<PAGE>
FILED PURSUANT TO FILED RULE 424(b)(5)
REGISTRATION NO. 33-54755
Prospectus Supplement
(To Prospectus dated August 12, 1994)
5,250,000 SHARES
[LOGO OF PUBLIC STORAGE]
STORAGE EQUITIES, INC.
COMMON STOCK
-----------
Of the 5,250,000 shares of Common Stock being offered, 4,550,000 shares are
being offered hereby in the United States and Canada (the "U.S. Shares") and
700,000 shares are being offered in a concurrent international offering
outside the United States and Canada. The price to the public and aggregate
underwriting discounts and commissions per share will be identical for both
offerings. See "Underwriting."
The Common Stock of Storage Equities, Inc. (the "Company") is traded on the
New York Stock Exchange (the "NYSE") under the symbol "SEQ". On May 23, 1995,
the closing price of the Common Stock on the NYSE was $15 7/8.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER
"CERTAIN CONSIDERATIONS" IN THE ACCOMPANYING PROSPECTUS.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<TABLE>
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------------------------------------------------------------------------------------------
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Company(1)
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share....................... $15.875 $.87 $15.005
------------------------------------------------------------------------------------------
Total........................... $83,343,750 $4,567,500 $78,776,250
------------------------------------------------------------------------------------------
Total Assuming Full Exercise of
Over-Allotment Option(2)....... $95,845,312 $5,252,625 $90,592,687
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
</TABLE>
(1) Before deducting expenses estimated at $200,000, which are payable by the
Company.
(2) Assuming exercise in full of the 45-day option granted by the Company to
the U.S. Underwriters to purchase up to 787,500 additional shares of
Common Stock, on the same terms, solely to cover over-allotments. See
"Underwriting."
-----------
The U.S. Shares of Common Stock are offered by the U.S. Underwriters,
subject to prior sale, when, as and if delivered to and accepted by the U.S.
Underwriters, and subject to their right to reject orders in whole or in part.
It is expected that delivery of the shares of Common Stock will be made in New
York City on or about May 31, 1995.
-----------
PAINEWEBBER INCORPORATED
SMITH BARNEY INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
RAYMOND JAMES & ASSOCIATES, INC.
THE ROBINSON-HUMPHREY COMPANY, INC.
-----------
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS MAY 23, 1995.
<PAGE>
Storage Equities' Facilities
[MAP OF UNITED STATES APPEARS HERE WHICH INDICATES BY REGION THE
PERCENTAGE OF MINI-WAREHOUSES IN WHICH THE COMPANY HAS AN INTEREST.]
North Western.................... 17%
North Eastern.................... 13%
Mid Western...................... 12%
South Western.................... 22%
South Central.................... 19%
South Eastern.................... 17%
----
100%
At March 31, 1995, Storage Equities had ownership interests in 438
facilities located in or near major metropolitan areas in 37 states.
[PHOTOGRAPH APPEARS HERE OF The familiar orange Public
AERIAL VIEW OF MINI-WAREHOUSE Storage logo is prominently
FACILITY ALONG MAJOR displayed at the Company's
THOROUGHFARES.] mini-warehouse facilities.
The Company seeks facilities that [PHOTOGRAPH APPEARS HERE OF
are located along major thoroughfares. MINI-WAREHOUSE FACILITY, ENTRANCE
AND SIGN WITH PUBLIC STORAGE LOGO.]
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere or incorporated by reference in this Prospectus Supplement and the
accompanying Prospectus. Unless otherwise indicated, all information in this
Prospectus Supplement assumes that the Underwriters' over-allotment option will
not be exercised. Investors should carefully consider the information set forth
under the heading "Certain Considerations" in the accompanying Prospectus. As
used herein, the term "Public Storage" includes Public Storage, Inc. and its
subsidiaries, including the Company's adviser and property operators, unless
the context indicates otherwise.
THE COMPANY
Storage Equities, Inc. (the "Company"), an equity real estate investment
trust ("REIT"), owns more mini-warehouse space in the United States than any
competitor and is the largest owner of mini-warehouses operated under the
"Public Storage" name. At March 31, 1995, the Company had equity investments in
422 mini-warehouses with approximately 23.9 million square feet of space. The
Company's mini-warehouses, which are located primarily in or near major
metropolitan markets in 37 states, offer relatively low-cost, easily
accessible, secure and enclosed storage space for both personal and business
use. See "Business."
The Company's primary objective is to maximize shareholder value by
increasing funds from operations per share of Common Stock through internal
growth and acquisitions of additional mini-warehouses. The Company believes
that its access to capital, geographic diversification and operating
efficiencies resulting from its size enhance its ability to achieve this
objective. The net proceeds of this offering of Common Stock (the "Offering")
will be used primarily to make additional investments in mini-warehouses. The
Company believes that its mini-warehouse investments made since December 31,
1994 and its proposed acquisitions to be made with the net proceeds of the
Offering generated an unleveraged cash yield of approximately 10% for the
latest 12-month period for which information is available. See "Use of
Proceeds."
The Company believes that its mini-warehouses have attractive operating
characteristics. For 1994, the Company's mini-warehouses had an average
occupancy level of 90% compared with an average break-even occupancy level
(before depreciation expense and debt service) of only 28%, resulting in a
profit margin (net operating income before depreciation expense ("net cash
flow") divided by rental income) of 64%. The Company's tenant base, which is
comprised of more than 190,000 individuals and businesses, has an average
occupancy term of 12 months, and no one mini-warehouse accounts for more than
1% of revenues. In addition, the Company's mini-warehouses are characterized by
a low level of capital expenditures to maintain their condition and appearance.
The Company further believes that its operating results have benefitted from
favorable industry trends and conditions. Notably, the level of new mini-
warehouse construction has decreased since 1988 while consumer demand has
increased. In addition, in recent years consolidation has occurred in the
fragmented mini-warehouse industry. The Company believes that it is well-
positioned to capitalize on this consolidation trend due to its demonstrated
access to capital and national presence. The Company's operator, Public
Storage, is the largest mini-warehouse operator in the United States and
Canada, operating approximately the same square footage of mini-warehouse space
as the next ten largest operators combined and approximately four times as much
space as the next largest operator.
S-3
<PAGE>
The Company's five senior officers are responsible for the acquisition of
more than 350 mini-warehouses, the development of more than 650 mini-warehouses
and the operation of more than 1,000 mini-warehouses during their average 16
years of experience with Public Storage. In addition, the Company's senior
management has a significant ownership position in the Company with officers,
directors and their affiliates beneficially owning approximately 9,358,000
shares or 28% of the Company's Common Stock as of March 31, 1995, with a
current market value of approximately $150 million. Approximately 2,165,000 of
these shares were purchased for cash at market prices during 1994.
The Company is currently advised by, and its facilities are operated by,
Public Storage, and the Company's executive officers and certain directors are
affiliated with Public Storage. All are subject to various conflicts of
interest arising out of their relationships with entities that own and operate
mini-warehouses. The Company is currently considering a transaction by which it
would become self-advised and self-managed and be combined with substantially
all of Public Storage's United States real estate investments. See "--Proposed
Restructuring." All operations are under the general supervision of the
Company's Board of Directors (the "Board of Directors"), including investments
in new facilities and transactions with affiliates. Of the Company's
investments, 211 were made jointly with seven of a group of eight public
limited partnerships organized by Public Storage (these eight partnerships are
referred to herein collectively as the "PSP Partnerships"). The Company has
elected to be taxed as a REIT under the Internal Revenue Code of 1986, as
amended (the "Code"). See "Business" and "Certain Considerations--Conflicts of
Interest and Transactions with Affiliates" and "Certain Federal Income Tax
Considerations" in the accompanying Prospectus.
PROPOSED RESTRUCTURING
The Company has formed a special committee of independent directors to
consider a transaction in which the Company would be combined with its adviser
and property operators and substantially all of Public Storage's United States
real estate investments. As a result of this transaction, the Company would
become self-advised and self-managed. The special committee selected Robertson,
Stephens & Company, L.P. as financial adviser in March 1995 to render advice in
connection with the restructuring. Although no terms have been established, it
is expected that the Company would issue shares of its common stock in the
transaction and the name of the Company would be changed to "Public Storage,
Inc." There is no agreement relating to this transaction and no assurances can
be made that an agreement can be reached, that a transaction can be completed
or as to the effect of such a transaction on the market price of the Company's
Common Stock. Any such transaction would be subject to, among other things,
prior approval of holders of Common Stock and delivery of a fairness opinion
from Robertson, Stephens & Company, L.P.
Public Storage, organized in 1972, has been engaged in the acquisition,
development, construction and operation of mini-warehouses and, to a lesser
extent, other commercial properties in the United States and Canada. As of
March 31, 1995, Public Storage operated 1,072 mini-warehouses and 51 business
parks in the United States, including the Company's 422 mini-warehouses and 16
business parks, and Public Storage had direct or indirect ownership interests
in 1,012 mini-warehouses and 41 business parks in the United States, including
the Company's facilities.
GROWTH STRATEGIES
The Company's growth strategies focus on improving the operating performance
of its existing properties and on increasing its ownership of mini-warehouses
through additional investments. Major elements of these strategies are as
follows:
. Increase net cash flow from existing properties. The Company seeks to
increase the net cash flow generated by its existing properties by (i)
increasing average occupancy rates and (ii) achieving higher levels
S-4
<PAGE>
of realized monthly rents per occupied square foot. Average occupancy at the
246 mini-warehouses in which the Company had an ownership interest since
January 1992 ("Same Store mini-warehouses") has increased from 86.8% in 1992 to
90.3% for 1994. Similarly, realized monthly rents per occupied square foot have
increased approximately 7% during this same period. These factors have resulted
in net cash flow growth at Same Store mini-warehouses of approximately 6%, 10%
and 7% in 1992, 1993 and 1994, respectively, over the prior year. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations."
.Acquire properties operated by Public Storage. The Company believes its
relationship with Public Storage enhances its ability to identify attractive
acquisition opportunities. Exclusive of the Company's facilities, approximately
600 mini-warehouses are operated under the "Public Storage" name on behalf of
approximately 80 ownership entities. From time to time, some of these owners
desire to sell their mini-warehouses, providing the Company with a source of
acquisition opportunities. These properties exhibit net cash flow growth
comparable to the Company's mini-warehouses and the Company believes they
include some of the better located, better constructed mini-warehouses in the
industry. Because of common property operation, the Company is provided with
reliable operating information prior to acquisition and these properties are
easily integrated into the Company's portfolio. From January 1, 1992 through
December 31, 1993, the Company acquired a total of 36 mini-warehouses which
were operated under the "Public Storage" name (2.1 million square feet of space
at an aggregate purchase price of $83.2 million). For 1994, the net cash flow
generated by these properties provided an unleveraged cash yield of
approximately 11.6%. From January 1, 1994 through May 5, 1995, the Company
acquired an additional 73 such properties.
.Acquire properties operated by other operators. The Company believes its
relationship with Public Storage also enhances its ability to capitalize on the
overall fragmentation in the mini-warehouse industry. Of the more than 22,000
mini-warehouses in the United States, the Company believes that the ten largest
operators operate less than 11% of the total space. Public Storage's presence
in and knowledge of substantially all of the major markets in the United States
provides the Company with local market information on rental rates, occupancy
and competition. From January 1, 1992 through December 31, 1993, the Company
acquired a total of 16 mini-warehouses (967,000 square feet of space at an
aggregate purchase price of $34.5 million) operated by other operators. For
1994, the net cash flow generated by these properties provided an unleveraged
cash yield of approximately 12.2%. From January 1, 1994 through May 5, 1995,
the Company acquired an additional 37 such properties.
.Access to acquisition capital. The Company believes that its strong financial
position enables it to access capital for growth. The Company's debt, as a
percentage of shareholders' equity, has decreased from 60% at December 31, 1990
to 13% at March 31, 1995, thereby significantly reducing refinancing risks. The
Company currently has a $115 million credit facility (LIBOR plus 1.25%) with a
bank group led by Wells Fargo Bank, which the Company uses as a temporary
source of acquisition financing. The Company seeks to ultimately finance all
acquisitions with permanent sources of capital. From January 1, 1992 through
March 31, 1995, the Company has issued approximately $500 million of perpetual
preferred and common equity to finance such acquisitions. See "Business--
Borrowings" and "--Limitations on Debt."
.Conservative distribution policy. The Company seeks to retain significant
funds (after funding its distributions and capital improvements) for additional
property acquisitions and debt reduction. From January 1, 1992 through March
31, 1995, the Company retained approximately $30 million for such purposes. For
the three months ended March 31, 1995, the Company distributed only 51% of its
funds from operations ("FFO") allocable to Common Stock. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
S-5
<PAGE>
As a result of the implementation of its growth strategies, the Company has
successfully increased FFO allocable to Common Stock. From 1992 through 1994,
FFO allocable to Common Stock increased 93%, while the weighted average number
of shares of Common Stock increased only 51%. See "--Summary Financial
Information."
OPERATING STRATEGIES
The Company's mini-warehouses are operated under the "Public Storage" name,
the most recognized name in the mini-warehouse industry. The major elements of
the Company's operating strategies are as follows:
. Capitalize on Public Storage name recognition. Public Storage, with more than
20 years of operating experience in the mini-warehouse business, is the largest
operator of mini-warehouses in the country. Including the Company's mini-
warehouses, as of March 31, 1995, Public Storage operated 1,106 mini-warehouses
aggregating approximately 65.2 million square feet of space located in 38
states and four provinces in Canada. In the past eight years, in excess of $56
million has been expended promoting the "Public Storage" name. The Company
believes that its participation in the Public Storage marketing and advertising
programs improves its competitive position in the market. Public Storage is the
only mini-warehouse operator regularly using television advertising in several
major markets around the country, and Public Storage's in-house Yellow Pages
staff designs and places advertisements in approximately 700 directories in 80
markets. In addition, Public Storage offers a toll-free referral system, 800-
44-STORE, which services approximately 100,000 calls per year from potential
customers inquiring as to the nearest Public Storage mini-warehouse.
.Benefit from Public Storage's economies of scale. Through its affiliation with
Public Storage, the Company is able to realize economies of scale. By combining
the advertising and marketing programs and purchasing activities of more than
1,100 mini-warehouses, Public Storage achieves significant per facility savings
which are passed on to the Company.
. Maintain high occupancy levels and increase realized rents. Subject to market
conditions, Public Storage generally seeks to achieve average occupancy levels
in excess of 90% and to eliminate promotions prior to increasing rental rates.
Average occupancy for the Company's Same Store mini-warehouses has increased
from 86.8% in 1992 to 90.3% in 1994. During the first quarter of 1995, the
average occupancy was 88.6% compared to 87.7% for the first quarter of 1994.
Realized monthly rents per square foot increased from $.55 in 1992 to $.60
during the first quarter of 1995. The Company has increased rental rates in
many markets where it has achieved high occupancy levels and eliminated or
minimized promotions.
.Concentrate properties in major markets. The Company is focused on owning and
acquiring mini-warehouses located principally in the 54 largest metropolitan
areas (those with populations in excess of 1,000,000) throughout the country.
The Company believes that the events resulting in the rental of mini-warehouse
space occur with greater frequency in the larger metropolitan areas than in
less populous areas. By concentrating its facilities within these markets, the
Company can also achieve economies of scale with respect to property operations
and advertising.
.Focus on high quality properties in prime locations. The Company seeks to own
high quality properties located on prime land with high traffic counts, high
visibility and a dense population within a three to five mile radius. The
Company believes that facilities located on prime land are less susceptible to
the threat of competition via new development and, as a result, have more
stable cash flows. The Company is also committed to investing the capital
necessary to maintain the high quality of its facilities and to upgrade them
when warranted by market conditions.
S-6
<PAGE>
.Systems and controls. Public Storage has an organizational structure and a
property management system, "CHAMP" (Computerized Help and Management Program),
which links its corporate office with each mini-warehouse. This enables Public
Storage to obtain daily information from each mini-warehouse and to achieve
efficiencies in operations and maintain control over space inventory, rental
rates and promotional discounts. Expense management is achieved through
centralized payroll and accounts payable systems and a comprehensive property
tax appeals department, and Public Storage has an extensive internal audit
program designed to ensure proper handling of cash collections.
. Professional property operation. In addition to approximately 120 support
personnel at the Public Storage corporate offices, Public Storage employs
approximately 2,700 on-site personnel who manage the day-to-day operations of
the mini-warehouses in the Public Storage system. These on-site personnel are
supervised by 107 district managers, 14 regional managers and three divisional
managers (with an average of 12 years experience in the mini-warehouse
industry) who report to the president of the mini-warehouse property operator
(who has 11 years of experience with the Public Storage organization). Public
Storage carefully selects and extensively trains the operational and support
personnel and offers them a progressive career path. See "Management."
THE OFFERING
Common Stock Offered by the Company:
<TABLE>
<S> <C>
United States Offering..................... 4,550,000 shares
International Offering..................... 700,000 shares
Total................................... 5,250,000 shares
Common Stock to be Outstanding After the
Offering........................................ 38,088,310 shares (1)
Use of Proceeds................................. The Company intends to use the net
proceeds of the offering to make
investments in real estate assets,
primarily mini-warehouses. See "Use of
Proceeds."
Listing......................................... NYSE
Stock Exchange Symbol........................... SEQ
</TABLE>
--------
(1) Excludes 700,334 shares subject to options under the Company's Stock Option
Plans, 3,872,054 shares which are issuable upon conversion or redemption of
the Company's 8.25% Convertible Preferred Stock (the "Convertible Preferred
Stock") and shares proposed to be issued in a merger with Public Storage
Properties VII, Inc. ("Properties 7"). See "Recent Developments."
S-7
<PAGE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AND MINI-WAREHOUSE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
--------------------- ---------------------------
1995 1994 1994 1993 1992
-------- ----------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Total revenues............. $ 43,198 $ 32,949 $147,196 $114,680 $97,448
Depreciation and amortiza-
tion...................... 8,147 6,811 28,274 24,998 22,405
Interest expense........... 1,520 1,558 6,893 6,079 9,834
Minority interest in in-
come...................... 1,823 2,049 9,481 7,291 6,895
Net income................. 13,200 8,746 42,118 28,036 15,123
OTHER DATA:
Funds from operations(1)... $ 18,534 $ 11,255 $ 56,143 $ 35,830 $21,133
Funds from operations allo-
cable to Common Stock(2).. 12,558 7,606 39,297 24,942 20,321
PER SHARE OF COMMON STOCK:
Net income(2).............. $ 0.24 $ 0.24 $ 1.05 $ 0.98 $ 0.90
Distributions paid on Com-
mon Stock................. 0.22 0.21 0.85 0.84 0.84
Weighted average shares of
Common Stock.............. 30,567 21,166 24,077 17,558 15,981
MINI-WAREHOUSE DATA(3):
Mini-warehouse net square
footage at end of period
(000's)................... 23,911 19,304 22,450 18,587 16,311
Number of mini-warehouses
at end of period.......... 422 329 386 316 278
Weighted average occupancy
of the Same Store mini-
warehouses for the period. 88.6% 87.7% 90.3% 89.5% 86.8%
Weighted average mini-
warehouse realized monthly
rent per occupied square
foot for Same Store mini-
warehouses for the period. $ 0.60 $ 0.58 $ 0.59 $ 0.56 $ 0.55
<CAPTION>
MARCH 31, 1995
---------------------
AS
ACTUAL ADJUSTED(4)
-------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Total assets............... $932,337 $1,031,402
Total debt................. 87,119 52,119
Shareholders' equity....... 696,432 830,497
</TABLE>
--------
(1) FFO is defined generally by the National Association of Real Estate
Investment Trusts, Inc. ("NAREIT") as income before loss on early
extinguishment of debt and gain on disposition of real estate, adjusted as
follows: (i) plus depreciation and amortization, and (ii) less
distributions to minority interests in excess of minority interest in
income. FFO is a supplemental performance measure for equity REITs used by
industry analysts. FFO does not take into consideration principal payments
on debt, capital improvements, distributions and other obligations of the
Company. Accordingly, FFO is not a substitute for the Company's net cash
provided by operating activities or net income as a measure of the
Company's liquidity or operating performance.
(2) Determined after preferred stock dividends.
(3) Reflects information regarding properties in which the Company has an
interest, not the Company's proportionate interest in such properties. See
"Business--General" and "--Investment in Facilities."
(4) Adjusted to give effect to (i) the issuance of 2,300,000 shares of
preferred stock in May 1995 and the application of a portion of the net
proceeds to repay indebtedness under the Company's credit facility and (ii)
the sale of the Common Stock offered hereby. Does not reflect shares of
Common Stock proposed to be issued in a merger with Properties 7. See
"Recent Developments," "Capitalization" and "Use of Proceeds."
S-8
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby (assuming no exercise of the Underwriters' over-allotment
option) are estimated at approximately $78,576,250. The net proceeds from the
Offering, together with the net proceeds remaining from a May 1995 offering of
preferred stock (approximately $17.3 million at May 23, 1995), will be used to
make investments in real estate, primarily mini-warehouses, including mortgage
loans and interests in real estate partnerships. In addition to the
contemplated transactions described under "Recent Developments," the Company
(i) has agreements in principle to acquire 24 mini-warehouses for an aggregate
purchase price (including closing and conversion costs) of approximately $81.0
million, consisting of $53.4 million of cash, $4.7 million of cancellation of
mortgage debt and $22.9 million of assumption of mortgage debt, and (ii) is in
the process of developing two properties at an aggregate cost of approximately
$8.2 million. Nineteen of the properties being acquired are owned by affiliates
of Public Storage and the purchase price will be based on independent
appraisals. These proposed acquisitions are contingent and, accordingly, there
is no assurance that all or any of the properties will be acquired.
Pending investment in real estate assets, the net proceeds of the Offering
will be deposited in interest bearing accounts or invested in certificates of
deposit, United States government obligations or other short-term, high-quality
debt instruments selected at the discretion of the officers of the Company.
RECENT DEVELOPMENTS
Proposed Restructuring. See "Prospectus Summary--Proposed Restructuring" for
the status of a proposed restructuring of the Company.
Acquisition of Properties. During 1995 (through May 5), the Company acquired
39 mini-warehouses, including facilities acquired in the merger with Properties
6, for an aggregate purchase price of approximately $108,026,000. Affiliates of
Public Storage owned 29 of these facilities.
Development of properties in selected markets. The Company is evaluating the
feasibility of developing mini-warehouses in selected markets in which there
are few, if any, facilities to acquire at attractive prices and where the
absence of other undeveloped parcels of land or other impediments to
development make it difficult to construct additional competing facilities. The
Company is currently constructing two properties in Atlanta, Georgia, which are
expected to open during 1995. See "Use of Proceeds."
Issuances of Capital Stock. During 1995 (through May 5), the Company issued
4,011,603 shares of Common Stock for an aggregate gross price of approximately
$56,000,000 and 4,495,000 shares of preferred stock for an aggregate gross
price of $112,375,000. As of March 31, 1995, the Company's officers, directors
and their affiliates beneficially owned approximately 9,358,000 shares or 28%
of the Common Stock, with a current market value of approximately $150 million.
The shares of Common Stock issued in 1995 were issued primarily in the February
1995 merger with Properties 6 described below and to Public Storage in
connection with the acquisition of participation interests in 19 mini-
warehouses. The transactions with Public Storage were approved by the Company's
independent directors, and the purchase price was supported by fairness
opinions.
Acquisition of Partnership Interests. During 1995 (through May 5), the
Company acquired, in cash tender offers, limited partnership interests in two
PSP Partnerships (PS Partners I and VIII), representing approximately 24% and
13% of these limited partnership interests, respectively, for an aggregate
purchase price of approximately $8,079,000. During 1994, the Company acquired
limited partnership interests in five other PSP Partnerships. As a result, the
Company owns approximately 33% to 66% of the outstanding limited partnership
interests of each of these seven PSP Partnerships. The Company currently owns
approximately 35% of the limited partnership interests in PS Partners VI and
intends to make a cash tender offer for up to 45% of the limited partnership
interests in that partnership.
The Company has an agreement in principle to acquire, from an unaffiliated
party, the entire limited partnership interest in a partnership that owns 13
mini-warehouses, in exchange for convertible preferred stock of the Company
with a liquidation preference of $31,200,000. Public Storage is a general
partner of the partnership. This proposed acquisition is subject to significant
contingencies, including the execution of a definitive agreement.
S-9
<PAGE>
Mergers with Related Companies. In February 1995, Public Storage Properties
VI, Inc. ("Properties 6") merged with and into the Company, and the outstanding
Properties 6 common stock (2,716,223 shares) was converted into an aggregate of
(i) approximately 3,148,000 shares of Common Stock and (ii) approximately
$21,427,000 in cash. Properties 6 owned 22 mini-warehouses and one combination
mini-warehouse/business park facility in seven states. PSI and its affiliates
received approximately 1,293,000 shares of Common Stock in the merger. One
facility acquired by the Company in the merger may be the subject of an ongoing
area-wide groundwater investigation pursuant to the federal Comprehensive
Environmental Response, Cleanup, and Liability Act. The Company believes that
the terms of the merger reflect a purchase price adjustment sufficient to cover
any resulting potential liability. See "Certain Considerations--Operating
Risks--Risk of Environmental Liabilities" in the accompanying Prospectus.
On February 2, 1995, the Company and Public Storage Properties VII, Inc.
("Properties 7") agreed, subject to certain conditions, to merge. In the
merger, Properties 7 would be merged with and into the Company, and each share
of Properties 7's common stock would be converted, at the election of the
shareholders of Properties 7, into either shares of the Company's Common Stock
or, with respect to up to 20% of Properties 7's common stock, $18.95 in cash.
This dollar amount has been based on Properties 7's net asset value (the
appraised value of Properties 7's real estate assets as of December 31, 1994
(which took into account certain potential structural and environmental
remediation costs relating to one of the properties) and the estimated book
value of Properties 7's other net assets as of May 31, 1995). The number of
shares of the Company's Common Stock issued in the merger will be determined by
dividing this same dollar amount by the average of the per share closing prices
of the Company's Common Stock on the NYSE for a specified period prior to
Properties 7's shareholders' meeting. In the event of the merger, pre-merger
cash distributions would be made to shareholders of Properties 7 to cause
Properties 7's net asset value as of the effective date of the merger to be
substantially equivalent to its estimated net asset value as of May 31, 1995.
The number of shares of the Company's Common Stock issued in the merger and the
amount receivable upon a cash election would be reduced on a pro rata basis in
an aggregate amount equal to additional distributions required in order to
satisfy Properties 7's real estate investment trust distribution requirements.
The merger was approved by the independent directors of the Company and
Properties 7 and is conditioned on, among other requirements, approval by the
shareholders of both the Company and Properties 7. The Company and Properties 7
are in the process of seeking the approval of their respective shareholders for
the merger at shareholders' meetings scheduled for June 14, 1995.
Properties 7 owns 34 mini-warehouses, three business parks and one
combination mini-warehouse/business park facility in 11 states. There are
3,806,491 outstanding shares of Properties 7 common stock. PSI has informed the
Company that PSI would expect to elect to receive the Company's Common Stock in
the merger and no cash.
In 1990 and 1991, PSI organized 18 finite-life REITs that are listed on the
American Stock Exchange, including Properties 6 and 7 discussed above and
Public Storage Properties VIII, Inc. ("Properties 8") that was merged into the
Company in September 1994. Public Storage owned or owns approximately 28% of
the common stock of Properties 6, 7 and 8 and their properties were or are
operated by Public Storage. The Company had no ownership interest in Properties
6, 7 and 8 or any of their properties prior to the merger or proposed merger.
S-10
<PAGE>
DISTRIBUTIONS AND PRICE RANGE OF COMMON STOCK
The Common Stock has been listed on the NYSE since October 19, 1984. The
following table sets forth distributions paid per share on the Common Stock in
the periods indicated below and the reported high and low sales prices on the
NYSE composite tape for the applicable periods.
<TABLE>
<CAPTION>
DISTRIBUTIONS
CALENDAR PERIODS HIGH LOW PAID
---------------- ---- ---- -------------
<S> <C> <C> <C>
1993:
First quarter........... $12 $ 8 7/8 $.21
Second quarter.......... 12 1/4 11 .21
Third quarter........... 14 1/2 11 5/8 .21
Fourth quarter.......... 15 13 3/4 .21
1994:
First quarter........... 16 13 1/2 .21
Second quarter.......... 16 3/4 13 3/8 .21
Third quarter........... 15 3/4 13 3/8 .21
Fourth quarter.......... 15 13 .22
1995:
First Quarter........... 17 1/8 13 1/2 .22
Second Quarter (through
May 23, 1995).......... 17 1/8 15 1/4 .22*
</TABLE>
--------
* Payable June 30, 1995 to holders of record on June 15, 1995.
As of March 31, 1995, there were 11,821 record holders of Common Stock. On
May 23, 1995, the last reported sale price of the Common Stock on the NYSE was
$15 7/8 per share.
Holders of Common Stock are entitled to receive distributions when, as and if
declared by the Board of Directors out of any funds legally available for that
purpose. The Company, as a REIT, is required to distribute annually to
Shareholders (which include not only holders of Common Stock, but also holders
of preferred stock), at least 95% of its "real estate investment trust taxable
income," which, as defined by the relevant tax statutes and regulations, is
generally equivalent to net taxable ordinary income. Under certain
circumstances, the Company can rectify a failure to meet this distribution
requirement by paying dividends after the close of a particular taxable year.
See "Certain Federal Income Tax Matters--Tax Treatment of the Company" in the
accompanying Prospectus.
The Company's revolving credit facility with a commercial bank restricts the
Company's ability to pay distributions in excess of "Funds from Operations" for
the prior four fiscal quarters less scheduled principal payments and less
capital expenditures. Funds from Operations is defined in the loan agreement
generally as net income before gain on sale of real estate, extraordinary loss
on early retirement of debt and deductions for depreciation, amortization and
non-cash charges. Also, unless full dividends on the Company's preferred stock
have been paid for all past dividend periods, no dividends may be paid on the
Common Stock, except in certain instances.
S-11
<PAGE>
CAPITALIZATION
The table below sets forth as of March 31, 1995 the historical consolidated
capitalization of the Company, and the consolidated capitalization of the
Company as adjusted to give effect to (i) the issuance of 2,300,000 shares of
preferred stock in May 1995 and the application of a portion of the net
proceeds therefrom to repay outstanding bank borrowings, and (ii) the sale of
the Common Stock offered hereby. See "Use of Proceeds," "Recent Developments"
and "Selected Financial Information."
<TABLE>
<CAPTION>
MARCH 31,
1995 AS ADJUSTED(2)
--------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Total debt:
Line of credit with banks.......................... $ 35,000 $ --
Mortgage notes payable............................. 52,119 52,119
--------- ----------
Total debt....................................... 87,119 52,119
Minority interest.................................... 133,893 133,893
Shareholders' equity:
Preferred Stock, $.01 par value, 50,000,000 shares
authorized:(1)
Senior Preferred Stock, 8,806,000 shares issued
and outstanding (11,106,000 shares issued and
outstanding, as adjusted)....................... 220,150 277,650
Convertible Preferred Stock, 2,300,000 shares is-
sued
and outstanding................................. 57,500 57,500
Common Stock, $.10 par value, 60,000,000 shares
authorized, 32,838,310 shares issued and
outstanding (38,088,310 issued and outstanding, as
adjusted)......................................... 3,284 3,809
Paid-in capital.................................... 424,965 501,005
Cumulative net income.............................. 185,685 185,685
Cumulative distributions paid...................... (195,152) (195,152)
--------- ----------
Total shareholders' equity....................... 696,432 830,497
--------- ----------
Total capitalization........................... $ 917,444 $1,016,509
========= ==========
</TABLE>
--------
(1) None of the outstanding series of preferred stock has a mandatory
redemption or sinking fund provision.
(2) Does not reflect shares of Common Stock proposed to be issued in the merger
with Properties 7. See "Recent Developments."
S-12
<PAGE>
SELECTED FINANCIAL INFORMATION
The following selected historical financial information relating to each of
the three years in the period ended December 31, 1994 has been derived from the
audited financial statements of the Company for those periods as restated. The
selected financial information for the three months ended March 31, 1995 and
the same period in 1994 has been derived from unaudited financial statements of
the Company for those periods. Certain of the real estate partnerships that are
now consolidated with the Company were previously accounted for under the
equity method. The financial information presented for all periods prior to
1993 has been restated to reflect such consolidation to enhance comparability.
These restatements have no effect on previously reported net income, earnings
per share, funds from operations or shareholders' equity. The data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Prospectus
Supplement and the financial statements included in the documents incorporated
by reference in the accompanying Prospectus, including the pro forma
information in the Form 10-Q for the quarter ended March 31, 1995 (the "1995
10-Q").
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31 YEAR ENDED DECEMBER 31,
-------------------- ------------------------------
1995 1994 1994 1993 1992
--------- --------- --------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues:
Rental income......... $ 41,974 $ 31,299 $ 141,845 $ 109,203 $ 95,886
Interest and other in-
come................. 1,224 1,650 5,351 5,477 1,562
--------- --------- --------- --------- --------
43,198 32,949 147,196 114,680 97,448
--------- --------- --------- --------- --------
Expenses:
Cost of operations.... 15,807 11,926 52,816 42,116 38,348
Depreciation and amor-
tization............. 8,147 6,811 28,274 24,998 22,405
General and adminis-
trative.............. 1,091 740 2,631 2,541 2,629
Advisory fee.......... 1,610 1,119 4,983 3,619 2,612
Interest expense...... 1,520 1,558 6,893 6,079 9,834
--------- --------- --------- --------- --------
28,175 22,154 95,597 79,353 75,828
--------- --------- --------- --------- --------
Income before minority
interest and gain on
disposition of real
estate................. 15,023 10,795 51,599 35,327 21,620
Minority interest in in-
come................... (1,823) (2,049) (9,481) (7,291) (6,895)
--------- --------- --------- --------- --------
Income before gain on
disposition of real es-
tate................... 13,200 8,746 42,118 28,036 14,725
Gain on disposition of
real estate............ -- -- -- -- 398
--------- --------- --------- --------- --------
Net income.............. $ 13,200 $ 8,746 $ 42,118 $ 28,036 $ 15,123
Net income allocable to
Common Stock(1)........ 7,224 5,097 25,272 17,148 14,311
Net income per share of
Common Stock........... 0.24 0.24 1.05 0.98 0.90
Distributions paid per
share of Common Stock.. 0.22 0.21 0.85 0.84 0.84
Weighted average shares
of Common Stock out-
standing............... 30,567 21,166 24,077 17,558 15,981
OTHER DATA:
Net cash provided by op-
erating activities..... $ 23,130 $ 17,357 $ 79,180 $ 59,477 $ 44,025
Net cash used in invest-
ing activities......... (66,499) (31,864) (169,590) (137,429) (21,010)
Net cash provided by
(used in) financing ac-
tivities............... 43,750 24,131 100,029 80,100 (21,070)
Funds from opera-
tions(2)............... 18,534 11,255 56,143 35,830 21,133
Preferred stock divi-
dends.................. 5,976 3,649 16,846 10,888 812
Funds from operations
allocable to Common
Stock(3)............... 12,558 7,606 39,297 24,942 20,321
BALANCE SHEET DATA:
Total assets............ $ 932,337 $ 703,434 $ 820,309 $ 666,133 $537,724
Total debt.............. 87,119 46,519 77,235 84,076 69,478
Shareholders' equity.... 696,432 454,738 587,786 376,066 253,669
</TABLE>
(Footnotes on following page)
S-13
<PAGE>
--------
(1) Net income allocable to Common Stock is equal to net income less preferred
stock dividends.
(2) Funds from operations is defined generally by NAREIT as income before loss
on early extinguishment of debt and gain on disposition of real estate,
adjusted as follows: (i) plus depreciation and amortization, and (ii) less
distributions to minority interests in excess of minority interest in
income. FFO is a supplemental performance measure for equity REITs used by
industry analysts. FFO does not take into consideration principal payments
on debt, capital improvements, distributions and other obligations of the
Company. Accordingly, FFO is not a substitute for the Company's net cash
provided by operating activities or net income as a measure of the
Company's liquidity or operating performance.
(3) FFO allocable to Common Stock is equal to FFO less preferred stock
dividends.
S-14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
consolidated financial statements appearing in the Annual Report on Form 10-K
for the year ended December 31,1994, as amended (the "1994 10-K") and the 1995
10-Q.
Results of Operations
Three months ended March 31, 1995 compared to the three months ended March
31, 1994: Net income for the three months ended March 31, 1995 was $13,200,000
compared to $8,746,000 for the same period in 1994, representing an increase of
$4,454,000. Net income allocable to common shareholders increased to $7,224,000
for the three months ended March 31, 1995 from $5,097,000 for the three months
endedMarch 31, 1994. The increase in net income and net income allocable to
common shareholders were primarily the result of improved property operations
for the Same Store mini-warehouses (those mini-warehouses owned since January
1992) and the acquisition of additional real estate facilities and partnership
interests during 1995 and 1994. Net income per common share was $.24 per share
(based on weighted average shares outstanding of 30,566,839) for the three
months ended March 31, 1995 compared to $.24 per share (based on weighted
average shares outstanding of 21,166,478) for the same period in 1994.
The Company's revenues are generated principally through the operation of its
real estate facilities. The Company's core business is the operation of mini-
warehouse facilities which, during the three months ended March 31, 1995,
represented approximately 90% of the Company's property operations (based on
the 1995 rental income).
During the three months ended March 31, 1995, property net operating income
(rental income less cost of operations and depreciation expense) improved
compared to the same period in 1994. Rental income increased $10,675,000 or 34%
from $31,299,000 for the three months ended March 31, 1994 to $41,974,000 for
the same period in 1995, cost of operations increased $3,881,000 or 33% from
$11,926,000 for the three months ended March 31, 1994 to $15,807,000 for the
same period in 1995 and depreciation expense increased by $1,336,000 from
$6,811,000 for the three months ended March 31, 1994 to $8,147,000 for the same
period in 1995, resulting in a net increase in property net operating income of
$5,458,000 or 43%. Property net operating income prior to the reduction for
depreciation expense ("net cash flow") increased by $6,794,000 or 35% from
$19,373,000 for the three months ended March 31, 1994 to $26,167,000 for the
same period in 1995. These increases were the result of (i) improved property
operations at the Same Store mini-warehouses, (ii) the acquisition of
additional real estate facilities (161 facilities from January 1, 1992 through
March 31, 1995) and (iii) improved property operations at the Company's
business park facilities.
Property net operating income for the Same Store mini-warehouses increased by
$504,000 or 5% from $9,343,000 for the three months ended March 31, 1994 to
$9,847,000 for the three months ended March 31, 1995. Net operating income
before depreciation expense ("net cash flow") for the Same Store mini-
warehouses increased by $721,000 or 5% from $13,790,000 for the three months
ended March 31, 1994 to $14,511,000 for the three months ended March 31, 1995.
These increases are principally due to increased weighted average occupancy
levels combined with an increase in average rental rates. Weighted average
occupancy levels were 88.6% for the Same Store mini-warehouses for the three
months ended March 31, 1995 compared to 87.7% for the same period in 1994.
Realized monthly rent per square foot for these facilities was $.60 and $.58
for the three months ended March 31, 1995 and 1994, respectively.
Mini-warehouse facilities acquired subsequent to December 31, 1991
contributed approximately $7,334,000 and $2,946,000 of property net operating
income for the three months ended March 31, 1995 and 1994, respectively
($9,503,000 and $3,845,000 of net cash flow for the three months ended March
31, 1995 and 1994, respectively).
S-15
<PAGE>
Property net operating income with respect to the Company's business park
operations increased by $566,000 from $273,000 for the three months ended March
31, 1994 to $839,000 for the same period in 1995. Net cash flow with respect to
the Company's business park operations increased by $415,000 from $1,738,000
for the three months ended March 31, 1994 to $2,153,000 for the same period in
1995. The increase is due principally to the acquisition of a business park
facility during the second quarter of 1994 which contributed approximately
$165,000 to the increase in the property net operating income. Weighted average
occupancy levels were 95.9% for the business park facilities for the three
months ended March 31, 1995 compared to 94.4% for the same period in 1994.
Interest and other income decreased from $1,650,000 for the three months
ended March 31, 1994 to $1,224,000 for the same period in 1995 for a net
decrease of $426,000. The decrease is primarily attributable to the
cancellation of approximately $2,273,000 and $24,441,000 of mortgage notes
receivable during 1995 and 1994, respectively, in connection with the
acquisition of real estate facilities securing such notes. As a result, the
average outstanding mortgage notes receivable balance was significantly lower
($22,388,000) during the three months ended March 31, 1995 compared to the same
period in 1994 ($47,087,000). As of March 31, 1995, the mortgage notes bear
interest at stated rates ranging from 8.5% to 11.97% and effective interest
rates ranging from 10.0% to 14.8%.
Depreciation and amortization expense was $8,147,000 and $6,811,000 for the
three months ended March 31, 1995 and 1994, respectively, representing an
increase of $1,336,000, which is due to the acquisition of additional
properties in 1994 and 1995.
General and administrative expense was $1,091,000 and $740,000 for the three
months ended March 31, 1995 and 1994, respectively, representing an increase of
$351,000. This increase is due to the growth in the Company's capital base
combined with certain costs incurred in connection with the acquisition of
additional real estate facilities.
"Minority interest in income" represents the income allocable to equity
(partnership) interests in the PSP Partnerships (whose accounts are
consolidated with the Company) which are not owned by the Company. Since 1990,
the Company has acquired portions of these equity interests through its
acquisition of limited and general partnership interests in the PSP
Partnerships. These acquisitions have resulted in reductions to the "Minority
interest in income" from what it would otherwise have been in the absence of
such acquisitions, and accordingly, have increased the Company's share of the
consolidated PSP Partnerships' income. In determining income allocable to the
minority interest for the three months ended March 31, 1995 and 1994,
consolidated depreciation and amortization expense of approximately $2,773,000
and $4,053,000, respectively, was allocated to the minority interest. The
decrease in depreciation allocated to the minority interest was principally the
result of the acquisition of limited partnership units by the Company.
The acquisition of these partnership interests has provided the Company with
increased liquidity through cash distributions from the PSP Partnerships. The
Company expects to continue to acquire additional partnership interests in the
PSP Partnerships during 1995. See "Recent Developments" and --"Liquidity and
Capital Resources."
Advisory fees increased by $491,000 from $1,119,000 for the three months
ended March 31, 1994 to $1,610,000 for the same period in 1995. The advisory
fee, which is based on a contractual computation, increased as a result of
increased adjusted net income (as defined) per common share combined with the
issuance of additional preferred and common stock during 1994 and 1995.
Year ended December 31, 1994 compared to year ended December 31, 1993: Net
income in 1994 was $42,118,000 compared to $28,036,000 in 1993, representing an
increase of $14,082,000. Net income per common share was $1.05 per share in
1994 compared to $.98 per share in 1993, representing an increase of $.07 per
share. In determining net income per common share, preferred stock dividends
($16,846,000 and $10,888,000 in 1994 and 1993, respectively) reduced income
allocable to the common stockholders. The increase was primarily the result of
improved property operations at the Company's Same Store mini-warehouses, the
acquisition of additional real estate facilities during 1994, 1993 and 1992,
and the acquisition of additional partnership interests.
S-16
<PAGE>
During 1994, property net operating income improved compared to 1993. Rental
income increased $32,642,000 or 30% from $109,203,000 in 1993 to $141,845,000
in 1994, cost of operations increased $10,700,000 or 25% from $42,116,000 in
1993 to $52,816,000 in 1994, and property depreciation expense increased
$3,175,000 from $24,924,000 in 1993 to $28,099,000 in 1994 or 13%, resulting in
a net increase in property operating income of $18,767,000 or 45%. Net cash
flow increased by $21,942,000 or 33%. These increases were the result of
improved property operations for the Same Store mini-warehouses, the
acquisition of a total of 123 additional mini-warehouse facilities and one
business park facility during 1994, 1993 and 1992, and improved property
operations at the Company's business park facilities.
Property net operating income for the Same Store mini-warehouses increased by
$2,583,000 or 6.7% from $38,383,000 in 1993 to $40,966,000 in 1994. Net cash
flow for the Same Store mini-warehouses increased by $3,634,000 or 6.6% from
$55,266,000 in 1993 to $58,900,000 in 1994. These increases continue the upward
trend of improved operations at these facilities over the past three years as
net cash flow increased by approximately 9.7% in 1993 and 6.1% in 1992 compared
to the respective prior year. These increases are principally due to increased
occupancy levels combined with an increase in average rental rates. Weighted
average occupancy levels were 90.3% for the Same Store mini-warehouses for the
year ended December 31, 1994 compared to 89.5% for the same period in 1993.
Realized monthly rent per square foot for these facilities was $.59 and $.56
for the year ended December 31, 1994 and 1993, respectively.
From January 1, 1992 through December 31, 1994, the Company acquired a total
of 123 mini-warehouse facilities, 23 of which were acquired pursuant to a
merger transaction on September 30, 1994. During 1994 and 1993 these newly
acquired mini-warehouses contributed approximately $22,831,000 and $5,812,000
of net cash flow, respectively.
Property net operating income with respect to the Company's business park
operations improved by $2,668,000 from a net operating loss of $429,000 in 1993
to net operating income of $2,239,000 in 1994. Net cash flow with respect to
the Company's business park operations improved by $1,289,000 from $6,009,000
in 1993 to $7,298,000 in 1994. These improvements are principally due to the
improved performance of the Company's business park facility located in Culver
City, California, where property net operating income increased by
approximately $511,000 combined with the 1994 acquisition of a facility located
in Monterey Park, California which provided property net operating income of
$710,000 in 1994. Weighted average occupancy levels were 95.3% for the business
park facilities for the year ended December 31, 1994 compared to 93.1% for the
same period in 1993.
Interest and other income decreased from $5,477,000 in 1993 to $5,351,000 in
1994. The decrease is primarily attributable to the cancellation of mortgage
notes receivable totaling $24,441,000 (face amount) during 1994 in connection
with the acquisition of the underlying real estate facilities securing the
mortgage notes.
Interest expense increased from $6,079,000 in 1993 to $6,893,000 in 1994,
representing an increase of $814,000. This increase is primarily attributable
to the overall increase in average debt outstanding in 1994 compared to 1993 as
a result of increased borrowings on its bank credit facilities in 1994 compared
to 1993. The Company principally uses its credit facilities to finance the
acquisition of real estate investments which are subsequently repaid with the
net proceeds from the sale of the Company's securities. The weighted average
annual interest rate on the credit facility and the mortgage notes outstanding
at December 31, 1994 were approximately 7.3% and 9.3%, respectively. During the
third and fourth quarters of 1994, the Company expensed $700,000 of debt
issuance costs and $300,000 of fees to establish the new bank credit facility.
Advisory fees increased by $1,364,000 from $3,619,000 in 1993 to $4,983,000
in 1994. The advisory fee, which is based on a contractual computation,
increased as a result of increased adjusted net income (as defined) per common
share combined with the issuance of additional common and preferred stock
during 1994 and 1993.
S-17
<PAGE>
Year ended December 31, 1993 compared to year ended December 31, 1992: Net
income in 1993 was $28,036,000 compared to $15,123,000 in 1992, representing an
increase of $12,913,000. Net income per common share was $.98 per share in 1993
compared to $.90 per share in 1992, representing an increase of $.08 per share.
Net income in 1992 included a gain on the partial condemnation by a
governmental authority of a mini-warehouse facility of $398,000 or $.02 per
common share. In addition, in determining net income per common share,
preferred stock dividends ($10,888,000 and $812,100 in 1993 and 1992,
respectively) reduced income allocable to the common stockholders.
Income before gain on disposition of real estate was $28,036,000 in 1993
compared to $14,725,000 in 1992, representing an increase of $13,311,000 or
90%. The increase was primarily the result of improved property operations for
properties owned throughout 1993 and 1992, the acquisition of additional real
estate facilities during 1993 and 1992, the acquisition of additional
partnership interests, increased interest income and reduced interest expense.
During 1993, property net operating income improved compared to 1992. Rental
income increased $13,317,000 or 13.9% from $95,886,000 in 1992 to $109,203,000
in 1993, cost of operations increased $3,768,000 or 9.8% from $38,348,000 in
1992 to $42,116,000 in 1993, and depreciation expense increased $2,888,000 from
$22,036,000 in 1992 to $24,924,000 in 1993, resulting in a net increase in
property operating income of $6,661,000 or 18.8%. Net cash flow increased by
$9,549,000 or 16.6%. These increases were the result of (i) improved property
operations at the Same Store mini-warehouses and (ii) the acquisition of 11
additional mini-warehouse facilities during 1992 (four of which were acquired
on December 30, 1992) and 41 additional mini-warehouse facilities during 1993
(13 of which were acquired on December 30, 1993) partially offset by reduced
property operations at the Company's business park facilities.
Property net operating income for the Same Store mini-warehouses increased by
$4,535,000 or 13.4% from $33,848,000 in 1992 to $38,383,000 in 1993. Property
net cash flow for the Same Store mini-warehouses increased by $4,893,000 or
9.7% from $50,373,000 in 1992 to $55,266,000 in 1993. These increases are
principally due to increased occupancy levels combined with a slight increase
in average rental rates. Weighted average occupancy levels were 89.5% for the
Same Store mini-warehouses for the year ended December 31, 1993 compared to
86.8% for the same period in 1992. Realized monthly rent per square foot for
these facilities was $.56 and $.55 for the year ended December 31, 1993 and
1992, respectively.
The real estate facilities which were acquired during 1993 and 1992
contributed approximately $5,812,000 and $959,000 of net cash flow in 1993 and
1992, respectively.
Property net operating income with respect to the Company's business park
operations decreased by $1,448,000 from $1,019,000 in 1992 to a net operating
loss of $429,000 in 1993. Net cash flow with respect to the Company's business
park operations decreased by $197,000 or 3.2% from $6,206,000 in 1992 to
$6,009,000 in 1993. These decreases are principally due to the performance of
the Company's business park facility located in Culver City, California, where
property net operating income decreased by approximately $590,000 due to a
decline in occupancy and increased expenses. The facility has been actively
marketed and property operations have improved in 1994. Weighted average
occupancy levels were 93.1% for the business park facilities for the year ended
December 31, 1993 compared to 90.0% for the same period in 1992.
Interest and other income increased from $1,562,000 in 1992 to $5,477,000 in
1993 for a net increase of $3,915,000. The increase is primarily attributable
to the acquisition of mortgage notes receivable totaling $61,088,000 (face
amount). The mortgage notes bear interest at stated rates ranging from 6.125%
to 11.97% and effective interest rates ranging from 10.00% to 14.74%. The
overall average outstanding mortgage notes receivable balance for the year
ended December 31, 1993 was approximately $54,453,000 generating an overall
average effective yield of 11.04%.
S-18
<PAGE>
Interest expense decreased from $9,834,000 in 1992 to $6,079,000 in 1993 for
a net decrease of $3,755,000. The decrease in interest expense is primarily
attributable to overall decreases in average debt outstanding as mortgage notes
payable were reduced by $19,141,000 during 1993 combined with reduced average
borrowings on the Company's credit facilities during 1993 as compared to 1992.
The weighted average annual interest rate on the mortgage notes outstanding at
December 31, 1993 was approximately 10.0%.
Advisory fees increased by $1,007,000 from $2,612,000 in 1992 to $3,619,000
in 1993. The advisory fee, which is based on a contractual computation,
increased as a result of increased adjusted net income (as defined) per common
share combined with the issuance of additional preferred stock during 1993.
Property Operating Trends
The following table illustrates property operating trends for the Company's
properties:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
------------------ --------------------------
1995(1) 1994 1994 1993 1992
--------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Change in property net
operating income ("NOI") over
prior year for the Same Store
mini-warehouses:
After reductions for depre-
ciation.................... 5.4% 11.0% 6.7% 13.4% 8.2%
Prior to reductions for de-
preciation................. 5.2% 9.3% 6.6% 9.7% 6.1%
Change in NOI over prior year
for all properties:
After reductions for depre-
ciation.................... 43.5% 39.0% 44.5% 18.8% 7.3%
Prior to reductions for de-
preciation................. 35.1% 30.0% 32.7% 16.6% 5.3%
Weighted average occupancy
levels for Same Store mini-
warehouses................... 88.6% 87.7% 90.3% 89.5% 86.8%
Realized monthly rent per
square foot for Same Store
mini-warehouses(2)........... $.60 $.58 $ .59 $ .56 $ .55
Gross profit margin (loss)(3)
Mini-warehouse facilities... 45.5% 44.1% 46.5% 49.0% 42.2%
Business park facilities(4). 19.8% 8.1% 15.1% (3.3)% 7.8%
Overall for all facilities.. 42.9% 40.1% 43.0% 38.6% 37.0%
Pre-depreciation operating
margin(5)
Mini-warehouse facilities... 63.7% 63.2% 64.1% 63.5% 61.9%
Business Park facilities(4). 50.7% 51.1% 49.1% 45.9% 47.8%
Overall for all facilities.. 62.3% 61.9% 62.8% 61.4% 60.0%
</TABLE>
--------
(1) Results for the three months ended March 31, 1995 are not necessarily
indicative of the results that may be expected for the year ended December
31, 1995. The Company experiences minor seasonal fluctuations in the
occupancy levels of mini-warehouses with occupancies and property
performance generally higher in the summer months than in the winter
months.
(2) Realized rent per square foot represents the actual revenue earned per
occupied square foot. Management believes this is a more relevant measure
than the posted rental rates, since posted rates can be discounted through
the use of promotions.
(3) Gross profit margin is computed by dividing NOI (rental income less cost of
operations and depreciation) by gross revenues.
(4) Decrease in gross profit margin and pre-depreciation operating margin, in
1993, is principally due to the reductions in property operations at the
Culver City and Lakewood facilities.
(5) Pre-depreciation operating margin is computed by dividing NOI prior to the
reduction of depreciation expense by gross revenues.
S-19
<PAGE>
Trends in property operations are due to:
. Increasing occupancy levels due to reduced construction from mid-1980's
levels and promotion of the Company's facilities.
. Increasing realized rents per square foot of mini-warehouse space due to
increased demand and reduced need for promotional discounting of mini-
warehouse space to improve occupancy.
. Increasing revenues due to increasing realized rents and occupancy
levels offset in part by modest increase in expenses (approximately 2%
for the first three months of 1995, 5% in 1994, 2% in 1993, and 2% in
1992 on Same Store mini-warehouses) due to expense controls including
modest increases in payroll offset by reductions in promotional
expenditures.
Liquidity and Capital Resources
Capital structure. The Company's financial profile is characterized by a low
level of debt, increasing net income, increasing cash flow from operations,
increasing FFO and a conservative dividend payout ratio with respect to the
Common Stock. These characteristics reflect management's desire to "match"
asset and liability maturities, to minimize refinancing risks and to retain
capital to take advantage of acquisition and development opportunities and to
provide financial flexibility.
Over the last three years the Company has taken a variety of steps to enhance
its capital structure, including:
. The public issuance of approximately $335 million of preferred stock.
The preferred stock does not require redemption or sinking funds by the
Company.
. The public issuance of approximately $115 million of Common Stock.
. The issuance of approximately $82 million of Common Stock in mergers
with Properties 6 and Properties 8.
. The retention of approximately $30 million of funds available for debt
payments or reinvestment.
The Company does not believe it has any significant refinancing risks with
respect to its mortgage debt and nominal interest rate risks associated with
its variable rate mortgage debt which had a principal balance of $18.3 million
at March 31, 1995. The Company uses its $115 million bank credit facility
primarily to fund acquisitions and provide financial flexibility and liquidity.
The credit facility bears interest at LIBOR plus 1.25%. At March 31, 1995, the
Company had borrowings of $35 million under this facility, which was repaid
with the proceeds of the offering of Series F Preferred Stock in May 1995.
As a result of these transactions, the Company's capitalization has
increased. Shareholders' equity increased from $188 million on December 31,
1991 to $696.4 million on March 31, 1995. The increased equity combined with
reductions in total debt has resulted in an improvement in the Company's debt
to equity ratio from 55% at December 31, 1991 to 13% at March 31, 1995. The
Company's ratio of debt to total assets also decreased from 19% at December 31,
1991 to 9% at March 31, 1995.
See "Prospectus Summary", "Use of Proceeds" and "Recent Developments" for
certain recent and pending transactions, including descriptions of the merger
with Properties 8 and Properties 6 in September 1994 and February 1995,
respectively, as well as the status of a proposed restructuring of the Company.
Net Cash Provided by Operating Activities and Funds From Operations. The
Company believes that important measures of its performance as well as its
liquidity are net cash provided by operating activities and FFO.
Net cash provided by operating activities (net income plus depreciation,
amortization and minority interest) reflects the cash generated from the
Company's business before distributions to various equity holders, including
the preferred shareholders, capital expenditures or mandatory principal
payments on debt. Net cash provided by operating activities has increased over
the past three years from $44.0 million in 1992
S-20
<PAGE>
to $79.2 million in 1994. Net cash provided by operating activities has
increased to $23.1 million for the three months ended March 31, 1995 from $17.4
million for the same period in 1994.
The following table summarizes the Company's ability to pay the minority
interests' distributions, its dividends to the preferred shareholders and
capital improvements to maintain the facilities through the use of net cash
provided by operating activities. The remaining cash flow is available to the
Company to make both scheduled and optional principal payments on debt, pay
distributions to common shareholders and for reinvestment.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
------------------------ ----------------------------------------
1995 1994 1994 1993 1992
----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Income.............. $13,200,000 $ 8,746,000 $ 42,118,000 $ 28,036,000 $ 15,123,000
Depreciation and amorti-
zation................. 8,147,000 6,811,000 28,274,000 24,998,000 22,405,000
Minority interest in in-
come................... 1,823,000 2,049,000 9,481,000 7,291,000 6,895,000
Gain on disposition of
real estate............ -- -- -- -- (398,000)
Amortization of dis-
counts on mortgage
notes receivable....... (40,000) (249,000) (693,000) (848,000) --
----------- ----------- ------------ ------------ ------------
Net cash provided by op-
erating
activities............. 23,130,000 17,357,000 79,180,000 59,477,000 44,025,000
Distributions from oper-
ations to
minority interests..... (4,596,000) (6,102,000) (23,037,000) (23,647,000) (22,892,000)
----------- ----------- ------------ ------------ ------------
Cash from operations
allocable to the
Company's shareholders. 18,534,000 11,255,000 56,143,000 35,830,000 21,133,000
Less: preferred stock
dividends.............. (5,976,000) (3,649,000) (16,846,000) (10,888,000) (812,000)
----------- ----------- ------------ ------------ ------------
Cash from operations
available to
common shareholders.... 12,558,000 7,606,000 39,297,000 24,942,000 20,321,000
Capital improvements to
maintain
facilities
Mini-warehouses....... (790,000) (397,000) (6,360,000) (3,520,000) (3,541,000)
Business parks........ (268,000) (207,000) (1,952,000) (2,915,000) (1,612,000)
Add back: minority
interest share of
capital improvements to
maintain facilities.... 332,000 228,000 2,948,000 2,935,000 2,975,000
----------- ----------- ------------ ------------ ------------
Funds available for
principal payments on
debt, common dividends
and reinvestment....... 11,832,000 7,230,000 33,933,000 21,442,000 18,143,000
Cash distributions to
common shareholders.... (6,458,000) (4,951,000) (21,249,000) (14,728,000) (13,424,000)
----------- ----------- ------------ ------------ ------------
Funds available for
principal payments on
debt and reinvestment.. $ 5,374,000 $ 2,279,000 $ 12,684,000 $ 6,714,000 $ 4,719,000
=========== =========== ============ ============ ============
</TABLE>
The increases in net cash provided by operating activities and funds
available for principal payments on debt, common dividends and reinvestment
over the past three years is primarily due to (i) increasing property net
operating income at the Same Store mini-warehouses, (ii) the acquisition of
limited and general partnership interests in the PSP Partnerships and (iii) the
leverage created through the issuance of preferred stock and the utilization of
the net proceeds in real estate investments which have provided net cash flows
in excess of the preferred stock dividend requirements. These factors have
improved the cash flow position of the common shareholders as FFO applicable to
the common shareholders has increased over the same period at a rate greater
than the increase in number of common shares. The significant increase in
capital improvements in 1994 compared to 1993 for the mini-warehouse facilities
is due to the acquisition of new
S-21
<PAGE>
facilities in 1994 and 1993 combined with approximately $800,000 of non-
recurring expense to upgrade certain facilities in Texas to provide for climate
controlled storage units. See the consolidated statements of cash flows for the
each of the three years in the period ended December 31, 1994 in the 1994 10-K
for additional information regarding the Company's investing and financing
activities.
FFO increased to $56,143,000 for the year ended December 31, 1994 compared to
$35,830,000 in 1993 and $21,133,000 in 1992. FFO has increased to $18,534,000
for the three months ended March 31, 1995 from $11,255,000 for the same period
in 1994. FFO applicable to the common shareholders (after deducting preferred
stock dividends) increased to $39,297,000 for the year ended December 31, 1994
compared to $24,942,000 in 1993 and $20,321,000 in 1992. FFO applicable to the
common shareholders has increased to $12,558,000 for the three months ended
March 31, 1995 from $7,606,000 for the same period in 1994. FFO is defined by
the National Association of Real Estate Investment Trusts, Inc. ("NAREIT") as
net income (computed in accordance with generally accepted accounting
principles), excluding gains (or losses) from debt restructuring and sales of
property, plus depreciation and amortization, and after adjustments for
unconsolidated partnerships and joint ventures. NAREIT has recently adopted
revisions to the definition of FFO which will become effective in 1996. The
most material impact of the new guidelines will be (i) amortization of deferred
financing costs will be treated as an expense--i.e. it will no longer be
treated as an add-back to net income and (ii) certain gains on sales of land
will be included in FFO if deemed to be recurring. These changes will have no
impact on the way the Company currently computes its funds from operations. FFO
is a supplemental performance measure for equity real estate investment trusts
used by industry analysts. FFO does not take into consideration scheduled
principal payments on debt, capital improvements, distributions and other
obligations of the Company. Accordingly, FFO is not a substitute for the
Company's cash flow or net income (as discussed above) as a measure of the
Company's liquidity or operating performance.
The Company believes that its rental revenues, distributions from real estate
partnership interests and interest income will be sufficient over at least the
next 12 months to meet the Company's operating expenses, capital improvements,
debt service requirements and distributions to shareholders. During 1995, the
Company has budgeted approximately $8 million for capital improvements ($2
million of which is directly attributable to the minority interest in respect
of its ownership interest) to maintain its facilities. During 1994, the Company
incurred capital improvements of approximately $8.3 million. The Company
believes that it is not subject to any significant refinancing risks. During
1993 and 1994, the Company either repaid or extended the maturities of its
mortgage notes such that in no year, until 1999, will there be more than $5.0
million of principal payments on mortgage notes becoming due and payable. See
Note 7 to the Company's consolidated financial statements in the 1994 10-K for
principal maturities on mortgage notes payable.
In March 1995, the Company acquired two parcels of land located in Atlanta,
Georgia on which the Company is currently developing mini-warehouse facilities.
The facilities are scheduled to open in late 1995 and have an estimated
aggregate cost of approximately $8.2 million.
The Company believes its geographically diverse portfolio has resulted in a
relatively stable and predictable investment portfolio with increasing overall
property performance over the past four years.
S-22
<PAGE>
Distributions
The Company has a conservative distribution policy that is, among other
things, supported by its cash flow from operations (after capital expenditures
and debt service), availability of cash to make such distributions and
Company's ability to maintain its REIT status. The Company's policy is also
conservative with respect to FFO. The Company's conservative distribution
policy permits it, after funding its distributions and capital improvements, to
retain significant funds to make additional investments and debt reductions.
During 1992, 1993, 1994 and the first quarter of 1995, the Company distributed
to common shareholders 66%, 59%, 54% and 51% of its FFO available to common
shareholders, respectively, allowing it to retain approximately $30 million
after capital improvements and preferred stock dividend requirements.
Distributions to shareholders since 1993 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
--------------------------- -------------------------------------------------------
1995 1994 1993
--------------------------- --------------------------- ---------------------------
DISTRIBUTIONS TOTAL DISTRIBUTIONS TOTAL DISTRIBUTIONS TOTAL
PER SHARE DISTRIBUTIONS PER SHARE DISTRIBUTIONS PER SHARE DISTRIBUTIONS
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Series A Preferred
Stock.................. $.625 $ 1,141,000 $2.500 $ 4,563,000 $2.500 $ 4,563,000
Series B Preferred
Stock.................. $.575 1,372,000 $2.300 5,340,000 $1.803 4,147,000
Series C Preferred
Stock.................. $.542 650,000 $1.042 1,250,000 -- --
Series D Preferred
Stock.................. $.594 713,000 $0.792 950,000 -- --
Series E Preferred
Stock.................. $.417 914,000 $ -- -- -- --
Convertible Preferred
Stock.................. $.516 1,186,000 $2.063 4,743,000 $0.947 2,178,000
----------- ----------- -----------
5,976,000 16,846,000 10,888,000
Common Stock............ $.220 6,458,000 $0.850 21,249,000 $0.840 14,728,000
----------- ----------- -----------
$12,434,000 $38,095,000 $25,616,000
=========== =========== ===========
</TABLE>
The Series C Preferred Stock and the Series D Preferred Stock were issued on
June 30, 1994 and September 1, 1994, respectively. Dividends with respect to
the Series C and Series D Preferred Stock are pro rated from the date of
issuance through December 31, 1994. The annual distribution requirement with
respect to the Series D Preferred stock is $2.38 per share. The dividend rate
on the Series C Preferred Stock is adjustable. For the period from the date of
issue (June 30, 1994) through September 30, 1994, the rate was equal to 8.15%
per annum, 8.426% per annum for the fourth quarter of 1994 and 8.668% per annum
for the first quarter of 1995. Thereafter, the dividend rate per annum will be
adjusted quarterly and will be equal to the highest of one of three U.S.
Treasury indices (Treasury Bill Rate, Ten Year Constant Maturity Rate, and
Thirty Year Constant Maturity Rate) multiplied by 110%. However, the dividend
rate for any dividend period will not be less than 6.75% per annum nor greater
than 10.75% per annum. The dividend rate with respect to the second quarter of
1995 is 8.393% per annum.
The annual distribution level with respect to the Company's outstanding
preferred stock (including the Series F Preferred Stock issued in May 1995) is
approximately $31,227,000. The amount assumes an annual dividend rate on the
Series C Preferred Stock of 8.393% (the rate in effect for the second quarter
of 1995). At the maximum rate on the Series C Preferred Stock (10.75%), the
amount would increase by approximately $707,000. The distributions for the
first quarter of 1995 with respect to the Common Stock is $.22 per share.
REIT Distribution Requirement
As a REIT, the Company is not taxed on that portion of its taxable income
which is distributed to its shareholders provided that at least 95% of its
taxable income in any year is so distributed prior to filing of the Company's
tax return with respect to such year. The Company has satisfied the REIT
distribution requirement since 1980. The Company has satisfied the REIT
distribution requirement for 1992, 1993 and 1994 by attributing distributions
in 1993, 1994 and 1995 to the prior year's taxable income. The Company
S-23
<PAGE>
may be required, over each of the next several years, to attribute
distributions made after the close of the taxable year to the prior year, but
shareholders will be treated for federal income tax purposes as having received
such distributions in the taxable years in which they are actually made. The
extent to which the Company will be required to attribute distributions to the
prior year will depend on the Company's operating results and the level of
distributions as determined by the Board of Directors.
Future Transactions
The Company intends to continue to expand its asset and capital base through
the acquisition of real estate assets and interests in real estate assets from
unaffiliated parties and affiliates of Public Storage through direct purchases,
mergers, tender offers or other transactions, including transactions of the
type described under "Use of Proceeds" and "Recent Developments." The Company
expects to fund these transactions with borrowings under its credit facility,
undistributed operating cash flow and the issuance of securities.
S-24
<PAGE>
BUSINESS
GENERAL
The Company, an equity real estate investment trust ("REIT"), owns more mini-
warehouse space in the United States than any competitor and is the largest
owner of mini-warehouses operated under the "Public Storage" name. At March 31,
1995, the Company had equity investments in 422 mini-warehouses with
approximately 23.9 million square feet of space. The Company's mini-warehouses,
which are located primarily in or near major metropolitan markets in 37 states,
offer relatively low-cost, easily accessible, secure and enclosed storage space
for both personal and business use.
The Company's primary objective is to maximize shareholder value by
increasing funds from operations per share of Common Stock through internal
growth and acquisitions of additional mini-warehouses. The Company believes
that its access to capital, geographic diversification and operating
efficiencies resulting from its size enhance its ability to achieve this
objective. The Company believes that its mini-warehouse investments made since
December 31, 1994 and its proposed acquisitions to be made with the net
proceeds of the Offering generated an unleveraged cash yield of approximately
10% for the latest 12-month period for which information is available.
The Company believes that its mini-warehouses have attractive operating
characteristics. For 1994, the Company's mini-warehouses had an average
occupancy of 90% compared with an average break-even occupancy level (before
depreciation expense and debt service) of only 28%, resulting in a profit
margin (net cash flow divided by rental income) of 64%. The Company's tenant
base, which is comprised of more than 170,000 individuals and businesses, has
an average occupancy term of 12 months, and no one mini-warehouse accounts for
more than 1% of revenues. In addition, the Company's mini-warehouses are
characterized by a low level of capital expenditure to maintain their condition
and appearance.
The Company further believes that its operating results have benefitted from
favorable industry trends and conditions. Notably, the level of new mini-
warehouse construction has decreased since 1988 while consumer demand has
increased. In addition, in recent years consolidation has occurred in the
fragmented mini-warehouse industry. The Company believes that it is well-
positioned to capitalize on this consolidation trend due to its demonstrated
access to capital and national presence. Public Storage is the largest mini-
warehouse operator in the United States and Canada, operating approximately the
same square footage of mini-warehouse space as the next ten largest operators
combined and approximately four times as much space as the next largest
operator.
The Company is evaluating the feasibility of developing mini-warehouses in
selected markets in which there are few, if any, facilities to acquire at
attractive prices and where the absence of other undeveloped parcels of land or
other impediments to development make it difficult to construct additional
competing facilities. The Company is currently constructing two properties in
Atlanta, Georgia, which are expected to open during 1995.
The Company's five senior officers are responsible for the acquisition of
more than 350 mini-warehouses, the development of more than 650 mini-warehouses
and the operation of more than 1,000 mini-warehouses during their average 16
years of experience with the Public Storage organization. In addition, the
Company's senior management has a significant ownership position in the Company
with officers, directors and their affiliates beneficially owning approximately
9,358,000 shares or 28% of the Common Stock as of March 31, 1995, with a
current market value of approximately $150 million. Approximately 2,165,000 of
these shares were purchased for cash at market prices during 1994.
The Company is currently advised by Public Storage Advisers, Inc. (the
"Adviser") and its facilities are operated by Public Storage Management, Inc.
("PSMI") and Public Storage Commercial Properties Group, Inc. ("PSCP"). The
Adviser, PSMI and PSCP are subsidiaries of Public Storage, Inc. ("PSI"), and
the Company's executive officers and certain directors are affiliated with PSI.
All are subject to various conflicts
S-25
<PAGE>
of interest arising out of their relationships with entities that own and
operate mini-warehouses. All operations are under the general supervision of
the Board of Directors, including investments in new facilities and
transactions with affiliates. Of the Company's investments, 211 were made
jointly with the PSP Partnerships. The Company has elected to be taxed as a
REIT under the Code. To the extent that the Company continues to qualify as a
REIT, it will not be taxed, with certain limited exceptions, on the taxable
income that is distributed to its shareholders. See "Certain Considerations--
Conflicts of Interest and Transactions with Affiliates" and "Certain Federal
Income Tax Considerations" in the accompanying Prospectus.
See "Prospectus Summary--Proposed Restructuring" for the status of a proposed
restructuring of the Company.
INVESTMENTS IN FACILITIES
At March 31, 1995, the Company had equity interests (through direct
ownership, as well as general and limited partnership interests) in 438
facilities (180 of which were wholly owned) located in 37 states: Alabama (14),
Arizona (5), California (107), Colorado (14), Connecticut (3), Delaware (3),
Florida (34), Georgia (12), Hawaii (1), Illinois (9), Indiana (8), Kansas (13),
Kentucky (2), Louisiana (3), Maryland (10), Massachusetts (1), Michigan (2),
Minnesota (1), Missouri (9), Nebraska (1), Nevada (9), New Hampshire (2), New
Jersey (13), New York (6), North Carolina (6), Ohio (20), Oklahoma (5), Oregon
(13), Pennsylvania (7), Rhode Island (2), South Carolina (1), Tennessee (8),
Texas (61), Utah (5), Virginia (12), Washington (14), and Wisconsin (2). These
facilities consist of 403 mini-warehouses, 16 business parks and 19 combination
mini-warehouse/business park facilities. Some of the general partnership and
limited partnership interests represent a de minimus interest in the
facilities.
At March 31, 1995, the Company also held mortgage loans secured by 11 other
mini-warehouses owned by seven private limited partnerships whose general
partners are affiliates of the Adviser.
None of the Company's current investments involves 5% or more of the
Company's total assets, gross revenues or net income. In the opinion of
management of the Company, the facilities in which the Company has invested are
adequately insured.
Mini-Warehouses. Mini-warehouses, which comprise the vast majority of the
Company's investments (approximately 94% of the Company's FFO for the three
months ended March 31, 1995), are designed to offer accessible storage space
for personal and business use at a relatively low cost. A user rents a fully
enclosed space which is for the user's exclusive use and to which only the user
has access on an unrestricted basis during business hours. On-site operation is
the responsibility of resident managers who are supervised by area managers.
Some mini-warehouses also include rentable uncovered parking areas for vehicle
storage. Leases for mini-warehouse space may be on a long-term or short-term
basis, although typically spaces are rented on a month-to-month basis. Rental
rates vary according to the location of the property and the size of the
storage space.
Users of space in mini-warehouses include both individuals and large and
small businesses. Individuals usually employ this space for storage of, among
other things, furniture, household appliances, personal belongings, motor
vehicles, boats, campers, motorcycles and other household goods. Businesses
normally employ this space for storage of excess inventory, business records,
seasonal goods, equipment and fixtures.
Mini-warehouses in which the Company has invested generally consist of three
to seven buildings containing an aggregate of between 350 to 750 storage
spaces, most of which have between 25 and 400 square feet and an interior
height of approximately eight to 12 feet.
The Company experiences minor seasonal fluctuations in the occupancy levels
of mini-warehouses with occupancies generally higher in the summer months than
in the winter months. The Company believes that these fluctuations result in
part from increased moving activity during the summer.
S-26
<PAGE>
The Company's mini-warehouses are geographically diversified and are
generally located in heavily populated areas and close to concentrations of
apartment complexes, single family residences and commercial developments.
However, there may be circumstances in which it may be appropriate to own a
property in a less populated area, for example, in an area that is highly
visible from a major thoroughfare and close to, although not in, a heavily
populated area. Moreover, in certain population centers, land costs and zoning
restrictions may create a demand for space in nearby less populated areas.
As with most other types of real estate, the conversion of mini-warehouses
to alternative uses in connection with a sale or otherwise would generally
require substantial capital expenditures. However, the Company does not intend
to convert its mini-warehouses to other uses.
Commercial Properties. Subject to the prohibitions on investments and
activities described below, the Company may invest in all types of real
estate. Most of the Company's non-mini-warehouse investments are interests in
business parks and low-rise office buildings. A business park may include both
industrial and office space. Industrial space may be used for, among other
things, light manufacturing and assembly, storage and warehousing,
distribution and research and development activities. The Company believes
that most of the office space is occupied by tenants who are also renting
industrial space. The remaining office space is used for general office
purposes. A business park may also include facilities for commercial uses such
as banks, travel agencies, restaurants, office supply shops, professionals or
other tenants providing services to the public. The amount of retail space in
a business park is not expected to be significant.
The Company's business parks typically consist of one to ten buildings
located on three to twelve acres and contain from approximately 55,000 to
175,000 square feet of rentable space. A business park property is typically
divided into units ranging in size from 600 to 5,000 square feet. However, the
Company may acquire business parks that do not have these characteristics. The
larger facilities have on-site management. Parking is open or covered, and the
ratio of spaces to rentable square feet ranges from one to four per thousand
square feet, depending upon the use of the property and its location. Office
space generally requires a greater parking ratio than most industrial uses.
GROWTH STRATEGIES
The Company's growth strategies focus on improving the operating performance
of its existing properties and on increasing its ownership of mini-warehouses
through additional investments. Major elements of these strategies are as
follows:
. Increase net cash flow from existing properties. The Company seeks to
increase the net cash flow generated by its existing properties by (i)
increasing average occupancy rates and (ii) achieving higher levels of
realized monthly rents per occupied square foot. Average occupancy at the Same
Store mini-warehouses has increased from 86.1% in 1992 to 90.3% for 1994.
Similarly, realized monthly rents per occupied square foot have increased
approximately 7% during this same period. These factors have resulted in net
cash flow growth at Same Store mini-warehouses of approximately 6%, 10% and 7%
in 1992, 1993 and 1994, respectively, over the prior year. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Results of Operations."
.Acquire properties operated by Public Storage. The Company believes its
relationship with Public Storage enhances its ability to identify attractive
acquisition opportunities. Exclusive of the Company's facilities,
approximately 600 mini-warehouses are operated under the "Public Storage" name
on behalf of approximately 80 ownership entities. From time to time, some of
these owners desire to sell their mini-warehouses providing the Company with a
source of acquisition opportunities. These properties exhibit net cash flow
growth comparable to the Company's mini-warehouses and the Company believes
they include some of the better located, better constructed mini-warehouses in
the industry. Because of common property operation, the Company is provided
with reliable operating information prior to acquisition and these properties
are easily integrated into the Company's portfolio. From January 1, 1992
through December 31,
S-27
<PAGE>
1993, the Company acquired a total of 36 mini-warehouses which were operated
under the "Public Storage" name (2.1 million square feet of space at an
aggregate purchase price of $83.2 million). For 1994, the net cash flow
generated by these properties provided an unleveraged cash yield of
approximately 11.6%. From January 1, 1994 through May 5, 1995 , the Company
acquired an additional 73 such properties.
The Company believes that adequate procedures are in place to protect the
Company's interest in affiliated transactions. All affiliated transactions must
be approved by the Company's independent directors and supported by independent
appraisals or fairness opinions.
.Acquire properties operated by other operators. The Company believes its
relationship with Public Storage also enhances its ability to capitalize on the
overall fragmentation in the mini-warehouse industry. Of the more than 22,000
mini-warehouses in the United States, the Company believes that the ten largest
operators manage less than 11% of the total space. Public Storage's presence in
and knowledge of substantially all of the major markets in the United States
provides the Company with local market information on rates, occupancy and
competition. From January 1, 1992 through December 31, 1993, the Company
acquired a total of 16 mini-warehouses (967,000 square feet of space at an
aggregate purchase price of $34.5 million) operated by other operators. For
1994, the net cash flow generated by these assets provided an unleveraged cash
yield of approximately 12.2%. From January 1, 1994 through May 5, 1995, the
Company acquired an additional 37 such properties.
.Access to acquisition capital. The Company believes that its strong financial
position enables it to access capital for growth. The Company's debt, as a
percentage of shareholders' equity, has decreased from 60% at December 31, 1990
to 13% at March 31, 1995, thereby significantly reducing refinancing risks. The
Company currently has a $115 million credit facility (LIBOR plus 1.25%) with a
bank group led by Wells Fargo Bank, which the Company uses as a temporary
source of acquisition financing. The Company seeks to ultimately finance all
acquisitions with permanent sources of capital. From January 1, 1992 through
March 31, 1995, the Company has issued approximately $500 million of perpetual
preferred and common equity to finance such acquisitions. See "--Borrowings"
and "--Limitations on Debt."
.Conservative distribution policy. The Company seeks to retain significant
funds (after funding its distributions and capital improvements) for additional
property acquisitions and debt reduction. From January 1, 1992 through March
31, 1995, the Company retained approximately $30 million for such purposes. For
the three months ended March 31, 1995, the Company distributed only 51% of its
FFO allocable to Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
As a result of the implementation of its growth strategies, the Company has
successfully increased FFO allocable to Common Stock. From 1992 through 1994,
FFO allocable to Common Stock increased 93%, while the weighted average number
of shares of Common Stock increased only 51%. See "Prospectus Supplement
Summary--Summary Financial Information."
OPERATING STRATEGIES
The Company's mini-warehouses are operated under the "Public Storage" name,
the most recognized name in the mini-warehouse industry. The major elements of
the Company's and Public Storage's operating strategies are as follows:
. Capitalize on Public Storage name recognition. Public Storage, with more than
20 years of operating experience in the mini-warehouse business, is the largest
operator of mini-warehouses in the country. Including the Company's mini-
warehouses, as of March 31, 1995, Public Storage operated 1,106 mini-warehouses
aggregating approximately 65.2 million square feet of space located in 38
states and four provinces in Canada. In the past eight years, in excess of $56
million has been expended promoting the "Public Storage" name. The Company
believes that its participation in the Public Storage marketing and
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advertising programs improves its competitive position in the market. Public
Storage is the only mini-warehouse operator regularly using television
advertising in several major markets around the country, and Public Storage's
in-house Yellow Pages staff designs and places advertisements in approximately
700 directories in 80 markets. In addition, Public Storage offers a toll-free
referral system, 800-44-STORE, which services approximately 100,000 calls per
year from potential customers inquiring as to the nearest Public Storage mini-
warehouse.
.Benefit from Public Storage's economies of scale. Through its affiliation with
Public Storage, the Company is able to realize economies of scale. By combining
the advertising and marketing programs and purchasing activities of more than
1,100 mini-warehouses, Public Storage achieves significant per facility savings
which are passed on to the Company.
.Maintain high occupancy levels and increase realized rents. Subject to market
conditions, Public Storage generally seeks to achieve average occupancy levels
in excess of 90% and to eliminate promotions prior to increasing rental rates.
Average occupancy for the Company's Same-Store mini-warehouses has increased
from 86.8% in 1992 to 90.3% in 1994. During the first quarter of 1995, the
average occupancy was 88.6% compared to 87.7% for the first quarter of 1994.
Realized monthly rents per square foot increased from $.55 in 1992 to $.60
during the first quarter of 1995. The Company has increased rental rates in
many markets where it has achieved high occupancy levels and eliminated or
minimized promotions.
.Concentrate properties in major markets. The Company is focused on owning and
acquiring mini-warehouses located principally in the 54 largest metropolitan
areas (those with populations in excess of 1,000,000) throughout the country.
The Company believes that the events resulting in the rental of mini-warehouse
space occur with greater frequency in the larger metropolitan areas than in
less populous areas. By concentrating its facilities within these markets, the
Company can also achieve economies of scale with respect to property operations
and advertising.
.Focus on high quality properties in prime locations. The Company seeks to own
high quality properties located on prime land with high traffic counts, high
visibility and a dense population within a three to five mile radius. The
Company believes that facilities located on prime land are less susceptible to
the threat of competition via new development and, as a result, have more
stable cash flows. The Company is also committed to investing the capital
necessary to maintain the high quality of its facilities and to upgrade them
when warranted by market conditions.
.Systems and controls. Public Storage has an organizational structure and a
property management system, "CHAMP" (Computerized Help and Management Program),
which links its corporate office with each mini-warehouse. This enables Public
Storage to obtain daily information from each mini-warehouse and to achieve
efficiencies in operations and maintain control over space inventory, rental
rates and promotional discounts. Expense management is achieved through
centralized payroll and accounts payable systems and a comprehensive property
tax appeals department, and Public Storage has an extensive internal audit
program designed to ensure proper handling of cash collections.
.Professional property operation. In addition to approximately 120 support
personnel at the Public Storage corporate offices, Public Storage employs
approximately 2,700 on-site personnel who manage the day-to-day operations of
the mini-warehouses in the Public Storage system. These on-site personnel are
supervised by 107 district managers, 14 regional managers and three divisional
managers (with an average of 12 years experience in the mini-warehouse
industry) who report to the president of the mini-warehouse property operator
(who has 11 years of experience with the Public Storage organization). Public
Storage carefully selects and extensively trains the operational and support
personnel and offers them a progressive career path. See "Management."
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COMPETITION
Competition in the market areas in which many of the Company's facilities
are located is significant and affects the occupancy levels, rental rates and
operating expenses of certain of the Company's facilities. In addition to
competition from mini-warehouses operated by Public Storage, there are three
other national firms and numerous regional and local operators. The Company
believes that the significant operating and financial experience of its
executive officers and directors, combined with the Company's capital
structure, national investment scope, geographic diversity, economies of scale
and the "Public Storage" name, should enable the Company to continue to
compete effectively with other entities.
In seeking investments, the Company competes with a wide variety of
institutions and other investors, some of whom may have greater financial
resources than the Company. An increase in the amount of funds available for
real estate investments may increase competition for ownership of interests in
facilities and may reduce yields.
The following table sets forth information on the largest mini-warehouse
operators in the United States and Canada as of March 31, 1995. Of the 1,106
mini-warehouses operated under the "Public Storage" name at March 31, 1995,
the Company had equity interests (through direct ownership, as well as general
and limited partnership interests) in 422 mini-warehouses.
Largest Mini-Warehouse Facility Operators-March 1995
[BAR CHART APPEARS HERE ILLUSTRATING THE LARGEST MINI-WAREHOUSE FACILITY
OPERATORS--MARCH 1995: PUBLIC STORAGE, SHURGARD, U-HAUL AND STORAGE USA.]
Public Storage 1,106 facilities 65,200,000 total rentable square feet
Shurgard 248 facilities 15,600,000 total rentable square feet
U-Haul 650 facilities 13,000,000 total rentable square feet
Storage USA 128 facilities 8,400,000 total rentable square feet
Sources: Public Storage; Shurgard Storage Centers, Inc. Registration Statement
filed April 18, 1995 and Prospectus dated February 15, 1995; Amerco Prospectus
dated March 16, 1995; Storage USA, Inc. Registration Statement filed April 18,
1995. Includes United States and Canada. In Canada, Public Storage's
mini-warehouses are operated by an affiliate of PSMI.
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PROHIBITED INVESTMENTS AND ACTIVITIES
The Company's Bylaws prohibit the Company from purchasing properties in which
the Company's officers or directors have an interest, or from selling
properties to such persons, unless the transactions are approved by a majority
of the independent directors and are fair to the Company based on an
independent appraisal. This Bylaw provision may be changed only upon a vote of
the holders of a majority of the shares of (i) Common Stock and Convertible
Preferred Stock, voting together and (ii) each of the series of senior
preferred stock. See "--Limitations on Debt" for other restrictions in the
Bylaws.
INVESTMENT ADVISER
Since the Company's organization, the Adviser has administered the day-to-day
investment operations of the Company and has advised and consulted with the
Board of Directors in connection with the acquisition and disposition of
investments. The Board of Directors has the duty of overall supervision of the
Company's operations.
The Adviser is wholly owned by PSI which in turn is wholly owned by PSI
Holdings, Inc. ("PSIH"). PSIH is beneficially owned 14% by Kenneth Q. Volk, Jr.
and 86% by B. Wayne Hughes and his daughter, Tamara L. Hughes, who has an
option to acquire, exercisable under certain circumstances, and an irrevocable
proxy to vote, Mr. Volk's remaining interest in PSIH. Certain of the directors
and officers of the Company
are also directors and officers of the Adviser. The Advisory Contract between
the Company and the Adviser was approved by the unanimous vote of the directors
who are not affiliated with the Adviser.
Effective September 30, 1991, the Company entered into an Amended and
Restated Advisory Contract (the "Advisory Contract") with the Adviser. This
contract, which amends the original advisory contract, provides for the monthly
payment of advisory fees equal to the sum of (i) 12.75% of the Company's
adjusted income (as defined, and after a reduction for the Company's share of
capital improvements) per share of Common Stock based on Common Stock
outstanding at September 30, 1991 (14,989,454 shares) and (ii) 6% of adjusted
income per share on shares in excess of 14,989,454 shares of Common Stock.
Under the original advisory contract, advisory fees were equal to 15% of the
Company's adjusted income (as defined, and without a reduction for the
Company's share of capital improvements). Effective May 14, 1992, the Advisory
Contract was amended to provide that, in computing the advisory fee, adjusted
income will be reduced by dividends paid on all preferred stock and that the
Adviser will also receive an amount equal to 6% of any such dividends.
In addition to the advisory fee, the Adviser is paid a disposition fee of 20%
of the total realized gain (as defined) from the sale of the Company's assets,
subject to certain limitations.
The Advisory Contract may be terminated (i) at any time by either party upon
60 days' written notice, with or without cause, or (ii) by the Company upon
written notice upon the occurrence of certain events. The Advisory Contract is
subject to annual renewals with the approval of the independent directors and,
in certain circumstances, can be assigned by either the Company or the Adviser.
Upon (i) termination of the Advisory Contract, other than under certain
circumstances, or (ii) expiration of the Advisory Contract due to the Company's
refusal to agree to an extension of the Advisory Contract on the same terms,
the Adviser will be entitled to receive payments as follows: (a) an amount
equal to the accrued and unpaid portion of the disposition fee, less 20% of any
total unrealized loss (as defined) as of the date of termination; (b) an amount
equal to 20% of the total unrealized gain (as defined); and (c) an amount equal
to 15% of adjusted income from October 1, 1991 to the date of termination minus
the advisory fee paid from October 1, 1991 to the date of termination.
See "Prospectus Summary--Proposed Restructuring" for the status of a proposed
restructuring of the Company.
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PROPERTY OPERATORS
Since the Company's organization, PSMI, which was organized in 1973, has
provided property operation services to the Company under a Management
Agreement between the Company and PSMI (as amended, the "Management
Agreement," which term shall include the assignment relating to such agreement
referenced in the following sentence). In 1987, PSMI assigned its rights to
operate commercial properties to PSCP, which was organized in 1987. PSMI
continues to operate mini-warehouse facilities under the Management Agreement.
Under the Management Agreement, PSMI and PSCP operate substantially all of the
assets in which the Company has invested. PSMI has informed the Company that
it believes it operates more rentable square feet of mini-warehouse storage
space than any other property operator. At March 31, 1995, PSMI, PSCP and
affiliates operated a total of approximately 1,157 facilities in the United
States and Canada, containing an aggregate of approximately 70.3 million net
rentable square feet of space, 1,106 of which were mini-warehouse facilities
containing approximately 65.2 million net rentable square feet of mini-
warehouse space.
Under the supervision of the Company, PSMI and PSCP coordinate rental
policies, rent collection, marketing activity, purchase of equipment and
supplies, maintenance activity, and the selection and engagement of vendors,
suppliers and independent contractors.
PSMI and PSCP assist and advise the Company in establishing policies for the
hire, discharge and supervision of employees for the operation of the
Company's facilities, including resident managers, assistant managers, relief
managers, and billing and maintenance personnel. Some or all of these
employees may be employed on a part-time basis and may also be employed by
PSI, partnerships organized by PSI or other persons or entities owning
facilities operated by PSMI or PSCP.
In the purchasing of services by the Company such as advertising (including
broadcast media advertising) and insurance, PSMI and PSCP attempt to achieve
economies by combining the resources of the various facilities that they
operate. Facilities operated by PSMI and PSCP carry comprehensive insurance,
including fire, earthquake, liability and extended coverage.
PSMI has developed systems for space inventory, accounting and handling
delinquent accounts, including a computerized network linking PSMI operated
facilities. Each project manager is furnished with detailed operating
procedures and typically receives facilities training from PSMI. Form letters
covering a variety of circumstances are also supplied to resident managers. A
record of actions taken by the resident managers when delinquencies occur is
maintained.
The Company's facilities are typically advertised via signage, yellow pages,
flyers and broadcast media advertising (television and radio) in geographic
areas in which many of the Company's facilities are located. The Company
believes that PSMI is the only mini-warehouse operator that uses television
advertising to any significant extent. Broadcast media and other advertising
costs are charged to the Company's facilities located in geographic areas
affected by the advertising. From time to time, PSMI or PSCP adopt promotional
programs, such as temporary rent reductions, in selected areas or for
individual facilities.
For as long as the Management Agreement is in effect, PSMI has granted the
Company a non-exclusive license to use two PSI service marks and related
designs, including the "Public Storage" name, in conjunction with rental and
operation of facilities managed pursuant to the Management Agreement. Upon
termination of the Management Agreement, the Company would no longer have the
right to use the service marks and related designs except as described below.
Management believes that the loss of the right to use the service marks and
related designs could have a material adverse effect on the Company's
business.
The Management Agreement as amended in February 1995 (approved by the Board
of Directors in August 1994) provides that (i) as to facilities directly owned
by the Company, the Management Agreement will expire in February 2002,
provided that in February of each year it shall be automatically extended for
one year unless either party notifies the other that the Management Agreement
is not being extended, in which
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case it expires, as to such facilities, on the first anniversary of its then
scheduled expiration date; and (ii) as to facilities in which the Company has
an interest, but not directly owned by the Company, the Management Agreement
may be terminated as to such facilities, upon 60 days' written notice by the
Company and upon seven years' notice by PSMI or PSCP, as the case may be. The
Management Agreement may also be terminated at any time by either party for
cause, but if terminated for cause by the Company, the Company retains the
right to use the service marks and related designs until the then scheduled
expiration date, if applicable, or otherwise a date seven years after such
termination.
PSMI and PSCP are wholly owned subsidiares of PSI, which in turn is a wholly
owned subsidiary of PSIH. Certain of the directors and officers of the Company
are also directors and officers of PSMI and PSCP.
For a description of the compensation payable to PSMI and PSCP under the
Property Management Agreement, see item 13 of the 1994 10-K.
See "Prospectus Summary--Proposed Restructuring" for the status of a proposed
restructuring of the Company.
AGREEMENT ON INVESTMENT OPPORTUNITIES
At any time and from time to time the Company can invoke its rights under the
Agreement on Investment Opportunities, which (when invoked) provides that PSI
and its affiliates may not invest, or offer to others the opportunity to
invest, in any existing mini-warehouse owned by an unaffiliated party unless
the opportunity has been presented to and rejected by the Company. These
parties may invest in other types of improved property, and in unimproved
property acquired for mini-warehouse construction, without obligation to make
such investments available to the Company. Upon completion of this offering,
the Company intends to invoke its rights under the Agreement on Investment
Opportunities until the net proceeds from the sale of the shares of Common
Stock offered hereby have been committed.
BORROWINGS
As of March 31, 1995, the Company had an aggregate of approximately $52
million of mortgage financing due at various dates between 1995 and 2028
(average maturity of approximately 8 years) and bearing interest at rates
ranging from 7.1% to 10.55% (weighted average of 9.33%) per year.
The Company has a $115 million credit facility with a group of commercial
banks. The facility bears interest at LIBOR plus 1.25% and is secured by the
Company's general partner interests in joint ventures with seven of the PSP
Partnerships. The revolving portion of the facility ($45 million) expires in
September 1997 and is extendable until 1999. The declining revolver portion of
the facility provides for maximum borrowings of $70 million through
September 1997, $20 million through September 1998 and $10 million through
September 1999. As of May 23, 1995, there were no amounts outstanding under the
credit facility.
The Company has received a commitment from its group of commercial banks
that, among other things, would expand the credit facility to $125 million,
reduce the interest rate and release the security for the credit facility. The
terms of the modified credit facility have not been finalized, and there is no
assurance that the modification will be implemented.
Subject to the limitations described under "--Limitations on Debt", the
Company has broad powers to borrow in furtherance of its investment objectives.
The Company has incurred in the past, and may incur in the future, both short-
term and long-term indebtedness to increase its funds available for investment
in additional facilities, capital expenditures and distributions.
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LIMITATIONS ON DEBT
The Bylaws provide that the Board of Directors shall not authorize or permit
the incurrence of any obligation by the Company which would cause the
Company's "Asset Coverage" of its unsecured indebtedness to become less than
300%. Asset Coverage is defined in the Bylaws as the ratio (expressed as a
percentage) by which the value of the total assets (as defined in the Bylaws)
of the Company less the Company's liabilities (except liabilities for
unsecured borrowings) bears to the aggregate amount of all unsecured
borrowings of the Company. This Bylaw provision may be changed only upon a
vote of the holders of a majority of the shares of (i) Common Stock and
Convertible Preferred Stock voting together and (ii) each of the series of
senior preferred stock.
The Company's Bylaws prohibit the Company from issuing debt securities in a
public offering unless the Company's "cash flow" (which for this purpose means
net income, exclusive of extraordinary items, plus depreciation) for the most
recent 12 months for which financial statements are available, adjusted to
give effect to the anticipated use of the proceeds from the proposed sale of
debt securities, would be sufficient to pay the interest on such securities.
This Bylaw provision may be changed only upon a vote of the holders of a
majority of the shares of (i) Common Stock and Convertible Preferred Stock
voting together and (ii) each of the series of senior preferred stock.
Without the consent of the holders of a majority of each of the series of
senior preferred stock, the Company will not take any action that would result
in a ratio of "Debt" to "Assets" (the "Debt Ratio") in excess of 50%. As of
March 31, 1995, the Debt Ratio was approximately 9%. "Debt" means the
liabilities (other than "accrued and other liabilities" and "minority
interest") that should, in accordance with generally accepted accounting
principles, be reflected on the Company's consolidated balance sheet at the
time of determination. "Assets" means the Company's total assets that should,
in accordance with generally accepted accounting principles, be reflected on
the Company's consolidated balance sheet at the time of determination.
AGREEMENTS WITH PUBLIC PARTNERSHIPS
Between 1982 and 1987, affiliates of PSI sponsored the eight PSP
Partnerships. Through public offerings, these limited partnerships raised an
aggregate of $454,791,000 for investment in existing facilities. The Company
and seven of the PSP Partnerships jointly own 211 facilities. As of March 31,
1995, the Company had invested approximately $175,000,000 in these joint
ventures with seven of the PSP Partnerships. The total of the original
purchase prices of the facilities jointly acquired by the Company and these
PSP Partnerships is approximately $470,000,000, consisting of cash paid by the
Company and the PSP Partnerships, Common Stock and convertible securities
issued by the Company, notes issued by the Company, existing property debt
assumed by the Company alone and existing property debt assumed jointly by the
Company and the PSP Partnerships. The interest of the Company in these joint
ventures ranges from approximately 10% to 70%, but is generally 50% or less.
In addition, the Company is a co-general partner, and owns limited partnership
interests (ranging from 33% to 66% at March 31, 1995), in all of the PSP
Partnerships. See "Recent Developments."
Pursuant to participation agreements entered into between the Company and
seven of the eight PSP Partnerships, the facilities in which the Company
invested with such PSP Partnerships were held in a number of separate joint
ventures comprised of a PSP Partnership and the Company. The participation
agreements were approved by the unanimous vote of the directors of the Company
who are not affiliated with the PSP Partnerships. The Company believes that
the terms of the participation agreements are as favorable to the Company as
the terms that could have been obtained from unaffiliated sources providing
comparable benefits to the Company. For tax administrative efficiency the
original joint ventures with the seven PSP Partnerships were consolidated into
a single joint venture for each of the seven respective PSP Partnerships
effective December 31, 1990. The consolidated agreements, like the prior
individual agreements, include the following provisions: (i) although the PSP
Partnership is the managing general partner of the respective joint venture,
the Company, at any time after seven years from the date a property was
acquired, may compel a sale of a property at not less than the property's
independently determined fair market value, (ii) both the Company and the PSP
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Partnership have a right of first refusal to acquire the other's interest in
the event of a proposed sale, and (iii) allocations will be made to take into
account, for tax purposes, any tax items (such as gain, loss, depreciation,
etc.) arising from the difference (if any) (a) between the tax basis of
property contributed to the general partnership and the fair market value of
the property and (b) between the discounted value for purposes of determining
profits and losses and the fair market value. In addition, depreciation
deductions are allocated to, and borne by, the PSP Partnership to the extent
such depreciation deductions are not in excess of the PSP Partnership's
original capital account. See "Certain Federal Income Tax Considerations--Tax
Consequences to Company of Joint Investments with PSP Partnerships" in the
accompanying Prospectus for a discussion of certain tax issues that may be
raised by joint investments by the Company and the PSP Partnerships.
EMPLOYEES
The Company has approximately 1,200 full and part-time employees, primarily
personnel engaged in rendering property operation services. The Company is
required to bear the compensation of personnel involved in the business of the
Company (other than executives and their secretarial support personnel), in
addition to payment of advisory fees and property operation fees.
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MANAGEMENT
The following table sets forth the directors and officers of the Company.
<TABLE>
<CAPTION>
NAME POSITIONS
---- ---------
<S> <C>
B. Wayne Hughes Chairman of the Board and Chief Executive Officer
Harvey Lenkin President and Director
Hugh W. Horne Vice President
Ronald L. Havner, Jr. Vice President and Chief Financial Officer
Obren B. Gerich Vice President
John Reyes Controller
Sarah Hass Secretary
Robert J. Abernethy Director
Dann V. Angeloff Director
William C. Baker Director
Uri P. Harkham Director
Berry Holmes Director
Michael M. Sachs Director
</TABLE>
B. Wayne Hughes, age 61, has been a director of the Company since its
organization in 1980 and was President and Co-Chief Executive Officer from 1980
until November 1991 when he became Chairman of the Board and sole Chief
Executive Officer. Mr. Hughes is the President and Chief Executive Officer of
PSI and various affiliates and the Chairman of the Board of 17 other REITs
organized by PSI beginning in 1989 (the "Public Storage REITs"). Mr. Hughes has
been active in the real estate investment field for 25 years.
Harvey Lenkin, age 59, became President and a director of the Company in
November 1991. He was President of PSMI from 1978 until 1988, when he became
Chairman of the Board of PSMI and an officer of PSI with overall responsibility
for investment banking and investor relations. He has been President of the
Public Storage REITs since their inception.
Hugh W. Horne, age 50, has been a Vice President of the Company since 1980
and was Secretary of the Company from 1980 until February 1992. He has been an
officer of PSI and PSMI since 1973. He is responsible for managing all aspects
of property acquisition.
Ronald L. Havner, Jr., age 37, a certified public accountant, became an
officer of the Company in 1990 and Chief Financial Officer in November 1991. He
has been an officer of PSI since 1986 and became Chief Financial Officer of PSI
and its affiliates in 1991. Mr. Havner has been an officer of the Public
Storage REITs since their inception.
Obren B. Gerich, age 56, a certified public accountant and certified
financial planner, has been a Vice President of the Company since 1980 and was
Chief Financial Officer of the Company until November 1991. Mr. Gerich has been
an officer of PSI since 1975. Mr. Gerich has been an officer of the Public
Storage REITs since their inception.
John Reyes, age 34, a certified public accountant, joined PSI in 1990 and has
been the Controller of the Company since 1992. From 1983 to 1990, Mr. Reyes was
employed by Ernst & Young.
Sarah Hass, age 39, became Secretary of the Company in February 1992. She
joined PSI's legal department in June 1991, rendering services on behalf of the
Company, PSI and its affiliates. From 1987 until May 1991, her professional
corporation was a partner in the law firm of Sachs & Phelps, then counsel to
the Company, the Adviser and PSI, and from April 1986 until June 1987, she was
associated with that firm, practicing in the area of securities law. From
September 1979 until September 1985, Ms. Hass was associated with the law firm
of Rifkind & Sterling, Incorporated.
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Robert J. Abernethy, age 54, Chairman of the Audit Committee, is President of
American Standard Development Company and of Self-Storage Management Company,
which develop and operate mini-warehouses. Mr. Abernethy has been a director of
the Company since its organization. Mr. Abernethy is a member of the board of
directors of Johns Hopkins University and of the Metropolitan Transportation
Authority and a former member of the board of directors of the Metropolitan
Water District of Southern California.
Dann V. Angeloff, age 59, is president of The Angeloff Company, a corporate
financial advisory firm. The Angeloff Company has rendered, and is expected to
continue to render, financial advisory and securities brokerage services for
PSI. Mr. Angeloff is the general partner of a limited partnership that owns a
mini-warehouse developed by PSI and managed by PSMI. Mr. Angeloff has been a
director of the Company since its organization. Mr. Angeloff is a director of
Compensation Resource Group, Datametrics Corporation, Nicholas/Applegate Growth
Equity Fund, Nicholas/Applegate Investment Trust, Royce Medical Company, Seda
Specialty Packaging Corp. and one of the Public Storage REITs.
William C. Baker, age 61, became a director of the Company in November 1991.
Since April 1993, Mr. Baker has been President of Red Robin International Inc.,
an operator and franchisor of casual dining restaurants in the United States
and Canada. From 1976 to 1988, he was a principal shareholder and Chairman and
Chief Executive Officer of Del Taco, Inc., an operator and franchisor of fast
food restaurants in California. Mr. Baker is a director of Santa Anita Realty
Enterprises, Inc., Santa Anita Operating Company and Callaway Golf Company.
Uri P. Harkham, age 46, became a director of the Company in March 1993. Mr.
Harkham has been the President and Chief Executive Officer of the Jonathan
Martin Fashion Group, which specializes in designing, manufacturing and
marketing women's clothing, since its organization in 1976. Since 1978, Mr.
Harkham has been the Chairman of the Board of Harkham Properties, a real estate
firm specializing in buying and managing fashion warehouses in Los Angeles and
Australia.
Berry Holmes, age 64, a member of the Audit Committee, is a private investor.
Mr. Holmes has been a director of the Company since its organization. Mr.
Holmes was president and a director of Financial Corporation of Santa Barbara
and Santa Barbara Savings and Loan Association through June 1984 and was a
consultant with Santa Barbara Savings and Loan Association during the second
half of 1984. Mr. Holmes is a director of one of the Public Storage REITs.
Michael M. Sachs, age 54, has been President since June 1990 of Westrec
Financial, Inc., a holding company formed to acquire, develop and manage,
through a subsidiary, recreational properties. Mr. Sachs was vice president of
the predecessor to Westrec Financial, Inc. for the prior two years. Mr. Sachs
has been a director of the Company since its organization. He was President of
a professional corporation that from 1982 to July 1985 was general counsel to
PSI and its affiliates and until June 1991 was of counsel to the law firm of
Sachs & Phelps, then counsel to the Company, the Adviser and PSI. From 1985
until June 1990, Mr. Sachs was an officer of PSI and its affiliates. Mr. Sachs
is a director of MMI Medical, Inc. and one of the Public Storage REITs.
The Company's mini-warehouses are operated by PSMI. The four senior
executives of PSMI are the following.
Marvin M. Lotz, age 52, has been president of PSMI since 1988. Mr. Lotz was
an officer of PSI with responsibility for property acquisitions from 1983 until
1988.
Anthony Grillo, age 39, joined PSMI in 1981 and has been a divisional manager
since 1988 in charge of overall mini-warehouse management activities in the
southwestern United States (approximately 380 properties).
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Ron Harden, age 46, joined PSMI in 1987 and became a divisional manager in
1988. He is responsible for overall mini-warehouse management activities in the
northeastern United States and in eastern Canada (approximately 329
properties).
Gary Hattenburg, age 44, joined PSMI as a divisional manager in 1989 to
oversee the overall mini-warehouse management activities in the northwestern
and southeastern United States and in western Canada (approximately 385
properties). He has been in the mini-warehouse industry since 1976 including
serving for four years as the Director of Operations for Shurgard Inc., a
national operator of mini-warehouses.
SPECIAL TAX CONSIDERATIONS FOR FOREIGN STOCKHOLDERS
The rules governing U.S. Federal income taxation of non-U.S. stockholders (as
defined below) are complex, and the following discussion is intended only as a
summary of such rules. Prospective non-U.S. stockholders should consult with
their tax advisors to determine the impact of U.S. Federal, state, and local
income tax laws on an investment in the REIT, including any reporting
requirements, as well as the tax treatment of such an investment under their
home country laws. Prospective non-U.S. stockholders should also review
"Certain Federal Income Tax Considerations" in the accompanying Prospectus. For
purposes of this discussion, a non-U.S. stockholder is a holder of the Common
Stock that, for U.S. Federal income tax purposes, is not a "United States
person." A "United States person," in turn, means a citizen or resident of the
United States; a corporation, partnership, or other entity created or organized
in the United States or under the laws of the United States or of any political
subdivision thereof; or an estate or trust whose income is includible in gross
income for U.S. Federal income tax purposes regardless of its source. The
following discussion assumes that the shares of Common Stock are held as
"capital assets" under the Internal Revenue Code.
Distributions to a non-U.S. stockholder will generally be subject to tax as
ordinary income to the extent of the Company's current and accumulated earnings
and profits as determined for U.S. Federal income tax purposes. Such
distributions will generally be subject to withholding of such income tax at a
30% rate, unless reduced by an applicable tax treaty or unless such dividends
are treated as effectively connected with a United States trade or business. If
the amount distributed exceeds a non-U.S. stockholder's allocable share of such
earnings and profits, the excess will be treated as a tax-free return of
capital to the extent of such stockholder's adjusted basis in the Common Stock.
To the extent that such distributions exceed the adjusted basis of a non-U.S.
stockholder's Common Stock, such distributions will generally be subject to tax
if such stockholder would otherwise be subject to tax on any gain from the sale
or disposition of its Common Stock, as described below. If it cannot be
determined at the time a distribution is made whether or not such distribution
will be in excess of current and accumulated earnings and profits, the
distribution will be subject to withholding at the same rate as dividends.
Amounts so withheld, however, are refundable or creditable against U.S. Federal
tax liability if it subsequently is determined that such distribution was, in
fact, in excess of current and accumulated earnings and profits of the Company,
unless the non-U.S. stockholder is otherwise subject to U.S. Federal income
tax.
For any year in which the Company qualifies as a REIT, distributions to a
non-U.S. stockholder that are attributable to gain from the sales or exchanges
by the Company of "United States real property interests" will be treated as if
such gain were effectively connected with a United States trade or business and
will thus be subject to tax at the normal capital gain rates applicable to U.S.
stockholders (subject to applicable alternative minimum tax) under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Also, distributions subject to FIRPTA may be subject to a 30%
branch profits tax in the hands of a foreign corporate stockholder not entitled
to a treaty exemption. The Company is required to withhold 35% of any
distribution that could be designated by the Company as a capital gains
dividend. This amount may be credited against the non-U.S. stockholder's FIRPTA
tax liability.
Gain recognized by a non-U.S. stockholder upon a sale of its Common Stock
will generally not be subject to tax under FIRPTA if the Company is a
"domestically controlled REIT," which is defined generally as a REIT in which
at all times during a specified testing period less than 50% in value of its
shares were held
S-38
<PAGE>
directly or indirectly by non-U.S. persons. Because only a minority of the
Company's stockholders are non-U.S. stockholders, the Company expects to
qualify as a "domestically controlled REIT." Accordingly, a non-U.S.
stockholder should not be subject to U.S. tax from gains recognized upon
disposition of the Common Stock, provided that such gain is not effectively
connected with the conduct of a United States trade or business and, in the
case of an individual stockholder, such holder is not present in the United
States for 183 days or more during the year of sale.
Under temporary United States Treasury regulations, United States information
reporting requirements and backup withholding tax will generally not apply to
dividends paid on the Common Stock to a non-U.S. stockholder at an address
outside the United States. Payments by a United States office of a broker of
the proceeds of a sale of the Common Stock is subject to both backup
withholding at a rate of 31% and information reporting unless the holder
certifies its non-U.S. stockholder status under penalties of perjury or
otherwise establishes an exemption. Information reporting requirements (but not
backup withholding) will also apply to payments of the proceeds of sales of the
Common Stock by foreign offices of United States brokers, or foreign brokers
with certain types of relationships to the United States, unless the broker has
documentary evidence in its records that the holder is a non-U.S. stockholder
and certain other conditions are met, or the holder otherwise establishes an
exemption.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be refunded or credited against the non-U.S.
stockholder's U.S. Federal income tax liability, provided that the required
information is furnished to the Internal Revenue Service.
These information reporting and backup withholding rules are under review by
the United States Treasury and their application to the Common Stock could be
changed by future regulations.
S-39
<PAGE>
UNDERWRITING
The U.S. Underwriters named below, for whom PaineWebber Incorporated, Smith
Barney Inc., Donaldson, Lufkin & Jenrette Securities Corporation, Raymond James
& Associates, Inc. and The Robinson-Humphrey Company, Inc. are acting as
Representatives, have severally agreed, subject to the terms and conditions of
the U.S. Underwriting Agreement (the "U.S. Underwriting Agreement"), to
purchase from the Company, and the Company has agreed to sell to the U.S.
Underwriters, the number of shares of Common Stock set forth opposite their
names.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
PaineWebber Incorporated............................................ 592,500
Smith Barney Inc. .................................................. 592,500
Donaldson, Lufkin & Jenrette Securities Corporation................. 592,500
Raymond James & Associates, Inc..................................... 592,500
The Robinson-Humphrey Company, Inc. ................................ 592,500
Bear, Stearns & Co. Inc. ........................................... 97,000
Alex. Brown & Sons Incorporated..................................... 97,000
BT Securities Corporation........................................... 97,000
A. G. Edwards & Sons, Inc. ......................................... 97,000
Goldman, Sachs & Co. ............................................... 97,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated.................. 97,000
Nomura Securities International, Inc. .............................. 97,000
Oppenheimer & Co., Inc. ............................................ 97,000
Prudential Securities Incorporated.................................. 97,000
Robertson, Stephens & Company....................................... 97,000
Advest, Inc. ....................................................... 65,000
Robert W. Baird & Co. Incorporated.................................. 65,000
Fahnestock & Co. Inc. .............................................. 65,000
Furman Selz Incorporated............................................ 65,000
Ladenburg, Thalmann & Co., Inc. .................................... 65,000
Rauscher Pierce Refsnes, Inc. ...................................... 65,000
Sutro & Co. Incorporated............................................ 65,000
Crowell, Weedon & Co. .............................................. 32,500
First Equity Corporation of Florida................................. 32,500
Gruntal & Co., Incorporated......................................... 32,500
Pennsylvania Merchant Group Ltd..................................... 32,500
Seidler Amdec Securities Inc. ...................................... 32,500
---------
Total............................................................. 4,550,000
=========
</TABLE>
The Company has also entered into an International Underwriting Agreement
(the "International Underwriting Agreement") with certain International
Underwriters (the "International Underwriters" and, together with the U.S.
Underwriters, the "Underwriters"), for whom PaineWebber International (U.K.)
Ltd., Smith Barney Inc., Donaldson, Lufkin & Jenrette Securities Corporation,
Raymond James & Associates, Inc. and The Robinson-Humphrey Company, Inc. are
acting as representatives (the "International Representatives"). Subject to the
terms and conditions of the International Underwriting Agreement, and
concurrently with the sale of 4,550,000 shares of Common Stock to the U.S.
Underwriters, the Company has agreed to sell to the International Underwriters,
and the International Underwriters have severally agreed to purchase, an
aggregate of 700,000 shares of Common Stock. The initial public offering price
per share and the total underwriting discounts and commissions per share will
be identical in the U.S. Underwriting Agreement and the International
Underwriting Agreement with respect to all shares of Common Stock being
purchased by the Underwriters from the Company.
S-40
<PAGE>
In the U.S. Underwriting Agreement and the International Underwriting
Agreement, the several U.S. Underwriters and the several International
Underwriters, respectively, have agreed, subject to certain conditions, to
purchase all of the shares of Common Stock being sold pursuant to each such
Underwriting Agreement (other than those covered by the over-allotment option
described below), if any are purchased. The U.S. Underwriting Agreement
provides that, in the event of a default by a U.S. Underwriter, in certain
circumstances, the purchase commitments of non-defaulting U.S. Underwriters may
be increased or the U.S. Underwriting Agreement may be terminated, and the
International Underwriting Agreement provides that, in the event of a default
by an International Underwriter, in certain circumstances, the purchase
commitments of non-defaulting International Underwriters may be increased or
the International Underwriting Agreement may be terminated. The sale of Common
Stock to be purchased by the U.S. Underwriters and the International
Underwriters are conditioned upon one another.
The Company has been advised by the Representatives and the International
Representatives that the Underwriters propose initially to offer the shares of
Common Stock to the public at the public offering price set forth on the cover
page of this Prospectus, and to certain securities dealers at such price less a
concession not in excess of $.52 per share. The U.S. Underwriters may allow,
and such dealers may reallow, the concessions of not more than $.10 per share
on sales to certain other dealers. After the public offering, the public
offering price and concessions may be changed by the Representatives and the
International Representatives.
The Company has granted to the U.S. Underwriters an option, exercisable
within the 45-day period after the date of the Prospectus, to purchase up to an
additional 787,500 shares of Common Stock at the public offering price set
forth on the cover page of this Prospectus, less the underwriting discounts and
commissions. The U.S. Underwriters may exercise such option only to cover over-
allotments, if any, in the sale of the shares of Common Stock offered hereby.
To the extent that such option is exercised, each U.S. Underwriter will become
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares of Common Stock as the percentage it was
obligated to purchase pursuant to the U.S. Underwriting Agreement.
Each U.S. Underwriter has represented and agreed that, as part of the
distribution of the shares of Common Stock, (a) it is not purchasing any shares
of Common Stock for the account of anyone other than a United States or
Canadian Person (as hereinafter defined) and (b) it has not offered or sold,
and will not offer or sell, directly or indirectly, any shares of Common Stock
or distribute this prospectus to any person outside the United States or Canada
or to anyone other than a United States or Canadian Person. Each International
Underwriter has represented and agreed that, as part of the distribution of the
shares of Common Stock, (a) it is not purchasing any shares of Common Stock for
the account of any United States or Canadian Person and (b) it has not offered
or sold, and will not offer or sell, directly or indirectly, any shares of
Common Stock or distribute any prospectus relating to the shares of Common
Stock to any person within the United States or Canada or to any United States
or Canadian Person. The foregoing limitations do not apply to stabilization
transactions or to sales between the U.S. Underwriters and the International
Underwriters pursuant to the Agreement Between U.S. and International
Underwriters. As used herein, "United States or Canadian Person" means any
individual who is a resident of the United States or Canada, or any
corporation, pension, profit-sharing or other trust or other entity organized
under or governed by the laws of the United States or Canada, or any political
subdivision of either thereof (other than a branch located outside the United
States and Canada of any United States or Canadian Person) and includes any
United States or Canadian Branch of a person who is otherwise not a United
States or Canadian Person.
Sales may be made between the U.S. Underwriters and the International
Underwriters of such number of shares of Common Stock as may be mutually
agreed. The per share price of any shares so sold shall be the price to the
public set forth on the cover page of this Prospectus, less an amount not
greater than the per share amount of the concession to dealers set forth above.
To the extent there are sales between the U.S. Underwriters and the
International Underwriters, the number of shares of Common Stock initially
available for sale by the U.S. Underwriters may be more or less than the amount
specified on the cover page of this Prospectus.
S-41
<PAGE>
The Company and its executive officers and directors have agreed not to sell,
offer to sell or otherwise dispose of shares of Common Stock or securities
convertible into Common Stock or sell, offer to sell or grant rights, options
or warrants with respect to Common Stock or securities convertible into Common
Stock prior to the expiration of 90 days from the date of this Prospectus
Supplement, without the prior written consent of PaineWebber Incorporated,
subject to certain exceptions, including offers and sales to the shareholders
of Properties 7 in connection with a potential merger of Properties 7 into the
Company, offers and sales in connection with the restructuring of the Company
and offers and sales in connection with the acquisition of property and
partnership interests. See "Prospectus Summary--Proposed Restructuring" and
"Recent Developments."
The Company has agreed to indemnify the Underwriters and their controlling
persons against certain liabilities, including liabilities under the Securities
Act or to contribute to payments the U.S. Underwriters and the International
Underwriters may be required to make in respect thereof.
LEGAL OPINIONS
Certain legal matters relating to the Common Stock will be passed upon for
the Company by David Goldberg, Glendale, California, counsel to the Company and
counsel to PSI and its affiliates, and for the Underwriters by Skadden, Arps,
Slate, Meagher & Flom, Los Angeles, California. Hogan & Hartson L.L.P.,
Washington, D.C., has delivered an opinion dated July 26, 1994 as to the status
of the Company as a REIT. Mr. Goldberg owns 20,877 shares of Common Stock,
1,000 Shares of Convertible Preferred Stock and 500 shares of Series C
Preferred Stock, and has options to acquire an additional 62,500 shares of
Common Stock and has invested in entities affiliated with PSI. See "Certain
Federal Income Tax Considerations" in the accompanying Prospectus.
EXPERTS
The consolidated financial statements and related schedules of the Company
appearing in the Company's Annual Report on Form 10-K, as amended by a Form 10-
K/A (Amendment No. 2) dated April 21, 1995, have been audited by Ernst & Young
LLP, independent auditors, as set forth in their reports included in the
Company's Annual Report on Form 10-K, and incorporated herein by reference.
Such consolidated financial statements are incorporated herein by reference in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
S-42
<PAGE>
PROSPECTUS
STORAGE EQUITIES, INC.
PREFERRED STOCK
COMMON STOCK
WARRANTS
Storage Equities, Inc. (the "Company") may from time to time offer in one or
more series (i) shares of preferred stock, par value $.01 per share (the
"Preferred Stock"), (ii) shares of Common Stock, par value $.10 per share (the
"Common Stock") or (iii) warrants to purchase Preferred Stock or Common Stock
(the "Warrants"), with an aggregate public offering price of up to $300,000,000
on terms to be determined at the time of offering. The Preferred Stock, Common
Stock and Warrants (collectively, the "Securities") may be offered, separately
or together, in amounts, at prices and on terms to be set forth in a supplement
to this Prospectus (a "Prospectus Supplement").
The specific terms of the 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
specific title and stated value, any dividend, liquidation, redemption,
conversion, voting and other rights, and any initial public offering price;
(ii) in the case of Common Stock, any initial public offering price; and (iii)
in the case of Warrants, the duration, offering price, exercise price and
detachability.
The applicable Prospectus Supplement will also contain information, where
applicable, about any listing on a securities exchange of the Securities
covered by such Prospectus Supplement.
The Securities may be offered directly, through agents designated from time
to time by the Company, or to or through underwriters or dealers. If any agents
or underwriters are involved in the sale of any of the Securities, their names,
and any applicable purchase price, fee, commission or discount arrangement
between or among them, will be set forth, or will be calculable from the
information set forth, in the applicable Prospectus Supplement. See "Plan of
Distribution." No Securities may be sold without delivery of the applicable
Prospectus Supplement describing the method and terms of the offering of such
series of Securities.
This Prospectus may also be used in a registered resale by persons who hold
(i) Securities issued pursuant to this Prospectus or (ii) securities issued in
private or other transactions in connection with acquisitions by the Company of
direct or indirect interests in real properties or otherwise, in each case in
transactions in which such persons may be deemed to be underwriters within the
meaning of the Securities Act of 1933.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER
"CERTAIN CONSIDERATIONS" IN THE PROSPECTUS.
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
------------
August 12, 1994
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy statements and other information
filed by the Company with the Commission can be inspected and copied at the
public reference facilities maintained by the Commission in Washington, D.C.
and at the Regional Offices of the Commission at 75 Park Place, 14th Floor, New
York, New York 10007; and Northwestern Atrium Center, Suite 1400, 500 West
Madison Street, Chicago, Illinois 60661. Copies of such material can be
obtained at prescribed rates from the Public Reference Room of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549. Such material can also be
inspected at the New York Stock Exchange ("NYSE"), 20 Broad Street, New York,
New York 10005.
The Company has filed with the Commission a registration statement on Form S-
3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"). This Prospectus does not contain all the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information, reference is hereby made to the Registration Statement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, filed by the Company with the Commission pursuant to
Section 13 of the Exchange Act (File No. 1-8389), are incorporated herein by
reference: (i) the Annual Report on Form 10-K for the year ended December 31,
1993, as amended by Form 10-K/A's dated April 26, 1994 and May 26, 1994, (ii)
the Quarterly Reports on Form 10-Q for the quarters ended March 31, 1994 and
June 30, 1994 and (iii) the Current Reports on Form 8-K dated January 12, 1994
(as amended by Form 8-K/A dated May 26, 1994), February 2, 1994, June 7, 1994
and June 23, 1994.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the offering of the Securities shall be deemed to be
incorporated by reference in this Prospectus.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
(or in the applicable Prospectus Supplement) or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
Copies of all documents which are incorporated herein by reference (not
including the exhibits to such documents, unless such exhibits are specifically
incorporated by reference in such information), will be provided without charge
to any person, including any beneficial owner, to whom this Prospectus is
delivered, upon written request. Requests for such copies should be directed to
Investor Services Department, Storage Equities, Inc., 600 North Brand
Boulevard, Suite 300, Glendale, California 91203-1241.
2
<PAGE>
THE COMPANY
The Company is a real estate investment trust ("REIT"), organized as a
corporation under the laws of California, that has invested primarily in
existing self-service facilities offering storage space for personal and
business use ("mini-warehouses"). The Company believes that it is one of the
largest owners of mini-warehouses in the United States. The Company has also
invested to a much smaller extent in existing business parks containing
commercial and industrial rental space. At June 30, 1994, the Company had
equity interests (through direct ownership, as well as general and limited
partnership interests) in 356 properties located in 36 states, including 325
mini-warehouse facilities, 16 business parks and 15 combination mini-
warehouse/business park facilities. These facilities are operated under the
"Public Storage" name. The Common Stock, and the Company's 10% Cumulative
Preferred Stock, Series A (the "Series A Preferred Stock"), 9.20% Cumulative
Preferred Stock, Series B (the "Series B Preferred Stock"), 8.25% Convertible
Preferred Stock (the "Convertible Preferred Stock") and Adjustable Rate
Cumulative Preferred Stock, Series C (the "Adjustable Rate Preferred Stock")
are traded on the NYSE under the symbols SEQ, SEQ PrA, SEQ PrB, SEQ PrX and SEQ
PrC, respectively.
The Company's operations are managed by Public Storage Advisers, Inc. (the
"Adviser"), the Company's investment adviser, by Public Storage Management,
Inc. ("PSMI"), its mini-warehouse property manager, and by Public Storage
Commercial Properties Group, Inc. ("PSCP"), its commercial property manager.
All operations are under the general supervision of the Company's Board of
Directors (the "Board of Directors"), including investments in new facilities,
which are reviewed and approved by the Board of Directors and are subject to
restrictions in the Company's Bylaws. Of the Company's investments, 212 were
made jointly with seven of a group of eight public limited partnerships
affiliated with the Adviser (these eight partnerships are referred to herein
collectively as the "PSP Partnerships"). The Adviser, PSMI, PSCP and the
Company's executive officers and certain directors are affiliated with Public
Storage, Inc. ("PSI"). PSI believes that, together with its affiliates, it is
the largest operator of mini-warehouse facilities in the United States and
Canada. At June 30, 1994, PSMI, PSCP and their affiliates managed a total of
approximately 1,176 facilities in the United States and Canada containing an
aggregate of approximately 69,190,400 net rentable square feet of space, 1,091
of which were mini-warehouse facilities containing approximately 63,979,100 net
rentable square feet of space. Since 1976, PSI and its affiliated entities and
unaffiliated investor groups have raised approximately $2.7 billion in equity
capital for the development and acquisition of facilities, primarily mini-
warehouses managed by PSMI.
The executive officers and certain directors of the Company, the Adviser,
PSI, PSMI and PSCP are subject to various conflicts of interest arising out of
their relationships with entities that own and operate mini-warehouses and
business parks. For example, the Company pays substantial fees to the Adviser,
PSMI and PSCP for investment advisory and property management services. The
issuance of securities pursuant to this Prospectus is expected to increase the
compensation payable to the Adviser, and, to the extent the proceeds of such
issuance are used to acquire properties, increase compensation to PSMI and
PSCP.
The Company has elected to be taxed as a REIT under the Internal Revenue Code
of 1986, as amended (the "Code"). To the extent that the Company continues to
qualify as a REIT, it will not be taxed, with certain limited exceptions, on
the net income that is currently distributed to its shareholders (the
"Shareholders"). See "Certain Federal Income Tax Considerations." The Company
was incorporated in California in 1980; its principal executive offices are
located at 600 North Brand Boulevard, Suite 300, Glendale, California 91203-
1241. Its telephone number is (818) 244-8080.
3
<PAGE>
CERTAIN CONSIDERATIONS
In evaluating the Securities, investors should consider the following
factors, in addition to other matters set forth or incorporated in this
Prospectus (and in the applicable Prospectus Supplement) and the Registration
Statement.
OPERATING RISKS
General Risks of Real Estate Ownership. The Company is subject to the risks
generally incident to the ownership of real estate-related assets, including
lack of demand for rental spaces in a locale, changes in general economic or
local conditions, changes in supply of or demand for similar or competing
facilities in an area, the impact of environmental protection laws, changes in
interest rates and availability of permanent mortgage funds which may render
the sale or financing of a property difficult or unattractive and changes in
tax, real estate and zoning laws.
Competition Among Mini-Warehouses. Most of the Company's properties are mini-
warehouses. Competition in the market areas in which many of the Company's
investments are located is significant and has affected the occupancy levels,
rental rates and operating expenses of certain of the Company's investments.
Risk of Environmental Liabilities. Under various federal, state and local
laws, regulations and ordinances (collectively, "Environmental Laws"), an owner
or operator of real estate interests may be liable for the costs of cleaning
up, as well as certain damages resulting from, past or present spills,
disposals or other releases of hazardous or toxic substances or wastes on, in
or from a property. Certain Environmental Laws impose such liability without
regard to whether the owner knew of, or was responsible for, the presence of
hazardous or toxic substances or wastes at or from a property. An owner or
operator of real estate or real estate interests also may be liable under
certain Environmental Laws that govern activities or operations at a property
having adverse environmental effects, such as discharges to air and water as
well as handling and disposal practices for solid and hazardous or toxic
wastes. In some cases, liability may not be limited to the value of the
property. The presence of such substances or wastes, or the failure to properly
remediate any resulting contamination, also may adversely affect the owner's or
operator's ability to sell, lease or operate its property or to borrow using
its property as collateral.
Most of the Company's facilities were acquired prior to the time that it was
customary to conduct extensive environmental investigations in connection with
property acquisitions. The Company's current practice is to conduct preliminary
environmental assessments in connection with property acquisitions (other than
acquisitions of additional interests in properties in which the Company has an
existing interest) to evaluate the environmental condition of, and potential
environmental liabilities associated with, such properties. Such assessments
generally consist of an investigation of environmental conditions at the
subject property (not including soil or groundwater sampling or analysis), as
well as a review of available information regarding the site and publicly
available data regarding conditions at other sites in the vicinity. In
connection with its operations and during the course of environmental
investigations in connection with property acquisitions, the Company has become
aware that prior operations or activities at certain facilities or from nearby
locations have or may have resulted in contamination to the soil and/or
groundwater at such facilities. In this regard, certain such facilities are or
may be the subject of federal or state environmental investigations or remedial
actions. In each such case, the Company has obtained or intends, with respect
to pending or future acquisitions, to obtain appropriate purchase price
adjustments or indemnifications that it believes are sufficient to cover any
such potential liabilities. Although there can be no assurance, the Company
believes it has funds available to cover any liability from such environmental
contamination or potential contamination and the Company is not aware of any
environmental contamination of its facilities material to its overall business
or financial condition.
FINANCING RISKS
Dilution and Subordination. The interest of Shareholders, including persons
who acquire Securities in this offering, can be diluted through the issuance of
additional securities.
4
<PAGE>
Since October 1992 the Company has issued shares of preferred stock in public
offerings and intends to issue additional such shares. These issuances could
involve certain risks to holders of shares of Common Stock. In the event of a
liquidation of the Company, the holders of the preferred stock will be entitled
to receive, before any distribution of assets to holders of Common Stock,
liquidating distributions (an aggregate of $190,625,000 in respect of the
preferred stock issued to date), plus any accrued and unpaid dividends. Holders
of preferred stock are entitled to receive, when declared by the Board of
Directors, cash dividends (an aggregate of $17,041,300 per year in respect of
the preferred stock issued to date (up to $17,821,300 at the maximum dividend
rate on shares of adjustable rate preferred stock)), in preference to holders
of Common Stock. As a REIT, the Company must distribute to its Shareholders
(which include not only holders of Common Stock but also holders of preferred
stock) at least 95% of its taxable income. Failure to pay full dividends on the
preferred stock could jeopardize the Company's qualification as a REIT. See
"Description of Preferred Stock" and "Certain Federal Income Tax
Considerations--Tax Treatment of the Company."
Risk of Leverage. In making real estate investments, the Company has incurred
and may continue to incur indebtedness to the extent believed appropriate. The
incurrence of indebtedness increases the risk of loss of the investment.
CONFLICTS OF INTEREST AND TRANSACTIONS WITH AFFILIATES
Conflicts of Interest. The Adviser, PSMI, PSCP and certain of the Company's
executive officers and directors have possible conflicts of interest arising
out of their relationship with entities that own and operate mini-warehouses
and other facilities. These conflicts of interests may include the method by
which the executive officers and directors allocate their time between the
Company and other activities, including activities involving mini-warehouses
and other facilities owned by affiliates of PSMI or PSCP. In addition, the
directors and executive officers of the Company and their affiliates may,
subject to certain limitations, invest in other businesses, including business
activities of the type conducted by or in competition with the Company. Also,
conflicts of interest will exist to the extent the Company's mini-warehouses
compete with other PSMI-managed mini-warehouses.
Transactions with Affiliates. The Company has purchased, and intends to
continue to purchase, real estate assets from affiliates of the Adviser, and,
to a much lesser extent, the Company has sold real estate assets to such
affiliates. These transactions present the risk that their terms may not be as
favorable to the Company as could be obtained in transactions with unaffiliated
parties, although it is the Company's policy that these affiliated transactions
receive approval by a majority of the Company's disinterested directors after
review of independent valuations.
A subsidiary of PSI has reinsured, and intends to continue to reinsure,
policies insuring against losses to goods stored by tenants in the Company's
mini-warehouses. PSI believes that the availability of insurance reduces the
potential liability of the Company to tenants for losses to their goods from
theft or destruction. The PSI subsidiary receives the premiums and bears the
risks associated with the insurance. PSI sells locks and boxes to tenants to be
used in securing their spaces and moving their goods. PSI believes that the
availability of locks and boxes for sale promotes the rental of spaces. PSI
receives the benefit and bears the expense of these sales.
EFFECTS OF LOSS OF QUALIFICATION AS A REIT
The Company has elected to be taxed as a REIT under the Code. In order for
the Company to continue to qualify as a REIT under the Code, certain detailed
technical requirements must be met (including certain income tests, certain
limitations on types of assets the Company can own, certain operational
limitations, and certain stock ownership tests). Although the Company intends
to operate so that it will continue to qualify as a REIT, the highly complex
nature of the rules governing REITs, the ongoing importance of factual
determinations, and the possibility of future changes in the circumstances of
the Company preclude any assurance that the Company will so qualify in any
year. If the Company fails to qualify as a REIT in any tax
5
<PAGE>
year, it will be taxed as a regular domestic corporation, and distributions to
Shareholders would not be deductible for tax purposes. This would result in a
significant corporate tax liability for the Company and a material reduction in
the after-tax cash that would be available for distribution to Shareholders.
Furthermore, unless certain relief provisions apply, the Company would not be
eligible to elect REIT status again until the fifth taxable year that begins
after the first year for which the Company fails to qualify.
As a REIT, the Company is not taxed on that portion of its taxable income
which is distributed to Shareholders provided that at least 95% of its taxable
income is so distributed. Under certain circumstances the Company can rectify a
failure to meet the 95% distribution test by making distributions after the
close of a particular taxable year and attributing those distributions to the
prior year's taxable income. The Company has satisfied the REIT distribution
requirement for 1990, 1991, 1992 and 1993 by attributing distributions in 1991,
1992, 1993 and 1994 to the prior year's taxable income. The Company may be
required, over each of the next several years, to make distributions after the
close of a taxable year and to attribute those distributions to the prior year.
The extent to which the Company will be required to attribute distributions to
the prior year will depend on the Company's operating results and the level of
distributions as determined by the Board of Directors. Reliance on subsequent
year distributions could cause the Company to be subject to certain penalty
taxes. In that regard, if the Company were to distribute during any year less
than 85% of the Company's REIT Taxable Income (not taking into account
distributions made in subsequent years but attributed to such year), which is
generally equivalent to net taxable ordinary income, a 4% non-deductible excise
tax would apply to the excess of the required 85% distribution (plus any
distribution shortfall from the preceding year) over the amount actually
distributed during the year. The Company intends to monitor its compliance with
this 85% distribution requirement in an effort to minimize any excise tax. See
"Certain Federal Income Tax Considerations--Tax Treatment of the Company."
USE OF PROCEEDS
Unless otherwise described in the applicable Prospectus Supplement, the
Company intends to use the net proceeds from the sale of the Securities for
general corporate purposes, primarily investments in mini-warehouses, including
mortgage loans and interests in real estate partnerships, and the repayment of
outstanding bank borrowings under the Company's credit facility.
RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to combined fixed charges and preferred stock dividends
is computed by dividing earnings by the sum of fixed charges and preferred
stock dividends. Earnings consists of net income before minority interest in
income, loss on early extinguishment of debt and gain on disposition of real
estate plus fixed charges (other than preferred stock dividends) less the
portion of minority interest in income which does not contribute to fixed
charges. Fixed charges consist of interest expense. Preferred stock dividends
consist of dividends on the Series A Preferred Stock (issued in October 1992),
the Series B Preferred Stock (issued in March 1993) and the Convertible
Preferred Stock (issued in July 1993), to the extent paid in the applicable
periods. The ratios do not reflect dividends on the Adjustable Rate Preferred
Stock, which was issued on June 30, 1994.
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS
ENDED
JUNE 30, FOR THE YEAR ENDED DECEMBER 31,
----------- ----------------------------------
1994 1993 1993 1992 1991 1990 1989
----- ----- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to combined
fixed charges and preferred
stock dividends.............. 2.34 2.57 2.40 2.89 2.71 2.79 2.18
</TABLE>
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<PAGE>
DESCRIPTION OF COMMON STOCK
The Company is authorized to issue 60,000,000 shares of Common Stock, $.10
par value per share. At June 30, 1994, the Company had outstanding 23,714,460
shares of Common Stock and had 415,667 and 3,872,054 shares of Common Stock
reserved for issuance under the Company's 1990 Stock Option Plan and in
connection with the conversion or redemption of the Convertible Preferred
Stock, respectively. In addition, at June 30, 1994, the Company had 1,150,000
shares of Common Stock reserved for issuance under the Company's 1994 Stock
Option Plan (the "1994 Plan"), subject to shareholder approval of the 1994
Plan.
The following description of the Common Stock sets forth certain general
terms and provisions of the Common Stock to which any Prospectus Supplement may
relate, including a Prospectus Supplement providing that Common Stock will be
issuable upon conversion of the Preferred Stock or upon the exercise of the
Warrants. The statements below describing the Common Stock are in all respects
subject to and qualified in their entirety by reference to the applicable
provisions of the Company's Restated Articles of Incorporation and Bylaws.
Holders of Common Stock will be entitled to receive dividends when, as and if
declared by the Board of Directors, out of funds legally available therefor.
Payment and declaration of dividends on the Common Stock and purchases of
shares thereof by the Company will be subject to certain restrictions if the
Company fails to pay dividends on outstanding preferred stock. See "Description
of Preferred Stock." Upon any liquidation, dissolution or winding up of the
Company, holders of Common Stock will be entitled to share equally and ratably
in any assets available for distribution to them, after payment or provision
for payment of the debts and other liabilities of the Company and the
preferential amounts owing with respect to any outstanding preferred stock.
Holders of Common Stock have no preemptive rights, which means they have no
right to acquire any additional shares of Common Stock that may be issued by
the Company at a subsequent date.
Each outstanding share of Common Stock entitles the holder to one vote on all
matters presented to such holders for a vote, with the exception that they have
cumulative voting rights with respect to the election of the Board of
Directors, in accordance with California law. Cumulative voting means that each
holder of Common Stock is entitled to cast as many votes as there are directors
to be elected multiplied by the number of shares registered in his or her name.
A holder of Common Stock may cumulate the votes for directors by casting all of
the votes for one candidate or by distributing the votes among as many
candidates as he or she chooses. The outstanding shares of Common Stock are,
and additional shares of Common Stock will be, when issued, fully paid and
nonassessable.
See "Certain Federal Income Tax Considerations--Tax Treatment of the Company"
for a discussion of certain powers given to the Board of Directors to prohibit
the transfer, or effect redemptions, of the Common Stock and any other capital
stock of the Company designed to aid the Company to maintain qualification as a
REIT.
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<PAGE>
DESCRIPTION OF PREFERRED STOCK
The Company is authorized to issue 50,000,000 shares of preferred stock,
$.01 par value per share. At June 30, 1994, the Company had outstanding
7,625,000 shares of preferred stock. The Company's Restated Articles of
Incorporation provide that the preferred stock may be issued from time to time
in one or more series and give the Board of Directors broad authority to fix
the dividend and distribution rights, conversion and voting rights, if any,
redemption provisions and liquidation preferences of each series of preferred
stock. Holders of preferred stock have no preemptive rights. The outstanding
shares of preferred stock are, and additional shares of preferred stock will
be, when issued, fully paid and nonassessable.
See "Certain Federal Income Tax Considerations--Tax Treatment of the
Company" for a discussion of certain powers given to the Board of Directors to
prohibit the transfer, or effect redemptions, of the preferred stock or any
other capital stock of the Company designed to aid the Company to maintain its
qualification as a REIT.
The issuance of preferred stock with special voting rights (or Common Stock)
could be used to deter attempts by a single Shareholder or group of
Shareholders to obtain control of the Company in transactions not approved by
the Board of Directors. The Company has no intention to issue the preferred
stock (or Common Stock) for such purposes.
OUTSTANDING PREFERRED STOCK
At June 30, 1994, the Company had four series of preferred stock
outstanding: 1,825,000 shares of Series A Preferred Stock, 2,300,000 shares of
Series B Preferred Stock, 2,300,000 shares of Convertible Preferred Stock and
1,200,000 shares of Adjustable Rate Preferred Stock. In all respects, the
Series A Preferred Stock, the Series B Preferred Stock and the Adjustable Rate
Preferred Stock rank on a parity with each other and are senior to the
Convertible Preferred Stock. Each of the Series A Preferred Stock, the Series
B Preferred Stock and the Adjustable Rate Preferred Stock (i) has a stated
value of $25.00 per share, (ii) in preference to the holders of shares of the
Common Stock and any other capital stock ranking junior to the Series A
Preferred Stock, the Series B Preferred Stock and the Adjustable Rate
Preferred Stock as to payment of dividends (including the Convertible
Preferred Stock), provides for cumulative quarterly dividends calculated as a
percentage of the stated value (10% in the case of the Series A Preferred
Stock, 9.20% in the case of the Series B Preferred Stock and a rate adjustable
quarterly ranging from 6.75% to 10.75% (8.15% through September 30, 1994) in
the case of the Adjustable Rate Preferred Stock) and (iii) is subject to
redemption, in whole or in part, at the option of the Company at a cash
redemption price of $25.00 per share, plus accrued and unpaid dividends (on
and after September 30, 2002 in the case of the Series A Preferred Stock, on
and after June 30, 2003 in the case of the Series B Preferred Stock, and on
and after June 30, 1999 in the case of the Adjustable Rate Preferred Stock).
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of the Series A Preferred Stock, the
Series B Preferred Stock and the Adjustable Rate Preferred Stock will be
entitled to receive out of the Company's assets available for distribution to
stockholders, before any distribution of assets is made to holders of Common
Stock or any other shares of capital stock ranking as to such distributions
junior to the Series A Preferred Stock, the Series B Preferred Stock and the
Adjustable Rate Preferred Stock (including the Convertible Preferred Stock),
liquidating distributions in the amount of $25.00 per share, plus all accrued
and unpaid dividends.
Except as expressly required by law and in certain other limited
circumstances, the holders of the Series A Preferred Stock, the Series B
Preferred Stock and the Adjustable Rate Preferred Stock are not entitled to
vote. The consent of holders of at least 66 2/3% of the outstanding shares of
the Series A, the Series B Preferred Stock and the Adjustable Rate Preferred
Stock (and any other series of preferred stock ranking on a parity therewith),
voting as a single class, is required to authorize another class of shares
senior to such preferred stock.
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<PAGE>
The Convertible Preferred Stock (i) has a stated value of $25.00 per share,
(ii) in preference to the holders of shares of the Common Stock and any other
capital stock ranking junior to the Convertible Preferred Stock as to payment
of dividends, provides for cumulative quarterly dividends at an annual rate of
8.25% of the stated value thereof, (iii) is convertible at the option of the
holder at any time into Common Stock at a conversion price of 1.6835 shares of
Common Stock for each share of Convertible Preferred Stock (subject to
adjustment in certain circumstances) and (iv) after July 1, 1998, under certain
circumstances, is redeemable for Common Stock at the option of the Company, in
whole or in part, at a redemption price of 1.6835 shares of Common Stock for
each share of Convertible Preferred Stock (subject to adjustment in certain
circumstances).
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of the Convertible Preferred Stock will
be entitled to receive out of the Company's assets available for distribution
to stockholders, before any distribution of assets is made to holders of Common
Stock or any other shares of capital stock ranking as to such distributions
junior to the Convertible Preferred Stock, liquidating distributions in the
amount of $25.00 per share, plus all accrued and unpaid dividends.
Except as expressly required by law and in certain other limited
circumstances, the holders of the Convertible Preferred Stock are not entitled
to vote. The consent of holders of at least 66 2/3% of the outstanding shares
of the Convertible Preferred Stock is required to authorize another class of
shares senior to the Convertible Preferred Stock and junior to the Series A
Preferred Stock, the Series B Preferred Stock and the Adjustable Rate Preferred
Stock (and any other series of preferred stock ranking on a parity therewith).
FUTURE SERIES OF PREFERRED STOCK
The following description of preferred stock sets forth certain general terms
and provisions of the Preferred Stock to which any Prospectus Supplement may
relate. The statements below describing the Preferred Stock are in all respects
subject to and qualified in their entirety by reference to the applicable
provisions of the Company's Restated Articles of Incorporation (including the
applicable form of Certificate of Determination) and Bylaws.
Reference is made to the Prospectus Supplement relating to the Preferred
Stock offered thereby for specific terms, including, where applicable, the
following: (1) the title and stated value of such Preferred Stock; (2) the
number of shares of such Preferred Stock offered, the liquidation preference
per share and the offering price of such Preferred Stock; (3) the dividend
rate(s), period(s) and/or payment date(s) or method(s) of calculation thereof
applicable to such Preferred Stock; (4) the date from which dividends on such
Preferred Stock shall accumulate, if applicable; (5) the provision for a
sinking fund, if any, for such Preferred Stock; (6) the provision for
redemption, if applicable, of such Preferred Stock; (7) any listing of such
Preferred Stock on any securities exchange; (8) the terms and conditions, if
applicable, upon which such Preferred Stock will be convertible into Common
Stock, including the conversion price (or manner of calculation thereof); (9)
the voting rights, if any, of such Preferred Stock; (10) any other specific
terms, preferences, rights, limitations or restrictions of such Preferred
Stock; (11) the relative ranking and preferences of such Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up of the
affairs of the Company; and (12) any limitations on issuance of any series of
preferred stock ranking senior to or on a parity with such series of Preferred
Stock as to dividend rights and rights upon liquidation, dissolution or winding
up of the affairs of the Company.
Ranking. The ranking of the Preferred Stock is set forth in the applicable
Prospectus Supplement. Unless otherwise specified in the Prospectus Supplement,
the Preferred Stock will, with respect to dividend rights and rights upon
liquidation, dissolution or winding up of the affairs of the Company, rank (i)
senior to the Common Stock, any additional class of common stock and any series
of preferred stock expressly made junior to such Preferred Stock with respect
to dividend rights or rights upon liquidation, dissolution or winding up of the
affairs of the Company; (ii) on a parity with all preferred stock issued by the
Company the
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<PAGE>
terms of which specifically provide that such preferred stock rank on a parity
with the Preferred Stock with respect to dividend rights or rights upon
liquidation, dissolution or winding up of the Company; and(iii) junior to all
preferred stock issued by the Company the terms of which specifically provide
that such preferred stock rank senior to the Preferred Stock with respect to
dividend rights or rights upon liquidation, dissolution or winding up of the
Company.
Dividends. Holders of shares of the Preferred Stock of each series shall be
entitled to receive, when, as and if declared by the Board of Directors, out of
assets of the Company legally available for payment, cash dividends at such
rates and on such dates as will be set forth in the applicable Prospectus
Supplement. Each such dividend shall be payable to holders of record as they
appear on the stock transfer books of the Company on such record dates as shall
be fixed by the Board of Directors.
Dividends on any series of the Preferred Stock may be cumulative or non-
cumulative, as provided in the applicable Prospectus Supplement. Dividends, if
cumulative, will be cumulative from and after the date set forth in the
applicable Prospectus Supplement. If the Board of Directors fails to declare a
dividend payable on a dividend payment date on any series of the Preferred
Stock for which dividends are noncumulative, then the holders of such series of
the Preferred Stock will have no right to receive a dividend in respect of the
dividend period ending on such dividend payment date, and the Company will have
no obligation to pay the dividend accrued for such period, whether or not
dividends on such series are declared payable on any future dividend payment
date.
No dividends (other than in Common Stock or other capital stock ranking
junior to the Preferred Stock of any series as to dividends and upon
liquidation) shall be declared or paid or set aside for payment, nor shall any
other distribution be declared or made upon the Common Stock, or any other
capital stock of the Company ranking junior to or on a parity with the
Preferred Stock of such series as to dividends or upon liquidation, nor shall
any Common Stock or any other capital stock of the Company ranking junior to or
on a parity with the Preferred Stock of such series as to dividends or upon
liquidation be redeemed, purchased or otherwise acquired for any consideration
(or any moneys be paid to or made available for a sinking fund for the
redemption of any shares of any such stock) by the Company (except by
conversion into or exchange for other capital stock of the Company ranking
junior to the Preferred Stock of such series as to dividends and upon
liquidation) unless (i) if such series of Preferred Stock has a cumulative
dividend, full cumulative dividends on the Preferred Stock of such series have
been or contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof set apart for payment for all past dividend
periods and the then current dividend period and (ii) if such series of
Preferred Stock does not have a cumulative dividend, full dividends on the
Preferred Stock of such series have been or contemporaneously are declared and
paid or declared and a sum sufficient for the payment thereof set apart for
payment for the then current dividend period.
Any dividend payment made on shares of a series of Cumulative Preferred Stock
shall first be credited against the earliest accrued but unpaid dividend due
with respect to shares of such series which remains payable.
Redemption. If so provided in the applicable Prospectus Supplement, the
shares of Preferred Stock will be subject to mandatory redemption or redemption
at the option of the Company, in whole or in part, in each case upon the terms,
at the times and at the redemption prices set forth in such Prospectus
Supplement.
The Prospectus Supplement relating to a series of Preferred Stock that is
subject to mandatory redemption will specify the number of shares of such
Preferred Stock that shall be redeemed by the Company in each year commencing
after a date to be specified, at a redemption price per share to be specified,
together with an amount equal to all accrued and unpaid dividends thereon
(which shall not, if such Preferred Stock does not have a cumulative dividend,
include any accumulation in respect of unpaid dividends for prior dividend
periods) to the date of redemption. The redemption price may be payable in
cash, securities or other property, as specified in the applicable Prospectus
Supplement.
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<PAGE>
Notwithstanding the foregoing, no shares of any series of Preferred Stock
shall be redeemed and the Company shall not purchase or otherwise acquire
directly or indirectly any shares of Preferred Stock of such series (except by
conversion into or exchange for capital stock of the Company ranking junior to
the Preferred Stock of such series as to dividends and upon liquidation) unless
all outstanding shares of Preferred Stock of such series are simultaneously
redeemed unless, in each case, (i) if such series of Preferred Stock has a
cumulative dividend, full cumulative dividends on the Preferred Stock of such
series shall have been or contemporaneously are declared and paid or declared
and a sum sufficient for the payment thereof set apart for payment for all past
dividend periods and the then current dividend period and (ii) if such series
of Preferred Stock does not have a cumulative dividend, full dividends on the
Preferred Stock of such series have been or contemporaneously are declared and
paid or declared and a sum sufficient for the payment thereof set apart for
payment for the then current dividend period; provided, however, that the
foregoing shall not prevent the purchase or acquisition of shares of Preferred
Stock of such series pursuant to a purchase or exchange offer made on the same
terms to holders of all outstanding shares of Preferred Stock of such series.
If fewer than all of the outstanding shares of Preferred Stock of any series
are to be redeemed, the number of shares to be redeemed will be determined by
the Company and such shares may be redeemed pro rata from the holders of record
of such shares in proportion to the number of such shares held by such holders
(with adjustments to avoid redemption of fractional shares) or any other
equitable method determined by the Company.
Notice of redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each holder of record of Preferred Stock of
any series to be redeemed at the address shown on the stock transfer books of
the Company. Each notice shall state: (i) the redemption date; (ii) the number
of shares and series of the Preferred Stock to be redeemed; (iii) the
redemption price; (iv) the place or places where certificates for such
Preferred Stock are to be surrendered for payment of the redemption price;(v)
that dividends on the shares to be redeemed will cease to accrue on such
redemption date; and (vi) the date upon which the holder's conversion rights,
if any, as to such shares shall terminate. If fewer than all the shares of
Preferred Stock of any series are to be redeemed, the notice mailed to each
such holder thereof shall also specify the number of shares of Preferred Stock
to be redeemed from each such holder and, upon redemption, a new certificate
shall be issued representing the unredeemed shares without cost to the holder
thereof. In order to facilitate the redemption of shares of Preferred Stock,
the Board of Directors may fix a record date for the determination of shares of
Preferred Stock to be redeemed, such record date to be not less than 30 or more
than 60 days prior to the date fixed for such redemption.
Notice having been given as provided above, from and after the date specified
therein as the date of redemption, unless the Company defaults in providing
funds for the payment of the redemption price on such date, all dividends on
the Preferred Stock called for redemption will cease. From and after the
redemption date, unless the Company so defaults, all rights of the holders of
the Preferred Stock as shareholders of the Company, except the right to receive
the redemption price (but without interest), will cease.
Subject to applicable law and the limitation on purchases when dividends on
Preferred Stock are in arrears, the Company may, at any time and from time to
time, purchase any shares of Preferred Stock in the open market, by tender or
by private agreement.
Liquidation Preference. Upon any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Company, then, before any
distribution or payment shall be made to the holders of any Common Stock or any
other class or series of capital stock of the Company ranking junior to any
series of the Preferred Stock in the distribution of assets upon any
liquidation, dissolution or winding up of the Company, the holders of such
series of Preferred Stock shall be entitled to receive out of assets of the
Company legally available for distribution to stockholders liquidating
distributions in the amount of the liquidation preference per share (set forth
in the applicable Prospectus Supplement), plus an amount equal to all dividends
accrued and unpaid thereon (which shall not include any accumulation in respect
of unpaid dividends for prior dividend periods if such Preferred Stock does not
have a cumulative dividend). After payment of the full
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<PAGE>
amount of the liquidating distributions to which they are entitled, the holders
of Preferred Stock will have no right or claim to any of the remaining assets
of the Company. In the event that, upon any such voluntary or involuntary
liquidation, dissolution or winding up, the legally available assets of the
Company are insufficient to pay the amount of the liquidating distributions on
all outstanding shares of any series of Preferred Stock and the corresponding
amounts payable on all shares of other classes or series of capital stock of
the Company ranking on a parity with the Preferred Stock in the distribution of
assets upon liquidation, dissolution or winding up, then the holders of such
series of Preferred Stock and all other such classes or series of capital stock
shall share ratably in any such distribution of assets in proportion to the
full liquidating distributions to which they would otherwise be respectively
entitled.
If liquidating distributions shall have been made in full to all holders of
Preferred Stock, the remaining assets of the Company shall be distributed among
the holders of any other classes or series of capital stock ranking junior to
such series of Preferred Stock upon liquidation, dissolution or winding up,
according to their respective rights and preferences and in each case according
to their respective number of shares. For such purposes, the consolidation or
merger of the Company with or into any other corporation, or the sale, lease,
transfer or conveyance of all or substantially all of the property or business
of the Company, shall not be deemed to constitute a liquidation, dissolution or
winding up of the Company.
Voting Rights. Holders of the Preferred Stock will not have any voting
rights, except as set forth below or as otherwise expressly required by law or
as indicated in the applicable Prospectus Supplement.
If the equivalent of six quarterly dividends payable on any series of
Preferred Stock are in default (whether or not declared or consecutive), the
holders of all such series of preferred stock, voting as a single class with
all other series of preferred stock upon which similar voting rights have been
conferred and are exercisable, will be entitled to elect two additional
directors until all dividends in default have been paid or declared and set
apart for payment.
Such right to vote separately to elect directors shall, when vested, be
subject, always, to the same provisions for vesting of such right to elect
directors separately in the case of future dividend defaults. At any time when
such right to elect directors separately shall have so vested, the Company may,
and upon the written request of the holders of record of not less than 20% of
the total number of preferred shares of the Company then outstanding shall,
call a special meeting of Shareholders for the election of directors. In the
case of such a written request, such special meeting shall be held within 90
days after the delivery of such request and, in either case, at the place and
upon the notice provided by law and in the Bylaws of the Company, provided that
the Company shall not be required to call such a special meeting if such
request is received less than 120 days before the date fixed for the next
ensuing annual meeting of Shareholders, and the holders of all classes of
outstanding preferred stock are offered the opportunity to elect such directors
(or fill any vacancy) at such annual meeting of shareholders. Directors so
elected shall serve until the next annual meeting of shareholders of the
Company or until their respective successors are elected and qualify. If, prior
to the end of the term of any director so elected, a vacancy in the office of
such director shall occur, during the continuance of a default by reason of
death, resignation, or disability, such vacancy shall be filled for the
unexpired term of such former director by the appointment of a new director by
the remaining director or directors so elected.
The affirmative vote or consent of the holders of at least a majority of the
outstanding shares of each series of Preferred Stock will be required to amend
or repeal any provision of or add any provision to, the Restated Articles of
Incorporation, including the Certificate of Determination, if such action would
materially and adversely alter or change the rights, preferences or privileges
of such series of Preferred Stock.
No consent or approval of the holders of any series of Preferred Stock will
be required for the issuance from the Company's authorized but unissued
preferred stock of other shares of any series of preferred stock ranking on a
parity with or junior to such series of Preferred Stock, or senior to a series
of Preferred Stock expressly made junior to other series of preferred stock as
to payment of dividends and distribution of assets, including other shares of
such series of Preferred Stock.
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<PAGE>
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of such series of Preferred Stock shall
have been redeemed or called for redemption upon proper notice and sufficient
funds shall have been deposited in trust to effect such redemption.
Conversion Rights. The terms and conditions, if any, upon which shares of any
series of Preferred Stock are convertible into Common Stock will be set forth
in the applicable Prospectus Supplement relating thereto. Such terms will
include the number of shares of Common Stock into which the Preferred Stock is
convertible, the conversion price (or manner of calculation thereof), the
conversion period, provisions as to whether conversion will be at the option of
the holders of the Preferred Stock or automatically upon the occurrence of
certain events, the events requiring an adjustment of the conversion price and
provisions affecting conversion in the event of the redemption of such
Preferred Stock.
DESCRIPTION OF WARRANTS
The Company has no Warrants outstanding (other than options issued under the
Company's employee stock option plan). The Company may issue Warrants for the
purchase of Preferred Stock or Common Stock. Warrants may be issued
independently or together with any other Securities offered by any Prospectus
Supplement and may be attached to or separate from such Securities. Each series
of Warrants will be issued under a separate warrant agreement (each, a "Warrant
Agreement") to be entered into between the Company and a warrant agent
specified in the applicable Prospectus Supplement (the "Warrant Agent"). The
Warrant Agent will act solely as an agent of the Company in connection with the
Warrants of such series and will not assume any obligation or relationship of
agency or trust for or with any holders or beneficial owners of Warrants. The
following sets forth certain general terms and provisions of the Warrants
offered hereby. Further terms of the Warrants and the applicable Warrant
Agreement will be set forth in the applicable Prospectus Supplement.
The applicable Prospectus Supplement will describe the terms of the Warrants
in respect of which this Prospectus is being delivered, including, where
applicable, the following: (1) the title of such Warrants; (2) the aggregate
number of such Warrants; (3) the price or prices at which such Warrants will be
issued; (4) the designation, number and terms of the shares of Preferred Stock
or Common Stock purchasable upon exercise of such Warrants; (5) the designation
and terms of the other Securities, if any, with which such Warrants are issued
and the number of such Warrants issued with each such Security; (6) the date,
if any, on and after which such Warrants and the related Preferred Stock or
Common Stock, if any, will be separately transferable; (7) the price at which
each share of Preferred Stock or Common Stock purchasable upon exercise of such
Warrants may be purchased; (8) the date on which the right to exercise such
Warrants shall commence and the date on which such right shall expire; (9) the
minimum or maximum amount of such Warrants which may be exercised at any one
time; and (10) any other terms of such Warrants, including terms, procedures
and limitations relating to the exchange and exercise of such Warrants.
13
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary of certain federal income tax considerations to the
Company is based on current law, is for general information only, and is not
tax advice. The tax treatment of a holder of any of the Securities will vary
depending upon the terms of the specific securities acquired by such holder, as
well as his or her particular situation, and this discussion does not attempt
to address any aspects of federal income taxation relating to holders of
Securities, except as discussed under "Taxation of Shareholders." Certain
federal income tax considerations relevant to holders of the Securities may be
provided in the applicable Prospectus Supplement relating thereto.
EACH INVESTOR IS ADVISED TO CONSULT THE APPLICABLE PROSPECTUS SUPPLEMENT, AS
WELL AS HIS OR HER OWN TAX ADVISOR, REGARDING THE TAX CONSEQUENCES TO HIM OR
HER OF THE ACQUISITION, OWNERSHIP AND SALE OF THE SECURITIES, INCLUDING THE
FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH ACQUISITION,
OWNERSHIP AND SALE AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAX TREATMENT OF THE COMPANY
If certain detailed conditions imposed by the Code and the related
regulations are met, an entity, such as the Company, that invests principally
in real estate and that otherwise would be taxed as a corporation may elect to
be treated as a REIT. The most important consequence to the Company of being
treated as a REIT for federal income tax purposes is that this enables the
Company to deduct dividend distributions to Shareholders, thus effectively
eliminating the "double taxation" (at the corporate and shareholder levels)
that typically results when a corporation earns income and distributes that
income to shareholders in the form of dividends.
The Company elected to be taxed as a REIT beginning with its fiscal year
ending December 31, 1981. That election will continue in effect until it is
revoked or terminated. Based upon the description in this Prospectus of the
Company's current and contemplated method of operation and upon certain
representations made by officers of the Company concerning the Company's
satisfaction of the factual elements of the REIT tests, Hogan & Hartson L.L.P.,
special counsel to the Company, is of the opinion that the Company has
qualified as a REIT during each of the five years in the period ended December
31, 1993, and as of July 26, 1994, the date of the opinion. This opinion is
based on various assumptions relating to the organization and operation of the
Company and is conditioned upon certain representations made by the Company as
to certain relevant factual matters. Moreover, qualification and taxation as a
REIT will depend upon the Company's ability to meet on a continuing basis,
distribution levels and diversity of stock ownership, and the various
qualification tests imposed by the Code as discussed below. While the Company
intends to operate so that it will continue to qualify as a REIT, given the
highly complex nature of the rules governing REITs, the ongoing importance of
factual determinations, and the possibility of future changes in the
circumstances of the Company, no assurance can be given by special counsel or
the Company that the Company will so qualify for any particular year. Hogan &
Hartson L.L.P. will not review compliance with these tests on a continuing
basis, and has not undertaken to update its opinion subsequent to the date
thereof.
The following is a very brief overview of certain of the technical
requirements that the Company must meet on an ongoing basis in order to
continue to qualify as a REIT:
1. The capital stock must be widely-held and not more than 50% of the
value of the capital stock may be held by five or fewer individuals
(determined after giving effect to various ownership attribution rules). To
aid in meeting these requirements, the Bylaws give the Board of Directors
the power to prohibit the transfer, or effect the redemption, of shares of
capital stock if the transfer would result in the Company not meeting these
requirements or if the ownership of capital stock would otherwise prevent
the Company from so complying.
14
<PAGE>
2. The Company's gross income must meet three income tests:
(a) at least 75% of the gross income must be derived from specified
real estate sources;
(b) at least 95% of the gross income must be from the real estate
sources includable in the 75% income test, and/or from dividends,
interest, or gains from the sale or disposition of stock or
securities not held for sale in the ordinary course of business;
and
(c) less than 30% of the gross income may be derived from the sale of
real estate assets held for less than four years, from the sale
of certain "dealer" property, or from the sale of stock or
securities held for less than one year.
3. Generally, 75% by value of the Company's investments must be in real
estate, mortgages secured by real estate, cash, or government securities.
4. The Company must distribute to Shareholders in each taxable year an
amount at least equal to 95% of the Company's "REIT Taxable Income" (which
is generally equivalent to net taxable ordinary income). Under certain
circumstances, the Company can rectify a failure to meet the 95%
distribution test by paying dividends after the close of a particular
taxable year.
The Company in years prior to 1990 made distributions in excess of its REIT
Taxable Income. During 1990, the Company reduced its distributions to
Shareholders to permit the Company to make an optional reduction in short-term
borrowings (which previously had been used to fund distributions to
Shareholders). As a result, distributions paid by the Company in 1990 were less
than 95% of the Company's REIT Taxable Income for 1990. The Company has
satisfied the REIT distribution requirements for 1990, 1991, 1992 and 1993 by
attributing distributions in 1991, 1992, 1993 and 1994 to the prior year's
taxable income. The Company may be required, over each of the next several
years, to make distributions after the close of a taxable year and to attribute
those distributions to the prior year. The extent to which the Company will be
required to attribute distributions to the prior year will depend on the
Company's operating results and the level of distributions as determined by the
Board of Directors. Reliance on subsequent year distributions could cause the
Company to be subject to certain penalty taxes. In that regard, if the Company
should fail to distribute during each calendar year at least the sum of (i) 85%
of its REIT ordinary income for such calendar year, (ii) 95% of its REIT
capital gain net income for such calendar year, and (iii) any undistributed
taxable income from prior periods, the Company would be subject to a 4% excise
tax on the excess of such required distribution over the amounts actually
distributed during such calendar year (not taking into account distributions
made in subsequent years but attributed to such calendar year). The Company
intends to monitor its compliance with this 85% distribution requirement in an
effort to minimize any excise tax.
For purposes of applying the income and asset tests mentioned above, a REIT
is considered to own a proportionate share of the assets of any partnership in
which it holds a partnership interest.
For years in which the Company qualifies as a REIT, the Company generally
will be taxable only on its undistributed income. Certain penalty taxes can
apply if the Company delays distributions until after the close of a taxable
year. Moreover, a confiscatory tax of 100% can apply to income derived by the
Company from sales of "dealer" property. If the Company fails to meet either
the 75% or 95% source of income tests described above, but still qualifies for
REIT status under the reasonable cause exception to those tests, a 100% tax is
imposed equal to the amount obtained by multiplying (i) the greater of the
amount, if any, by which it failed either the 75% or the 95% income tests,
times (ii) the fraction that its REIT Taxable Income represents of the
Company's gross income (excluding capital gain and certain other items). It
should be noted that the Company is not required to distribute its net capital
gain. However, to the extent that the Company does not declare a capital gain
dividend, that gain will be taxable to the Company at normal corporate rates,
and the Company will be subject to a 4% non-deductible excise tax to the extent
that it does not distribute 95% of its capital gain. The Company also will be
subject to the minimum tax on tax preference items (excluding items
specifically allocable to its shareholders).
For any taxable year that the Company fails to qualify as a REIT, it would be
taxed at the usual corporate rates on all of its taxable income, whether or not
it makes any distributions to Shareholders. Those taxes would reduce the amount
of cash available to the Company for distribution to Shareholders. As a result,
15
<PAGE>
failure of the Company to qualify during any taxable year as a REIT could have
a material adverse effect upon the Company and the Shareholders, unless certain
relief provisions are available.
The Company's election to be treated as a REIT will terminate automatically
if the Company fails to meet the qualification requirements described above. If
a termination (or a voluntary revocation) occurs, unless certain relief
provisions apply, the Company will not be eligible to elect REIT status again
until the fifth taxable year that begins after the first year for which the
Company's election was terminated (or revoked). If the Company loses its REIT
status, but later qualifies and elects to be taxed as a REIT again, the Company
may face significant adverse tax consequences. Immediately prior to the
effectiveness of the election to return to REIT status, the Company would be
treated as if it disposed of all of its assets in a taxable transaction,
triggering taxable gain with respect to the Company's appreciated assets. (The
Company would, however, be permitted to elect an alternative treatment under
which the gains would be taken into account only as and when they actually are
recognized upon sales of the appreciated property occurring within the 10-year
period after return to REIT status.) The Company would not receive the benefit
of a dividends paid deduction to reduce any such taxable gains. Thus, any such
gains on appreciated assets would be subject to double taxation, at the
corporate as well as the shareholder level.
TAXATION OF SHAREHOLDERS
Distributions generally will be taxable to Shareholders as ordinary income to
the extent of the Company's earnings and profits. For this purpose, earnings
and profits of the Company first will be allocated to distributions paid on
preferred stock until an amount equal to such distributions has been allocated
thereto. As a result, it is likely that any distributions paid on preferred
stock will be taxable in full as dividends to the holders of preferred stock.
Dividends declared during the last quarter of a calendar year and actually paid
during January of the immediately following calendar year generally are treated
as if received by the shareholders on December 31 of the calendar year during
which they were declared. Distributions paid to Shareholders will not
constitute passive activity income and as a result, generally cannot be offset
by losses from passive activities of Shareholders subject to the passive
activity rules. Distributions designated by the Company as capital gain
dividends generally will be taxed as long-term capital gain to Shareholders, to
the extent that the distributions do not exceed the Company's actual net
capital gain for the taxable year. Corporate Shareholders may be required to
treat up to 20% of any such capital gain dividends as ordinary income.
Distributions by the Company, whether characterized as ordinary income or as
capital gain, are not eligible for the 70% dividends received deduction for
corporations. If the Company should realize a loss, Shareholders will not be
permitted to deduct any share of that loss. Future regulations may require that
Shareholders take into account, for purposes of computing their individual
alternative minimum tax liability, certain tax preference items of the Company.
The Company may distribute cash in excess of its net taxable income. Upon
distribution of such cash by the Company to Shareholders (other than as a
capital gain dividend), if all of the Company's current and accumulated
earnings and profits have been distributed, the excess cash will be deemed to
be a non-taxable return of capital to each Shareholder to the extent of the
adjusted tax basis of the Shareholder's capital stock. Distributions in excess
of the adjusted tax basis will be treated as gain from the sale or exchange of
the capital stock. A Shareholder who has received a distribution in excess of
current and accumulated earnings and profits of the Company may, upon the sale
of the capital stock, realize a higher taxable gain or a smaller loss because
the basis of the Common Stock as reduced will be used for purposes of computing
the amount of the gain or loss. Generally, gain or loss realized by a
Shareholder upon the sale of capital stock will be reportable as capital gain
or loss. If a Shareholder receives a long-term capital gain dividend from the
Company and has held the capital stock for six months or less, any loss
incurred on the sale or exchange of the capital stock is treated as a long-term
capital loss, to the extent of the corresponding long-term capital gain
dividend received.
If a Shareholder is subject to "backup withholding," the Company will be
required to deduct and withhold from any dividends payable to such Shareholder
a tax of 31%. These rules may apply when a
16
<PAGE>
Shareholder fails to supply a correct taxpayer identification number, or when
the IRS notifies the Company that a Shareholder is subject to the rules or has
furnished an incorrect taxpayer identification number.
The Company is required to demand annual written statements from the record
holders of designated percentages of its capital stock disclosing the actual
owners of the capital stock and to maintain permanent records showing the
information it has received as to the actual ownership of such capital stock
and a list of those persons failing or refusing to comply with such demand.
In any year in which the Company does not qualify as a REIT, distributions by
the Company to Shareholders will be taxable in the same manner discussed above,
except that no distributions can be designated as capital gain dividends,
distributions will be eligible for the corporate dividends received deduction,
and Shareholders will not receive any share of the Company's tax preference
items.
Tax Exempt Investors. In general, a tax exempt entity that is a Shareholder
is not subject to tax on distributions from the Company or gain realized on the
sale of capital stock, provided that the tax exempt entity has not financed the
acquisition of its capital stock with "acquisition indebtedness" within the
meaning of the Code. Special rules apply to organizations exempt under Code
Sections 501(c)(7), (c)(9), (c)(17) and (c)(20), and such prospective investors
should consult their own tax advisors concerning the applicable "set aside" and
reserve requirements. In addition, for taxable years beginning after December
31, 1993, certain distributions by a REIT to a tax-exempt employee's pension
trust that owns more than 10% of the REIT will, in certain circumstances, be
treated as "unrelated business taxable income."
Foreign Investors. The rules governing United States income, gift and estate
taxation of foreign entities and individuals who are neither citizens nor
residents of the United States are complex. They depend not only upon United
States federal and state income, gift and estate tax principles, but also upon
the treaties, if any, between the United States and the country of the
nonresident investor. Therefore, any prospective foreign investor is urged to
consult its own tax advisor with respect to both the United States and foreign
tax consequences of owning stock of the Company. The following discussion sets
forth several points that may be relevant to particular foreign investors. It
assumes that any such investor holds the stock of the Company as an investment
and not in connection with the conduct of a U.S. trade or business. Ordinary
dividends generally will be subject to withholding at the source, at a 30% rate
(which may be reduced under applicable treaties if the shareholder satisfies
all pertinent requirements). Capital gain dividends may be subject to such
withholding at a 35% rate if they relate to dispositions of U.S. real property
interests (including the sale or disposition prior to maturity of loans where
interest is based upon a "participation" in the income or appreciation from
real property). Such dispositions would generally include the sale (but not the
retirement) of profit-sharing loans relating to U.S. real property. In
addition, such capital gain dividends (net of the amount of regular income tax)
may be subject to a 30% branch tax in the hands of any foreign corporate
recipients. Such tax may be reduced or eliminated in the case of a corporation
that is a resident of a country with which the U.S. has a tax treaty, provided
that a majority of such corporation's ultimate shareholders are residents of
the country in question and that various filing requirements are satisfied.
Investors may be able to obtain a partial refund of taxes withheld in respect
of capital gain distributions by filing a nonresident U.S. tax return. Because
only a minority of the Company's shareholders are expected to be foreign
taxpayers, the Company should qualify as a "domestically-controlled REIT."
Accordingly, a foreign taxpayer will not be subject to U.S. tax from gains
recognized upon disposition of capital stock (unless the shareholder was
present in the U.S. for more than 183 days in the year of sale and certain
other requirements are met). Upon the death of a foreign individual
shareholder, the investor's stock in the Company will be treated as part of the
investor's U.S. estate for purposes of the U.S. estate tax, except as may be
otherwise provided in an applicable estate tax treaty.
17
<PAGE>
TAX CONSEQUENCES TO COMPANY OF JOINT INVESTMENTS WITH PSP PARTNERSHIPS
The Company entered into arrangements with seven of the PSP Partnerships
under which the Company participated in the acquisition of existing mini-
warehouses and business park properties. See "The Company."
Under the arrangements with the seven PSP Partnerships, the Company would
acquire an undivided interest in property that was to be owned jointly with a
PSP Partnership and then would transfer its interest in the property to a joint
venture that was formed with the PSP Partnership in exchange for a partnership
interest in that joint venture. These transactions have been treated as
nontaxable events under Section 721 of the Code, and the Company generally has
received a carryover basis in that joint venture interest equal to the
Company's basis in the property conveyed to the joint venture. The Company
obtained opinions of counsel that the actual tax consequences arising from the
formation of the Company's joint investments with PSP Partnerships were
consistent with the foregoing. It is possible, however, that the IRS might
attempt to restructure the transactions by taking the position that the Company
and the PSP Partnership should be treated for tax purposes as having
transferred their respective consideration to the joint venture, with the joint
venture (rather than the Company and the PSP Partnership) acquiring the real
property from the seller. In the event that a court would agree with the IRS,
the joint venture would recognize a short-term capital gain in an amount equal
to the fair market value of the consideration supplied by the Company that
consisted of the Company's securities or notes. Under the joint venture
agreements, any such gain would be allocated to the Company.
All of the joint ventures with the PSP Partnerships provide for a special
allocation of initial cost recovery deductions to the PSP Partnerships. After
that initial allocation, subsequent cost recovery deductions are then allocated
to the Company, to the extent required to balance out the initial allocation to
the PSP Partnerships. Assuming that these allocations are respected for tax
purposes, these provisions initially have the effect of delaying the cost
recovery deductions otherwise allocable to the Company, reducing the amount of
the Company's distributions during that period that would be considered a
return of capital, if distributions to Shareholders otherwise exceeded the
Company's current or accumulated earnings and profits. These effects reverse at
such time as the depreciation of the joint ventures begins to be allocated to
the Company.
STATE AND LOCAL TAXES
The tax treatment of the Company and the Shareholders in states having taxing
jurisdiction over them may differ from the federal income tax treatment.
Accordingly, no discussion of state taxation of the Company and the
Shareholders is provided nor is any representation made as to the tax status of
the Company in such states. All investors should consult their own tax advisors
as to the treatment of the Company under the respective state tax laws
applicable to them.
18
<PAGE>
PLAN OF DISTRIBUTION
The Company may sell the Securities to one or more underwriters for public
offering and sale by them or may sell the Securities to investors directly or
through agents. Any such underwriter or agent involved in the offer and sale of
the Securities will be named in the applicable Prospectus Supplement.
Underwriters may offer and sell the Securities at a fixed price or prices,
which may be changed, at prices related to the prevailing market prices at the
time of sale or at negotiated prices. The Company also may, from time to time,
authorize underwriters acting as the Company's agents to offer and sell the
Securities upon the terms and conditions as are set forth in the applicable
Prospectus Supplement. In connection with the sale of Securities, underwriters
may be deemed to have received compensation from the Company in the form of
underwriting discounts or commissions and may also receive commissions from
purchasers of Securities for whom they may act as agent. Underwriters may sell
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 agent.
Any underwriting compensation paid by the Company to underwriters or agents
in connection with the offering of Securities, and any discounts, concessions
or commissions allowed by underwriters to participating dealers, will be set
forth in the applicable Prospectus Supplement. Underwriters, dealers and agents
participating in the distribution of the Securities may be deemed to be
underwriters, and any discounts and commissions received by them and any profit
realized by them on resale of the Securities may be deemed to be underwriting
discounts and commissions, under the Securities Act. Underwriters, dealers and
agents may be entitled, under agreements entered into with the Company, to
indemnification against and contribution toward certain civil liabilities,
including liabilities under the Securities Act.
If so indicated in the applicable Prospectus Supplement, the Company will
authorize dealers acting as the Company's agents to solicit offers by certain
institutions to purchase Securities from the Company at the public offering
price set forth in such Prospectus Supplement pursuant to Delayed Delivery
Contracts ("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 aggregate principal amount of Securities sold pursuant to
Contracts shall be not less nor more than, the respective amounts stated in the
applicable Prospectus Supplement. Institutions with whom 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. Contracts will not be subject to any conditions except
(i) the purchase by an institution of the Securities covered by its Contracts
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) if the Securities are being sold to underwriters, the Company shall have
sold to such underwriters the total principal amount of the Securities less the
principal amount thereof covered by Contracts. Agents and underwriters will
have no responsibility in respect of the delivery or performance of Contracts.
This Prospectus may also be used in a registered resale by persons who hold
(i) Securities issued pursuant to this Prospectus or (ii) securities issued in
private or other transactions by the Company in connection with acquisitions of
interests in, or notes secured by, mini-warehouses and other real properties or
interests in entities that own mini-warehouses and other real properties, or
otherwise, in each case in transactions in which they may be deemed
underwriters within the meaning of the Securities Act. Any profits realized on
sales pursuant to this Prospectus by holders of such shares may be regarded as
underwriting compensation. Such sales may be made on the NYSE, in the over-the-
counter market or in privately negotiated transactions. Unless any such sale
involves less than 1% of the Company's outstanding securities of the same
class, this Prospectus will be supplemented to set forth the name of such
securityholder, the nature of any position, office or other material
relationship of the securityholder with the Company and its affiliates during
the preceding three years and the amount of securities of the class owned by
such securityholder prior to the sale, the amount of such securities to be sold
and the percentage of such class after the sale.
Certain of the underwriters, if any, and their affiliates may be customers
of, engage in transactions with and perform services for the Company in the
ordinary course of business.
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<PAGE>
LEGAL OPINIONS
David Goldberg, Glendale, California, counsel to the Company and counsel to
PSI and its affiliates, has delivered an opinion dated July 26, 1994 to the
effect that the securities offered by this Prospectus will be validly issued,
fully paid and nonassessable. Hogan & Hartson L.L.P., Washington, D.C., has
delivered an opinion dated July 26, 1994 as to the status of the Company as a
REIT. Mr. Goldberg owns 2,900 shares of Common Stock and has options to
acquire an additional 40,000 shares of Common Stock and has invested in
entities affiliated with PSI.
EXPERTS
The consolidated financial statements and related schedules of the Company
for the year ended December 31, 1993 appearing in the Company's Annual Report
on Form 10-K, as amended by a Form 10-K/A (Amendment No. 2) dated May 26,
1994, and the combined summaries of historical information relating to
operating revenues and specified expenses--certain properties (the "Combined
Summaries") for the properties and periods indicated in Note 1 to such
Combined Summaries, appearing in the Company's Current Report on Form 8-K
dated June 7, 1994 have been audited by Ernst & Young, independent auditors,
as set forth in their reports included in the Company's Annual Report on Form
10-K and the Company's Current Report on Form 8-K dated June 7, 1994 and
incorporated herein by reference. Such consolidated financial statements and
Combined Summaries are incorporated herein by reference in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
20
<PAGE>
----------Same Store Growth (1)----------------------[LOGO OF PUBLIC STORAGE]
Monthly Realized Rents per Occupied Square Foot
[BAR CHART APPEARS HERE ILLUSTRATING THE
MONTHLY REALIZED RENTS PER OCCUPIED
SQUARE FOOT FOR SAME STORE MINI-
WAREHOUSES FOR THE YEARS 1992, 1993
AND 1994 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1994 AND 1995.]
1992 $.55
1993 $.56
1994 $.59
3 Months Ended March 31, 1994 $.58
3 Months Ended March 31, 1995 $.60
Average Occupancy Levels
[BAR CHART APPEARS HERE ILLUSTRATING
THE AVERAGE OCCUPANCY LEVELS FOR
SAME STORE MINI-WAREHOUSES FOR THE
YEARS 1992, 1993 AND 1994 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1994
AND 1995.]
1992 86.8%
1993 89.5%
1994 90.3%
3 Months Ended March 31, 1994 87.7%
3 Months Ended March 31, 1995 88.6%
Net Cash Flow (in Millions) (2)
[BAR CHART APPEARS HERE ILLUSTRATING
THE NET CASH FLOW FOR SAME STORE
MINI-WAREHOUSES FOR THE YEARS 1992,
1993 AND 1994 AND FOR THE THREE
MONTHS ENDED MARCH 31, 1994 AND 1995.]
1992 $50.4
1993 $55.3
1994 $58.9
3 Months Ended March 31, 1994 $13.8
3 Months Ended March 31, 1995 $14.5
(1) Same Store refers to mini-warehouses in which the Company has
invested since January 1992.
(2) Net operating income before depreciation expense.
--------------------------------------------------------------------------------
<PAGE>
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS IN CONNECTION WITH THIS OFFERING, OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS AND, IF GIVEN OR
MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR BY THE UNDERWRITERS. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUB-
SEQUENT TO ITS DATE. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPEC-
TUS DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY
ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES. THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN OF-
FER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIR-
CUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Supplement Summary.............................................. S-3
Use of Proceeds ........................................................... S-9
Recent Developments........................................................ S-9
Distributions and Price Range of Common Stock.............................. S-11
Capitalization............................................................. S-12
Selected Financial Information............................................. S-13
Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................... S-15
Business................................................................... S-25
Management................................................................. S-36
Special Tax Considerations for Foreign Stockholders........................ S-38
Underwriting............................................................... S-40
Legal Opinions ............................................................ S-42
Experts.................................................................... S-42
PROSPECTUS
Available Information...................................................... 2
Incorporation of Certain Documents by Reference............................ 2
The Company................................................................ 3
Certain Considerations..................................................... 4
Use of Proceeds............................................................ 6
Ratio of Earnings to Fixed Charges......................................... 6
Description of Common Stock................................................ 7
Description of Preferred Stock............................................. 8
Description of Warrants.................................................... 13
Certain Federal Income Tax Considerations.................................. 14
Plan of Distribution....................................................... 19
Legal Opinions............................................................. 20
Experts.................................................................... 20
</TABLE>
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5,250,000 SHARES
[LOGO OF PUBLIC STORAGE]
STORAGE EQUITIES, INC.
COMMON STOCK
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PROSPECTUS SUPPLEMENT
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PAINEWEBBER INCORPORATED
SMITH BARNEY INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
RAYMOND JAMES &
ASSOCIATES, INC.
THE ROBINSON-HUMPHREY
COMPANY, INC.
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MAY 23, 1995
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