properties
totaling 172 thousand square feet with a total cost of $8.6 million and six
expansion properties totaling 99 thousand square feet with a total cost of $4.4
million. The Partnership is in the process of developing 18 new facilities,
with expected costs totaling $65.6 million and completion dates anticipated to
range from the fourth quarter of 1997 through the second quarter of 1999.
Expansions are under way for 18 existing facilities with planned completion
dates ranging from the fourth quarter of 1997 to the third quarter of 1998.
Estimated costs of the 18 expansions under way are $16.3 million. Development
properties placed in service are anticipated to be dilutive to earnings in the
first 18 to 24 months after opening.
On February 19, 1997, the Company and the Partnership filed a shelf
registration statement with the Securities and Exchange Commission relating to
$450.0 million of securities, including up to $250.0 million of common stock,
preferred stock, depository shares and warrants of the REIT and up to $200.0
million of unsecured, nonconvertible senior debt securities of the Partnership.
An additional $150.0 million of unsecured, nonconvertible debt securities were
issuable under the Partnership's existing shelf registration statement.
In March 1997, the Company issued 2,461,000 shares of its Common Stock
under the new shelf registration statement for an aggregate purchase price of
$90.4 million. The proceeds from the issuance were contributed to the
Partnership in exchange for additional Units. The Partnership used the net
proceeds to repay debt incurred under its revolving lines of credit, to finance
the acquisition of self-storage facilities, and for working capital.
On June 1, 1997, the Partnership issued $100.0 million of 8.20% Senior
Notes due June 1, 2017. These notes are unsecured obligations of the
Partnership and may be redeemed at any time at the option of the Partnership,
subject to certain terms and conditions. At September 30, 1997, the Partnership
had the above-mentioned notes payable, $100.0 million of 7.125% Senior Notes
payable, $34.9 million in borrowings outstanding on its lines of credit, $31.0
million of fixed rate mortgage notes payable, and $8.9 million of variable rate
mortgage notes payable. As of September 30, 1997, the fixed rate mortgage notes
carried rates of interest ranging from 6.0% to 11.5% with a weighted average
rate of 10.4%. The variable rate mortgage notes carried rates of interest
ranging
S-21
<PAGE>
from 7.9% to 9.0% with a weighted average rate of 8.4%. The Partnership had
$70.5 million of unused borrowing capacity under its lines of credit at
September 30, 1997.
During the nine month period ended September 30, 1997, the Partnership
issued approximately 827,000 Units valued at approximately $30.9 million in
connection with the acquisition of facilities. As of September 30, 1997, there
were approximately 2,731,000 outstanding Units owned by third parties.
Beginning one year after their issuance, each Unit is redeemable for cash equal
to the market value of one share of Common Stock at the time of redemption or,
at the Company's option, one share of Common Stock. At September 30, 1997,
1,289,000 Units had been outstanding for one year or more. 82,000 of these
Units are redeemable for cash or, at the Company's option, a two-year
promissory note. Any shares of Common Stock issued in redemption of Units are
expected to be registered under the Securities Act and to be freely tradeable.
From September 30, 1997 through November 24, 1997, the Partnership
completed the acquisition of 44 self-storage facilities for approximately
$103.0 million. These acquisitions were financed through operating cash flows,
the issuance of Units, the issuance of common stock and borrowings under
existing credit facilities, including a $75.0 million bridge loan with First
National Bank of Chicago that matures in March 1998 and has a current effective
annual interest rate of 7.1%.
The Partnership has entered into various property acquisition contracts
for facilities with an aggregate cost of approximately $12.2 million. These
acquisitions are subject to customary conditions to closing, including
satisfactory due diligence, and are expected to close during the fourth
quarter. Should these contracts be terminated, the costs incurred by the
Partnership would be immaterial.
Funds From Operations ("FFO")
The Partnership believes that FFO should be considered in conjunction with
its net income and cash flows to facilitate a clear understanding of its
results of operations. FFO is defined as net income, computed in accordance
with GAAP, excluding gains (losses) from debt restructuring and sales of
property, plus depreciation and amortization, and after adjustments for
unconsolidated partnerships and joint ventures. FFO should not be considered an
alternative to net income as a measure of the Partnership's performance or to
cash flows as a measure of liquidity. Effective January 1, 1996, the National
Association of Real Estate Investment Trusts amended its definition of FFO.
Because of the change in the definition of FFO, FFO for the Partnership may not
be comparable to similarly titled measures of operating performance disclosed
by other companies.
The following table illustrates the components of the Partnership's FFO
for the nine months ended September 30, 1997, and September 30, 1996.
Funds From Operations
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1997 1996
---------- -----------
<S> <C>
Net Income .................................... $50,655 $ 31,956
Gain on sale of assets ........................ (2,569) (288)
Depreciation of revenue producing assets ...... 13,328 8,235
Amortization of non compete .................. -- 83
Amortization of lease guarantees ............... -- 70
-------- --------
Consolidated FFO .............................. $ 61,414 $ 40,056
======== ========
</TABLE>
The Company, in order to qualify as a REIT, is required to distribute a
substantial portion of its net income as dividends to its shareholders. While
the Partnership's goal is to generate and retain sufficient cash flow to meet
its operating, capital, and debt service needs, the Company's dividend
requirements may require the Partnership to utilize its bank lines of credit to
finance property acquisitions and development and major capital improvements.
For the year ended December 31, 1996, distributions were approximately 86% of
the the Partnership's FFO.
The Partnership believes that its liquidity and capital resources are
adequate to meet its cash requirements relating to its existing operations for
the next twelve months.
S-22
<PAGE>
Inflation
The Partnership does not believe that inflation had or will have a direct
effect on its operations. Substantially all of the leases at the facilities
allow for monthly rental increases that provide the Partnership with the
opportunity to achieve increases in rental income as each lease matures.
Seasonality
The Partnership's revenues typically have been higher in the third and
fourth quarters primarily because the Partnership increases its rental rates on
most of its storage units at the beginning of May, and to a lesser extent
because self-storage facilities tend to experience greater occupancy during the
late spring and early fall months due to the greater incidence of residential
moves during those periods. The Partnership believes that its tenant mix,
rental structure, and expense structure provide adequate protection against
undue fluctuations in cash flows and net revenues during off-peak seasons.
Thus, the Partnership does not expect seasonality to materially affect
distributions to shareholders.
Recent Accounting Developments
In February 1997, Statement of Financial Accounting Standards (SFAS) No.
128, "Net Income Per Share" was issued and is effective for fiscal years ending
after December 15, 1997. The statement establishes standards for computing and
presenting net income per share. Upon adoption, all prior period data presented
will be restated to conform to the provisions of SFAS No. 128. The adoption of
SFAS No. 128 is not expected to have a material impact on the financial
statements of the Partnership.
In September 1997, SFAS No. 130, "Reporting Comprehensive Income" was
issued and is effective for fiscal years beginning after December 15, 1997.
SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general purpose financial statements. SFAS No. 130 requires
the disclosure of an amount that represents total comprehensive income and the
components of comprehensive income in a financial statement. The adoption of
SFAS No. 130 is not expected to have a material impact on the financial
statements of the Partnership.
In September 1997, SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" was issued and is effective for fiscal
years beginning after December 15, 1997. SFAS No. 131 establishes standards for
determining an entity's operating segments and the type and level of financial
information to be disclosed in both annual and interim financial statements. It
also establishes standards for related disclosures about products and services,
geographic areas and major customers. The adoption of SFAS No. 131 is not
expected to have a material impact on the financial statements of the
Partnership.
Legal Proceedings
The Partnership is the subject of a purported national class action filed
on September 25, 1997, in the Superior Court of the District of Columbia, Nelda
Perkins v. Storage USA, Inc., Civil Action No. 97-CA97426, seeking recovery of
certain late fees paid by Partnership tenants since September 1993, treble
damages, unspecified punitive damages and an injunction against further
assessment of similar fees. The Partnership filed its initial response in the
case, believes it has defenses to the claims and intends to defend the suit
vigorously. While the ultimate resolution of this case cannot be currently
determined, management believes that the aggregate liability or loss, if any,
resulting from this claim will not have a material adverse effect on its
financial position.
S-23
<PAGE>
SUSA PARTNERSHIP, L.P. PRO FORMA FINANCIAL INFORMATION
The accompanying unaudited Pro Forma Condensed Consolidated Statements of
Operations for the nine months ended September 30, 1997, and the year ended
December 31, 1996, have been prepared to reflect (i) the completion of the
Offering and the application of the net proceeds therefrom as described in "Use
of Proceeds," (ii) the incremental effect of the acquisition of 191 facilities
subsequent to January 1, 1996, (iii) the sale of $100.0 million in aggregate
principal amount of 7.125% Senior Notes due November 1, 2003, in October 1996,
(iv) the sale by the Company of $58.3 million of Common Stock in a public
offering in March 1997, (v) the sale by the Company of $32.0 million of Common
Stock to USRealty on March 1997, (vi) the sale of $100.0 million in aggregate
principal amount of 8.20% Senior Notes due June 1, 2017, in June 1997 (vii) the
sale by the Company of $220.5 million of Common Stock to USRealty and (viii)
the pending acquisition of eight facilities under contract, as if such
transactions had occurred on January 1, 1996. The accompanying unaudited Pro
Forma Condensed Consolidated Balance Sheet as of September 30, 1997, has been
prepared to reflect the (i) the completion of the Offering and the application
of the net proceeds therefrom as described in "Use of Proceeds" (ii) the
acquisition of 37 facilities acquired in the fourth quarter of 1997 and (iii)
the pending acquisition of eight facilities under contract, as if such
transactions had occurred on September 30, 1997. These unaudited statements
should be read in conjunction with the respective financial statements and
notes thereto of the Partnership and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included or incorporated by
reference herein. In the opinion of management, the pro forma condensed
consolidated financial information provides all adjustments necessary to
reflect the effects of the Offering, the facility acquisitions and the USRealty
investment.
The pro forma condensed consolidated financial information is unaudited
and is not necessarily indicative of the consolidated results that would have
occurred if the transactions had been consummated in the periods presented, or
on any particular date in the future, nor does it purport to represent the
financial position, results of operations or changes in cash flows for future
periods.
S-24
<PAGE>
SUSA PARTNERSHIP, L.P.
Pro Forma Condensed Consolidated Balance Sheet
As of September 30, 1997
(unaudited, in thousands)
<TABLE>
<CAPTION>
Facility
Historical(1) Acquisitions(2) Offering(3) Pro Forma
--------------- ----------------- ------------- -------------
<S> <C>
ASSETS
Investment in storage facilities at cost
Land .................................... $ 296,004 $ 36,580 $ 332,584
Building ................................. 769,679 98,902 868,581
---------- --------- ----------
1,065,683 135,482 1,201,165
Accumulated depreciation .................. (39,380) -- (39,380)
Cash and cash equivalents ............... 3,905 -- $ 36,178 40,083
Other assets .............................. 41,841 -- 1,750 43,591
---------- --------- ---------- ----------
Total assets ........................... $1,072,049 $135,482 $ 37,928 $1,245,459
========== ========= ========== ==========
LIABILITES
Line of credit borrowings ............... $ 34,929 $127,143 $ (162,072)
Notes and debentures payable ............ 200,000 -- 200,000 $ 400,000
Mortgage notes payable .................. 39,864 -- -- 39,864
Accounts payable and accrued expenses ... 14,667 -- -- 14,667
Distributions payable ..................... 16,445 -- -- 16,445
Rent received in advance .................. 6,553 -- -- 6,553
Minority interest ........................ 1,986 -- -- 1,986
---------- --------- ---------- ----------
Total liabilities ........................ 314,444 127,143 37,928 479,515
---------- --------- ---------- ----------
PARTNERS' CAPITAL
General partner capital .................. 677,419 3,548 680,967
Limited partners' capital ............... 89,002 4,791 93,793
Notes receivable -- officers ............ (8,816) -- (8,816)
---------- --------- ---------- ----------
Total partners' capital .................. 757,605 8,339 -- 765,944
---------- --------- ---------- ----------
Total liabilities and partners' capital $1,072,049 $135,482 $ 37,928 $1,245,459
========== ========= ========== ==========
</TABLE>
See Notes to Pro Forma Condensed Consolidated Balance Sheet.
S-25
<PAGE>
SUSA PARTNERSHIP, L.P.
Notes and Adjustments to Pro Forma
Condensed Consolidated Balance Sheet
As of September 30, 1997
(unaudited, in thousands)
(1) Reflects the historical consolidated balance sheet of the Partnership as of
September 30, 1997.
(2) Reflects the acquisition of 37 facilities subsequent to September 30, 1997,
and the pending acquisition of 8 facilities at an aggregate cost of
approximately $135,482. The acquisitions were funded with borrowings of
$52,143 under the Partnership's lines of credit and a $75,000 bridge loan,
the issuance of approximately 92,000 shares of the Company's Common Stock
for $3,548, which proceeds were contributed to the Partnership and the
issuance of approximately 125,000 Units for $4,791.
(3) Reflects the Offering of the Notes and the Debentures by the Partnership
and the repayment of approximately $162,072 of the Partnership's lines of
credit, the capitalization of the Offering discount, underwriters' fees
and other expenses associated with the Offering of $1,750.
S-26
<PAGE>
SUSA PARTNERSHIP, L.P.
Pro Forma Condensed Consolidated Statement of Operations
For the Nine Months Ended September 30, 1997
(unaudited, in thousands)
<TABLE>
<CAPTION>
Facility Pro Forma
Historical(1) Acquisitions(2) Adjustments Pro Forma
--------------- ----------------- ------------------ -----------
<S> <C>
REVENUE
Rental income .............................. $ 113,267 $20,571 $133,838
Management income ........................ -- -- --
Other income .............................. 2,213 271 2,484
--------- -------- ---------
Total revenue ........................... 115,480 20,842 136,322
--------- -------- ---------
OPERATING EXPENSES
Cost of property operations and maintenance 28,359 4,302 32,661
Taxes .................................... 9,403 1,637 11,040
General and administrative ............... 4,656 -- $ 840(3) 5,496
Depreciation and amortization ............ 14,002 -- 3,055(4) 17,057
--------- -------- ------------ ---------
Total operating expenses .................. 56,420 5,939 3,895 66,254
--------- -------- ------------ ---------
Income from property operations ............ 59,060 14,903 (3,895) 70,068
--------- -------- ------------ ---------
OTHER INCOME (EXPENSE)
Interest expense ........................... (11,604) -- (11,860)(5) (23,464)
Interest income(8) ........................ 880 -- -- 880
--------- -------- ------------ ---------
Income before minority interest and gain on
exchange of storage facilities ............ 48,336 14,903 (15,755) 47,484
Gain on exchange of storage facilities ... 2,569 -- (2,569)(6) --
--------- -------- ------------ ---------
Income before minority interest ............ 50,905 14,903 (18,324) 47,484
Minority interest ........................ (250) -- -- (250)
--------- -------- ------------ ---------
Net income ................................. $ 50,655 $14,903 $ (18,324) $ 47,234
========= ======== ============ =========
Net income per Unit ........................ $ 1.76 $ 1.56
========= =========
Weighted average Units outstanding(9) ...... 28,848 30,357
========= =========
</TABLE>
See Notes to Pro Forma Condensed Consolidated Statements of Operations.
S-27
<PAGE>
SUSA PARTNERSHIP, L.P.
Pro Forma Condensed Statement of Operations
For the Year Ended December 31, 1996
(unaudited, in thousands)
<TABLE>
<CAPTION>
Initial Facility Pro Forma
Pro Formal(7) Acquisitions(2) Adjustments Pro Forma
--------------- ----------------- ------------------ -----------
<S> <C>
REVENUES .................................
Rental Income .............................. $ 130,839 $38,128 $168,967
Management Income ........................ 485 -- 485
Other Income .............................. 1,715 866 2,581
--------- -------- ---------
Total revenue ........................... 133,039 38,994 172,033
--------- -------- ---------
OPERATING EXPENSES
Cost of property operations and
maintenance .............................. 33,530 8,940 42,470
Taxes .................................... 10,827 2,541 13,368
General and Administrative ............... 4,722 -- $ 1,384(3) 6,106
Depreciation and amortization ............ 16,097 -- 5,686(4) 21,783
--------- -------- ------------ ---------
Total operating expenses .................. 65,176 11,481 7,070 83,727
--------- -------- ------------ ---------
Income from property operations ............ 67,863 27,513 (7,070) 88,306
--------- -------- ------------ ---------
OTHER INCOME (EXPENSE) .....................
Interest expense ........................... (12,885) -- (16,307)(5) (29,192)
Interest income(8) ........................ 687 -- -- 687
--------- -------- ------------ ---------
Income before minority interest and
gain on exchange of storage facilities . 55,665 27,513 (23,377) 59,801
Gain on exchange of storage facilities ... 288 -- (288)(6) --
--------- -------- ------------ ---------
Income before minority interest ............ 55,953 27,513 (23,665) 59,801
Minority interest ........................ (157) -- (157)
--------- -------- ------------ ---------
Net income ................................. $ 55,796 $27,513 $ (23,665) $ 59,644
========= ======== ============ =========
Net income per Unit ........................ $ 2.10 $ 1.96
========= =========
Weighted average Units outstanding(9) . 26,627 30,357
========= =========
</TABLE>
See Notes to Pro Forma Condensed Consolidated Statements of Operations.
S-28
<PAGE>
SUSA PARTNERSHIP, L.P.
Notes to Pro Forma Condensed Consolidated Statements of Operations
For the Nine Months Ended September 30, 1997, and the Year Ended December 31,
1996
(unaudited, in thousands)
(1) Reflects the historical consolidated statements of operations of the
Partnership for the nine months ended September 30, 1997.
(2) Reflects the incremental effect of the acquisition of 37 facilities during
the fourth quarter of 1997, the pending acquisition of the eight facilities
under contract and the acquisition of 109 facilities during 1996, as if
such acquisitions had occurred as of the beginning of the period presented.
Also reflects estimated cost of property, operations and maintenance, and
taxes.
(3) To reflect an estimated increase in general and administrative expense due
to the acquisition of the facilities.
(4) To reflect depreciation expense on the facilities acquired from the
beginning of the period presented based on the allocation of 73% of the
purchase price to building, depreciated over 40 years on a straight line
basis.
(5) Reflects estimated interest expense on the Notes and Debentures at an
effective annual interest rate of 7.1% (which includes cash interest and
amortizaiton of deferred offering costs), plus interest on the offering of
$100.0 million in aggregate principal amount of 8.20% Notes due November 1,
2017, from the beginning of the period presented, less interest on debt
repaid with the proceeds of the offerings.
(6) To remove the gain recorded on the exchange of facilities of $2,569 for
the nine months ended September 30, 1997, and $288 for the year ended
December 31, 1996.
(7) The Initial Pro Forma Statement of Operations for the year ended December
31, 1996, if presented as if (i) the acquisition of 82 facilities for
$304.0 million during 1996, (ii) the issuance of Units to the Company for
net proceeds of $220.5 million during 1996 and (iii) the issuance of $100.0
million in aggregate principal amount of 8.20% Notes in October 1996, had
occurred on January 1, 1996.
(8) Does not include income that would have been earned on the investment of
the excess proceeds of $36,178, estimated to be $1.4 million for the nine
months ended September 30, 1997, and $4.8 million for the year ended
December 31, 1996.
(9) Pro forma weighted average Units outstanding represents the number of
Units outstanding at September 30, 1997, of 30,140, adjusted for 217 Units
issued in connection with the facility acquisitions.
S-29
<PAGE>
DESCRIPTION OF SECURITIES
The following description of certain terms of the Securities sets forth
certain terms and provisions of the Securities and the Indenture (as defined
below) and is qualified in its entirety by reference to the terms and
provisions of the Securities and the Indenture, which are incorporated herein
by reference. Capitalized terms not otherwise defined herein shall have the
meanings given to them in the Securities and in the Indenture. The following
description of the particular terms of the Securities does not purport to be
complete and is subject to (which are deemed to be "Debt Securities" as defined
in the accompanying Prospectus), and, to the extent inconsistent therewith,
replaces the description of the general terms and provisions of the Debt
Securities set forth in the accompanying Prospectus.
General
The Notes and the Debentures will be limited to $100,000,000 each in
aggregate principal amounts and will mature on December 1, , and December
1, , respectively. The Securities are redeemable at any time at the option
of the Partnership, in whole or in part, at a redemption price equal to the sum
of (i) the principal of the Securities being redeemed plus accrued interest to
the redemption date and (ii) the Make-Whole Amount, if any. The Securities will
not be entitled to the benefits of any sinking fund. The Securities are to be
issued pursuant to an Indenture, dated as of November 1, 1996 (the
"Indenture"), between the Partnership and The First National Bank of Chicago,
as Trustee (the "Trustee"). The terms of the Securities include those
provisions contained in the Securities and the Indenture and those made part of
the Indenture by reference to the Trust Indenture Act of 1939, as amended (the
"TIA"). The Securities are subject to all such terms, and holders of Securities
are referred to the Securities, the Indenture and the TIA for a statement
thereof. Copies of the Indenture and the form of the Securities are available
for inspection at the office of the Trustee located at One First National
Plaza, Suite 0126, Chicago, Illinois 60670 (the "Corporate Trust Office").
The Securities will be direct, unsecured and unsubordinated obligations of
the Partnership and will rank pari passu with each other and all other
unsecured and unsubordinated indebtedness of the Partnership from time to time
outstanding. However, the Securities will be effectively subordinated to
mortgages and other secured indebtedness of the Partnership. As of September
30, 1997, the Partnership had outstanding $234.9 million of unsecured,
unsubordinated debt and $39.9 million of secured debt and $994.8 million in
unencumbered assets. On a pro forma basis, after giving effect to the
completion of the Offering, as of September 30, 1997, the Partnership would
have had outstanding $400.0 million of unsecured, unsubordinated indebtedness,
$39.9 million in secured indebtedness and $1,168.2 million in unencumbered
assets. Subject to certain limitations set forth in the Securities and in the
Indenture described in the Prospectus under the caption "Description of Debt
Securities -- Certain Covenants," the Indenture will permit the Partnership to
incur additional indebtedness and additional secured indebtedness.
The Securities will be issued only in fully registered, book-entry form,
in denominations of $1,000 and integral multiples thereof, except under the
limited circumstances described below under " -- Book-Entry System."
Except as provided under "Description of Debt Securities -- Certain
Covenants -- Existence," "Description of Debt Securities -- Merger,
Consolidation or Sale," below and "Description of Debt Securities -- Events of
Default" and "Description of Debt Securities -- Modification and Waiver" in the
accompanying Prospectus, the Securities and the Indenture do not contain any
other provisions that would afford Holders (as defined below) of the Securities
protection in the event of (i) a highly leveraged or similar transaction
involving the Partnership, the management of the Partnership or the Company, or
any affiliate of either such party, (ii) a change of control or (iii) a
reorganization, restructuring, merger or similar transaction involving the
Partnership that may adversely affect the Holders of the Securities. The
financial covenants of the Partnership described above would continue to apply,
unless waived by Holders of the Securities, in the event of a highly leveraged
or similar transaction involving the Partnership, management of the Partnership
or the Company, or any affiliate of either such party. In addition, subject to
the limitations set forth under "Description of Debt Securities -- Merger,
Consolidation or Sale" in the accompanying Prospectus, the Partnership may, in
the future, enter into certain transactions such as the sale of all or
substantially all of its assets or the merger or consolidation of the
Partnership that would increase the amount of the Partnership's indebtedness or
substantially reduce or eliminate the Partnership's assets, which may have an
adverse effect on the Partnership's ability to service its indebtedness,
including the Securities.
S-30
<PAGE>
The Partnership has no present intention of engaging in a highly leveraged
or similar transaction involving the Partnership. In addition, certain
provisions of Tennessee law and the Company's Amended Charter, including
restrictions on ownership and transfers of the Company's stock designed to
preserve its status as a REIT, may act to prevent or hinder any such
transactions or a change of control.
The Securities are not guaranteed by the Company.
Payment of Principal and Interest on the Securities
Interest on the Securities will accrue at the rate set forth on the cover
page of this Prospectus Supplement from December 1, 1997, or the most recent
Interest Payment Date (as defined below) to which interest has been paid or
provided for, and will be payable in U.S. Dollars semi-annually in arrears on
June 1 and December 1 of each year (each, an "Interest Payment Date"),
commencing June 1, 1998. The interest so payable will be paid to the person
(the "Holder") in whose name the applicable Note is registered at the close of
business on the May 15 or November 15, as the case may be (whether or not a
Business Day, as defined below), next preceding the applicable Interest Payment
Date (each, a "Regular Record Date"). The principal of each Note payable on the
Maturity Date will be paid in U.S. Dollars against presentation and surrender
thereof at the Corporate Trust Office of the Trustee located at 14 Wall Street,
8th Floor, Window 2, New York, New York 10005. Interest on the Securities will
be computed on the basis of a 360-day year consisting of twelve 30-day months.
Maturity
The Notes will mature on December 1, , and the Debentures will mature on
December 1, (each a "Maturity Date"). The Securities may be redeemed at the
option of the Partnership at any time. See " -- Optional Redemption." The
Securities will not be entitled to the benefit of any sinking fund.
Optional Redemption
The Securities may be redeemed at any time at the option of the
Partnership, in whole or in part from time to time, at a redemption price equal
to the sum of (i) the principal amount of the Securities (or portion thereof)
being redeemed plus accrued interest thereon to the redemption date and (ii)
the Make-Whole Amount (as defined below), if any, with respect to such
Securities (or portion thereof) (the "Redemption Price").
If notice has been given as provided in the Indenture and funds for the
redemption of any Securities (or any portion thereof) called for redemption
shall have been made available on the redemption date referred to in such
notice, such Securities (or any portion thereof) will cease to bear interest on
the date fixed for such redemption specified in such notice and the only right
of the Holders of such Securities will be to receive payment of the Redemption
Price.
Notice of any optional redemption of any Securities (or any portion
thereof) will be given to Holders at their addresses, as shown in the security
register for such Securities, not more than 60 nor less than 30 days prior to
the date fixed for redemption. The notice of redemption will specify, among
other items, the Redemption Price and the principal amount of the Securities
held by such Holder to be redeemed.
The Partnership will notify the Trustee at least 60 days prior to giving
notice of redemption (or such shorter period as is satisfactory to the Trustee)
of the aggregate principal amount of such Securities to be redeemed and their
redemption date. If less than all of the Securities are to be redeemed at the
option of the Partnership, the Trustee shall select, in such manner as it shall
deem fair and appropriate, such Securities to be redeemed in whole or in part.
As used herein:
"Make-Whole Amount" means, in connection with any optional redemption or
accelerated payment of any Securities, the excess, if any, of (i) the aggregate
present value as of the date of such redemption or accelerated payment of each
dollar of principal being redeemed or paid and the amount of interest
(exclusive of interest accrued to the date of redemption or accelerated
payment) that would have been payable in respect of each such dollar if such
redemption or accelerated payment had not been made, determined by discounting,
on a semi-annual basis, such principal and interest at the Reinvestment Rate
(determined on the third Business Day preceding the date such notice of
redemption is given or declaration of acceleration is made) from the respective
dates
S-31
<PAGE>
on which such principal and interest would have been payable if such redemption
or accelerated payment had not been made, over (ii) the aggregate principal
amount of the Securities being redeemed or paid.
"Reinvestment Rate" means . % plus the arithmetic mean of the yields under
the respective heading "Week Ending" published in the most recent Statistical
Release under the caption "Treasury Constant Maturities" for the maturity
(rounded to the nearest month) corresponding to the remaining life to maturity,
as of the payment date of the principal being redeemed or paid. If no maturity
exactly corresponds to such maturity, yields for the two published maturities
most closely corresponding to such maturity shall be calculated pursuant to the
immediately preceding sentence and the Reinvestment Rate shall be interpolated
or extrapolated from such yields on a straight-line basis, rounding in each of
such relevant periods to the nearest month. For the purpose of calculating the
Reinvestment Rate, the most recent Statistical Release published prior to the
date of determination of the Make-Whole Amount shall be used.
"Statistical Release" means the statistical release designated "H.15
(519)" or any successor publication which is published weekly by the Federal
Reserve System and which establishes yields on actively traded United States
government securities adjusted to constant maturities, or, if such statistical
release is not published at the time of any determination under the Indenture,
then such other reasonably comparable index which shall be designated by the
Partnership.
Satisfaction and Discharge of the Indenture
The Indenture will, under certain circumstances upon the Partnership's
request, cease to be of further effect with respect to the Securities, and the
Trustee will execute proper instruments acknowledging satisfaction and
discharge of its Indenture as to the Securities.
Book-Entry System
The Notes and the Debentures each will be issued in the form of a single
fully-registered Note in book-entry form (each, a "Global Note") which will be
deposited with, or on behalf of, The Depository Trust Company ("DTC") and
registered in the name of DTC's nominee. Except as set forth below, the Global
Notes may not be transferred except as a whole by DTC to a nominee of DTC or by
a nominee of DTC to DTC or another nominee of DTC or by DTC or any such nominee
to a successor of DTC or a nominee of such successor.
So long as DTC or its nominee is the registered owner of a Global Note,
DTC or its nominee, as the case may be, will be considered the sole Holder of
the Securities represented by such Global Note for all purposes under the
Indenture and the beneficial owners of such Securities will be entitled only to
those rights and benefits afforded to them in accordance with DTC's regular
operating procedures. Upon specified written instructions of a Participant (as
defined below), DTC will have its nominee assist Participants in the exercise
of certain Holders' rights, such as a demand for acceleration or an instruction
to the Trustee. Except as provided below, owners of beneficial interests in a
Global Note will not be entitled to have Securities registered in their names,
will not receive or be entitled to receive physical delivery of Securities in
certificated form and will not be considered the registered owners or Holders
thereof under the Indenture.
If with respect to either the Notes or the Debentures (i) DTC is at any
time unwilling or unable to continue as depository or if at any time DTC ceases
to be a clearing agency registered under the Exchange Act, and a successor
depository is not appointed by the Partnership within 90 days, (ii) an Event of
Default under the Indenture has occurred and is continuing and the beneficial
owners representing a majority in principal amount of such Securities advise
DTC to cease acting as depository or (iii) the Partnership, in its sole
discretion, determines at any time that such Securities shall no longer be
represented by a Global Note, the Partnership will issue individual Securities
of the applicable amount and in certificated form in exchange for the Global
Note representing such Securities. In any such instance, an owner of a
beneficial interest in a Global Note representing such Securities will be
entitled to physical delivery of individual Securities in certificated form of
like tenor, equal in principal amount to such beneficial interest and to have
such Securities in certificated form registered in its name. Securities so
issued in certificated form will be issued in denominations of $1,000 or any
integral multiple thereof, and will be issued in registered form only, without
coupons.
The following is based on information furnished by DTC:
S-32
<PAGE>
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code and
a "clearing agency" registered pursuant to the provisions of Section 17A of
the Exchange Act. DTC holds securities that its participants
("Participants") deposit with DTC. DTC also facilitates the settlement
among Participants of securities transactions, such as transfers and
pledges, in deposited securities through electronic computerized book-entry
changes in Participants' accounts, thereby eliminating the need for
physical movement of securities certificates. Direct Participants include
securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations ("Direct Participants"). DTC
is owned by a number of its Direct Participants and by the New York Stock
Exchange, Inc., the American Stock Exchange, Inc. and the National
Association of Securities Dealers, Inc. Access to the DTC system is also
available to others such as securities brokers and dealers, banks and trust
companies that clear through or maintain a custodial relationship with a
Direct Participant, either directly or indirectly ("Indirect
Participants"). The rules applicable to DTC and its Participants are on
file with the Securities and Exchange Commission.
Purchases of Securities under the DTC system must be made by or through
Direct Participants, which will receive a credit for the Securities on
DTC's records. The ownership interest of each actual purchaser of each Note
("Beneficial Owner") is in turn recorded on the Direct and Indirect
Participant's records. A Beneficial Owner does not receive written
confirmation from DTC of its purchase, but such Beneficial Owner is
expected to receive a written confirmation providing details of the
transaction, as well as periodic statements of its holdings, from the
Direct or Indirect Participant through which such Beneficial Owner entered
into the transaction. Transfers of ownership interests in Securities are
accomplished by entries made on the books of Participants acting on behalf
of Beneficial Owners. Beneficial Owners do not receive certificates
representing their ownership interests in the Securities, except in the
event that use of the book-entry system for the Securities is discontinued.
To facilitate subsequent transfers, each Global Note is registered in the
name of DTC's partnership nominee, Cede & Co. The deposit of each Global
Note with DTC and its registration in the name of Cede & Co. effects no
change in beneficial ownership. DTC has no knowledge of the actual
Beneficial Owners of the Securities; DTC's records reflect only the
identity of the Direct Participants to whose accounts the Securities are
credited, which may or may not be the Beneficial Owners. The Participants
remain responsible for keeping account of their holdings on behalf of their
customers.
Delivery of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants and by Direct
Participants and Indirect Participants to Beneficial Owners are governed by
arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Redemption notices shall be sent to Cede & Co. If less than all of the
Securities are being redeemed, DTC's practice is to determine by lot the
amount of the interest of each Direct Participant in such issue to be
redeemed.
Neither DTC nor Cede & Co. will consent or vote with respect to the
Securities. Under its usual procedures, DTC mails a proxy (an "Omnibus
Proxy") to the issuer as soon as possible after the record date. The
Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those
Direct Participants to whose accounts the Securities are credited on the
record date (identified on a list attached to the Omnibus Proxy).
Principal and interest payments on the Securities will be made by the
Partnership to the Trustee and from the Trustee to DTC. DTC's practice is
to credit Direct Participant's accounts on the payable date in accordance
with their respective holdings as shown on DTC's records unless DTC has
reason to believe that it will not receive payment on the payable date.
Payments by Participants to Beneficial Owners will be governed by standing
instructions and customary practices, as is the case with securities held
for the accounts of customers in bearer form or registered in "street
name," and will be the responsibility of such Participant and not of DTC,
the Trustee or the Partnership subject to any statutory or regulatory
requirements as may be in effect from time to time. Payment of principal
and interest to DTC is the responsibility of the Partnership or the
Trustee, disbursement of such payments to Direct Participants is the
responsibility of DTC, and disbursement of such payments to the Beneficial
Owners is the responsibility of Direct and Indirect Participants.
S-33
<PAGE>
DTC may discontinue providing its services as securities depository with
respect to the Securities at any time by giving reasonable notice to the
Partnership or the Trustee. Under such circumstances, in the event that a
successor securities depository is not appointed, Note certificates are
required to be printed and delivered.
The Partnership may decide to discontinue use of the system of book-entry
transfers through DTC (or a successor securities depository). In that
event, Note certificates will be printed and delivered.
None of the Partnership, any of the Underwriters (as defined below) or
the Trustee will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial interests in
a Global Note, or for maintaining, supervising or reviewing any records
relating to such beneficial interests.
The information in this section concerning DTC and DTC's book-entry
system has been obtained from sources that the Partnership believes to be
reliable, but the Partnership takes no responsibility for the accuracy
thereof.
Same-Day Settlement and Payment
Settlement for the Securities will be made in immediately available funds.
All payments of principal and interest in respect of the Securities will be
made by the Partnership in immediately available funds.
Secondary trading in long-term Securities and debentures of corporate
issuers is generally settled in clearing house or next-day funds. In contrast,
the Securities will trade in DTC's Same-Day Funds Settlement System until
maturity, or until such Securities are issued in certificated form, and
secondary market trading activity in the Securities will therefore be required
by DTC to settle in immediately available funds. No assurance can be given as
to the effect, if any, of settlement in immediately available funds on trading
activity in the Securities.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement and the
Pricing Agreement, the Partnership has agreed to sell to each of the
underwriters named below (the "Underwriters"), and each of the Underwriters has
severally agreed to purchase, the principal amount of the Notes and the
Debentures set forth opposite its name below:
<TABLE>
<CAPTION>
Principal Principal
Amount of Amount of
Underwriters Notes Debentures
- --------------------------------------------- -------------- -------------
<S> <C>
Goldman, Sachs & Co. .................. $ $
First Chicago Capital Markets, Inc. ...
Morgan Stanley & Co. Incorporated ......
------------- -------------
Total ................................. $100,000,000 $100,000,000
============= =============
</TABLE>
Under the terms and conditions of the Underwriting Agreement and the
Pricing Agreement, the Underwriters are committed to take and pay for all of
the Notes or Debentures, if any are taken. The Notes and Debentures are being
offered separately, and the offering of each is not conditional upon the other.
The Underwriters propose to offer the Securities in part directly to the
public at the initial public offering prices set forth on the cover page of
this Prospectus Supplement and in part to certain securities dealers at such
price less a concession of % and % of the principal amount of the Notes and
the Debentures, respectively. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of % of the principal amount of the
Securities to certain brokers and dealers. After the Securities are released
for sale to the public, the offering price and other selling terms may from
time to time be varied by the Underwriters.
In connection with the Offering, the Underwriters may purchase and sell
the Securities in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover short
positions created by the Underwriters in connection with the Offering.
Stabilizing transactions consist of certain bids or purchases for the purpose
of preventing or retarding a decline in the market price of the Securities, and
short positions created by the Underwriters involve the sale by the
Underwriters of a greater number of Securities than they are required to
purchase from the Company in the Offering. The Underwriters also may impose a
penalty bid,
S-34
<PAGE>
whereby selling concessions allowed to broker-dealers in respect to the
securities sold in the Offering may be reclaimed by the Underwriters if such
Securities are repurchased by the Underwriters in stabilizing or covering
transactions. These activities may stabilize, maintain or otherwise affect the
market price of the Securities, which may be higher than the price that might
otherwise prevail in the open market; and these activities, if commenced, may
be discontinued at any time. These transactions may be effected in the
over-the-counter market or otherwise.
The Securities are a new issue of securities with no established trading
market. The Underwriters have advised the Partnership that they intend to make
a market in the Securities but are not obligated to do so and may discontinue
market making at any time without notice. No assurance can be given as to the
liquidity of the trading market for the Securities.
In the ordinary course of their business, the Underwriters provide
investment banking, advisory and other financial services to the Partnership,
the Company and their affiliates for which they receive customary fees.
The First National Bank of Chicago ("FNBC"), an affiliate of First Chicago
Capital Markets, Inc. ("FCCM") and one of the Underwriters, is a participant in
the Partnership's $75.0 million line of credit and the provider of the $75.0
million bridge loan. FNBC will accordingly receive a portion of the net
proceeds of the Securities offered hereby. FCCM is participating in this
Offering on the same terms as the other Underwriters and will receive customary
managing, underwriting and selling fees.
The Partnership has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
VALIDITY OF SECURITIES
The validity of the Securities offered hereby will be passed upon for the
Partnership by Hunton & Williams, Richmond, Virginia, and for the Underwriters
by Sullivan & Cromwell, New York, New York, who will rely on the opinion of
Hunton & Williams as to matters of Tennessee law.
S-35
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
PROSPECTUS
$250,000,000
STORAGE USA, INC.
Preferred Stock, Depositary Shares,
Common Stock and Warrants
$350,000,000
SUSA PARTNERSHIP, L.P.
Debt Securities
Storage USA, Inc. (the "Company") may from time to time offer its (i)
shares of Preferred Stock, $.01 par value ("Preferred Stock"), (ii) depositary
shares representing entitlement to all rights and preferences of a fraction of
a share of Preferred Stock of a specified series and represented by depositary
receipts ("Depositary Shares"), (iii)shares of Common Stock, $.01 par value
("Common Stock"), and (iv) warrants exercisable for either Preferred Stock or
Common Stock ("Warrants"), having an aggregate initial public offering price
not to exceed $250,000,000, on terms to be determined at the time of offering.
SUSA Partnership, L.P. (the "Partnership") may from time to time offer in
one or more series unsecured, non-convertible debt securities ("Debt
Securities") having an aggregate initial public offering price not to exceed
$350,000,000, on terms to be determined at the time of offering. The Preferred
Stock, the Depositary Shares, the Common Stock, the Warrants and the Debt
Securities offered hereby (collectively, the "Offered Securities") may be
offered, separately or as units with other Offered Securities, in separate
series, in amounts, at prices and on terms to be determined at the time of sale
and to be set forth in a supplement to this Prospectus (a "Prospectus
Supplement").
The Debt Securities will be effectively subordinated to any secured
indebtedness of the Partnership and any indebtedness of the Partnership's
subsidiaries. At December 31, 1996, the Partnership and its subsidiaries had
$45.7 million in secured indebtedness outstanding. The Partnership's
subsidiaries had no unsecured indebtedness outstanding at December 31, 1996.
The Debt Securities will rank in pari passu with all other unsecured and
unsubordinated indebtedness of the Partnership. Subject to certain limitations
set forth in the indenture regarding the Debt Securities, the Partnership may
incur additional secured or unsecured indebtedness. See "Description of Debt
Securities -- Certain Covenants -- Limitations on Incurrence of Indebtedness."
Except as described under "Description of Debt Securities -- Merger,
Consolidation or Sale" or "Description of Debt Securities -- Certain Covenants"
or as may be set forth in any Prospectus Supplement, the applicable indenture
will not contain any provisions that would limit the ability of the Partnership
or its subsidiaries to incur indebtedness or that would afford holders of the
Debt Securities protection in the event of a significant transaction involving
the Partnership that may adversely affect the holders of the Debt Securities.
The specific terms of the Offered Securities in respect of which this
Prospectus is being delivered will be set forth in the applicable Prospectus
Supplement and will include, where applicable, (i) in the case of Preferred
Stock, the series designation and number of shares, the dividend, liquidation,
redemption, conversion, voting and other rights, the initial public offering
price and whether interests in the Preferred Stock will be represented by
Depositary Shares; (ii) in the case of Depositary Shares, the fractional share
of Preferred Stock represented by each such Depositary Share; (iii) in the case
of Common Stock, the number of shares and initial public offering price; (iv)
in the case of Warrants, the specific title and aggregate number, the number of
shares purchasable upon exercise of the Warrants, the issue price and the
exercise price and in the case of Warrants for Preferred Stock, the
designation, aggregate number and terms of the series of Preferred Stock
purchasable upon exercise of such Warrants; (v) in the case of Debt Securities,
the specific title, aggregate principal amount, form (which may be certificated
or global), authorized denominations, maturity, rate (or manner of calculation
thereof) and time of payment of interest, terms for redemption at the option of
the Partnership or repayment at the option of the holder, terms for sinking
fund payments, covenants and any initial public offering price; and (vi) in the
case of all Offered Securities, whether such Offered Securities will be offered
separately or as a unit with other Offered Securities. In addition, such
specific terms may include limitations on direct or beneficial ownership and
restrictions on transfer of the Offered Securities, in each case as may be
appropriate to preserve the status of the Company as a real estate investment
trust ("REIT") for federal income tax purposes.
The applicable Prospectus Supplement will also contain information, where
applicable, concerning material United States federal income tax considerations
relating to, and any listing on a securities exchange of, the Offered
Securities covered thereby.
The Offered Securities may be offered directly, through agents designated
from time to time by the Company or the Partnership or to or through
underwriters or dealers. If any designated agents or any underwriters are
involved in the sale of Offered Securities, they will be identified and their
compensation will be described in the applicable Prospectus Supplement. See
"Plan of Distribution." No Offered Securities may be sold without delivery of
the applicable Prospectus Supplement describing such Offered Securities and the
method and terms of the offering thereof.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is February 26, 1997.
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AVAILABLE INFORMATION
The Partnership and the Company, its general partner, are subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and, in accordance therewith, the Company and the
Partnership file reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The reports, proxy
statements and other information filed by the Company and the Partnership with
the Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at its Regional Offices at Suite 1400, Northwestern Atrium
Center, 500 West Madison Street, Chicago, Illinois 60661 and Suite 1300, 7
World Trade Center, New York, New York 10048, can also be inspected and copied
at the offices of the New York Stock Exchange, 20Broad Street, New York, New
York 10005. The Commission maintains a Web site that contains reports, proxy
and information statements and other information regarding the Company and the
Partnership and other registrants that have been filed electronically with the
Commission. The address of such site is http://www.sec.gov.
This Prospectus is part of a registration statement on Form S-3 (together
with all amendments and exhibits thereto, the "Registration Statement") filed
with the Commission under the Securities Act of 1933, as amended (the
"Securities Act"). This Prospectus does not contain all the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules of the Commission. For further information, reference
is made to the Registration Statement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company (File No. 001-12910) and the
Partnership (File No. 333-3344) with the Commission are incorporated herein by
reference:
(i) the Company's Annual Report on Form 10-K, for the year ended December 31,
1995, as amended by the Annual Report on Form 10-K/A-1, filed on June 27,
1996;
(ii) the Company's Quarterly Reports on Form 10-Q, for the quarter ended March
31, 1996, as amended by the Quarterly Report on Form 10-Q/A filed on June
27, 1996, for the quarter ended June 30, 1996, filed on August 14, 1996,
and for the quarter ended September 30, 1996, filed on November 14, 1996;
(iii) the Company's Current Reports on Form 8-K filed on March 7, April 1, April
5, June 21, as amended by the Current Report on Form 8-K/A filed on July
17, August 2, as amended by the Current Report on Form 8-K/A filed on
September 16, October 24, as amended by the Current Report on Form 8-K/A
filed on October 31, November 1, November 8 and December 19, 1996, as
amended by the Current Report on Form 8-K/A filed on February 18, 1997,
and February 18, 1997;
(iv) the Partnership's Quarterly Reports on Form 10-Q, for the quarter ended
June 30, 1996, filed on August 14, 1996, and the Partnership's Quarterly
Report on Form 10-Q, for the quarter ended September 30, 1996, filed on
November 14, 1996;
(v) the Partnership's Current Reports on Form 8-K filed on October 24,
November 1, November 5, as amended by the Current Report on Form 8-K/A
filed on November 12, and December 19, 1996, as amended by the Current
Report on Form 8-K/A filed on February 18, 1997, and February 18, 1997;
(vi) the financial statements of the Partnership included on pages F-29 to F-49
of the Partnership's Registration Statement on Form S-3 (File No.
333-3344) filed on July 23, 1996; and
(vii) the description of the Company's Common Stock contained in the Company's
Registration Statement on Form 8-A dated March 15, 1994.
All documents filed by the Company and the Partnership pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date hereof
and prior to the termination of the offering of all of the Offered Securities
shall be deemed to be incorporated by reference herein. Any statement contained
herein or in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein, in any accompanying
Prospectus Supplement relating to a specific offering of Offered Securities or
in any other subsequently filed document, as the case may be, which also is or
is deemed to be incorporated by reference herein, modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus or
any accompanying Prospectus Supplement.
The Company and the Partnership will provide on request and without charge
to each person to whom this Prospectus is delivered a copy (without exhibits)
of any or all documents incorporated by reference into this Prospectus.
Requests for such copies should be directed to Storage USA, Inc., 10440 Little
Patuxent Parkway, Suite 1100, Columbia, Maryland 21044, Attention: Secretary
(telephone (410) 730-9500).
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THE COMPANY AND THE PARTNERSHIP
The Company is a self-managed, self-advised real estate investment trust
("REIT") engaged in the business of owning, managing, acquiring, developing and
franchising self-storage facilities. The Company operates through the
Partnership, in which it is the sole general partner and in which it owned an
approximately 93% partnership interest as of December 31, 1996. The description
of business, property information, policies with respect to certain activities
and management information for the Partnership are substantially identical to
that of the Company. Such information may be found in the Company's Annual
Report on Form 10-K for the year ended December 31, 1995, as amended, and in
the Company's 1996 Annual Meeting Proxy Statement filed April 5, 1996.
At December 31, 1996, the Company, through the Partnership, owned 242
facilities containing 16.4 million net rentable square feet in 29 states and
the District of Columbia and managed for others 27 facilities containing an
additional 1.6 million net rentable square feet. Average physical and economic
occupancy for the facilities owned by the Partnership at December 31, 1996,
were 86% and 79%, respectively. Average weighted annual rent per square foot
for these facilities was $9.73. At December 31, 1996, the Company, through the
Partnership, had under construction or in development approximately 1.3 million
net rentable square feet contained in 12 new facilities and in expansions to 18
existing facilities.
The Company is a Tennessee corporation and the Partnership is a Tennessee
limited partnership. Their executive offices are located at 10440 Little
Patuxent Parkway, Suite 1100, Columbia, Maryland 21044 and their telephone
number is (410) 730-9500.
USE OF PROCEEDS
The Company will contribute the net proceeds of any sale of Preferred
Stock, Depository Shares, Common Stock or Warrants to the Partnership in
exchange for additional units of general or limited partnership interest.
Unless otherwise set forth in the applicable Prospectus Supplement, the net
proceeds from the sale of any Offered Securities will be used by the
Partnership for general purposes, which may include repayment of indebtedness,
making improvements to properties and the acquisition and development of
additional properties.
RATIOS OF EARNINGS TO FIXED CHARGES
The Company's ratio of earnings to fixed charges for the nine months ended
September 30, 1996, was 5.25 and for the year ended December 31, 1995, was
7.45. The Partnership's ratio of earnings to fixed charges for the nine months
ended September 30, 1996, was 5.5 and for the year ended December 31, 1995, was
7.73.
The Company completed its initial public offering and commenced business
as a REIT on March 24, 1994. For the period January 1, 1994, through March 23,
1994, fixed charges of the Company exceeded its earnings by $165,000. The
Company's ratio of earnings to fixed charges for the period March 24, 1994, to
December 31, 1994, was 9.18 and the Company's pro forma ratio of earnings to
fixed charges for the year ended December 31, 1994, was 8.54. For the period
January 1, 1994, through March 23, 1994, fixed charges of the Partnership
exceeded its earnings by $165,000. The Partnership's ratio of earnings to fixed
charges for the period March 24, 1994, to December 31, 1994, was 9.38 and the
Partnership's pro forma ratio of earnings to fixed charges for the year ended
December 31, 1994, was 8.63.
The pro forma results of operations from which the ratio of earnings to
fixed charges for 1994 is calculated reflect the Company's and the
Partnership's annual results of operations and assume that the Company's
initial public offering and related transactions, including the contribution of
the net proceeds from such offering to the Partnership, were completed on
January 1, 1994. The Company's ratio of earnings to fixed charges for the year
ended December 31, 1993, was 1.10. For the years ended December 31, 1992, and
1991, respectively, fixed charges exceeded earnings by $3.0 and $4.2 million.
The ratios of earnings to fixed charges were computed by dividing earnings
by fixed charges. For purposes of computing these ratios, earnings consist of
income before extraordinary items plus fixed charges other than capitalized
interest, and fixed charges consist of interest on borrowed funds (including
capitalized interest) and amortization of debt discount and expense. To date,
the Company and the Partnership have not issued any preferred equity interests;
therefore, the ratios of earnings to combined fixed charges and preferred share
dividends are the same as the ratios of earnings to fixed charges.
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DESCRIPTION OF CAPITAL STOCK
General
The Company is authorized to issue 150,000,000 shares of Common Stock,
$.01 par value, and 5,000,000 shares of Preferred Stock, $.01 par value. At
December 31, 1996, there were 24,722,737 shares of Common Stock outstanding and
no shares of Preferred Stock outstanding.
The following information with respect to the capital stock of the Company
is subject to the detailed provisions of the Company's Amended Charter (the
"Charter") and Amended and Restated Bylaws (the "Bylaws"), as currently in
effect. These statements do not purport to be complete, or to give full effect
to the provisions of statutory or common law, and are subject to, and are
qualified in their entirety by reference to, the terms of the Charter and
Bylaws, which are incorporated by reference herein.
Common Stock
The holders of Common Stock are entitled to one vote per share on all
matters voted on by shareholders, including elections of directors. Except as
otherwise required by law or provided in any resolution adopted by the Board of
Directors with respect to any series of Preferred Stock, the holders of such
shares of Common Stock exclusively possess all voting power. The Charter does
not provide for cumulative voting in the election of directors. Subject to any
preferential rights of any outstanding series of Preferred Stock, the holders
of Common Stock are entitled to such distributions as may be declared from time
to time by the Board of Directors from funds available therefor, and upon
liquidation are entitled to receive pro rata all assets of the Company
available for distribution to such holders. All shares of Common Stock issued
will be fully paid and nonassessable, and the holders thereof will not have
preemptive rights.
The Transfer Agent for the Common Stock is First Union National Bank of
North Carolina, Charlotte, NorthCarolina. The Common Stock is traded on the
NYSE under the symbol "SUS." The Company will apply to the NYSE to list the
additional shares of Common Stock to be sold pursuant to any Prospectus
Supplement, and the Company anticipates that such shares will be so listed.
Preferred Stock
The following description of the terms of the Preferred Stock sets forth
certain general terms and provisions of the Preferred Stock to which a
Prospectus Supplement may relate. Specific terms of any series of Preferred
Stock offered by a Prospectus Supplement will be described in that Prospectus
Supplement. The description set forth below is subject to and qualified in its
entirety by reference to the Articles of Amendment to the Charter fixing the
preferences, limitations and relative rights of a particular series of
Preferred Stock.
General. Under the Charter, the Board of Directors of the Company is
authorized, without further shareholder action, to provide for the issuance of
up to 5,000,000 shares of Preferred Stock, in such series, with such
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications or other provisions, as may be
fixed by the Board of Directors.
The Preferred Stock will have the dividend, liquidation, redemption,
conversion and voting rights set forth below unless otherwise provided in the
Prospectus Supplement relating to a particular series of Preferred Stock.
Reference is made to the Prospectus Supplement relating to the particular
series of Preferred Stock offered thereby for specific terms, including: (i)
the title and liquidation preference per share of such Preferred Stock and the
number of shares offered; (ii) the price at which such series will be issued;
(iii) the dividend rate (or method of calculation), the dates on which
dividends shall be payable and the dates from which dividends shall commence to
accumulate; (iv) any redemption or sinking fund provisions of such series; (v)
any conversion provisions of such series; and (vi) any additional dividend,
liquidation, redemption, sinking fund and other rights, preferences,
privileges, limitations and restrictions of such series.
The Preferred Stock will, when issued, be fully paid and nonassessable.
Unless otherwise specified in the Prospectus Supplement relating to a
particular series of Preferred Stock, each series will rank on a parity as to
dividends and distributions in the event of a liquidation with each other
series of Preferred Stock and, in all cases, will be senior to the Common
Stock.
Dividend Rights. Holders of Preferred Stock of each series will be
entitled to receive, when, as and if declared by the Board of Directors, out of
assets of the Company legally available therefor, cash dividends at such rates
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and on such dates as are set forth in the Prospectus Supplement relating to
such series of Preferred Stock. Such rate may be fixed or variable or both and
may be cumulative, noncumulative or partially cumulative.
If the applicable Prospectus Supplement so provides, as long as any shares
of Preferred Stock are outstanding, no dividends will be declared or paid or
any distributions be made on the Common Stock, other than a dividend payable in
Common Stock, unless the accrued dividends on each series of Preferred Stock
have been fully paid or declared and set apart for payment and the Company
shall have set apart all amounts, if any, required to be set apart for all
sinking funds, if any, for each series of Preferred Stock.
If the applicable Prospectus Supplement so provides, when dividends are
not paid in full upon any series of Preferred Stock and any other series of
Preferred Stock ranking on a parity as to dividends with such series of
Preferred Stock, all dividends declared upon such series of Preferred Stock and
any other series of Preferred Stock ranking on a parity as to dividends will be
declared pro rata so that the amount of dividends declared per share on such
series of Preferred Stock and such other series will in all cases bear to each
other the same ratio that accrued dividends per share on such series of
Preferred Stock and such other series bear to each other.
Each series of Preferred Stock will be entitled to dividends as described
in the Prospectus Supplement relating to such series, which may be based upon
one or more methods of determination. Different series of Preferred Stock may
be entitled to dividends at different dividend rates or based upon different
methods of determination. Except as provided in the applicable Prospectus
Supplement, no series of Preferred Stock will be entitled to participate in the
earnings or assets of the Company.
Rights Upon Liquidation. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the holders of each
series of Preferred Stock will be entitled to receive out of the assets of the
Company available for distribution to shareholders the amount stated or
determined on the basis set forth in the Prospectus Supplement relating to such
series, which may include accrued dividends, if such liquidation, dissolution
or winding up is involuntary, or may equal the current redemption price per
share (otherwise than for the sinking fund, if any, provided for such series)
provided for such series set forth in such Prospectus Supplement, if such
liquidation, dissolution or winding up is voluntary, and on such preferential
basis as is set forth in such Prospectus Supplement. If, upon any voluntary or
involuntary liquidation, dissolution or winding up of the Company, the amounts
payable with respect to Preferred Stock of any series and any other shares of
stock of the Company ranking as to any such distribution on a parity with such
series of Preferred Stock are not paid in full, the holders of Preferred Stock
of such series and of such other shares will share ratably in any such
distribution of assets of the Company in proportion to the full respective
preferential amounts to which they are entitled or on such other basis as is
set forth in the applicable Prospectus Supplement. The rights, if any, of the
holders of any series of Preferred Stock to participate in the assets of the
Company remaining after the holders of other series of Preferred Stock have
been paid their respective specified liquidation preferences upon any
liquidation, dissolution or winding up of the Company will be described in the
Prospectus Supplement relating to such series.
Redemption. A series of Preferred Stock may be redeemable, in whole or in
part, at the option of the Company, and may be subject to mandatory redemption
pursuant to a sinking fund, in each case upon terms, at the times, the
redemption prices and for the types of consideration set forth in the
Prospectus Supplement relating to such series. The Prospectus Supplement
relating to a series of Preferred Stock which is subject to mandatory
redemption shall specify the number of shares of such series that shall be
redeemed by the Company in each year commencing after a date to be specified,
at a redemption price per share to be specified, together with an amount equal
to any accrued and unpaid dividends thereon to the date of redemption.
If, after giving notice of redemption to the holders of a series of
Preferred Stock, the Company deposits with a designated bank funds sufficient
to redeem such Preferred Stock, then from and after such deposit, all shares
called for redemption will no longer be outstanding for any purpose, other than
the right to receive the redemption price and the right to convert such shares
into other classes of stock of the Company. The redemption price will be stated
in the Prospectus Supplement relating to a particular series of Preferred
Stock.
Except as indicated in the applicable Prospectus Supplement, the Preferred
Stock is not subject to any mandatory redemption at the option of the holder.
Sinking Fund. The Prospectus Supplement for any series of Preferred Stock
will state the terms, if any, of a sinking fund for the purchase or redemption
of that series.
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Conversion Rights. The Prospectus Supplement for any series of Preferred
Stock will state the terms, if any, on which shares of that series are
convertible into shares of Common Stock or another series of Preferred Stock.
The Preferred Stock will have no preemptive rights.
Voting Rights. Except as indicated in the Prospectus Supplement relating
to a particular series of Preferred Stock, or except as expressly required by
Tennessee law, a holder of Preferred Stock will not be entitled to vote. Except
as indicated in the Prospectus Supplement relating to a particular series of
Preferred Stock, in the event the Company issues full shares of any series of
Preferred Stock, each such share will be entitled to one vote on matters on
which holders of such series of Preferred Stock are entitled to vote.
Under Tennessee law, the affirmative vote of the holders of a majority of
the outstanding shares of all series of Preferred Stock entitled to vote,
voting as a separate voting group, will be required for (i) the authorization
of any class of stock ranking prior to or on a parity with Preferred Stock or
the increase in the number of authorized shares of any such stock, (ii) any
increase in the number of authorized shares of Preferred Stock and (iii)
certain amendments to the Articles that may be adverse to the rights of
Preferred Stock outstanding.
Transfer Agent and Registrar. The transfer agent, registrar and dividend
disbursement agent for a series of Preferred Stock will be selected by the
Company and be described in the applicable Prospectus Supplement. The registrar
for shares of Preferred Stock will send notices to shareholders of any meetings
at which holders of Preferred Stock have the right to vote on any matter.
DESCRIPTION OF DEPOSITARY SHARES
General
The Company may, at its option, elect to offer fractional shares of
Preferred Stock, rather than full shares of Preferred Stock. In such event, the
Company will issue to the public receipts for Depositary Shares, each of which
will represent a fraction (to be set forth in the Prospectus Supplement
relating to a particular series of Preferred Stock) of a share of a particular
series of Preferred Stock as described below.
The shares of any series of Preferred Stock represented by Depositary
Shares will be deposited under a Deposit Agreement (the "Deposit Agreement")
between the Company and the depositary named in the applicable Prospectus
Supplement (the "Depositary"). Subject to the terms of the Deposit Agreement,
each owner of a Depositary Share will be entitled, in proportion to the
applicable fraction of a share of Preferred Stock represented by such
Depositary Share, to all the rights and preferences of the Preferred Stock
represented thereby (including dividend, voting, redemption and liquidation
rights).
The Depositary Shares will be evidenced by depositary receipts issued
pursuant to the Deposit Agreement ("Depositary Receipts"). Depositary Receipts
will be distributed to those persons purchasing the fractional shares of
Preferred Stock in accordance with the terms of the offering. If Depositary
Shares are issued, copies of the forms of Deposit Agreement and Depositary
Receipt will be incorporated by reference in the Registration Statement of
which this Prospectus is a part, and the following summary is qualified in its
entirety by reference to such documents.
Pending the preparation of definitive engraved Depositary Receipts, the
Depositary may, upon the written order of the Company, issue temporary
Depositary Receipts substantially identical to (and entitling the holders
thereof to all the rights pertaining to) the definitive Depositary Receipts but
not in definitive form. Definitive Depositary Receipts will be prepared
thereafter without unreasonable delay, and temporary Depositary Receipts will
be exchangeable for definitive Depositary Receipts at the Company's expense.
Dividends and Other Distributions
The Depositary will distribute all cash dividends or other cash
distributions received in respect of the Preferred Stock to the record holders
of Depositary Shares relating to such Preferred Stock in proportion to the
number of such Depositary Shares owned by such holders. The Depositary shall
distribute only such amount, however, as can be distributed without attributing
to any holder of Depositary Shares a fraction of one cent, and the balance not
so distributed shall be added to and treated as part of the next sum received
by the Depositary for distribution to record holders of Depositary Shares.
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In the event of a distribution other than in cash, the Depositary will
distribute property received by it to the record holders of Depositary Shares
entitled thereto, unless the Depositary determines that it is not feasible to
make such distribution, in which case the Depositary may, with the approval of
the Company, sell such property and distribute the net proceeds from such sale
to such holders.
The Deposit Agreement will also contain provisions relating to the manner
in which any subscription or similar rights offered by the Company to holders
of the Preferred Stock shall be made available to the holders of Depositary
Shares.
Redemption of Depositary Shares
If a series of Preferred Stock represented by Depositary Shares is subject
to redemption, the Depositary Shares will be redeemed from the proceeds
received by the Depositary resulting from the redemption, in whole or in part,
of such series of Preferred Stock held by the Depositary. The redemption price
per Depositary Share will be equal to the applicable fraction of the redemption
price per share payable with respect to such series of Preferred Stock.
Whenever the Company redeems shares of Preferred Stock held by the Depositary,
the Depositary will redeem as of the same redemption date the number of
Depositary Shares representing the shares of Preferred Stock so redeemed. If
fewer than all the Depositary Shares are to be redeemed, the Depositary Shares
to be redeemed will be selected by lot or pro rata as may be determined by the
Depositary.
After the date fixed for redemption, the Depositary Shares so called for
redemption will no longer be outstanding and all rights of the holders of the
Depositary Shares will cease, except the right to receive the money, securities
or other property payable upon such redemption and any money, securities or
other property to which the holders of such Depositary Shares were entitled
upon such redemption upon surrender to the Depositary of the Depositary
Receipts evidencing such Depositary Shares.
Voting the Preferred Stock
Upon receipt of notice of any meeting at which the holders of Preferred
Stock are entitled to vote, the Depositary will mail the information contained
in such notice of meeting to the record holders of the Depositary Shares
relating to such Preferred Stock. Each record holder of such Depositary Shares
on the record date (which will be the same date as the record date for the
Preferred Stock) will be entitled to instruct the Depositary as to the exercise
of the voting rights pertaining to the amount of Preferred Stock represented by
such holder's Depositary Shares. The Depositary will endeavor, insofar as
practicable, to vote the amount of Preferred Stock represented by such
Depositary Shares in accordance with such instructions, and the Company will
agree to take all action which may be deemed necessary by the Depositary in
order to enable the Depositary to do so. The Depositary may abstain from voting
shares of Preferred Stock to the extent it does not receive specific
instructions from the holders of Depositary Shares representing such Preferred
Stock.
Amendment and Termination of the Depositary Agreement
The form of Depositary Receipt evidencing the Depositary Shares and any
provision of the Deposit Agreement may at any time be amended by agreement
between the Company and the Depositary. However, any amendment that materially
and adversely alters the rights of the holders of Depositary Shares will not be
effective unless such amendment has been approved by the holders of at least a
majority of the Depositary Shares then outstanding. The Deposit Agreement may
be terminated by the Company or the Depositary only if (i) all outstanding
Depositary Shares have been redeemed or (ii) there has been a final
distribution in respect of the Preferred Stock in connection with any
liquidation, dissolution or winding up of the Company and such distribution has
been distributed to the holders of Depositary Receipts.
Charges of Depositary
The Company will pay all transfer and other taxes and governmental charges
arising solely from the existence of the depositary arrangements. The Company
will pay charges of the Depositary in connection with the initial deposit of
the Preferred Stock and any redemption of the Preferred Stock. Holders of
Depositary Receipts will pay other transfer and other taxes and governmental
charges and such other charges, including a fee for the withdrawal of shares of
Preferred Stock upon surrender of Depositary Receipts, as are expressly
provided in the Deposit Agreement to be for their accounts.
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Miscellaneous
The Depositary will forward to holders of Depository Receipts all reports
and communications from the Company that are delivered to the Depositary and
that the Company is required to furnish to holders of Preferred Stock.
Neither the Depositary nor the Company will be liable if it is prevented
or delayed by law or any circumstance beyond its control in performing its
obligations under the Deposit Agreement. The obligations of the Company and the
Depositary under the Deposit Agreement will be limited to performance in good
faith of their duties thereunder and they will not be obligated to prosecute or
defend any legal proceeding in respect of any Depositary Shares or Preferred
Stock unless satisfactory indemnity is furnished. They may rely upon written
advice of counsel or accountants, or upon information provided by persons
presenting Preferred Stock for deposit, holders of Depositary Receipts or other
persons believed to be competent and on documents believed to be genuine.
Resignation and Removal of Depositary
The Depositary may resign at any time by delivering to the Company notice
of its election to do so, and the Company may at any time remove the
Depositary, any such resignation or removal to take effect upon the appointment
of a successor Depositary and its acceptance of such appointment. Such
successor Depositary must be appointed within 60 days after delivery of the
notice of resignation or removal.
Restrictions on Ownership
In order to safeguard the Company against an inadvertent loss of REIT
status, the Deposit Agreement will contain provisions restricting the ownership
and transfer of Depositary Shares. Such restrictions will be described in the
applicable Prospectus Supplement and will be referenced on the applicable
Depositary Receipts.
DESCRIPTION OF WARRANTS
The Company may issue Warrants for the purchase of Preferred Stock
("Preferred Stock Warrants") or Common Stock ("Common Stock Warrants").
Warrants may be issued independently or together with any other Offered
Securities offered by any Prospectus Supplement and may be attached to or
separate from such Securities. Each series of Warrants will be issued under a
separate warrant agreement (each, a "Warrant Agreement") to be entered into
between the Company and a warrant agent specified in the applicable Prospectus
Supplement (the "Warrant Agent"). The Warrant Agent will act solely as an agent
of the Company in connection with the Warrants of such series and will not
assume any obligation or relationship of agency or trust for or with any
holders or beneficial owners of Warrants. The following summaries of certain
provisions of the Warrant Agreement and the Warrants do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, all the provisions of the Warrant Agreement and the Warrant certificates
relating to each series of Warrants that will be filed with the Commission and
incorporated by reference as an exhibit to the Registration Statement of which
this Prospectus is a part at or prior to the time of the issuance of such
series of Warrants.
The applicable Prospectus Supplement will describe the terms of such
Warrants, including the following where applicable: (i) the offering price;
(ii) the aggregate number of shares purchasable upon exercise of such Warrants,
the exercise price, and in the case of Warrants for Preferred Stock, the
designation, aggregate number and terms of the series of Preferred Stock
purchasable upon exercise of such Warrants; (iii) the designation and terms of
any series of Preferred Stock with which such Warrants are being offered and
the number of such Warrants being offered with such Preferred Stock; (iv) the
date, if any, on and after which such Warrants and the related series of
Preferred Stock or Common Stock will be transferable separately; (v) the date
on which the right to exercise such Warrants shall commence and the date on
which such right shall expire (the "Expiration Date"); (vi) any special United
States federal income tax consequences; and (vii) any other material terms of
such Warrants.
Warrant certificates may be exchanged for new Warrant certificates of
different denominations, may (if in registered form) be presented for
registration of transfer and may be exercised at the corporate trust office of
the Warrant agent or any other office indicated in the applicable Prospectus
Supplement. Prior to the exercise of any Warrants, holders of such Warrants
will not have any rights of holders of such Preferred Stock or Common Stock,
including the right to receive payments of dividends, if any, on such Preferred
Stock or Common Stock, or to exercise any applicable right to vote.
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Exercise of Warrants
Each Warrant will entitle the holder thereof to purchase such number of
shares of Preferred Stock or Common Stock, as the case may be, at such exercise
price as shall in each case be set forth in, or calculable from, the Prospectus
Supplement relating to the offered Warrants. After the close of business on the
Expiration Date (or such later date to which such Expiration Date may be
extended by the Company), unexercised Warrants will become void.
Warrants may be exercised by delivering to the Warrant Agent payment as
provided in the applicable Prospectus Supplement of the amount required to
purchase the Preferred Stock or Common Stock, as the case may be, purchasable
upon such exercise together with certain information set forth on the reverse
side of the Warrant certificate. Warrants will be deemed to have been exercised
upon receipt of payment of the exercise price, subject to the receipt within
five business days, of the Warrant certificate evidencing such Warrants. Upon
receipt of such payment and the Warrant certificate properly completed and duly
executed at the corporate trust office of the Warrant Agent or any other office
indicated in the applicable Prospectus Supplement, the Company will, as soon as
practicable, issue and deliver the Preferred Stock or Common Stock, as the case
may be, purchasable upon such exercise. If fewer than all of the Warrants
represented by such Warrant certificate are exercised, a new Warrant
certificate will be issued for the remaining amount of Warrants.
Amendments and Supplements to Warrant Agreements
The Warrant Agreements may be amended or supplemented without the consent
of the holders of the Warrants issued thereunder to effect changes that are not
inconsistent with the provisions of the Warrants and that do not adversely
affect the interests of the holders of the Warrants.
Common Stock Warrant Adjustments
Unless otherwise indicated in the applicable Prospectus Supplement, the
exercise price of, and the number of shares of Common Stock covered by, a
Common Stock Warrant are subject to adjustment in certain events, including (i)
payment of a dividend on the Common Stock payable in capital stock and stock
splits, combinations or reclassification of the Common Stock; (ii) issuance to
all holders of Common Stock of rights or warrants to subscribe for or purchase
shares of Common Stock at less than their current market price (as defined in
the Warrant Agreement for such series of Warrants); and (iii) certain
distributions of evidences of indebtedness or assets (including securities but
excluding cash dividends or distributions paid out of consolidated earnings or
retained earnings or dividends payable other than in Common Stock) or of
subscription rights and warrants (excluding those referred to above).
No adjustment in the exercise price of, and the number of shares of Common
Stock covered by, a Common Stock Warrant will be made for regular quarterly or
other periodic or recurring cash dividends or distributions or for cash
dividends or distributions to the extent paid from consolidated earnings or
retained earnings. No adjustment will be required unless such adjustment would
require a change of at least 1% in the exercise price then in effect. Except as
stated above, the exercise price of, and the number of shares of Common Stock
covered by, a Common Stock Warrant will not be adjusted for the issuance of
Common Stock or any securities convertible into or exchangeable for Common
Stock, or carrying the right or option to purchase or otherwise acquire the
foregoing, in exchange for cash, other property or services.
In the event of any (i) consolidation or merger of the Company with or
into any entity (other than a consolidation or a merger that does not result in
any reclassification, conversion, exchange or cancellation of outstanding
shares of Common Stock); (ii) sale, transfer, lease or conveyance of all or
substantially all of the assets of the Company; or (iii) reclassification,
capital reorganization or change of the Common Stock (other than solely a
change in par value or from par value to no par value), then any holder of a
Common Stock Warrant will be entitled, on or after the occurrence of any such
event, to receive on exercise of such Common Stock Warrant the kind and amount
of shares of stock or other securities, cash or other property (or any
combination thereof) that the holder would have received had such holder
exercised such holder's Common Stock Warrant immediately prior to the
occurrence of such event. If the consideration to be received upon exercise of
the Common Stock Warrant following any such event consists of common stock of
the surviving entity, then from and after the occurrence of such event, the
exercise price of such Common Stock Warrant will be subject to the same
anti-dilution and other adjustments described in the second preceding
paragraph, applied as if such common stock were Common Stock.
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RESTRICTIONS ON TRANSFER OF CAPITAL STOCK
For the Company to qualify as a REIT under the Internal Revenue Code of
1986, as amended (the "Code"), shares of capital stock must be held by a
minimum of 100 persons for at least 335 days in each taxable year or during a
proportionate part of a shorter taxable year. In addition, at all times during
the second half of each taxable year, no more than 50% in value of the shares
of beneficial interest of the Company may be owned, directly or indirectly, by
applying certain constructive ownership rules, by five or fewer individuals
(the "5/50 Rule"). Because the Board of Directors believes it is essential for
the Company to continue to qualify as a REIT, the Charter restricts the
acquisition of shares of capital stock (the "Ownership Limitation").
The Ownership Limitation provides that, subject to certain exceptions
specified in the Charter, no shareholder may own, or be deemed to own by virtue
of the attribution provisions of the Code, more than 9.8% of the outstanding
shares of Common Stock or more than 9.8% of the outstanding shares of any
series of Preferred Stock. Pursuant to a Strategic Alliance Agreement, dated as
of March 19, 1996 (the "Strategic Alliance Agreement"), among the Company,
Security Capital U.S. Realty and Security Capital Holdings, S.A. (Security
Capital U.S. Realty and Security Capital Holdings, S.A. are collectively
referred to herein as "Security Capital"), the Board of Directors of the
Company proposed, and the shareholders approved, an amendment to the Charter
that provides that Security Capital and its affiliates may beneficially own, in
the aggregate, up to 37.5% of the common stock of the Company (the "Special
Shareholder Limit"). The Ownership Limitation prevents any non-U.S. holder
(other than Security Capital and its affiliates) from acquiring additional
shares of the Company's capital stock if, as a result of such acquisition, the
Company would fail to qualify as a domestically-controlled REIT (computed
assuming that Security Capital owns the maximum percentage of the Company's
capital stock that it is permitted to own under the Special Shareholder Limit).
The Ownership Limitation also provides that if any holder of capital stock
of the Company purports to transfer shares to a person or there is a change in
the capital structure of the Company, and either the purported transfer or the
change in capital structure would result in the Company 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
capital stock being transferred (or in the case of an event other than a
transfer, the capital stock beneficially owned) that would cause one or more of
the restrictions on ownership or transfer to be violated shall be automatically
transferred to a trust for the benefit of a designated charitable beneficiary.
The purported transferee of such shares shall have no right to receive
dividends or other distributions with respect to such shares and shall have no
right to vote such shares. Any dividends or other distributions paid to such
purported transferee prior to the discovery by the Company that the shares have
been transferred to a trust shall be paid upon demand to the trustee of the
trust for the benefit of the charitable beneficiary. The trustee of the trust
will have all rights to dividends with respect to shares of capital 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 the ownership of such shares of
stock by the transferee would not violate the restrictions on ownership or
transfer. 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 capital stock in the purported transfer that resulted in the transfer of
shares of capital stock to the trust, or (ii) if the transfer or other event
that resulted in the transfer of shares of capital stock to the trust was not a
transaction in which the purported record 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.
The Board of Directors may grant an exemption for the Ownership Limitation
to any person so requesting, so long as (A) the Board has determined that such
exemption will not result in the Company being closely held within the meaning
of Section 856(h) of the Code, and (B) such person provides to the Board such
representations and undertakings as the Board may require.
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DESCRIPTION OF DEBT SECURITIES
The following description sets forth certain general terms and provisions
of the Debt Securities to which any Prospectus Supplement may relate. The
particular terms of the Debt Securities being offered and the extent to which
such general provisions may apply will be described in a Prospectus Supplement
relating to such Debt Securities.
The Debt Securities will be issued under an indenture dated as of November
1, 1996, as amended or supplemented from time to time (the "Indenture"),
between the Partnership and The First National Bank of Chicago, as trustee (the
"Trustee"). The Indenture has been incorporated by reference to the
Registration Statement of which this Prospectus is a part and is available for
inspection at the corporate trust services office of the Trustee at One First
National Plaza -- Suite 0126, Chicago, Illinois 60670 or as described above
under "Available Information." The Indenture is subject to, and governed by,
the Trust Indenture Act of 1939, as amended (the "TIA"). The statements made
hereunder relating to the Indenture and the Debt Securities to be issued
thereunder are summaries of certain provisions thereof and do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, all provisions of the Indenture and such Debt Securities. Capitalized terms
used but not defined herein shall have the respective meanings set forth in the
Indenture.
Wherever particular Sections or defined terms of the Indenture are
referred to herein or in a Prospectus Supplement, such Sections or defined
terms are incorporated by reference herein or therein, as the case may be.
General
The Debt Securities will be direct, unsecured obligations of the
Partnership and will rank in pari passu with all other unsecured and
unsubordinated indebtedness of the Partnership. The Debt Securities are
non-convertible and will be effectively subordinated to any secured
indebtedness of the Partnership and any indebtedness of the Partnership's
subsidiaries. At least one nationally-recognized statistical rating
organization will have assigned an investment grade rating to the Debt
Securities at the time of sale. At December 31, 1996, the Partnership and its
subsidiaries had $45.7 million in secured indebtedness outstanding. The
Partnership's subsidiaries had no unsecured indebtedness outstanding at
December 31, 1996. The Debt Securities may be issued without limit as to
aggregate principal amount, in one or more series, in each case as established
from time to time in or pursuant to authority granted by a resolution of the
Board of Directors of the Company as sole general partner of the Partnership or
as established in the Indenture or in one or more indentures supplemental to
the Indenture. All Debt Securities of one series need not be issued at the same
time and, unless otherwise provided, a series may be reopened, without the
consent of the holders of the Debt Securities of such series, for issuances of
additional Debt Securities of such series (Section 301).
The Indenture provides that there may be more than one Trustee thereunder,
each with respect to one or more series of Debt Securities. Any Trustee under
the Indenture may resign or be removed with respect to one or more series of
Debt Securities, and a successor Trustee may be appointed to act with respect
to such series (Section 610). In the event that two or more persons are acting
as Trustee with respect to different series of Debt Securities, each such
trustee shall be a Trustee of a trust under the applicable Indenture separate
and apart from the trust administered by any other Trustee (Section 609), and,
except as otherwise indicated herein, any action described herein to be taken
by a Trustee may be taken by each such Trustee with respect to, and only with
respect to, the one or more series of Debt Securities for which it is Trustee
under the applicable Indenture.
The applicable Prospectus Supplement will set forth the price or prices at
which the Debt Securities to be offered will be issued and will describe the
following terms of such Debt Securities: (i) the title of such Debt Securities;
(ii) any limit on the aggregate principal amount of such Debt Securities or the
series of which they are a part; (iii) the Person to whom any interest on a
Debt Security shall be payable, if other than the Person in whose name the Debt
Security is registered; (iv) the date or dates on which the principal of any of
such Debt Securities will be payable; (v) the rate or rates at which any of
such Debt Securities will bear interest, if any, the date or dates from which
any such interest will accrue, the Interest Payment Dates on which any such
interest will be payable and the Regular Record Date for any such interest
payable on any Interest Payment Date; (vi) the place or places where the
principal of and any premium and interest on any of such Debt Securities will
be payable; (vii) the period or periods within which, the price or prices at
which and the terms and conditions on which any of such Debt Securities may be
redeemed, in whole or in part, at the option of the Partnership; (viii) the
obligation, if any, of the
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Partnership to redeem or purchase any of such Debt Securities pursuant to any
sinking fund or analogous provision or at the option of the Holder thereof, and
the period or periods within which, the price or prices at which, and the terms
and conditions on which, any of such Debt Securities will be redeemed or
purchased, in whole or in part, pursuant to any such obligation; (ix) the
denominations in which any of such Debt Securities will be issuable, if other
than denominations of $1,000 and any integral multiple thereof; (x) if the
amount of principal of or any premium or interest on any of such Debt
Securities may be determined with reference to an index or pursuant to a
formula, the manner in which such amounts will be determined; (xi) if other
than the entire principal amount thereof, the portion of the principal amount
of any of such Debt Securities which will be payable upon declaration of
acceleration of the Maturity thereof; (xii) if the principal amount payable at
the Stated Maturity of any of such Debt Securities will not be determinable as
of any one or more dates prior to the Stated Maturity, the amount which will be
deemed to be such principal amount as of any such date for any purpose,
including the principal amount thereof which will be due and payable upon any
Maturity other than the Stated Maturity or which will be deemed to be
Outstanding as of any such date (or, in any such case, the manner in which such
deemed principal amount is to be determined); (xiii) if applicable, that such
Debt Securities, in whole or any specified part, are defeasible pursuant to the
provisions of the Indenture described under " -- Defeasance and Covenant
Defeasance-Defeasance and Discharge" or " -- Defeasance and Covenant Defeasance
- -- Covenant Defeasance," or under both such captions; (xiv) whether any of such
Debt Securities will be issuable in whole or in part in the form of one or more
Global Debt Securities and, if so, the respective Depositaries for such Global
Debt Securities, the form of any legend or legends to be borne by any such
Global Debt Security in addition to or in lieu of the legend referred to under
" -- Form, Exchange and Transfer -- Global Debt Securities" and, if different
from those described under such caption, any circumstances under which any such
Global Debt Security may be exchanged in whole or in part for Debt Securities
registered, and any transfer of such Global Debt Security in whole or in part
may be registered, in the names of Persons other than the Depositary for such
Global Debt Security or its nominee; (xv) any addition to or change in the
Events of Default applicable to any of such Debt Securities and any change in
the right of the Trustee or the Holders thereof to declare the principal amount
of any of such Debt Securities due and payable; (xvi) any addition to or change
in the covenants in the Indenture described under " -- Certain Covenants"
applicable to any of such Debt Securities; and (xvii) any other terms of such
Debt Securities not inconsistent with the provisions of the Indenture. (Section
301)
Debt Securities, including Original Issue Discount Debt Securities, may be
sold at a substantial discount below their principal amount. Certain special
United States federal income tax considerations (if any) applicable to Debt
Securities sold at an original issue discount may be described in the
applicable Prospectus Supplement.
Except as described under " -- Merger, Consolidation or Sale" or " --
Certain Covenants" or as may be set forth in any Prospectus Supplement, the
Indenture does not contain any provisions that would limit the ability of the
Partnership to incur indebtedness or that would afford holders of the Debt
Securities protection in the event of (i) a highly leveraged or similar
transaction involving the Partnership, the management of the Partnership or any
affiliate of any such party, (ii) a change of control or (iii) a
reorganization, restructuring, merger or similar transaction involving the
Partnership that may adversely affect the holders of the Debt Securities. In
addition, subject to the limitations set forth under " -- Merger, Consolidation
or Sale," the Partnership may, in the future, enter into certain transactions,
such as the sale of all or substantially all of its assets or the merger or
consolidation of the Partnership, that would increase the amount of the
Partnership's indebtedness or substantially reduce or eliminate the
Partnership's assets, which may have an adverse effect on the Partnership's
ability to service its indebtedness, including the Debt Securities. However,
restrictions on ownership and transfers of the Company's Common Stock designed
to preserve its status as a REIT may act to prevent or hinder a change of
control. Reference is made to the applicable Prospectus Supplement for
information with respect to any deletions from, modifications of or additions
to the events of default or covenants that are described below, including any
addition of a covenant or other provision providing event risk or similar
protection.
Denominations, Registration and Transfer
The Debt Securities of each series will be issuable only in fully
registered form, without coupons, and, unless otherwise specified in the
applicable Prospectus Supplement, only in denominations of $1,000 and integral
multiples thereof. (Section 302)
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At the option of the Holder, subject to the terms of the Indenture and the
limitations applicable to Global Debt Securities, Debt Securities of each
series will be exchangeable for other Debt Securities of the same series of any
authorized denomination and of a like tenor and aggregate principal amount.
(Section 305)
Subject to the terms of the Indenture and the limitations applicable to
Global Debt Securities, Debt Securities may be presented for exchange as
provided above or for registration of transfer (duly endorsed or with the form
of transfer endorsed thereon duly executed) at the office of the Security
Registrar or at the office of any transfer agent designated by the Partnership
for such purpose. No service charge will be made for any registration of
transfer or exchange of Debt Securities, but the Partnership may require
payment of a sum sufficient to cover any tax or other governmental charge
payable in connection therewith. Such transfer or exchange will be effected
upon the Security Registrar or such transfer agent, as the case may be, being
satisfied with the documents of title and identity of the person making the
request. The Partnership has appointed the Trustee as Security Registrar. Any
transfer agent (in addition to the Security Registrar) initially designated by
the Partnership for any Debt Securities will be named in the applicable
Prospectus Supplement. (Section 305) The Partnership may at any time designate
additional transfer agents or rescind the designation of any transfer agent or
approve a change in the office through which any transfer agent acts, except
that the Partnership will be required to maintain a transfer agent in each
Place of Payment for the Debt Securities of each series. (Section 1002)
If the Debt Securities of any series (or of any series and specified
terms) are to be redeemed in part, the Partnership will not be required to (i)
issue, register the transfer of or exchange any Debt Security of that series
(or of that series and specified terms, as the case may be) during a period
beginning at the opening of business 15 days before the day of mailing of a
notice of redemption of any such Debt Security that may be selected for
redemption and ending at the close of business on the day of such mailing, (ii)
register the transfer of or exchange any Debt Security so selected for
redemption, in whole or in part, except the unredeemed portion of any such Debt
Security being redeemed in part or (iii) to issue, register the transfer of or
exchange any Debt Security that has been surrendered for payment at the option
of the Holder, except the portion, if any, of such Debt Security not to be so
repaid. (Section 305)
Global Debt Securities
Some or all of the Debt Securities of any series may be represented, in
whole or in part, by one or more Global Debt Securities which will have an
aggregate principal amount equal to that of the Debt Securities represented
thereby. Each Global Debt Security will be registered in the name of a
Depositary or a nominee thereof identified in the applicable Prospectus
Supplement, will be deposited with such Depositary or nominee or a custodian
therefor and will bear a legend regarding the restrictions on exchanges and
registration of transfer thereof referred to below and any such other matters
as may be provided for pursuant to the Indenture. (Section 305)
Notwithstanding any provision of the Indenture or any Debt Security
described herein, no Global Debt Security may be exchanged in whole or in part
for Debt Securities registered, and no transfer of a Global Debt Security in
whole or in part may be registered, in the name of any Person other than the
Depositary for such Global Debt Security or any nominee of such Depositary
unless (i) the Depositary has notified the Partnership that it is unwilling or
unable to continue as Depositary for such Global Debt Security or has ceased to
be qualified to act as such as required by the Indenture, (ii) there shall have
occurred and be continuing an Event of Default with respect to the Debt
Securities represented by such Global Debt Security or (iii) there shall exist
such circumstances, if any, in addition to or in lieu of those described above
as may be described in the applicable Prospectus Supplement (Section 305). All
securities issued in exchange for a Global Debt Security or any portion thereof
will be registered in such names as the Depositary may direct. (Sections 204
and 305)
As long as the Depositary, or its nominee, is the registered Holder of a
Global Debt Security, the Depositary or such nominee, as the case may be, will
be considered the sole owner and Holder of such Global Debt Security and the
Debt Securities represented thereby for all purposes under the Debt Securities
and the Indenture (Section 308). Except in the limited circumstances referred
to above, owners of beneficial interests in a Global Debt Security will not be
entitled to have such Global Debt Security or any Debt Securities represented
thereby registered in their names, will not receive or be entitled to receive
physical delivery of certificated Debt Securities in exchange therefor and will
not be considered to be the owners or Holders of such Global Debt Security or
any Debt Securities represented thereby for any purpose under the Debt
Securities or the Indenture. All payments of principal of and any premium and
interest on a Global Debt Security will be made to the Depositary or its
nominee, as the case may be, as the Holder thereof. The laws of some
jurisdictions require that certain purchasers of
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securities take physical delivery of such securities in definitive form. These
laws may impair the ability to transfer beneficial interests in a Global Debt
Security.
Ownership of beneficial interests in a Global Debt Security will be
limited to institutions that have accounts with the Depositary or its nominee
("participants") and to persons that may hold beneficial interests through
participants. In connection with the issuance of any Global Debt Security, the
Depositary will credit, on its book-entry registration and transfer system, the
respective principal amounts of Debt Securities represented by the Global Debt
Security to the accounts of its participants. Ownership of beneficial interests
in a Global Debt Security will be shown only on, and the transfer of those
ownership interests will be effected only through, records maintained by the
Depositary (with respect to participants' interests) or any such participant
(with respect to interests of persons held by such participants on their
behalf). Payments, transfers, exchanges and others matters relating to
beneficial interests in a Global Debt Security may be subject to various
policies and procedures adopted by the Depositary from time to time. None of
the Partnership, the Trustee or any agent of the Partnership or the Trustee
will have any responsibility or liability for any aspect of the Depositary's or
any participant's records relating to, or for payments made on account of,
beneficial interests in a Global Debt Security, or for maintaining, supervising
or reviewing any records relating to such beneficial interests.
Secondary trading in notes and debentures of corporate issuers is
generally settled in clearing-house or next-day funds. In contrast, beneficial
interests in a Global Debt Security, in some cases, may trade in the
Depositary's same-day funds settlement system, in which secondary market
trading activity in those beneficial interests would be required by the
Depositary to settle in immediately available funds. The Partnership cannot
predict the effect, if any, that settlement in immediately available funds
would have on trading activity in such beneficial interests. Also, settlement
for purchases of beneficial interests in a Global Debt Security upon the
original issuance thereof may be required to be made in immediately available
funds.
Payment and Paying Agents
Unless otherwise indicated in the applicable Prospectus Supplement,
payment of interest on a Debt Security on any Interest Payment Date will be
made to the Person in whose name such Debt Security (or one or more Predecessor
Debt Securities) is registered at the close of business on the Regular Record
Date for such interest. (Section 307)
Unless otherwise indicated in the applicable Prospectus Supplement,
principal of and any premium and interest on the Debt Securities of a
particular series will be payable at the office of such Paying Agent or Paying
Agents as the Partnership may designate for such purpose from time to time,
except that at the option of the Partnership payment of any interest may be
made by check mailed to the address of the Person entitled thereto as such
address appears in the Security Register. Unless otherwise indicated in the
applicable Prospectus Supplement, the corporate trust office of the Trustee in
the City of New York will be designated as the Partnership's sole Paying Agent
for payments with respect to Debt Securities of each series. Any other Paying
Agents initially designated by the Partnership for the Debt Securities of a
particular series will be named in the applicable Prospectus Supplement. The
Partnership may at any time designate additional Paying Agents or rescind the
designation of any Paying Agent or approve a change in the office through which
any Paying Agent acts, except that the Partnership will be required to maintain
a Paying Agent in each Place of Payment for the Debt Securities of a particular
series. (Section 1002)
All moneys paid by the Partnership to a Paying Agent for the payment of
the principal of, or any premium or interest on, any Debt Security that remain
unclaimed at the end of two years after such principal, premium or interest has
become due and payable will be repaid to the Partnership, and the Holder of
such Debt Security thereafter may look only to the Partnership for payment
thereof. (Section 1003)
Any interest not punctually paid or duly provided for on any Interest
Payment Date with respect to a Debt Security ("Defaulted Interest") will
forthwith cease to be payable to the holder on the applicable regular record
date and may either be paid to the person in whose name such Debt Security is
registered at the close of business on a special record date (the "Special
Record Date") for the payment of such Defaulted Interest to be fixed by the
Trustee, notice whereof shall be given to the holder of such Debt Security not
less than 10 days prior to such Special Record Date, or may be paid at any time
in any other lawful manner, all as more completely described in the applicable
supplement (Section 307).
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Merger, Consolidation or Sale
The Partnership may not consolidate with or merge into, or convey,
transfer or lease its properties and assets substantially as an entirety to,
any Person (a "successor Person"), and may not permit any Person to merge into,
or convey, transfer or lease its properties and assets substantially as an
entirety to, the Partnership, unless (i) the successor Person (if any) is a
corporation, partnership or trust organized and validly existing under the laws
of any domestic jurisdiction and assumes, by a supplemental indenture, the
Partnership's obligations on the Debt Securities and under the Indenture, (ii)
immediately after giving effect to the transaction, and treating any
indebtedness which becomes an obligation of the Partnership or any Subsidiary
as a result of the transaction as having been incurred by it at the time of the
transaction, no Event of Default, and no event which, after notice or lapse of
time or both, would become an Event of Default, shall have occurred and be
continuing and (iii) certain other conditions are met. (Section 801)
Certain Covenants
Existence. Except as permitted under " -- Merger, Consolidation or Sale,"
the Partnership will be required to do or cause to be done all things necessary
to preserve and keep in full force and effect its existence, rights and
franchises; provided, however, that the Partnership shall not be required to
preserve any right or franchise if it determines that the preservation thereof
is no longer desirable in the conduct of its business and that the loss thereof
is not disadvantageous in any material respect to the holders of the Debt
Securities (Section 1005).
Maintenance of Properties. The Partnership will be required to cause all
properties used or useful in the conduct of its business or the business of any
subsidiary to be maintained and kept in good condition, repair and working
order and supplied with all necessary equipment and to cause to be made all
necessary repairs, renewals, replacements, betterments and improvements
thereof, all as in the judgment of the Partnership may be necessary so that the
business carried on in connection therewith may be properly and advantageously
conducted at all times; provided, however, that the Partnership shall not be
prevented from discontinuing the operation or maintenance of any of its
properties if such discontinuance is, in the judgment of the Partnership,
desirable in the conduct of its business or the business of any Subsidiary and
not disadvantageous in any material respect to the Holders. (Section 1006).
Insurance. The Partnership will be required to, and to cause each of its
subsidiaries to, keep all of its insurable properties insured against loss or
damage with insurers of recognized responsibility in commercially reasonable
amounts and types (Section 1008).
Payment of Taxes and Other Claims. The Partnership will be required to pay
or discharge or cause to be paid or discharged, before the same shall become
delinquent, (i) all taxes, assessments and governmental charges levied or
imposed upon the Partnership or any subsidiary or upon the income, profits or
property of the Partnership or any subsidiary, and (ii) all lawful claims for
labor, materials and supplies which, if unpaid, might by law become a lien upon
the property of the Partnership or any subsidiary; provided, however, that the
Partnership shall not be required to pay or discharge or cause to be paid or
discharged any such tax, assessment, charge or claim whose amount,
applicability or validity is being contested in good faith by appropriate
proceedings. (Section 1007).
Provision of Financial Information. Whether or not the Partnership is
subject to Section 13 or Section 15(d) of the Exchange Act and for so long as
any Debt Securities are outstanding, the Partnership will, to the extent
permitted under the Exchange Act, file with the Commission the annual reports,
quarterly reports and other documents which the Partnership would have been
required to file with the Commission pursuant to such Section 13 or Section
15(d) (the "Financial Statements") if the Partnership were so subject, such
documents to be filed with the Commission on or prior to the respective dates
(the "Required Filing Dates") by which the Partnership would have been required
so to file such documents if the Partnership were so subject. The Partnership
will also in any event (x) within 15 days of each Required Filing Date (i)
transmit by mail to all holders of Debt Securities whose names appear in the
security register for such Debt Securities (the "Holders"), as their names and
addresses appear in the security register for such Debt Securities, without
cost to such Holders, copies of the annual reports and quarterly reports which
the Partnership would have been required to file with the Commission pursuant
to Section 13 or Section 15(d) of the Exchange Act if the Partnership were
subject to such Sections and (ii) file with any Trustee copies of the annual
reports, quarterly reports and other documents which the Partnership would have
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been required to file with the Commission pursuant to Section 13 or Section
15(d) of the Exchange Act if the Partnership were subject to such Sections and
(y) if filing such documents by the Partnership with the Commission is not
permitted under the Exchange Act, promptly upon written request and payment of
the reasonable cost of duplication and delivery, supply copies of such
documents to any prospective Holder. (Section 1010).
Limitations on Incurrence of Indebtedness. The Partnership will not, and
will not permit any Subsidiary to, incur any Indebtedness (as defined below),
other than inter-company debt representing Indebtedness to which the only
parties are the Company, the Partnership and any of their Subsidiaries (but
only so long as such Indebtedness is held solely by any of the Company, the
Partnership and any Subsidiary) that is subordinate in right of payment to
Outstanding Debt Securities if, immediately after giving effect to the
incurrence of such additional Indebtedness, the aggregate principal amount of
all outstanding Indebtedness of the Partnership and its Subsidiaries on a
consolidated basis is greater than 60% of the sum of (i) Total Assets (as
defined below) as of the end of the calendar quarter covered in the
Partnership's Annual Report on Form 10-K or Quarterly Report on Form 10-Q, as
the case may be, most recently filed with the Trustee (or such reports of the
Company if filed by the Partnership with the Trustee in lieu of filing its own
reports) prior to the incurrence of such additional Indebtedness and (ii) the
increase in Total Assets from the end of such quarter including, without
limitation, any increase in Total Assets resulting from the incurrence of such
additional Indebtedness (such increase, together with the Total Assets, is
referred to as "Adjusted Total Assets"). (Section 1009)
In addition to the foregoing limitation on the incurrence of Indebtedness,
the Partnership will not, and will not permit any Subsidiary to, incur any
Indebtedness if the ratio of Consolidated Income Available for Debt Service to
the Annual Service Charge (in each case as defined below) for the four
consecutive fiscal quarters most recently ended prior to the date on which such
additional Indebtedness is to be incurred shall have been less than 1.5 to 1,
on a pro forma basis, after giving effect to the incurrence of such
Indebtedness and to the application of the proceeds therefrom and calculated on
the assumption that (i) such Indebtedness and any other Indebtedness incurred
by the Partnership or its Subsidiaries since the first day of such four-quarter
period and the application of the proceeds therefrom, including to refinance
other Indebtedness, had occurred at the beginning of such period, (ii) the
repayment or retirement of any other Indebtedness by the Partnership or its
Subsidiaries since the first day of such four-quarter period and had been
incurred, repaid or retired at the beginning of such period (except that, in
making such computation, the amount of Indebtedness under any revolving credit
facility shall be computed based upon the average daily balance of such
Indebtedness during such period), (iii) the income earned on any increase in
Adjusted Total Assets since the end of such four-quarter period had been earned
on an annualized basis, during such period, and (iv) in the case of any
acquisition or disposition by the Partnership or any Subsidiary of any asset or
group of assets since the first day of such four-quarter period, including,
without limitation, by merger, stock purchase or sale, or asset purchase or
sale, such acquisition or disposition or any related repayment Indebtedness had
occurred as of the first day of such period with appropriate adjustments with
respect to such acquisition or disposition being included in such pro forma
calculation. (Section 1009) Further the Partnership will not, and will not
permit any Subsidiary to, incur any Secured Indebtedness of the Partnership or
any Subsidiary if, immediately after giving effect to the incurrence of such
additional Secured Indebtedness, the aggregate principal amount of all
outstanding Secured Indebtedness of the Partnership and its Subsidiaries on a
consolidated basis would be greater than 40% of Adjusted Total Assets. As used
herein, "Secured Indebtedness" means indebtedness secured by any mortgage,
trust, deed, deed of trust, deed to secure debt, security agreement, pledge,
conditional sale or other title retention agreement, capitalized lease, or
other like agreement granting or conveying security title to or a security
interest in real property or other tangible assets.
For purposes of the foregoing provisions regarding the limitation on the
incurrence of Indebtedness, Indebtedness shall be deemed to be "incurred" by
the Partnership or a Subsidiary whenever the Partnership and its Subsidiary
shall create, assume, guarantee or otherwise become liable in respect thereof.
(Section 1009)
Maintenance of Total Unencumbered Assets. For so long as there are
Outstanding any Debt Securities (other than Debt Securities that are not, by
their terms, entitled to the benefit of this covenant), the Partnership is
required to maintain Total Unencumbered Assets of not less than 150% of the
aggregate outstanding principal amount of all outstanding Unsecured
Indebtedness. (Section 1009)
As used herein:
"Annual Service Charge" as of any date means the maximum amount which is
payable in any 12-month period from such date for interest and required
amortization (including amounts payable to sinking funds or
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similar arrangements for the retirement of debt which matures serially, but
excluding principal payable at final maturity of such debt) on Indebtedness
of the Partnership and its Subsidiaries.
"Consolidated Income Available For Debt Service" for any period means
Consolidated Net Income plus amounts which have been deducted for (i)
interest on Indebtedness of the Partnership and its Subsidiaries, (ii)
provision for taxes of the Partnership and its Subsidiaries based on
income, (iii) amortization of Indebtedness discount, (iv) provisions for
gains and losses on properties, (v) depreciation and amortization, (vi) the
effect of any noncash charge resulting from a change in accounting
principles in determining Consolidated Net Income for such period, (vii)
amortization of deferred charges and (viii) the effect of net income (or
loss) of joint ventures in which the Partnership or any Subsidiary owns an
interest to the extent not providing a source of, or requiring a use of,
cash, respectively.
"Consolidated Net Income" for any period means the amount of consolidated
net income (or loss) of the Partnership and its Subsidiaries for such
period determined on a consolidated basis in accordance with generally
accepted accounting principles.
"Indebtedness" of the Partnership or any Subsidiary means any
indebtedness of the Partnership or such Subsidiary, as applicable, whether
or not contingent, in respect of (i) borrowed money evidenced by bonds,
notes, debentures or similar instruments, (ii) indebtedness secured by a
mortgage, pledge, lien, charge, encumbrance of any security interest
existing on property owned by the Partnership or such Subsidiary, (iii) the
reimbursement obligations, contingent or otherwise, in connection with any
letters of credit actually issued or amounts representing the balance that
constitutes an accrued expense or trade payable or (iv) any lease of
property by the Partnership or such Subsidiary as lessee which is reflected
in the Partnership's consolidated balance sheet as a capitalized lease in
accordance with generally accepted accounting principles, in the case of
items of indebtedness under (i) through (iii) above to the extent that any
such items (other than letters of credit) would appear as a liability on
the Partnership's consolidated balance sheet in accordance with generally
accepted accounting principles, and also includes, to the extent not
otherwise included, any obligation by the Partnership or such Subsidiary to
be liable for, or to pay, as obligor, guarantor or otherwise (other than
for purposes of collection in the ordinary course of business),
indebtedness of another person (other than the Partnership or any
Subsidiary).
"Subsidiary" means a corporation, partnership or limited liability
company more than 50% of the outstanding voting stock, partnership
interests or membership interests, as the case may be, of which is owned or
controlled, directly or indirectly, by the Partnership or by one or more
other Subsidiaries, or by the Partnership and one or more other
Subsidiaries. For the purposes of this definition, voting stock means stock
which ordinarily has voting power for the election of directors, whether at
all times or only so long as no senior class of stock has such voting power
by reason of any contingency.
"Total Assets" as of any date means the sum of (i) Undepreciated Real
Estate Assets and (ii) all other assets of the Partnership and its
Subsidiaries on a consolidated basis determined in accordance with
generally accepted accounting principles (but excluding intangibles and
accounts receivable).
"Total Unencumbered Assets" means the sum of (i) those Undepreciated Real
Estate Assets which have not been pledged, mortgaged or otherwise
encumbered by the owner thereof to secure Indebtedness, excluding
infrastructure assessment bonds and (ii) all other assets of the
Partnership and its Subsidiaries determined in accordance with generally
accepted accounting principles (but excluding intangibles and accounts
receivable) which have not been pledged, mortgaged or otherwise encumbered
by the owner thereof to secure Indebtedness.
"Undepreciated Real Estate Assets" as of any date means the cost
(original cost plus capital improvements) of real estate assets of the
Partnership and its Subsidiaries on such date, before depreciation and
amortization, determined on a consolidated basis in accordance with
generally accepted accounting principles.
"Unsecured Indebtedness" means Indebtedness which is (i) not subordinated
to any other Indebtedness and (ii) not secured by any mortgage, lien,
charge, pledge, encumbrance or security interest of any kind upon any of
the properties of the Partnership or any Subsidiary.
Additional Covenants. Any additional or different covenants of the
Partnership with respect to any series of Debt Securities will be set forth in
the applicable Prospectus Supplement.
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Events of Default
Each of the following will constitute an Event of Default under the
Indenture with respect to Debt Securities of any series: (i) failure to pay any
interest on any Debt Securities of that series when due, that has continued for
30 days; (ii) failure to pay principal of or any premium on any Debt Security
of that series when due; (iii) failure to deposit any sinking fund payment,
when due, in respect of any Debt Security of that series; (iv) failure to
perform any other covenant of the Partnership in the Indenture (other than a
covenant included in the Indenture solely for the benefit of a series other
than that series), that has continued for 60 days after written notice has been
given by the Trustee, or the Holders of at least 25% in aggregate principal
amount of the Outstanding Debt Securities of that series, as provided in the
Indenture; (v) failure to pay when due (subject to any applicable grace period)
the principal of, or acceleration of, any indebtedness for money borrowed by
the Partnership, if, in the case of any such failure, such indebtedness has not
been discharged or, in the case of any such acceleration, such indebtedness has
not been discharged or such acceleration has not been rescinded or annulled, in
each case within 10 days after written notice has been given by the Trustee, or
the Holders of at least 25% in aggregate principal amount of the Outstanding
Debt Securities of that series, as provided in the Indenture, if the aggregate
outstanding principal amount of indebtedness under the instrument with respect
to which such default or acceleration has occurred exceeds $10 million; (vi)
certain events of bankruptcy, insolvency or reorganization of the Partnership
or any Significant Subsidiary or any of their respective property; and (vii)
any other event of default provided with respect to a particular series of Debt
Securities. (Section 501)
If an Event of Default (other than an Event of Default described in clause
(vi) above) with respect to the Debt Securities of any series at the time
Outstanding shall occur and be continuing, either the Trustee or the Holders of
at least 25% in aggregate principal amount of the Outstanding Debt Securities
of that series by notice as provided in the Indenture may declare the principal
amount of the Debt Securities of that series (or, in the case of any Debt
Security that is an Original Issue Discount Debt Security or the principal
amount of which is not then determinable, such portion of the principal amount
of such Debt Security, or such other amount in lieu of such principal amount,
as may be specified in the terms of such Debt Security) to be due and payable
immediately. If an Event of Default described in clause (vi) above with respect
to the Debt Securities of any series at the time Outstanding shall occur, the
principal amount of all the Debt Securities of that series (or, in the case of
any such Original Issue Discount Debt Security or other Debt Security, such
specified amount) will automatically, and without any action by the Trustee or
any Holder, become immediately due and payable. After any such acceleration,
but before a judgment or decree based on acceleration, the Holders of a
majority in aggregate principal amount of the Outstanding Debt Securities of
that series may, under certain circumstances, rescind and annul such
acceleration if all Events of Default, other than the non-payment of
accelerated principal (or other specified amount), have been cured or waived as
provided in the Indenture. (Section 502) For information as to waiver of
defaults, see " -- Modification and Waiver."
Subject to the provisions of the Indenture relating to the duties of the
Trustee in case an Event of Default shall occur and be continuing, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any of the Holders, unless such
Holders shall have offered to the Trustee reasonable indemnity. (Section 603)
Subject to such provisions for the indemnification of the Trustee, the Holders
of a majority in aggregate principal amount of the Outstanding Debt Securities
of any series will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred on the Trustee with respect to the Debt Securities
of that series. (Section 512)
No Holder of a Debt Security of any series will have any right to
institute any proceeding with respect to the Indenture, or for the appointment
of a receiver or a trustee, or for any other remedy thereunder, unless (i) such
Holder has previously given to the Trustee written notice of a continuing Event
of Default with respect to the Debt Securities of that series, (ii) the Holders
of at least 25% in aggregate principal amount of the Outstanding Debt
Securities of that series have made written request, and such Holder or Holders
have offered reasonable indemnity, to the Trustee to institute such proceeding
as trustee and (iii) the Trustee has failed to institute such proceeding, and
has not received from the Holders of a majority in aggregate principal amount
of the Outstanding Debt Securities of that series a direction inconsistent with
such request, within 60 days after such notice, request and offer. (Section
507) However, such limitations do not apply to a suit instituted by a Holder of
a Debt Security for the enforcement of payment of the principal of or any
premium or interest on such Debt Security on or after the applicable due date
specified in such Debt Security. (Section 508)
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Within 120 days after the close of each fiscal year, the Partnership will
be required to furnish to the Trustee a statement by certain of the Company's
officers as to whether the Partnership, to their knowledge, is in default in
the performance or observance of any of the terms, provisions and conditions of
the Indenture and, if so, specifying all such known defaults. (Section 1004)
Modification and Waiver
Modifications and amendments of the Indenture may be made by the
Partnership and the Trustee with the consent of the Holders of a majority in
principal amount of the Outstanding Debt Securities of each series affected by
such modification or amendment; provided, however, that no such modification or
amendment may, without the consent of the Holder of each Outstanding Debt
Security affected thereby, (i) change the Stated Maturity of the principal of,
or any installment of principal of or interest on, any Debt Security, (ii)
reduce the principal amount of, or any premium or interest on, any Debt
Security, (iii) reduce the amount of principal of an Original Issue Discount
Debt Security or any other Debt Security payable upon acceleration of the
Maturity thereof, (iv) change the place or currency of payment of principal of,
or any premium or interest on, any Debt Security, (v) impair the right to
institute suit for the enforcement of any payment on or with respect to any
Debt Security, (vi) reduce the percentage in principal amount of Outstanding
Debt Securities of any series, the consent of whose Holders is required for
modification or amendment of the Indenture, (vii) reduce the percentage in
principal amount of Outstanding Debt Securities of any series necessary for
waiver of compliance with certain provisions of the Indenture or for waiver of
certain defaults or (viii) modify such provisions with respect to modification
and waiver. (Section 902)
The Holders of a majority in principal amount of the Outstanding Debt
Securities of any series may waive compliance by the Partnership with certain
restrictive provisions of the Indenture. (Section 1011) The Holders of a
majority in principal amount of the Outstanding Debt Securities of any series
may waive any past default under the Indenture, except a default in the payment
of principal, premium or interest and certain covenants and provisions of the
Indenture that cannot be amended without the consent of the Holder of each
Outstanding Debt Security of such series affected. (Section 513)
The Indenture provides that in determining whether the Holders of the
requisite principal amount of the Outstanding Debt Securities have given or
taken any direction, notice, consent, waiver or other action under the
Indenture as of any date (i) the principal amount of an Original Issue Discount
Debt Security that will be deemed to be Outstanding will be the amount of the
principal thereof that would be due and payable as of such date upon
acceleration of the Maturity thereof to such date and (ii) if, as of such date,
the principal amount payable at the Stated Maturity of a Debt Security is not
determinable (for example, because it is based on an index), the principal
amount of such Debt Security deemed to be Outstanding as of such date will be
an amount determined in the manner prescribed for such Debt Security. Certain
Debt Securities, including those for whose payment or redemption money has been
deposited or set aside in trust for the Holders and those that have been fully
defeased pursuant to Section 1302, will not be deemed to be Outstanding.
(Section 101)
Except in certain limited circumstances, the Partnership will be entitled
to set any day as a record date for the purpose of determining the Holders of
Outstanding Debt Securities of any series entitled to give or take any
direction, notice, consent, waiver or other action under the Indenture, in the
manner and subject to the limitations provided in the Indenture. In certain
limited circumstances, the Trustee will be entitled to set a record date for
action by Holders. If a record date is set for any action to be taken by
Holders of a particular series, such action may be taken only by persons who
are Holders of Outstanding Debt Securities of that series on the record date.
To be effective, such action must be taken by Holders of the requisite
principal amount of such Debt Securities within a specified period following
the record date. For any particular record date, this period will be 180 days
or such shorter period as may be specified by the Partnership (or the Trustee,
if it set the record date), and may be shortened or lengthened (but not beyond
180 days) from time to time. (Section 104)
Modifications and amendments of the Indenture may be made by the
Partnership and the Trustee without the consent of any holders of Debt
Securities for any of the following purposes: (i) to evidence the succession of
another person to the Partnership and the assumption by such successor of the
covenants of the Partnership in the Indenture and the Debt Securities; (ii) to
add to the covenants of the Partnership for the benefit of the holders of all
or any series of Debt Securities or to surrender any right or power conferred
upon the Partnership in the Indenture; (iii) to add events of default for the
benefit of the holders of all or any series of Debt Securities; (iv) to add to
or change any provisions of the Indenture as necessary to permit or facilitate
the issuance of Debt Securities in uncertificated form; (v) to add to, change
or eliminate any of the provisions of the Indenture with respect
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to one or more series of Debt Securities, so long as the changes (A) do not (1)
apply to any Debt Securities of any series created prior to such modification
or amendment and entitled to the benefit of such provision or (2) modify the
rights of the holder of any such Debt Security with respect to such provision,
or (B) will only become effective when there is no such Debt Security
Outstanding; (vi) to secure the Debt Securities; (vii) to establish the form or
terms of Debt Securities of any series as permitted in the Indenture; or (viii)
to provide for the acceptance of appointment by a successor Trustee. (Section
901)
Defeasance and Covenant Defeasance
If and to the extent indicated in the applicable Prospectus Supplement,
the Partnership may elect, at its option at any time, to have the provisions of
Section 1302 of the Indenture, relating to defeasance and discharge of
indebtedness, or Section 1303, relating to defeasance of certain restrictive
covenants in the Indenture, applied to the Debt Securities of any series, or to
any specified part of a series. (Section 1301)
Defeasance and Discharge. The Indenture provides that, upon the
Partnership's exercise of its option (if any) to have Section 1302 applied to
any Debt Securities, the Partnership will be discharged from all its
obligations with respect to such Debt Securities (except for certain
obligations to exchange or register the transfer of Debt Securities, to replace
stolen, lost or mutilated Debt Securities, to maintain paying agencies and to
hold moneys for payment in trust) upon the deposit in trust for the benefit of
the Holders of such Debt Securities of money or U.S. Government Obligations, or
both, which, through the payment of principal and interest in respect thereof
in accordance with their terms, will provide money in an amount sufficient to
pay the principal of and any premium and interest on such Debt Securities on
the respective Stated Maturities in accordance with the terms of the Indenture
and such Debt Securities. Such defeasance or discharge may occur only if, among
other things, the Partnership has delivered to the Trustee an Opinion of
Counsel to the effect that the Partnership has received from, or there has been
published by, the United States Internal Revenue Service a ruling, or there has
been a change in tax law, in either case to the effect that Holders of such
Debt Securities will not recognize gain or loss for federal income tax purposes
as a result of such deposit, defeasance and discharge and will be subject to
federal income tax on the same amount, in the same manner and at the same times
as would have been the case if such deposit, defeasance and discharge were not
to occur. (Sections 1302 and 1304)
Defeasance of Certain Covenants. The Indenture provides that, upon the
Partnership's exercise of its option (if any) to have Section 1303 applied to
any Debt Securities, the Partnership may omit to comply with certain
restrictive covenants, including those described under "Certain Covenants," in
the last sentence under "Merger, Consolidation or Sale" and any that may be
described in the applicable Prospectus Supplement, and the occurrence of
certain Events of Default, which are described above in clause (iv) (with
respect to such restrictive covenants) and clauses (v) and (vii) under "Events
of Default" and any that may be described in the applicable Prospectus
Supplement, will be deemed not to be or result in an Event of Default, in each
case with respect to such Debt Securities. The Partnership, in order to
exercise such option, will be required to deposit, in trust for the benefit of
the Holders of such Debt Securities, money or U.S. Government Obligations, or
both, which, through the payment of principal and interest in respect thereof
in accordance with their terms, will provide money in an amount sufficient to
pay the principal of and any premium and interest on such Debt Securities on
the respective Stated Maturities in accordance with the terms of the Indenture
and such Debt Securities. The Partnership will also be required, among other
things, to deliver to the Trustee an Opinion of Counsel to the effect that
Holders of such Debt Securities will not recognize gain or loss for federal
income tax purposes as a result of such deposit and defeasance of certain
obligations and will be subject to federal income tax on the same amount, in
the same manner and at the same times as would have been the case if such
deposit and defeasance were not to occur. In the event the Partnership
exercised this option with respect to any Debt Securities and such Debt
Securities were declared due and payable because of the occurrence of any Event
of Default, the amount of money and U.S. Government Obligations so deposited in
trust would be sufficient to pay amounts due on such Debt Securities at the
time of their respective Stated Maturities but may not be sufficient to pay
amounts due on such Debt Securities upon any acceleration resulting from such
Event of Default. In such case, the Partnership would remain liable for such
payments. (Sections 1303 and 1304) "U.S. Government Obligations" means
securities which are (i)direct obligations of the United States of America for
the payment of which its full faith and credit is pledged or (ii)obligations of
a person controlled or supervised by and acting as a agency or instrumentality
of the United States of America, the payment of which is unconditionally
guaranteed as a full faith and credit obligation by the United States of
America, which, in either case, are not callable or redeemable at the option of
the issuer thereof, and shall also
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include a depository receipt issued by a bank or trust company as custodian
with respect to any such U.S. Government Obligation or a specific payment of
interest on or principal of any such U.S. Government Obligation held by such
custodian of the account of the holder of a depository receipt, provided that
(except as required by law) such custodian is not authorized to make any
deduction from the amount payable to the holder of such depository receipt from
any amount received by the custodian in respect of the U.S. Government
Obligation or the specific payment of interest on or principal of the U.S.
Government Obligation evidenced by such depository receipt. (Section 1304)
Notices
Notices to Holders of Debt Securities will be given by mail to the
addresses of such Holders as they may appear in the Security Register.
(Sections 101 and 106)
Title
The Partnership, the Trustee and any agent of the Partnership or the
Trustee may treat the Person in whose name a Debt Security is registered as the
absolute owner thereof (whether or not such Debt Security may be overdue) for
the purpose of making payment and for all other purposes. (Section 308)
No Conversion Rights
The Debt Securities will not be convertible into or exchangeable for any
capital stock of the Company or equity interest in the Partnership.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax considerations that
may be relevant to a prospective holder of the Offered Securities is based on
current law, is for general information only, and is not tax advice. The
discussion contained herein does not purport to deal with all aspects of
taxation that may be relevant to particular investors in light of their
personal investment or tax circumstances, or to certain types of investors
(including insurance companies, tax exempt organizations, financial
institutions or broker-dealers, foreign corporations and persons who are not
citizens or residents of the United States) subject to special treatment under
the federal income tax laws.
The statements in this discussion are based on current provisions of the
Code, existing, temporary and currently proposed Treasury regulations
promulgated under the Code (the "Treasury Regulations"), the legislative
history of the Code, existing administrative rulings and practices of the
Internal Revenue Service (the "Service"), and judicial decisions. No assurance
can be given that future legislative, judicial or administrative actions or
decisions, which may be retroactive in effect, will not affect the accuracy of
any statements in this Prospectus with respect to the transactions entered into
or contemplated prior to the effective date of such changes.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP AND
SALE OF THE OFFERED SECURITIES AND OF THE COMPANY'S ELECTION TO BE TAXED AS A
REIT, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES
OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION, AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
Taxation of the Company
The Company made an election to be taxed as a REIT under sections 856
through 860 of the Code, effective for its taxable year ended December 31,
1994. The Company believes that, commencing with such taxable year, it has been
organized and has operated in such a manner as to qualify for taxation as a
REIT under the Code, and the Company intends to continue to operate in such a
manner, but no assurance can be given that the Company will operate in a manner
so as to qualify or remain qualified as a REIT.
The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following discussion sets forth the
material aspects of the Code sections that govern the federal income tax
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treatment of a REIT. The discussion is qualified in its entirety by the
applicable Code provisions, Treasury Regulations and administrative and
judicial interpretations thereof, all of which are subject to change
prospectively or retrospectively.
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income tax on its net income that is distributed
currently to its shareholders. That treatment substantially eliminates the
"double taxation" (i.e., taxation at both the corporate and shareholder levels)
that generally results from an investment in a corporation. However, the
Company will be subject to federal income tax in the following circumstances.
First, the Company will be taxed at regular corporate rates on any
undistributed REIT taxable income, including undistributed net capital gains.
Second, under certain circumstances, the Company may be subject to the
"alternative minimum tax" on its undistributed items of tax preference. Third,
if the Company has (i) net income from the sale or other disposition of
"foreclosure property" that is held primarily for sale to customers in the
ordinary course of business or (ii) other nonqualifying income from foreclosure
property, it will be subject to tax at the highest corporate rate on such
income. Fourth, if the Company has net income from prohibited transactions
(which are, in general, certain sales or other dispositions of property (other
than foreclosure property) held primarily for sale to customers in the ordinary
course of business), such income will be subject to a 100% tax. Fifth, if the
Company should fail to satisfy the 75% gross income test or the 95% gross
income test (as discussed below), and has nonetheless maintained its
qualification as a REIT because certain other requirements have been met, it
will be subject to a 100% tax on the net income attributable to the greater of
the amounts by which the Company fails the 75% and 95% gross income tests.
Sixth, if the Company should fail to distribute during each calendar year at
least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of
its REIT capital gain net income for such year and (iii)any undistributed
taxable income from prior periods, the Company would be subject to a 4% excise
tax on the excess of such required distribution over the amounts actually
distributed. Seventh, if the Company acquires any asset from a C corporation
(i.e., a corporation generally subject to full corporate-level tax) in a
transaction in which the basis of the asset in the Company's hands is
determined by reference to the basis of the asset (or any other asset) in the
hands of the C corporation and the Company recognizes gain on the disposition
of such asset during the 10-year period beginning on the date on which such
asset was acquired by the Company, then to the extent of such asset's "built-in
gain" (i.e., the excess of the fair market value of such asset at the time of
acquisition by the Company over the adjusted basis in such asset at such time),
the Company will be subject to tax at the highest regular corporate rate
applicable (as provided in Treasury Regulations that have not yet been
promulgated). The results described above with respect to the recognition of
"built-in gain" assume that the Company would make an election pursuant to IRS
Notice 88-19 if it were to make any such acquisition.
Requirements for Qualification
The Code defines a REIT as a corporation, trust or association (i) that is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation, but
for sections 856 through 860 of the Code; (iv) that is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(v) the beneficial ownership of which is held by 100 or more persons; (vi) not
more than 50% in value of the outstanding stock of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of each taxable year (the "5/50 Rule");
(vii) that makes an election to be a REIT (or has made such election for a
previous taxable year) and satisfies all relevant filing and other
administrative requirements established by the Service that must be met in
order to elect and to maintain REIT status; (viii) that uses a calendar year
for federal income tax purposes and complies with the recordkeeping
requirements of the Code and Treasury Regulations; and (ix) that meets certain
other tests, described below, regarding the nature of its income and assets.
The Code provides that conditions (i) to (iv), inclusive, must be met during
the entire taxable year and that condition (v) must be met during at least 335
days of a taxable year of 12 months, or during a proportionate part of a
taxable year of less than 12 months. Conditions (v) and (vi) will not apply
until after the first taxable year for which an election is made by the Company
to be taxed as a REIT. The Company believes that it has issued sufficient
shares of Common Stock with sufficient diversity of ownership to allow it to
satisfy requirements (v) and (vi). In addition, the Company's Charter provides
for restrictions regarding transfer of the Common Stock that are intended to
assist the Company in continuing to satisfy the stock ownership requirements
described in (v) and (vi) above. Such transfer restrictions are described above
under "Restrictions on Transfer of Capital Stock."
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For purposes of determining stock ownership under the 5/50 Rule, a
supplemental unemployment compensation benefits plan, a private foundation or a
portion of a trust permanently set aside or used exclusively for charitable
purposes generally is considered an individual. A trust that is a qualified
trust under Code section 401(a), however, generally is not considered an
individual and the beneficiaries of such trust are treated as holding shares of
a REIT in proportion to their actuarial interests in the trust for purposes of
the 5/50 Rule.
The Company currently has one direct corporate subsidiary, Storage USA
Trust, a Maryland real estate investment trust (the "Trust"), and may have
additional corporate subsidiaries in the future. Code section 856 (i) provides
that a corporation that is a "qualified REIT subsidiary" is not treated as a
separate corporation, and all assets, liabilities, and items of income,
deduction, and credit of a qualified REIT subsidiary are treated as assets,
liabilities and items of income, deduction and credit of the REIT. A "qualified
REIT subsidiary" is a corporation, all of the capital stock of which has been
held by the REIT at all times during the period such corporation has been in
existence. Thus, in applying the requirements described herein, any qualified
REIT subsidiaries of the Company are ignored, and all assets, liabilities and
items of income, deduction and credit of such subsidiaries are treated as
assets, liabilities, and items of income, deduction, and credit of the Company.
The Trust is a qualified REIT subsidiary. The Trust, therefore, is not subject
to federal corporate income taxation, although it may be subject to state and
local taxation.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT is deemed to own its proportionate share of
the assets of the partnership and is deemed to be entitled to the gross income
of the partnership attributable to such share. In addition, the assets and
gross income of the partnership will retain the same character in the hands of
the REIT for purposes of section 856 of the Code, including satisfying the
gross income and asset tests described below. Thus, the Company's proportionate
share of the assets, liabilities and items of income of the Partnership and the
subsidiary partnerships of the Partnership (each, a "Subsidiary Partnership"),
are treated as assets and gross income of the Company for purposes of applying
the requirements described herein.
Income Tests
In order for the Company to maintain its qualification as a REIT, there
are three requirements relating to the Company's gross income that must be
satisfied annually. First, at least 75% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year
must consist of defined types of income derived directly or indirectly from
investments relating to real property or mortgages on real property (including
"rents from real property" and, in certain circumstances, interest) or
temporary investment income. Second, at least 95% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year
must be derived from such real property or temporary investments, and from
dividends, other types of interest and gain from the sale or disposition of
stock or securities, or from any combination of the foregoing. Third, not more
that 30% of the Company's gross income (including gross income from prohibited
transactions) for each taxable year may be gain from the sale or other
disposition of (i) stock or securities held for less than one year, (ii) dealer
property that is not foreclosure property and (iii) certain real property held
for less than four years (apart from involuntary conversions and sales of
foreclosure property).
Rents received by the Company will qualify as "rents from real property"
in satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "rents from
real property" solely by reason of being based on a fixed percentage or
percentages of receipts or sales. Second, the Code provides that rents received
from a tenant will not qualify as "rents from real property" in satisfying the
gross income tests if the Company, or an owner of 10% or more of the Company,
directly or constructively owns 10% or more of such tenant (a "Related Party
Tenant"). 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". Finally, for rents
received to qualify as "rents from real property," the Company generally must
not operate or manage the property or furnish or render services to the tenants
of such property, other than through an "independent contractor" who is
adequately compensated and from whom the Company derives no revenue. The
"independent contractor" requirement, however, does not apply to the extent the
services provided by the Company are customarily furnished or rendered in
connection with the rental of real property for occupancy only and are not
otherwise considered "rendered to the occupant."
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The Company, through the Partnership, derives the bulk of its revenues
from rent from storage unit leases, additional first month rent and late
charges attributable to such rents (collectively, the "Primary Revenues"). The
Company derives additional revenues from ancillary services such as moving
truck rental commissions, packing and shipping commissions, rent from leasing
space utilized for sales of locks and packing supplies to SUSA Management,
Inc., a Tennessee corporation ("Management"), 5% of whose voting stock and 94%
of whose nonvoting stock (which together constitute 99% of the beneficial
economic interest therein) are owned by the Partnership, rent from vehicle and
boat storage leases (including additional first month rent and late charges
attributable thereto), and similar items (collectively, the "Ancillary
Revenues"). The Company also receives dividends from Management, Storage USA
Franchise Corp., a Tennessee corporation ("Franchise"), and Storage USA
Construction, Inc., a Tennessee corporation ("Construction"). The Partnership
owns 100% of the nonvoting stock of each of Franchise and, through Franchise,
Construction, representing 97.5% of the beneficial economic interest of each of
Franchise and Construction. The Company believes that, other than the late
charges attributable to rent, which are treated as interest that qualifies for
the 95% gross income test, but not the 75% gross income test, the Primary
Revenues qualify as rents from real property and that dividends from
Management, Franchise and Construction ("the Nonqualified Subsidiaries")
qualify as dividends for purposes of the 95% test. Furthermore, the Company
believes that the Ancillary Revenues and other types of potentially
nonqualifying gross income earned by the Company in each taxable year are equal
to, and will continue to be equal to, less than 5% of the Company's total gross
income and, thus, that such items of income do not adversely affect the
Company's qualification as a REIT.
The Company does not receive any rent that is based on the income or
profits of any person. In addition, other than with respect to its leasing
arrangement with Management with respect to the sale of lock and packing
supplies (the revenue from which the Company treats as nonqualifying income for
purposes of the 75% and 95% tests), the Company does not own, directly or
indirectly, 10% or more of any tenant or receive any rent based on the income
or profits of any tenant. Furthermore, the Company believes that any personal
property leased in connection with its storage facilities is well within the
15% restriction. However, in order for the Primary Revenues to constitute
"rents from real property," the Company must not provide services to its
tenants that are not customarily furnished or rendered in connection with the
rental of the self-storage units, other than through an independent contractor.
The Company, through the Partnership and the Subsidiary Partnerships
(each, a "Partnership") (which are not independent contractors), provides
certain services with respect to the facilities. Such services include (i)
common area services, such as cleaning and maintaining public entrances, exits,
stairways, walkways, lobbies and rest rooms, removing snow and debris,
collecting trash and painting the exteriors of the facilities and common areas,
(ii) providing general security for the facilities, (iii) cleaning and
repairing of units at the facilities as tenants move in and out, (iv) at the
request of the tenant, and without additional charge, accepting delivery of
goods from carriers or unlocking a particular unit when goods are delivered to
a facility (however, the Partnerships do not otherwise assist tenants in the
storage or removal of goods or belongings from the units), (v) permitting
tenants to use the facsimile machine at a facility for sending occasional local
facsimiles without additional charge and for sending occasional long-distance
facsimiles for a nominal charge, (vi) maintaining underground utilities and
structural elements of the facilities, (vii) paying real and personal property
taxes or the cost of replacing or refurbishing personal property with respect
to real and personal property owned by a Partnership at a facility, (viii) for
a fee, acting as an agent for moving truck rental companies for tenants of
certain facilities and walk-in customers, (ix) for a fee, providing packing and
shipping services to tenants of certain facilities and walk-in customers and
(x) at a few facilities, allowing tenants to use trucks owned by the Company or
a Partnership to move their goods and belongings into and out of the units
without additional charge. The Company believes that the services provided by
the Partnerships are customarily furnished or rendered in connection with the
rental of space for occupancy only by self-storage facilities in the geographic
areas in which its facilities are located.
The Company's investment, through the Partnerships, in the facilities in
major part gives rise to rental income that is qualifying income for purposes
of the 75% and 95% gross income tests. Gains on sales of the facilities (other
than from prohibited transactions, as described below) or of the Company's
interests in the Partnerships generally will be qualifying income for purposes
of the 75% and 95% gross income tests. The Company anticipates that income on
its other investments, including its indirect investments in the Nonqualified
Subsidiaries, will not result in the Company failing the 75% or 95% gross
income test for any year.
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends in
whole or in part on the income or profits of any person. However, an
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amount received or accrued generally will not be excluded from the term
interest solely by reason of being based on a fixed percentage or percentages
of receipts or sales.
Any gross income derived from a prohibited transaction is taken into
account in applying the 30% income test necessary to qualify as a REIT (and the
net income from that transaction is subject to a 100% tax). The term
"prohibited transaction" generally includes a sale or other disposition of
property (other than foreclosure property) that is held primarily for sale to
customers in the ordinary course of a trade or business. The Company believes
that no asset owned by the Company or a Partnership is held for sale to
customers and that a sale of any such asset will not be in the ordinary course
of business of the Company or a Partnership. Whether property is held
"primarily for sale to customers in the ordinary course of a trade or business"
depends, however, on the facts and circumstances in effect from time to time,
including those related to a particular property. Nevertheless, the Company and
the Partnerships have complied, and will continue to comply, with the terms of
safe-harbor provisions in the Code prescribing when asset sales will not be
characterized as prohibited transactions. Complete assurance cannot be given,
however, that the Company or the Partnerships can comply with the safe-harbor
provisions of the Code or avoid owning property that may be characterized as
property held "primarily for sale to customers in the ordinary course of a
trade or business."
It is possible that, from time to time, the Company or a Partnership will
enter into hedging transactions with respect to one or more of its assets or
liabilities. Any such hedging transactions could take a variety of forms,
including interest rate swap contracts, interest rate cap or floor contracts,
futures or forward contracts, and options. To the extent that the Company or a
Partnership enters into an interest rate swap or cap contract to hedge any
variable rate indebtedness incurred to acquire or carry real estate assets, any
periodic income or gain from the disposition of such contract should be
qualifying income for purposes of the 95% gross income test, but not the 75%
gross income test. Furthermore, any such contract would be considered a
"security" for purposes of applying the 30% gross income test. To the extent
that the Company or a Partnership hedges with other types of financial
instruments or in other situations, it may not be entirely clear how the income
from those transactions will be treated for purposes of the various income
tests that apply to REITs under the Code. The Company intends to structure any
hedging transactions in a manner that does not jeopardize its status as a REIT.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. Those relief
provisions generally will be available if (i)the Company's failure to meet such
tests is due to reasonable cause and not due to willful neglect, (ii) the
Company attaches a schedule of the sources of its income to its return and
(iii) any incorrect information on the schedule was not due to fraud with
intent to evade tax. It is not possible, however, to state whether in all
circumstances the Company would be entitled to the benefit of those relief
provisions. As discussed above in Federal Income Tax Considerations-Taxation of
the Company, even if those relief provisions apply, a 100% tax would be imposed
with respect to the net income attributable to the greater of the amounts by
which the Company fails the 75% and 95% income tests. No such relief is
available for violations of the 30% income test.
Asset Tests
The Company, at the close of each quarter of each taxable year, also must
satisfy two tests relating to the nature of its assets. First, at least 75% of
the value of the Company's total assets must be represented by cash or cash
items (including certain receivables), government securities, or "real estate
assets," including, in cases where the Company raises new capital through stock
or long-term (at least five-year) debt offerings, stock or debt instruments
attributable to the temporary investment of such new capital during the
one-year period following the Company's receipt of such capital. The term "real
estate assets" also includes real property (including interests in real
property and interests in mortgages on real property) and shares of other
REITs. For purposes of the 75% asset test, the term "interest in real property"
includes an interest of land or improvements thereon, such as buildings or
other inherently permanent structures (including items that are structural
components of such buildings or structures), a leasehold of land or
improvements thereon, and an option to acquire land or improvements thereon (or
a leasehold of land or improvements thereon). Second, of the investments not
included in the 75% asset class, the value of any one issuer's securities owned
by the Company (other than its ownership interest in the Partnerships, the
Trust and any other qualified REIT subsidiary) may not exceed 5% of the value
of the Company's total assets, and the Company may not own more than 10% of any
one issuer's outstanding voting securities (except for its ownership interest
in the Partnerships, the Trust and any other qualified REIT subsidiary).
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The Partnership owns 5% of the voting stock and 94% of the nonvoting stock
of Management (which together constitute 99% of the beneficial economic
interest therein). In addition, the Partnership owns 100% of the nonvoting
stock of each of Franchise and, through Franchise, Construction, which
represents 97.5% of the beneficial economic interest in each of Franchise and
Construction. By virtue of its partnership interest in the Partnership, the
Company is deemed to own its pro rata share of the assets of the Partnership,
including the stock of the Nonqualified Subsidiaries held by the Partnership.
The Partnership does not own more than 10% of the voting securities of any
Nonqualified Subsidiary. In addition, based upon its analysis of the estimated
value of the stock of each Nonqualified Subsidiary owned by the Partnership
relative to the estimated value of the other assets owned by the Company, the
Company believes that its pro rata share of the stock of each Nonqualified
Subsidiary owned by the Partnership does not exceed 5% of the total value of
the Company's assets. No independent appraisals have been obtained to support
this conclusion. This 5% limitation must be satisfied at the end of each
quarter in which the Company or the Partnership increases its interest in a
Nonqualified Subsidiary (including as a result of the Company increasing its
interest in the Partnership in connection with a stock offering or as limited
partners of the Partnership exercise their rights to redeem their limited
partnership interests). Although the Company plans to take steps to ensure that
it satisfies the 5% asset test for any quarter with respect to which retesting
is to occur, there can be no assurance that such steps will always be
successful or will not require a reduction in the Partnership's overall
interest in a Nonqualified Subsidiary. The Company does not expect to own
securities of any other issuer in excess of the restrictions set forth above.
If the Company should fail to satisfy the asset tests at the end of a
calendar quarter, such a failure would not cause it to lose its REIT status if
(i) it satisfied all of the asset tests at the close of the preceding calendar
quarter and (ii) the discrepancy between the value of the Company's assets and
the asset test requirements arose from changes in the market values of its
assets and was not wholly or partly caused by an acquisition of one or more
nonqualifying assets. If the condition described in clause (ii) of the
preceding sentence were not satisfied, the Company still could avoid
disqualification by eliminating any discrepancy within 30 days after the close
of the quarter in which it arose.
Distribution Requirements
The Company, in order to avoid corporate income taxation of the earnings
that it distributes, is required to distribute dividends (other than capital
gain dividends) to its shareholders in an amount at least equal to (i) the sum
of (A) 95% of its "REIT taxable income" (computed without regard to the
dividends paid deduction and its net capital gain) and (B) 95% of the net
income (after tax), if any, from foreclosure property, minus (ii) the sum of
certain items of noncash income. Such distributions must be paid in the taxable
year to which they relate, or in the following taxable year if declared before
the Company timely files its tax return for such year and if paid on or before
the first regular dividend payment date after such declaration. To the extent
that the Company does not distribute all of its net capital gain or distributes
at least 95%, but less than 100%, of its REIT taxable income, as adjusted, it
will be subject to tax thereon at regular ordinary and capital gains corporate
tax rates. Furthermore, if the Company should fail to distribute during each
calendar year at least the sum of (i) 85% of its REIT ordinary income for such
year, (ii) 95% of its REIT capital gain income for such year and (iii) any
undistributed taxable income from prior periods, the Company would be subject
to a 4% nondeductible excise tax on the excess of such required distribution
over the amounts actually distributed. The Company has made, and will continue
to make, timely distributions sufficient to satisfy the annual distribution
requirement.
It is possible that, from time to time, the Company may experience timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of that income and deduction of such
expenses in arriving at its REIT taxable income. Further, it is possible that,
from time to time, the Company may be allocated a share of net capital gain
attributable to the sale of depreciated property that exceeds its allocable
share of cash attributable to that sale. Therefore, the Company may have less
cash available for distribution than is necessary to meet its annual 95%
distribution requirement or to avoid corporate income tax or the excise tax
imposed on certain undistributed income. In such a situation, the Company may
find it necessary to arrange for short-term (or possibly long-term) borrowings
or to raise funds through the issuance of additional Offered Securities.
Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirement for a year by paying "deficiency
dividends" to its shareholders in a later year, which may be included in the
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Company's deduction for dividends paid for the earlier year. Although the
Company may be able to avoid being taxed on amounts distributed as deficiency
dividends, it will be required to pay to the Service interest based upon the
amount of any deduction taken for deficiency dividends.
Recordkeeping Requirement
Pursuant to applicable Treasury Regulations, in order to be taxed as a
REIT, the Company must maintain certain records and request on an annual basis
certain information from its shareholders designed to disclose the actual
ownership of its outstanding stock. The Company has complied, and will continue
to comply, with such requirements.
Partnership Anti-Abuse Rule
A final regulation (the "Anti-Abuse Rule") under the partnership
provisions of the Code (the "Partnership Provisions") authorizes the Service,
in certain abusive transactions involving partnerships, to disregard the form
of the transaction and recast it for federal tax purposes as the Service deems
appropriate. The Anti-Abuse Rule applies where a partnership is formed or
utilized in connection with a transaction (or series of related transactions)
with a principal purpose of substantially reducing the present value of the
partners' aggregate federal tax liability in a manner inconsistent with the
intent of the Partnership Provisions. The Anti-Abuse Rule states that the
Partnership Provisions are intended to permit taxpayers to conduct joint
business (including investment) activities through a flexible arrangement that
accurately reflects the partners' economic agreement and clearly reflects the
partners' income without incurring any entity-level tax. The purposes for
structuring a transaction involving a partnership are determined based on all
of the facts and circumstances, including a comparison of the purported
business purpose for a transaction and the claimed tax benefits resulting from
the transaction. A reduction in the present value of the partners' aggregate
federal tax liability through the use of a partnership does not, by itself,
establish inconsistency with the intent of the Partnership Provisions.
The Anti-Abuse Rule contains an example in which a corporation that elects
to be taxed as a REIT contributes substantially all of the proceeds from a
public offering to a partnership in exchange for a general partnership
interest. The limited partners of the partnership contribute real property
assets to the partnership, subject to liabilities that exceed their respective
aggregate bases in such property. In addition, some of the limited partners
have the right, beginning two years after the formation of the partnership, to
require the redemption of their limited partnership interests in exchange for
cash or REIT stock (at the REIT's option) equal to the fair market value of
their respective interests in the partnership at the time of the redemption.
The example concludes that the use of the partnership is not inconsistent with
the intent of the Partnership Provisions and, thus, cannot be recast by the
Service. However, because the Anti-Abuse Rule is extraordinarily broad in scope
and is applied based on an analysis of all of the facts and circumstances,
there can be no assurance that the Service will not attempt to apply the
Anti-Abuse Rule to the Company. If the conditions of the Anti-Abuse Rule are
met, the Service is authorized to take appropriate enforcement action,
including disregarding a Partnership for federal tax purposes or treating one
or more of the partners as nonpartners. Any such action could jeopardize the
Company's status as a REIT.
Failure to Qualify
If the Company fails to qualify for taxation as a REIT in any taxable year
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to the shareholders in any year in which
the Company fails to qualify will not be deductible by the Company nor will
they be required to be made. In such event, to the extent of current and
accumulated earnings and profits, all distributions to shareholders will be
taxable as ordinary income and, subject to certain limitations of the Code,
corporate distributees may be eligible for the dividends received deduction.
Unless entitled to relief under specific statutory provisions, the Company also
will be disqualified from taxation as a REIT for the four taxable years
following the year during which the Company ceased to qualify as a REIT. It is
not possible to state whether in all circumstances the Company would be
entitled to such statutory relief.
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Other Tax Consequences
State and Local Taxes
The Company, the Trust, the Partnerships or the investors in the Company
may be subject to state or local taxation in various state or local
jurisdictions, including those in which it or they own property, transact
business or reside. Such state and local tax treatment may not conform to the
federal income tax consequences discussed above. In addition, the Company, the
Trust or the Partnerships may be subject to certain state and local taxes
imposed on owners of property, such as ad valorem property taxes, transfer
taxes and rent taxes. CONSEQUENTLY, PROSPECTIVE INVESTORS SHOULD CONSULT THEIR
OWN TAX ADVISORS REGARDING THE EFFECT OF STATE AND LOCAL TAX LAWS ON AN
INVESTMENT IN THE COMPANY.
Tax Aspects of the Company's Investments in the Partnerships
The following discussion summarizes certain federal income tax
considerations applicable to the Company's direct or indirect investments in
the Partnership. The discussion does not cover state or local tax laws or any
federal tax laws other than income tax laws.
Classification as Partnerships
The Company is entitled to include in its income its distributive share of
each Partnership's income and to deduct its distributive share of each
Partnership's losses only if the Partnerships are classified for federal income
tax purposes as partnerships rather than as corporations or associations
taxable as corporations. An entity will be classified as a partnership rather
than as a corporation for federal income tax purposes if the entity (i) is
treated as a partnership under Treasury regulations, effective January 1, 1997,
relating to entity classification (the "Check-the-Box Regulations") and (ii) is
not a "publicly traded" partnership. Pursuant to the Check-the-Box Regulations,
an unincorporated entity with at least two members may elect to be classified
either as an association or as a partnership. If such an entity fails to make
an election, it generally will be treated as a partnership for federal income
tax purposes. The federal income tax classification of an entity that was in
existence prior to January 1, 1997, such as the Partnerships, will be respected
for all periods prior to January 1, 1997, if (i) the entity had a reasonable
basis for its claimed classification, (ii) the entity and all members of the
entity recognized the federal tax consequences of any changes in the entity's
classification within the 60 months prior to January1, 1997, and (iii) neither
the entity nor any member of the entity was notified in writing on or before
May 8, 1996, that the classification of the entity was under examination. The
Company believes that each Partnership will be treated as a partnership under
the Check-the-Box Regulations.
A publicly traded partnership is a partnership whose interests are traded
on an established securities market or are readily tradable on a secondary
market (or the substantial equivalent thereof). A publicly traded partnership
will not, however, be treated as a corporation for any taxable year if 90% or
more of the partnership's gross income for such year consists of certain
passive-type income, including (as may be relevant here) real property rents,
gains from the sale or other disposition of real property, interest and
dividends (the "90% Passive Income Exception").
The U.S. Department of the Treasury has issued regulations effective for
taxable years beginning after December 31, 1995 (the "PTP Regulations"), that
provide limited safe harbors from the definition of a publicly traded
partnership. Pursuant to one of those safe harbors (the "Private Placement
Exclusion"), interests in a partnership will not be treated as readily tradable
on a secondary market or the substantial equivalent thereof if (i) all
interests in the partnership were issued in a transaction (or transactions)
that was not required to be registered under the Securities Act and (ii) the
partnership does not have more than 100 partners at any time during the
partnership's taxable year. In determining the number of partners in a
partnership, a person owning an interest in a flow-through entity (i.e., a
partnership, grantor trust or S corporation) that owns an interest in the
partnership is treated as a partner in such partnership only if (i)
substantially all of the value of the owner's interest in the flow-through
entity is attributable to the flow-through entity's interest (direct or
indirect) in the partnership and (ii) a principal purpose of the use of the
flow-through entity is to permit the partnership to satisfy the 100- partner
limitation. Each Partnership qualifies for the Private Placement Exclusion.
If a Partnership is considered a publicly traded partnership under the PTP
Regulations because it is deemed to have more than 100 partners, such
Partnership should not be treated as a corporation because it should be
eligible for the 90% Passive Income Exception. If, however, for any reason a
Partnership were taxable as a corporation, rather than as a partnership, for
federal income tax purposes, the Company would not be able to qualify
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as a REIT. See "Federal Income Tax Considerations -- Requirements for
Qualification -- Income Tests" and " -- Requirements for Qualification -- Asset
Tests." In addition, any change in a Partnership's status for tax purposes
might be treated as a taxable event, in which case the Company might incur tax
liability without any related cash distribution. See "Federal Income Tax
Considerations -- Requirements for Qualification -- Distribution
Requirements." Further, items of income and deduction of such Partnership would
not pass through to its partners, and its partners would be treated as
stockholders for tax purposes. Consequently, such Partnership would be required
to pay income tax at corporate tax rates on its net income, and distributions
to its partners would constitute dividends that would not be deductible in
computing such Partnership's taxable income.
Income Taxation of the Partnerships and their Partners
Partners, Not the Partnerships, Subject to Tax. A partnership is not a
taxable entity for federal income tax purposes. Rather, the Company is required
to take into account its allocable share of each Partnership's income, gains,
losses, deductions and credits for any taxable year of such Partnership ending
within or with the taxable year of the Company, without regard to whether the
Company has received or will receive any distribution from such Partnership.
Partnership Allocations. Although a partnership agreement generally will
determine the allocation of income and losses among partners, such allocations
will be disregarded for tax purposes under section 704(b) of the Code if they
do not comply with the provisions of section 704(b) of the Code and the
Treasury Regulations promulgated thereunder. If an allocation is not recognized
for federal income tax purposes, the item subject to the allocation will be
reallocated in accordance with the partners' interests in the partnership,
which will be determined by taking into account all of the facts and
circumstances relating to the economic arrangement of the partners with respect
to such item. Each Partnership's allocations of taxable income, gain and loss
are intended to comply with the requirements of section 704(b) of the Code and
the Treasury Regulations promulgated thereunder.
Tax Allocations With Respect to Contributed Properties. Pursuant to
section 704(c) of the Code, income, gain, loss and deduction attributable to
appreciated or depreciated property that is contributed to a partnership in
exchange for an interest in the partnership must be allocated in a manner such
that the contributing partner is charged with, or benefits from, respectively,
the unrealized gain or unrealized loss associated with the property at the time
of the contribution. The amount of such unrealized gain or unrealized loss is
generally equal to the difference between the fair market value of the
contributed property at the time of contribution, and the adjusted tax basis of
such property at the time of contribution (a "Book-Tax Difference"). The
Treasury Department recently issued regulations requiring partnerships to use a
"reasonable method" for allocating items affected by section 704(c) of the Code
and outlining several reasonable allocation methods.
Under the partnership agreements governing the Partnerships, depreciation
or amortization deductions of the Partnership generally are allocated among the
partners in accordance with their respective interests in the Partnership,
except to the extent that Code section 704(c) requires otherwise. In addition,
gain on the sale of a contributed property will be specially allocated to the
contributing partner (including the Company) to the extent of any "built-in"
gain with respect to such property for federal income tax purposes. The
application of section 704(c) to the Partnerships is not entirely clear,
however, and may be affected by Treasury Regulations promulgated in the future.
Basis in Partnership Interest. The Company's adjusted tax basis in its
partnership interest in a Partnership generally is equal to (i) the amount of
cash and the basis of any other property contributed to the Partnership by the
Company, (ii) increased by (A) its allocable share of the Partnership's income
and (B) its allocable share of indebtedness of the Partnership and (iii)
reduced, but not below zero, by (A) the Company's allocable share of the
Partnership's loss and (B) the amount of cash distributed to the Company, and
by constructive distributions resulting from a reduction in the Company's share
of indebtedness of the Partnership.
If the allocation of the Company's distributive share of a Partnership's
loss would reduce the adjusted tax basis of the Company's partnership interest
in the Partnership below zero, the recognition of such loss will be deferred
until such time as the recognition of such loss would not reduce the Company's
adjusted tax basis below zero. To the extent that the Partnership's
distributions, or any decrease in the Company's share of the indebtedness of
the Partnership (such decrease being considered a constructive cash
distribution to the partners), would reduce the Company's adjusted tax basis
below zero, such distributions (including such constructive distributions)
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constitute taxable income to the Company. Such distributions and constructive
distributions normally will be characterized as capital gain, and, if the
Company's partnership interest in the Partnership has been held for longer than
the long-term capital gain holding period (currently one year), the
distributions and constructive distributions will constitute long-term capital
gain.
Depreciation Deductions Available to the Partnerships. The Partnerships
have acquired equity interests in certain facilities, and expect to acquire
additional facilities in the future, for cash. To that extent, a Partnership's
initial basis in such a facility for federal income tax purpose generally
equals the purchase price paid by the Partnership. The Partnerships depreciate
such depreciable property for federal income tax purposes under the alternative
depreciation system of depreciation ("ADS"). Under ADS, the Partnerships
generally depreciate furnishings and equipment over a 10-year recovery period
using a straight-line method and a half-year convention. If, however, a
Partnership places more than 40% of its furnishings and equipment in service
during the last three months of a taxable year, a mid-quarter depreciation
convention must be used for the furnishings and equipment placed in service
during that year. Under ADS, the Partnerships generally depreciate buildings
and improvements over a 40-year recovery period using a straight-line method
and a mid-month convention. However, to the extent that a Partnership has
acquired or will acquire equity interests in facilities in exchange for
partnership interests in the Partnership, the Partnership's initial basis in
each such facility for federal income tax purposes should be the same as the
transferor's basis in that facility on the date of acquisition. The
Partnerships depreciate such depreciable property for federal income tax
purposes under ADS. Although the law is not entirely clear, the Partnerships
depreciate such depreciable property for federal income tax purposes over the
same remaining useful lives and under the same methods used by the transferors.
A Partnership's tax depreciation deductions will be allocated among the
partners in accordance with their respective interests in the Partnership
(except to the extent that the Partnership is required under Code section
704(c) to use a method of allocating depreciation deductions attributable to
the contributed properties that results in the Company receiving a
disproportionate share of such deductions).
Sale of a Partnership's Property
Generally, any gain realized by a Partnership on the sale of property held
by the Partnership for more than one year will be long-term capital gain,
except for any portion of such gain that is treated as depreciation or cost
recovery recapture. Any gain recognized by a Partnership on the disposition of
contributed properties will be allocated first to the partners of the
Partnership under section 704(c) of the Code to the extent of their "built-in
gain" on those properties for federal income tax purposes. The partners'
"built-in gain" on the contributed properties sold will equal the excess of the
partners' proportionate share of the book value of those properties over the
partners' tax basis allocable to those properties at the time of the sale. Any
remaining gain recognized by the Partnership on the disposition of the
contributed properties, and any gain recognized by the Partnership or the
disposition of the other properties, will be allocated among the partners in
accordance with their respective percentage interests in the Partnership.
The Company's share of any gain realized by a Partnership on the sale of
any property held by the Partnership as inventory or other property held
primarily for sale to customers in the ordinary course of the Partnership's
trade or business will be treated as income from a prohibited transaction that
is subject to a 100% penalty tax. Such prohibited transaction income also may
have an adverse effect upon the Company's ability to satisfy the income tests
for REIT status. See "Federal Income Tax Considerations -- Requirements for
Qualification -- Income Tests." The Company, however, does not presently intend
to allow any Partnership to acquire or hold any property that represents
inventory or other property held primarily for sale to customers in the ordinary
course of the Company's or such Partnership's trade or business.
Nonqualified Subsidiaries
The Partnership owns 94% of the nonvoting stock, and 5% of the voting
stock, of Management, representing in the aggregate a 99% economic interest
therein. In addition, the Partnership owns 100% of the nonvoting stock of
Franchise, representing a 97.5% economic interest therein. By virtue of its
ownership of the Partnership, the Company is considered to own its pro rata
share of the stock of the Nonqualified Subsidiaries held by the Partnership.
As noted above, for the Company to qualify as a REIT the Company's
proportionate share of the value of the securities of each Nonqualified
Subsidiary held by the Partnership may not exceed 5% of the total value of the
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Company's assets. In addition, the Company's proportionate share of each
Nonqualified Subsidiary's equity securities may not constitute more than 10% of
the voting securities of such Nonqualified Subsidiary. The Partnership owns 5%
of the voting securities of Management, but does not own any of the voting
securities of Franchise. In addition, the Company believes that its
proportionate share of the value of the securities of each Nonqualified
Subsidiary owned by the Partnership does not exceed 5% of the total value of
the Company's assets. If the Service were to challenge successfully those
determinations, however, the Company likely would fail to qualify as a REIT.
Each Nonqualified Subsidiary will be organized as a corporation and will
pay federal, state and local income taxes on its taxable income at normal
corporate rates. Any such taxes will reduce amounts available for distribution
by such Nonqualified Subsidiary, which in turn will reduce amounts available
for distribution to the Company's stockholders.
PLAN OF DISTRIBUTION
The Company and the Partnership may sell Offered Securities to or through
underwriters and also may sell Offered Securities directly to other purchasers
or through agents.
The distribution of the Offered Securities may be effected from time to
time in one or more transactions at a fixed price or prices, which may be
changed, or at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices.
In connection with the sale of Offered Securities, underwriters may
receive compensation from the Company, the Partnership or from purchasers of
Offered Securities for whom they may act as agents in the form of discounts,
concessions or commissions. Underwriters may sell Offered Securities to or
through dealers, and such dealers may receive compensation in the form of
discounts, concessions or commissions from the underwriters and/or commissions
from the purchasers for whom they may act as agents. Underwriters, dealers and
agents that participate in the distribution of Offered Securities may be deemed
to be underwriters, and any discounts or commissions received by them from the
Company or the Partnership and any profit on the resale of Offered Securities
by them may be deemed to be underwriting discounts and commissions, under the
Securities Act. Any such underwriter or agent will be identified, and any such
compensation received from the Company or the Partnership will be described, in
the Prospectus Supplement.
Under agreements which may be entered into by the Company or the
Partnership, underwriters and agents who participate in the distribution of
Debt Securities may be entitled to indemnification by the Company or the
Partnership against certain liabilities, including liabilities under the
Securities Act.
Certain of the underwriters and their affiliates may be customers of,
engage in transactions with and perform services for the Company and the
Partnership in the ordinary course of business.
If so indicated in the applicable Prospectus Supplement, the Company or
the Partnership will authorize dealers acting as the Company's or the
Partnership's agents to solicit offers by certain institutions to purchase
Offered Securities from the Company or the Partnership at the public offering
price set forth in such Prospectus Supplement pursuant to Delayed Delivery
Contracts (the "Contracts") providing for payment and delivery on the date or
dates stated in such Prospectus Supplement. Each Contract will be for an amount
not less than, and the principal amount of Offered Securities sold pursuant to
Contracts shall not be less nor more than, the respective amounts stated in
such Prospectus Supplement. Institutions with which Contracts, when authorized,
may be made include commercial and savings banks, insurance companies, pension
funds, investment companies, educational and charitable institutions and other
institutions, but will in all cases be subject to the approval of the Company
or the Partnership. Contracts will not be subject to any conditions except (i)
the purchase by an institution of the Offered Securities covered by its
Contract shall not at the time of delivery be prohibited under the laws of any
jurisdiction in the United States to which such institution is subject and (ii)
the Company or the Partnership shall have sold to such underwriters the total
principal amount of the Offered Securities less the principal amount thereof
covered by Contracts. A commission indicated in the Prospectus Supplement will
be paid to agents and underwriters soliciting purchases of Offered Securities
pursuant to Contracts accepted by the Company or the Partnership. Agents and
underwriters shall have no responsibility in respect of the delivery or
performance of Contracts.
Pursuant to the Strategic Alliance Agreement, so long as Security Capital
owns at least 15% of the outstanding Common Stock, Security Capital will be
entitled (except in certain limited circumstances), upon compliance
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with certain specified conditions, to a participation right to purchase or
subscribe for, either as part of such issuance or a concurrent issuance, a
total number of shares of Common Stock or Preferred Stock or of Warrants or
Depositary Shares, as the case may be, equal to up to 37.5% (depending on
Security Capital's ownership percentage at the time of the offering) of the
total number of shares of Commmon Stock or Preferred Stock or of Warrants or
Depositary Shares, as applicable, proposed to be issued by the Company. All
purchases pursuant to such participation rights will be at the same price and
on the same terms and conditions as are applicable to the other purchasers
thereof.
VALIDITY OF OFFERED SECURITIES
The validity of the Offered Securities will be passed upon for the Company
and the Partnership by Hunton & Williams, Richmond, Virginia.
EXPERTS
The consolidated financial statements of the Company incorporated by
reference in its annual report on Form10-K for the year ended December 31,
1995, and the historical summaries of combined gross revenue and direct
operating expenses included in the Company's Current Reports on Form 8-K, dated
April 5, 1996, Form 8-K/A, dated July 17, 1996, Form 8-K/A, dated September 16,
1996, Form 8-K, dated October 24, 1996, Form 8-K/A, dated October 31, 1996, and
Form 8-K/A dated February 18, 1997, have been audited by Coopers & Lybrand
L.L.P., independent accountants, as set forth in their reports thereon included
therein and incorporated herein by reference. Such financial statements and
summaries are incorporated herein by reference in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of the Partnership for the year
ended December 31, 1995, appearing on pages F29-F49 of the Partnership's
Registration Statement on Form S-3 (File No. 333-3344), and the historical
summaries of combined gross revenue and direct operating expenses included in
the Partnerships's Current Reports on Form 8-K/A, dated September 16, 1996,
Form 8-K, dated October 24, 1996, Form 8-K/A, dated October 31, 1996, and Form
8-K/A dated February 18, 1997, have been audited by Coopers & Lybrand L.L.P.,
independent accountants, as set forth in their reports thereon included therein
and incorporated herein by reference. Such financial statements and summaries
are incorporated herein by reference in reliance upon such reports given upon
the authority of such firm as experts in accounting and auditing.
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No person has been authorized to give any information or or to make any
representations other than those contained in this Prospectus Supplement or the
Prospectus, and, if given or made, such information or representations must not
be relied upon as having been authorized. This Prospectus Supplement and the
Prospectus do not constitute an offer to sell or the solicitation of an offer
to buy any securities other than the securities to which it relates or an offer
to sell or the solicitation of an offer to buy such securities in any
circumstances in which such offer or solicitation is unlawful. Neither the
delivery of this Prospectus Supplement or the Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that there has
been no change in the affairs of the Partnership since the date hereof or that
the information contained herein is correct as of any time subsequent to its
date.
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TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
<CAPTION>
Page
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<S> <C>
Prospectus Supplement Summary .................. S-3
The Partnership ................................. S-10
Management .................................... S-15
Recent Developments ........................... S-15
Use of Proceeds ................................. S-16
Ratio of Earnings to Fixed Charges ............ S-16
Capitalization ................................. S-17
Summary Financial and Operating Data ............ S-17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations .................................... S-20
SUSA Partnership, L.P. Pro Forma
Financial Information ........................ S-24
Description of Securities ..................... S-30
Underwriting .................................... S-34
Validity of Securities ........................ S-35
Prospectus
Available Information ........................... 2
Incorporation of Certain Documents by
Reference .................................... 2
The Company and the Partnership ............... 3
Use of Proceeds ................................. 3
Ratios of Earnings to Fixed Charges ............ 3
Description of Capital Stock .................. 4
Description of Depositary Shares ............... 6
Description of Warrants ........................ 8
Restrictions on Transfer of Capital Stock ...... 10
Description of Debt Securities .................. 11
Federal Income Tax Considerations ............... 21
Plan of Distribution ........................... 31
Validity of Offered Securities .................. 32
Experts ....................................... 32
</TABLE>
$200,000,000
SUSA Partnership, L.P.
$100,000,000
% Notes
due December 1,
$100,000,000
% Debentures
due December 1,
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Goldman, Sachs & Co.
First Chicago Capital Markets, Inc.
Morgan Stanley Dean Witter
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