<PAGE>
FILED PURSUANT TO RULE 424(b)(5)
REGISTRATION NOS. 333-00965 AND 333-18395
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JANUARY 7, 1997)
[LOGO OF PUBLIC STORAGE(R)]
6,000,000 SHARES
PUBLIC STORAGE, INC.
DEPOSITARY SHARES EACH REPRESENTING 1/1,000 OF A SHARE OF
8% CUMULATIVE PREFERRED STOCK, SERIES J
LIQUIDATION PREFERENCE EQUIVALENT TO $25.00 PER DEPOSITARY SHARE
---------------
Each of the 6,000,000 Depositary Shares (the "Depositary Shares") offered
hereby represents ownership of 1/1,000 of a share of 8% Cumulative Preferred
Stock, Series J (the "Preferred Stock") of Public Storage, Inc. (the
"Company"), deposited with The First National Bank of Boston, as Depositary,
and entitles the holder to all proportional rights, preferences and privileges
of the Preferred Stock represented thereby (including dividend, voting,
redemption and liquidation rights and preferences). The proportionate
liquidation preference of each Depositary Share is $25. See "Description of
Preferred Stock and Depositary Shares."
Dividends on the Preferred Stock represented by the Depositary Shares are
cumulative from the date of issue and are payable quarterly, commencing on
December 31, 1997 at the rate of 8% of the liquidation preference per year
($2.00 per year per Depositary Share). See "Description of Preferred Stock and
Depositary Shares--Dividends."
Except in certain circumstances relating to the Company's qualification as a
real estate investment trust ("REIT"), the Preferred Stock is not redeemable
prior to August 31, 2002. On or after August 31, 2002, the Preferred Stock
and, therefore, the Depositary Shares, will be redeemable at the option of the
Company, in whole or in part, at a redemption price equivalent to $25 per
Depositary Share, plus dividends accrued and unpaid to the redemption date.
See "Description of Preferred Stock and Depositary Shares--Redemption" and
"Certain Federal Income Tax Considerations--Tax Treatment of the Company" in
the accompanying Prospectus.
The Depositary Shares have been approved for listing on the New York Stock
Exchange ("NYSE"), under the symbol "PSAPrJ," subject to official notice of
issuance. See "Underwriting."
Ownership of more than 9.9% of the outstanding Depositary Shares or of the
outstanding Preferred Stock is restricted in order to preserve the Company's
status as a REIT for federal income tax purposes. See "Description of Common
Stock and Class B Common Stock--Ownership Limitations" in the accompanying
Prospectus.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER
"RISK FACTORS" BEGINNING ON PAGE 4 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.
---------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COMPANY(2)(3)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Depositary Share............ $25.00 $.7875 $24.2125
- -------------------------------------------------------------------------------------------
Total........................... $150,000,000 $4,725,000 $145,275,000
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
(1) Plus accrued dividends, if any, from the date of issue.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $200,000.
---------------
The Depositary Shares are being offered by the several Underwriters named
herein, subject to prior sale, when, as and if accepted by them and subject to
certain conditions. It is expected that delivery of the Depositary Shares will
be made at the offices of Smith Barney Inc., 333 West 34th Street, New York,
New York 10001 on or about August 28, 1997.
---------------
SMITH BARNEY INC.
DONALDSON LUFKIN & JENRETTE
SECURITIES CORPORATION
MORGAN STANLEY DEAN WITTER
PAINEWEBBER INCORPORATED
ROBERTSON, STEPHENS & COMPANY
August 25, 1997
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE DEPOSITARY
SHARES. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE
OFFERING AND MAY BID FOR AND PURCHASE DEPOSITARY SHARES IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Depositary Shares
offered hereby are estimated at approximately $145,075,000. The Company
intends to use the net proceeds from this offering to make investments in real
estate, primarily mini-warehouses, including mortgage loans and interests in
real estate partnerships, and to make additional investments in Public Storage
Pickup & Delivery, Inc. ("PSPUD"). The Company owns substantially all of the
economic interests in PSPUD, which is engaged in the portable self-storage
business. See the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997, which is incorporated by reference herein.
The Company's Board of Directors has approved the development of 29 mini-
warehouses at an aggregate estimated cost (including land cost) of
$133,000,000. At least 30% of this cost will be funded by the Company with the
balance expected to be funded by a joint venture partner. PSPUD's Board of
Directors has approved the development of 11 warehouses for portable self-
storage at an aggregate estimated cost (including land cost) of $40,000,000.
All of this cost is expected to be funded by capital contributions from the
Company. The proposed developments by the Company and PSPUD are contingent
and, accordingly, there is no assurance that development of all or any of them
will be completed.
Pending investment in real estate assets, the net proceeds of this 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.
S-2
<PAGE>
DESCRIPTION OF PREFERRED STOCK AND DEPOSITARY SHARES
GENERAL
Under the Company's Articles of Incorporation, as amended, the Board of
Directors is authorized without further shareholder action to provide for the
issuance of up to 50,000,000 shares of preferred stock, in one or more series,
with such voting powers, full or limited, and with such designations,
preferences and relative, participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, as shall be set forth in
resolutions providing for the issue thereof adopted by the Board of Directors.
At June 30, 1997, the Company had outstanding 13,328,409 shares of preferred
stock.
Prior to issuance, the Board of Directors will have adopted resolutions
creating the 8% Cumulative Preferred Stock, Series J (the "Preferred Stock").
When issued, the Preferred Stock will have a liquidation value of $25,000 per
share, will be fully paid and nonassessable, will not be subject to any
sinking fund or other obligation of the Company to repurchase or retire the
Preferred Stock, and will have no preemptive rights.
The First National Bank of Boston will be the transfer agent and dividend
disbursing agent for the Preferred Stock.
Each Depositary Share represents 1/1,000 of a share of Preferred Stock. The
shares of the Preferred Stock will be deposited with The First National Bank
of Boston, as Depositary (the "Preferred Stock Depositary"), under a Deposit
Agreement among the Company, the Preferred Stock Depositary and the holders
from time to time of the depositary receipts (the "Depositary Receipts")
issued by the Preferred Stock Depositary thereunder. The Depositary Receipts
will evidence the Depositary Shares. Subject to the terms of the Deposit
Agreement, each holder of a Depositary Receipt evidencing a Depositary Share
will be entitled, proportionately, to all the rights and preferences of, and
subject to all of the limitations of, the interest in the Preferred Stock
represented thereby (including dividend, voting, redemption and liquidation
rights and preferences). See "Description of Depositary Shares" in the
accompanying Prospectus and "--Depositary Shares," below.
Immediately following the issuance of the Preferred Stock by the Company,
the Company will deposit the Preferred Stock with the Preferred Stock
Depositary, which will then issue and deliver the Depositary Receipts to the
Company. The Company will, in turn, deliver the Depositary Receipts to the
Underwriters. Depositary Receipts will be issued evidencing only whole
Depositary Shares.
The Depositary Shares have been approved for listing on the NYSE, subject to
official notice of issuance. The Preferred Stock will not be so listed and the
Company does not expect that there will be any trading market for the
Preferred Stock except as represented by the Depositary Shares.
OWNERSHIP RESTRICTIONS
For a discussion of ownership limitations that apply to the Preferred Stock
and related Depositary Shares, see "Description of Common Stock and Class B
Common Stock--Ownership Limitations" in the accompanying Prospectus.
PREFERRED STOCK
The following is a brief description of the terms of the Preferred Stock
which does not purport to be complete and is subject to and qualified in its
entirety by reference to the Certificate of Determination of the Preferred
Stock, the form of which is filed as an exhibit to, or incorporated by
reference in, the Registration Statement of which this Prospectus Supplement
constitutes a part.
S-3
<PAGE>
Ranking
With respect to the payment of dividends and amounts upon liquidation, the
Preferred Stock will rank pari passu with the Company's 10% Cumulative
Preferred Stock, Series A, 9.20% Cumulative Preferred Stock, Series B,
Adjustable Rate Cumulative Preferred Stock, Series C, 9.50% Cumulative
Preferred Stock, Series D, 10% Cumulative Preferred Stock, Series E, 9.75%
Cumulative Preferred Stock, Series F, 8 7/8% Cumulative Preferred Stock,
Series G, 8.45% Cumulative Preferred Stock, Series H and 8 5/8% Cumulative
Preferred Stock, Series I (collectively, together with the Preferred Stock,
the "Senior Preferred Stock") and any other shares of preferred stock of the
Company, now or hereafter issued, ranking pari passu with the Senior Preferred
Stock, and will rank senior to the Common Stock and any other capital stock of
the Company ranking junior to the Preferred Stock, including the Company's
8.25% Convertible Preferred Stock.
Dividends
Holders of shares of Preferred Stock, in preference to the holders of shares
of the Common Stock, and of any other capital stock of the Company ranking
junior to the Preferred Stock as to payment of dividends, will be entitled to
receive, when and as declared by the Board of Directors out of assets of the
Company legally available for payment, cash dividends payable quarterly at the
rate of 8% of the liquidation preference per year ($2,000.00 per year per
share, equivalent to $2.00 per year per Depositary Share). Dividends on the
shares of Preferred Stock will be cumulative from the date of issue and will
be payable quarterly on or before March 31, June 30, September 30 and December
31, commencing December 31, 1997, to holders of record as they appear on the
stock register of the Company on such record dates, not less than 15 or more
than 45 days preceding the payment dates thereof, as shall be fixed by the
Board of Directors. After full dividends on the Preferred Stock have been paid
or declared and funds set aside for payment for all past dividend periods and
for the then current quarter, the holders of shares of Preferred Stock will
not be entitled to any further dividends with respect to that quarter.
When dividends are not paid in full upon the Preferred Stock and any other
shares of preferred stock of the Company ranking on a parity as to dividends
with the Preferred Stock (including the other series of Senior Preferred
Stock), all dividends declared upon the Preferred Stock and any other
preferred shares of the Company ranking on a parity as to dividends with the
Preferred Stock shall be declared pro rata so that the amount of dividends
declared per share on such Preferred Stock and such other shares shall in all
cases bear to each other the same ratio that the accrued dividends per share
on the Preferred Stock and such other preferred shares bear to each other.
Except as set forth in the preceding sentence, unless full dividends on the
Preferred Stock have been paid for all past dividend periods, no dividends
(other than in Common Stock or other shares of capital stock of the Company
ranking junior to the Preferred Stock as to dividends and upon liquidation)
shall be declared or paid or set aside for payment, nor shall any other
distribution be made on the Common Stock or on any other shares of capital
stock of the Company ranking junior to or on a parity with the Preferred Stock
as to dividends or upon liquidation. Unless full dividends on the Preferred
Stock have been paid for all past dividend periods, no Common Stock or any
other shares of capital stock of the Company ranking junior to or on a parity
with the Preferred Stock as to dividends or upon liquidation shall be
redeemed, purchased or otherwise acquired for any consideration (or any moneys
be paid or made available for a sinking fund for the redemption of any such
shares) by the Company or any subsidiary of the Company except by conversion
into or exchange for shares of capital stock of the Company ranking junior to
the Preferred Stock as to dividends and upon liquidation.
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. Management believes that this restriction will not impede
the Company's ability to pay the dividends on the Preferred Stock in full.
Conversion Rights
The Preferred Stock will not be convertible into shares of any other class
or series of capital stock of the Company.
S-4
<PAGE>
Liquidation Rights
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of the 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 of any other shares of capital stock of the Company ranking as to
such distribution junior to the Preferred Stock, liquidating distributions in
the amount of $25,000 per share (equivalent to $25 per Depositary Share), plus
all accrued and unpaid dividends (whether or not earned or declared) for the
then current, and all prior, dividend periods. If upon any voluntary or
involuntary liquidation, dissolution or winding up of the Company, the amounts
payable with respect to the Preferred Stock and any other shares of stock of
the Company ranking as to any such distribution on a parity with the Preferred
Stock (including other series of Senior Preferred Stock) are not paid in full,
the holders of the Preferred Stock and of such other shares will share ratably
in any such distribution of assets of the Company in proportion to the full
respective preferential amounts to which they are entitled. After payment of
the full amount of the liquidating distribution to which they are entitled,
the holders of the Preferred Stock will not be entitled to any further
participation in any distribution of assets by the Company.
For purposes of liquidation rights, a consolidation or merger of the Company
with or into any other corporation or corporations or a sale of all or
substantially all of the assets of the Company is not a liquidation,
dissolution or winding up of the Company.
Redemption
Except in certain circumstances relating to the Company's qualification as a
REIT, the shares of Preferred Stock are not redeemable prior to August 31,
2002. On and after August 31, 2002, at any time or from time to time, the
shares of Preferred Stock will be redeemable in whole or in part at the option
of the Company at a cash redemption price of $25,000 per share of Preferred
Stock (equivalent to $25 per Depositary Share), plus all accrued and unpaid
dividends to the date of redemption. If fewer than all the outstanding shares
of Preferred Stock are to be redeemed, the shares to be redeemed will be
determined by the Board of Directors of the Company, and such shares shall 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 by lot in a manner determined by the Board
of Directors of the Company.
Notwithstanding the foregoing, if any dividends, including any accumulation,
on the Preferred Stock are in arrears, no Preferred Stock shall be redeemed
unless all outstanding Preferred Stock is simultaneously redeemed, and the
Company shall not purchase or otherwise acquire, directly or indirectly, any
Preferred Stock; provided, however, that this shall not prevent the purchase
or acquisition of the Preferred Stock pursuant to a purchase or exchange offer
if such offer is made on the same terms to all holders of the Preferred Stock.
Notice of redemption of the Preferred Stock will be given by publication in
a newspaper of general circulation in the County of Los Angeles and the City
of New York, such publication to be made once a week for two successive weeks
commencing not less than 30 nor more than 60 days prior to the redemption
date. A similar notice will be mailed by the Company, postage prepaid, not
less than 30 or more than 60 days prior to the redemption date, addressed to
the respective holders of record of shares of Preferred Stock to be redeemed
at their respective addresses as they appear on the stock transfer records of
the Company. Each notice shall state: (i) the redemption date; (ii) the number
of shares of Preferred Stock to be redeemed; (iii) the redemption price per
share of Preferred Stock; (iv) the place or places where certificates for the
Preferred Stock are to be surrendered for payment of the redemption price; and
(v) that dividends on the shares of Preferred Stock to be redeemed will cease
to accrue on such redemption date. If fewer than all the shares of Preferred
Stock held by any holder are to be redeemed, the notice mailed to such holder
shall also specify the number of shares of Preferred Stock to be redeemed from
such holder. 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 nor more than 60 days prior to the date fixed for such redemption.
S-5
<PAGE>
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 stockholders of the Company, except the
right to receive the redemption price (but without interest), will cease. Upon
surrender in accordance with such notice of the certificates representing any
such shares (properly endorsed or assigned for transfer, if the Board of
Directors of the Company shall so require and the notice shall so state), the
redemption price set forth above shall be paid out of the funds provided by
the Company. If fewer than all the shares represented by any such certificate
are redeemed, a new certificate shall be issued representing the unredeemed
shares without cost to the holder thereof.
Subject to applicable law and the limitation on purchases when dividends on
the 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.
Voting Rights
Except as indicated below, or except as expressly required by applicable
law, holders of the Preferred Stock will not be entitled to vote.
If the equivalent of six quarterly dividends payable on the Preferred Stock
or any other series of preferred stock are in default (whether or not declared
or consecutive), holders of the Preferred Stock (voting as a class with all
other series of Senior Preferred Stock) will be entitled to elect two
additional directors (in addition to any directors elected with respect to the
required Debt Ratio (as defined below)) until all dividends in default have
been paid or declared and set apart for payment.
If the Debt Ratio on the last day of any two consecutive fiscal quarters
exceeds 50% (unless such condition is approved or ratified by the holders of a
majority of each of the series of Senior Preferred Stock), the holders of each
of the series of Senior Preferred Stock will be entitled to elect two
additional directors (in addition to any directors elected for defaults in
dividends) until the Debt Ratio as of the last day of a fiscal quarter is less
than 50%. Debt Ratio means the ratio of "Debt" to "Assets." "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.
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 or with respect
to the required Debt Ratio. 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 (with respect to dividend defaults) or
20% of the holders of the Preferred Stock (with respect to the required Debt
Ratio) 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 (in the case of dividend defaults)
or the holders of the Preferred Stock (with respect to the required Debt
Ratio) 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 (a) in dividends on preferred
shares of the Company or (b) with respect to the required
S-6
<PAGE>
Debt Ratio, 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 66 2/3% of the
outstanding shares of the Preferred Stock and any other series of preferred
stock ranking on a parity with the Preferred Stock as to dividends or upon
liquidation (which includes the other series of Senior Preferred Stock),
voting as a single class, will be required to authorize another class of
shares senior to the Preferred Stock with respect to the payment of dividends
or the distribution of assets on liquidation. The affirmative vote or consent
of the holders of at least 66 2/3% of the outstanding shares of the Preferred
Stock will be required to amend or repeal any provision of or add any
provision to, the Articles of Incorporation, including the Certificate of
Determination, if such action would materially and adversely alter or change
the rights, preferences or privileges of the Preferred Stock.
The affirmative vote or consent of the holders of a majority of the
outstanding shares of Preferred Stock will be required to change certain Bylaw
provisions of the Company.
No consent or approval of the holders of shares of the 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 the Preferred Stock as to payment of dividends and
distribution of assets, including other shares of Preferred Stock.
DEPOSITARY SHARES
The following is a brief description of the terms of the Depositary Shares
which does not purport to be complete and is subject to, and qualified in its
entirety by reference to, the provisions of the Deposit Agreement (including
the form of Depositary Receipt contained therein), which is filed as an
exhibit to, or incorporated by reference in, the Registration Statement of
which this Prospectus Supplement constitutes a part.
Dividends
The Depositary will distribute all cash dividends or other cash
distributions received in respect of the Preferred Stock to the record holders
of Depositary Receipts in proportion to the number of Depositary Shares owned
by such holders on the relevant record date, which will be the same date as
the record date fixed by the Company for the Preferred Stock. In the event
that the calculation of such amount to be paid results in an amount which is a
fraction of one cent, the amount the Depositary shall distribute to such
record holder shall be rounded to the next highest whole cent.
In the event of a distribution other than in cash, the Depositary will
distribute property received by it to the record holders of Depositary
Receipts entitled thereto, in proportion, as nearly as may be practicable, to
the number of Depositary Shares owned by such holders on the relevant record
date, unless the Depositary determines (after consultation with the Company)
that it is not feasible to make such distribution, in which case the
Depositary may (with the approval of the Company) adopt any other method for
such distribution as it deems equitable and appropriate, including the sale of
such property (at such place or places and upon such terms as it may deem
equitable and appropriate) and distribution of the net proceeds from such sale
to such holders.
Liquidation Preference
In the event of the liquidation, dissolution or winding up of the affairs of
the Company, whether voluntary or involuntary, the holders of each Depositary
Share will be entitled to 1/1000th of the liquidation preference accorded each
share of the Preferred Stock.
Redemption
Whenever the Company redeems any Preferred Stock held by the Depositary, the
Depositary will redeem as of the same redemption date the number of Depositary
Shares representing the Preferred Stock so redeemed. The Depositary will
publish a notice of redemption of the Depositary Shares containing the same
type of information and in the same manner as the Company's notice of
redemption and will mail the notice of
S-7
<PAGE>
redemption promptly upon receipt of such notice from the Company and not less
than 30 nor more than 60 days prior to the date fixed for redemption of the
Preferred Stock and the Depositary Shares to the record holders of the
Depositary Receipts. In case less than all the outstanding Depositary Shares
are to be redeemed, the Depositary Shares to be so redeemed shall be
determined pro rata or by lot in a manner determined by the Board of
Directors.
Voting
Promptly upon receipt of notice of any meeting at which the holders of the
Preferred Stock are entitled to vote, the Depositary will mail the information
contained in such notice of meeting to the record holders of the Depositary
Receipts as of the record date for such meeting. Each such record holder of
Depositary Receipts will be entitled to instruct the Depositary as to the
exercise of the voting rights pertaining to the number of shares of Preferred
Stock represented by such record holder's Depositary Shares. The Depositary
will endeavor, insofar as practicable, to vote such Preferred Stock
represented by such Depositary Shares in accordance with such instructions,
and the Company will agree to take all action which may be deemed necessary by
the Depositary in order to enable the Depositary to do so. The Depositary will
abstain from voting any of the Preferred Stock to the extent that it does not
receive specific instructions from the holders of Depositary Receipts.
Withdrawal of Preferred Stock
Upon surrender of Depositary Receipts at the principal office of the
Depositary, upon payment of any unpaid amount due the Depositary, and subject
to the terms of the Deposit Agreement, the owner of the Depositary Shares
evidenced thereby is entitled to delivery of the number of whole shares of
Preferred Stock and all money and other property, if any, represented by such
Depositary Shares. Partial shares of Preferred Stock will not be issued. If
the Depositary Receipts delivered by the holder evidence a number of
Depositary Shares in excess of the number of Depositary Shares representing
the number of whole shares of Preferred Stock to be withdrawn, the Depositary
will deliver to such holder at the same time a new Depositary Receipt
evidencing such excess number of Depositary Shares. Holders of Preferred Stock
thus withdrawn will not thereafter be entitled to deposit such shares under
the Deposit Agreement or to receive Depositary Receipts evidencing Depositary
Shares therefor.
Amendment and Termination of Deposit Agreement
The form of Depositary Receipt evidencing the Depositary Shares and any
provision of the Deposit Agreement may at any time and from time to time be
amended by agreement between the Company and the Depositary. However, any
amendment which materially and adversely alters the rights of the holders
(other than any change in fees) of Depositary Shares will not be effective
unless such amendment has been approved by the holders of at least a majority
of the Depositary Shares then outstanding. No such amendment may impair the
right, subject to the terms of the Deposit Agreement, of any owner of any
Depositary Shares to surrender the Depositary Receipt evidencing such
Depositary Shares with instructions to the Depositary to deliver to the holder
the Preferred Stock and all money and other property, if any, represented
thereby, except in order to comply with mandatory provisions of applicable
law. The Deposit Agreement may be terminated by the Company or the Depositary
only if (i) all outstanding Depositary Shares have been redeemed or (ii) there
has been a final distribution in respect of the Preferred Stock in connection
with any dissolution of the Company and such distribution has been made to all
the holders of Depositary Shares.
Charges of Depositary
The Company will pay all transfer and other taxes and governmental charges
arising solely from the existence of the depositary arrangements. The Company
will pay charges of the Depositary in connection with the initial deposit of
the Preferred Stock and the initial issuance of the Depositary Shares, and
redemption of the Preferred Stock and all withdrawals of Preferred Stock by
owners of Depositary Shares. Holders of Depositary
S-8
<PAGE>
Receipts will pay transfer, income and other taxes and governmental charges
and certain other charges as are provided in the Deposit Agreement to be for
their accounts. In certain circumstances, the Depositary may refuse to
transfer Depositary Shares, may withhold dividends and distributions and sell
the Depositary Shares evidenced by such Depositary Receipt if such charges are
not paid.
Miscellaneous
The Depositary will forward to the holders of Depositary Receipts all
reports and communications from the Company which are delivered to the
Depositary and which the Company is required to furnish to the holders of the
Preferred Stock. In addition, the Depositary will make available for
inspection by holders of Depositary Receipts at the principal office of the
Depositary, and at such other places as it may from time to time deem
advisable, any reports and communications received from the Company which are
received by the Depositary as the holder of Preferred Stock.
Neither the Depositary nor any Depositary's Agent (as defined in the Deposit
Agreement), nor the Registrar (as defined in the Deposit Agreement) nor the
Company assumes any obligation or will be subject to any liability under the
Deposit Agreement to holders of Depositary Receipts other than for its gross
negligence, willful misconduct or bad faith. Neither the Depositary, any
Depositary's Agent, the Registrar nor the Company will liable if it is
prevented or delayed by law or any circumstance beyond its control in
performing its obligations under the Deposit Agreement. The Company and the
Depositary are not obligated to prosecute or defend any legal proceeding in
respect of any Depositary Shares, Depositary Receipts or Preferred Stock
unless reasonably satisfactory indemnity is furnished. The Company and the
Depositary may rely on written advice of counsel or accountants, on
information provided by holders of Depositary Receipts or other persons
believed in good faith to be competent to give such information and on
documents believed to be genuine and to have been signed or presented by the
proper party or parties.
Resignation and Removal of Depositary
The Depositary may resign at any time by delivering to the Company notice of
its election to do so, and the Company may at any time remove the Depositary,
any such resignation or removal to take effect upon the appointment of a
successor Depositary and its acceptance of such appointment. Such successor
Depositary must be appointed within 60 days after delivery of the notice for
resignation or removal and must be a bank or trust company having its
principal office in the United States of America and having a combined capital
and surplus of at least $150,000,000.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain federal income tax considerations
pertaining to the acquisition, ownership and disposition of the Depositary
Shares. This discussion is general in nature and not exhaustive of all
possible tax considerations, nor does the discussion address any state, local
or foreign tax considerations. The discussion is based on current law and does
not purport to deal with all aspects of federal income taxation that may be
relevant to a prospective shareholder in light of its particular circumstances
or to certain types of shareholders (including insurance companies, financial
institutions, broker-dealer, tax exempt investors, foreign corporations and
persons who are not citizens or residents of the United States) subject to
special treatment under the federal income tax laws. The Company has not
requested and will not request a ruling from the Internal Revenue Service (the
"Service") with respect to any of the federal income tax issues discussed
below. Prospective investors should consult, and must depend on, their own tax
advisors regarding the federal, state, local, foreign and other tax
consequences of holding and disposing of the Depositary Shares.
TAXPAYER RELIEF ACT OF 1997
The Taxpayer Relief Act of 1997 (the "Act"), enacted on August 5, 1997,
contains a number of REIT related technical simplification provisions that
affect the taxation of the Company. These provisions generally
S-9
<PAGE>
are effective with respect to the Company for taxable years beginning on and
after January 1, 1998. Accordingly, while the discussion of the taxation of
the Company and its stockholders under the heading "Certain Federal Income Tax
Considerations" in the Prospectus is accurate as of the date hereof, several
statements contained therein will be affected by the Act, as of the Company's
taxable year commencing January 1, 1998. However, the REIT-related changes
made by the Act, which are technical in nature and are intended to simplify
the existing taxation of REITs, are not expected to adversely affect the
Company's taxation and qualification as a REIT.
TAXATION OF HOLDERS OF DEPOSITARY SHARES
General. Owners of the Depositary Shares will be treated for federal income
tax purposes as if they were owners of the Preferred Stock represented by such
Depositary Shares. Accordingly, such owners will be entitled to take into
account, for federal income tax purposes, income and deductions to which they
would be entitled if they were holders of such Preferred Stock. See
"Description of The Depositary Shares--Federal Income Tax Consequences" in the
accompanying Prospectus.
Dividends and Other Distributions; Backup Withholding. For a discussion of
the taxation of the Company, the treatment of dividends and other
distributions with respect to shares of the Company, and the backup
withholding rules, see "Federal Income Tax Considerations--Tax Treatment of
the Company" and "--Taxation of Holders of Common Stock" in the accompanying
Prospectus.
Sale or Exchange of Depositary Shares. Upon the sale or exchange of a
Depositary Share to a party other than the Company, a holder of Depositary
Shares will realize capital gain or loss measured by the difference between
the amount realized on the sale or other disposition and adjusted tax basis in
the Depositary Shares (provided the Depositary Shares are held as a capital
asset). Under the Act, net capital gain (i.e., generally, capital gain in
excess of capital loss) recognized by an individual upon the sale of a capital
asset that has been held for more than 18 months will generally be subject to
tax at a rate not to exceed 20%. Net capital gain recognized by an individual
from the sale of a capital asset that has been held for more than 12 months
but for not more than 18 months will continue to be subject to tax at a rate
not to exceed 28% and capital gain recognized from the sale of a capital asset
that has been held for 12 months or less will continue to be subject to tax at
ordinary income tax rates. In addition, capital gain recognized by a corporate
taxpayer will continue to be subject to tax at the ordinary income tax rates
applicable to corporations. Any loss on a sale of Depositary Shares which were
held for six months or less and with respect to which a capital gain dividend
was received will be treated as a long term capital loss, up to the amount of
the capital gain dividend received with respect to such Shares.
Redemption of Depositary Shares. Whenever the Company redeems any Preferred
Stock held by the Depositary, the Depositary will redeem as of the same
redemption date the number of Depositary Shares representing the Preferred
Stock so redeemed. The treatment to a holder of Depositary Shares accorded to
any redemption by the Company (as distinguished from a sale, exchange or other
disposition) of Preferred Stock held by the Depositary and corresponding
redemption of Depositary Shares can only be determined on the basis of
particular facts as to the holder of Depositary Shares at the time of
redemption. In general, a holder of Depositary Shares will recognize capital
gain or loss measured by the difference between the amount received upon the
redemption and the holder of the Depositary Shares' adjusted tax basis in the
Depositary Shares redeemed (provided the Depositary Shares are held as a
capital asset) if such redemption (i) results in a "complete termination" of a
holder's interest in all classes of stock of the Company under Section
302(b)(3) of the Code, or (ii) is "not essentially equivalent to a dividend"
with respect to the holder under Section 302(b)(1) of the Code. In applying
these tests, there must be taken into account not only any Depositary Shares
owned by the holder, but also such holder's ownership of Common Stock, other
series of preferred stock and any other options (including stock purchase
rights) to acquire any of the foregoing. The holder also must take into
account any such securities (including options) which are considered to be
owned by such holder by reason of the constructive ownership rules set forth
in Sections 318 and 302(c) of the Code.
S-10
<PAGE>
If a particular holder of Depositary Shares owns (actually or
constructively) no shares of Common Stock of the Company or an insubstantial
percentage of the outstanding shares of Common Stock of the Company, based
upon current law, it is probable that the redemption of Depositary Shares from
such a holder would be considered "not essentially equivalent to a dividend."
However, whether a distribution is "not essentially equivalent to a dividend"
depends on all of the facts and circumstances, and a holder of Depositary
Shares intending to rely on any of these tests at the time of redemption
should consult its own tax adviser to determine their application to its
particular situation.
If the redemption does not meet any of the tests under Section 302 of the
Code, then the redemption proceeds received from the Depositary Shares will be
treated as a distribution on the Depositary Shares as described under "Certain
Federal Income Tax Considerations--Tax Treatment of Holders of Common Stock"
in the accompanying Prospectus. If the redemption is taxed as a dividend, the
holder of Depositary Shares' adjusted tax basis in the Depositary Shares will
be transferred to any other stockholdings of the holder of Depositary Shares
in the Company. If the holder of Depositary Shares owns no other stockholdings
in the Company, under certain circumstances, such basis may be transferred to
a related person, or it may be lost entirely.
S-11
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions of the Underwriting Agreement
dated the date hereof, each of the Underwriters named below (the
"Underwriters"), for whom Smith Barney Inc., Donaldson, Lufkin & Jenrette
Securities Corporation, Morgan Stanley & Co. Incorporated, PaineWebber
Incorporated and Robertson, Stephens & Company LLC are acting as the
Representatives (the "Representatives"), has severally agreed to purchase, and
the Company has agreed to sell to each Underwriter, the number of Depositary
Shares set forth opposite the name of such Underwriter below:
<TABLE>
<CAPTION>
NUMBER OF
DEPOSITARY
UNDERWRITERS SHARES
- ------------ ----------
<S> <C>
Smith Barney Inc. .............................................. 1,128,000
Donaldson, Lufkin & Jenrette Securities Corporation............. 1,128,000
Morgan Stanley & Co. Incorporated............................... 1,128,000
PaineWebber Incorporated........................................ 1,128,000
Robertson, Stephens & Company LLC............................... 1,128,000
Alex. Brown & Sons Incorporated................................. 30,000
Cowen & Company................................................. 30,000
A. G. Edwards & Sons, Inc. ..................................... 30,000
EVEREN Securities, Inc. ........................................ 30,000
<CAPTION>
NUMBER OF
DEPOSITARY
UNDERWRITERS SHARES
- ------------ ----------
<S> <C>
Fahnestock & Co. Inc. .......................................... 30,000
Janney Montgomery Scott Inc. ................................... 30,000
Legg Mason Wood Walker, Incorporated............................ 30,000
McDonald & Company Securities, Inc. ............................ 30,000
Morgan Keegan & Company, Inc. .................................. 30,000
Prudential Securities Incorporated.............................. 30,000
Raymond James & Associates, Inc. ............................... 30,000
The Robinson-Humphrey Company, Inc. ............................ 30,000
---------
Total....................................................... 6,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Depositary Shares are
subject to approval of certain legal matters by counsel and to certain other
conditions. The Underwriters are obligated to take and pay for all Depositary
Shares offered hereby (other than those covered by the over-allotment option
described below) if any such shares are taken.
The Underwriters initially propose to offer part of the Depositary Shares
directly to the public at the public offering price set forth on the cover
page of this Prospectus Supplement and part to certain dealers at a price
which represents a concession not in excess of $.50 per share under the public
offering price. The Underwriters may allow, and such dealers may re-allow, a
concession not in excess of $.25 per share to the other Underwriters or to
certain other dealers. After the initial public offering, the public offering
price and such concessions may be changed by the Underwriters.
The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended.
The Depositary Shares have been approved for listing on the NYSE, subject to
official notice of issuance. Prior to this offering, there has been no public
market for the Depositary Shares. Trading of the Depositary Shares on the NYSE
is expected to commence within a 30-day period after the initial delivery of
the Depositary Shares. The Underwriters have advised the Company that they
intend to make a market in the Depositary Shares prior to the commencement of
trading on the NYSE, but are not obligated to do so and may discontinue market
making at any time without notice.
In connection with the offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the Depositary
Shares. Specifically, the Underwriters may overallot the offering, creating a
syndicate short position. Underwriters may bid for and purchase Depositary
Shares in the open market to cover syndicate short positions. In addition, the
Underwriters may bid for and purchase Depositary Shares in the open market to
stabilize the price of the Depositary Shares. These activities may stabilize
or maintain the market price of the Depositary Shares above independent market
levels. The Underwriters are not required to engage in these activities and
may end these activities at any time.
S-12
<PAGE>
LEGAL OPINIONS
Certain legal matters relating to the Preferred Stock and Depositary Shares
will be passed upon for the Company by David Goldberg, senior vice-president
and general counsel of the Company, and for the Underwriters by Skadden, Arps,
Slate, Meagher & Flom LLP, Los Angeles, California. Hogan & Hartson L.L.P.,
Washington, D.C., has delivered an opinion as to the status of the Company as
a REIT. See "Certain Federal Income Tax Considerations" in the accompanying
Prospectus. Mr. Goldberg owns 81,199 shares of Common Stock, 1,600 shares of
preferred stock, and has options to acquire an additional 157,500 shares of
Common Stock. Skadden, Arps, Slate, Meagher & Flom LLP has from time to time
represented the Company on unrelated matters.
EXPERTS
The consolidated financial statements of the Company for the year ended
December 31, 1996 appearing in the Company's Annual Report on Form 10-K have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report 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 report given upon the authority of
such firm as experts in accounting and auditing.
S-13
<PAGE>
PROSPECTUS
PUBLIC STORAGE, INC.
PREFERRED STOCK
DEPOSITARY SHARES
EQUITY STOCK
COMMON STOCK
WARRANTS
Public Storage, 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"), and depositary shares (the "Depositary Shares")
representing a fractional interest in a share of Preferred Stock, (ii) shares
of equity stock, par value $.01 per share (the "Equity Stock"), (iii) shares
of common stock, par value $.10 per share (the "Common Stock"), or (iv)
warrants to purchase Preferred Stock, Equity Stock or Common Stock (the
"Warrants"), with an aggregate public offering price of up to $400,000,000 on
terms to be determined at the time of offering. The Preferred Stock,
Depositary Shares, Equity Stock, Common Stock and Warrants (collectively, the
"Securities") may be offered, separately or together (in any combination), as
separate series, 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 and
Depositary Shares, the specific title and stated value, any dividend,
liquidation, redemption, conversion, voting and other rights, the offering
price and whether Depositary Shares will be offered, and if so, the fraction
of a share of Preferred Stock represented by a Depositary Share; (ii) in the
case of Equity Stock, the specific title, any dividend, liquidation,
redemption conversion, voting and other rights and the offering price; (iii)
in the case of Common Stock, the offering price; and (iv) 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.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER
"RISK FACTORS" BEGINNING ON PAGE 4 IN THE PROSPECTUS.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
January 7, 1997
<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 7 World
Trade Center, 13th Floor, New York, New York 10048; and Citicorp Center, Suite
1400, 500 West Madison Street, Chicago, Illinois 60661. Copies of such
material can be obtained at prescribed rates from the Public Reference Room of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 or by
accessing the Commission's World Wide Web site at http://www.sec.gov. Such
material can also be inspected at the New York Stock Exchange ("NYSE"), 20
Broad Street, New York, New York 10005 and the Pacific Stock Exchange,
301 Pine Street, San Francisco, California 94104.
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 Securities Exchange Act of 1934 (the "Exchange Act")
(File No. 1-8389), are incorporated herein by reference: (i) the Annual Report
on Form 10-K for the year ended December 31, 1995, as amended by Form 10-K/As
dated April 29, 1996, May 14, 1996 and May 15, 1996, (ii) the Quarterly
Reports on Form 10-Q for the quarters ended March 31, 1996, June 30, 1996 and
September 30, 1996 and (iii) the Current Reports on Form 8-K dated January 22,
1996, September 6, 1996, September 18, 1996 and October 28, 1996.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the offering of the Securities shall be deemed to be
incorporated by reference in this Prospectus.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained
herein (or in the applicable Prospectus Supplement) or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
Copies of all documents which are incorporated herein by reference (not
including the exhibits to such documents, unless such exhibits are
specifically incorporated by reference in such information), will be provided
without charge to any person, including any beneficial owner, to whom this
Prospectus is delivered, upon written request. Requests for such copies should
be directed to Investor Services Department, Public Storage, Inc., 701 Western
Avenue, Glendale, California 91201-2397.
2
<PAGE>
THE COMPANY
The Company is a fully integrated, self-administered and self-managed real
estate investment trust ("REIT") that acquires, develops, owns and operates
self-service facilities offering space for personal and business use ("mini-
warehouses"). The Company is the largest owner and operator of mini-warehouses
in the United States. The Company also owns and operates, to a much smaller
extent, business parks containing commercial and industrial rental space. At
December 31, 1996, the Company had equity interests (through direct ownership,
as well as general and limited partnership and capital stock interests) in
1,108 properties located in 37 states, consisting of 1,064 mini-warehouse
facilities and 44 business parks.
In a series of mergers among Public Storage Management, Inc. and its
affiliates (collectively, "PSMI"), culminating in the November 16, 1995 merger
of PSMI into the Company (the "Merger"), the Company became self-administered
and self-managed, acquired substantially all of PSMI's United States real
estate interests and was renamed "Public Storage, Inc."
The Company has elected to be taxed as a REIT under the Internal Revenue
Code of 1986, as amended (the "Code"). To the extent that the Company
continues to qualify as a REIT, it will not be taxed, with certain limited
exceptions, on the net income that is distributed currently 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 701 Western Avenue, Glendale,
California 91201-2397. Its telephone number is (818) 244-8080.
3
<PAGE>
RISK FACTORS
In evaluating the Securities, investors should consider the following
factors, in addition to other matters set forth or incorporated in this
Prospectus (and in the applicable Prospectus Supplement) and the Registration
Statement.
CONTROL AND INFLUENCE BY THE HUGHES FAMILY
At December 31, 1996, B. Wayne Hughes, the chief executive officer of the
Company, and members of his family (collectively, the "Hughes Family")
beneficially owned approximately 43% of the outstanding shares of Common Stock
(approximately 47% upon conversion of the Company's Class B common stock, par
value $.10 per share (the "Class B Common Stock")). Consequently, the Hughes
Family has the ability to effectively control all matters submitted to a vote
of Shareholders, including the election of directors, amendment of the
Company's restated articles of incorporation (the "Articles of
Incorporation"), dissolution and the approval of other extraordinary
transactions. In addition, this concentration of ownership may have the effect
of delaying or preventing a change in control of the Company.
OWNERSHIP LIMITATIONS
Public shareholders are further limited in their ability to change control
of the Company due to restrictions in the Articles of Incorporation and the
Company's bylaws (the "Bylaws") on beneficial ownership. Unless such
limitations are waived by the Company's board of directors (the "Board of
Directors"), no Shareholder may own more than (A) 2.0% of the outstanding
shares of all common stock of the Company or (B) 9.9% of the outstanding
shares of any class or series of shares of preferred stock of the Company. The
Articles of Incorporation and Bylaws provide, however, that no person shall be
deemed to exceed the ownership limit solely by reason of the beneficial
ownership of shares of any class of capital stock to the extent that such
shares of capital stock were beneficially owned by such person at the time of
the Merger, which includes the Common Stock owned by the Hughes Family. The
principal purpose of the foregoing limitations is to assist in preventing, to
the extent practicable, a concentration of ownership that might jeopardize the
ability of the Company to obtain the favorable tax benefits afforded a
qualified REIT. An incidental consequence of such provisions is to make a
change of control significantly more difficult (if not impossible) even if it
would be favorable to the interests of the public shareholders. Such
provisions will prevent future takeover attempts which the Board of Directors
has not approved even if a majority of the public shareholders deem it to be
in their best interests or in which the public shareholders may receive a
premium for their shares over the then market value. See "Description of
Common Stock and Class B Common Stock--Ownership Limitations."
TAX RISKS
Possible Treatment of the Merger as a Taxable Event. In connection with the
Merger, Hogan & Hartson L.L.P. ("Hogan & Hartson"), counsel to the Company,
delivered an opinion that for federal income tax purposes under current law,
the Merger will be treated as a reorganization within the meaning of Section
368(a) of the Code. This opinion is based on certain representations made by
the Company and by PSMI and its shareholders and on certain assumptions.
Furthermore, this opinion is not binding on the IRS. Therefore, the IRS may
contest the qualification of the Merger as a reorganization under Section
368(a) of the Code. If such a contest were successful, the Merger would be a
taxable transaction and PSMI would recognize gain in an amount equal to the
excess of the fair market value of the Common Stock and the Class B Common
Stock issued in the Merger over the adjusted basis of the assets transferred
to the Company. As the successor to PSMI, the Company would be primarily
liable for this resulting tax liability. See "--Increase in Nonqualifying
Income," "--Elimination of Any Accumulated Earnings and Profits," "--Increased
Risk of Violation of Ownership Requirements," and "Certain Federal Income Tax
Considerations--Consequences of the Merger on the Company's Qualification as a
REIT." Subject to certain limitations, Hughes has agreed to indemnify the
Company for tax liabilities of PSMI, including any tax liabilities arising
directly or indirectly as a result of the Merger or related transactions.
4
<PAGE>
Risk of Violation of Gross Income Requirements. As a result of the Merger,
the Company performs property management services for properties in which it
has no or only a partial interest. Some or all of the gross income received
from these services will not be treated as income qualifying for certain REIT
gross income tests applicable to the Company. If the Company's nonqualifying
income were to exceed 5% of its total gross income, the Company's REIT status
may terminate for that year and future years unless the Company meets certain
"reasonable cause" standards. Even if the Company meets such standards,
however, it would be subject to a 100% excise tax on any excess nonqualifying
net income.
Increased Risk of Violation of Ownership Requirements. For the Company to
qualify as a REIT under the Code, no more than 50% in value of its outstanding
stock may be owned, directly or constructively under the applicable
attribution rules of the Code, by five or fewer individuals (as defined in the
Code to include certain entities) during the last half of a taxable year.
Following the Merger, the value of the outstanding capital stock of the
Company held by the Hughes Family was estimated at approximately 45%.
Accordingly, no four individuals other than the Hughes Family could own
directly or constructively, in the aggregate, more than 5% of the value of
outstanding capital stock of the Company. In order to assist the Company in
meeting these ownership restrictions, the Articles of Incorporation contain
the ownership limitations described under "Description of Common Stock and
Class B Common Stock--Ownership Limitations." However, even with these
ownership limitations, the Company could still be in violation of the
ownership restrictions if four individuals unrelated to the Hughes Family were
to own the maximum amount of capital stock permitted under the Articles of
Incorporation. Therefore, to further assist the Company in meeting the
ownership restrictions, the Hughes Family entered into an agreement with the
Company restricting the Hughes Family's acquisition of additional shares of
capital stock of the Company and providing that if, at any time, for any
reason, more than 50% in value of its outstanding capital stock otherwise
would be considered owned by five or fewer individuals, a number of shares of
Common Stock owned by Wayne Hughes necessary to prevent such violation will
automatically and irrevocably be transferred to a designated charitable
beneficiary. The provisions in the Articles of Incorporation and the agreement
with Wayne Hughes are modeled after certain arrangements that the Internal
Revenue Service (the "IRS") has ruled in private letter rulings will preclude
a REIT from being considered to violate the ownership restrictions so long as
such arrangements are enforceable as a matter of state law and the REIT seeks
to enforce them as and when necessary. There can be no assurance, however,
that the IRS might not seek to take a different position with respect to the
Company (a private letter ruling is legally binding only with respect to the
taxpayer to whom it was issued) or contend that the Company failed to enforce
these various arrangements and, hence, there can be no assurance that these
arrangements will necessarily preserve the Company's REIT status. No private
letter ruling has been sought by the Company from the IRS with respect to the
effect of these arrangements.
Elimination of Any Accumulated Earnings and Profits. Any accumulated
earnings and profits of PSMI carried over to the Company in the Merger. To
retain its REIT status, the Company would have had to distribute any acquired
earnings and profits on or before December 31, 1995. In connection with the
Merger, a study of the earnings and profits showed that PSMI had no earnings
and profits at the time of the Merger. The determination of earnings and
profits depends on a number of factual matters related to the activities and
operation of PSMI and its predecessors in years prior to the Merger.
Accordingly, no assurances can be given that the IRS will not challenge such
conclusion. If the IRS were subsequently to determine that such earnings and
profits existed at the time of the Merger, the Company may lose its REIT
qualification for the year of the Merger and, perhaps, for subsequent years
unless certain relief provisions apply. See "Certain Federal Income Tax
Considerations--Consequences of the Merger on the Company's Qualification as a
REIT--Elimination of any Accumulated Earnings and Profits Attributable to Non-
REIT Years."
Consequences of Failure to Qualify as a REIT. For any taxable year that the
Company fails to qualify as a REIT and certain relief provisions do not apply,
the Company would be taxed at the regular corporate rates on all of its
taxable income, whether or not it makes any distributions to its shareholders.
Those taxes would reduce the amount of cash available to the Company for
distribution to its shareholders or for reinvestment. As a result, failure of
the Company to qualify during any taxable year as a REIT could have a material
adverse effect upon
5
<PAGE>
the Company and its shareholders. Furthermore, unless certain relief
provisions apply, the Company would not be eligible to elect REIT status again
until the fifth taxable year that begins after the first year for which the
Company fails to qualify.
Corporate Level Tax on Sale of Certain Built-in Gain Assets. The Company
will be subject to a corporate level tax if it disposes of any of the assets
acquired in the Merger at any time during the 10-year period beginning at the
time of the Merger (the "Restriction Period"). This tax would be imposed at
the top regular corporate rate (currently 35%) in effect at the time of the
disposition on the excess of (i) the lesser of (a) the fair market value at
the time of the Merger of the assets disposed of and (b) the selling price of
such assets over (ii) the Company's adjusted basis at the time of the Merger
in such assets (such excess being referred to as the "Built-in Gain"). The
Company currently does not intend to dispose of any of the assets acquired in
the Merger during the Restriction Period, but there can be no assurance that
one or more such dispositions will not occur. See "Certain Federal Income Tax
Considerations--Tax Treatment of the Merger--Built-in Gain Rules."
OPERATING RISKS
General Risks of Real Estate Ownership. The Company is subject to the risks
generally incident to the ownership of real estate-related assets, including
lack of demand for rental spaces in a locale, changes in general economic or
local conditions, changes in supply of or demand for similar or competing
facilities in an area, the impact of environmental protection laws, changes in
interest rates and availability of permanent mortgage funds which may render
the sale or financing of a property difficult or unattractive and changes in
tax, real estate and zoning laws.
Significant Competition Among Mini-Warehouses. Most of the Company's
properties are mini-warehouses. Competition in the market areas in which the
Company operates is significant and has affected the occupancy levels, rental
rates and operating expenses of certain of the Company's properties.
Competition may be accelerated by any increase in availability of funds for
investment in real estate. Recent increases in development of mini-warehouses
are expected to further intensify competition among mini-warehouse operators
in certain market areas.
Risk of Environmental Liabilities. Under various federal, state and local
laws, regulations and ordinances (collectively, "Environmental Laws"), an
owner or operator of real estate interests may be liable for the costs of
cleaning up, as well as certain damages resulting from, past or present
spills, disposals or other releases of hazardous or toxic substances or wastes
on, in or from a property. Certain Environmental Laws impose such liability
without regard to whether the owner knew of, or was responsible for, the
presence of hazardous or toxic substances or wastes at or from a property. An
owner or operator of real estate or real estate interests also may be liable
under certain Environmental Laws that govern activities or operations at a
property having adverse environmental effects, such as discharges to air and
water as well as handling and disposal practices for solid and hazardous or
toxic wastes. In some cases, liability may not be limited to the value of the
property. The presence of such substances or wastes, or the failure to
properly remediate any resulting contamination, also may adversely affect the
owner's or operator's ability to sell, lease or operate its property or to
borrow using its property as collateral.
The Company has recently conducted preliminary environmental assessments of
most of its properties (and intends to conduct such assessments in connection
with property acquisitions) to evaluate the environmental condition of, and
potential environmental liabilities associated with, such properties. Such
assessments generally consist of an investigation of environmental conditions
at the subject property (not including soil or groundwater sampling or
analysis), as well as a review of available information regarding the site and
publicly available data regarding conditions at other sites in the vicinity.
In connection with these recent property assessments, the Company's operations
and recent property acquisitions, the Company has become aware that prior
operations or activities at certain facilities or from nearby locations have
or may have resulted in contamination to the soil and/or groundwater at such
facilities. In this regard, certain such facilities are or may be the subject
of federal or
6
<PAGE>
state environmental investigations or remedial actions. The Company has
obtained with respect to recent acquisitions, and intends to obtain with
respect to pending or future acquisitions, appropriate purchase price
adjustments or indemnifications that it believes are sufficient to cover any
such potential liabilities. Although there can be no assurance, based on the
recent preliminary environmental assessments, the Company believes it has
funds available to cover any liability from environmental contamination or
potential contamination and the Company is not aware of any environmental
contamination of its facilities material to its overall business or financial
condition.
Tenant Reinsurance. A corporation owned by the Hughes Family continues to
reinsure policies insuring against losses to goods stored by tenants in the
mini-warehouses operated by the Company. The Company believes that the
availability of insurance reduces its potential liability to tenants for
losses to their goods from theft or destruction. This corporation will
continue to receive the premiums and bear the risks associated with the
insurance. The Company has a right of first refusal to acquire the stock or
assets of this corporation if the Hughes Family or the corporation agree to
sell them, but the Company has no interest in its operations and no right to
acquire the stock or assets of the corporation in the absence of a decision to
sell. If the reinsurance business were owned directly by the Company, the
insurance premiums would be nonqualifying income to the Company. The Company
would be precluded from exercising its right of first refusal with respect to
the stock of the reinsurance corporation if such exercise would cause the
Company to violate any of the requirements for qualification as a REIT under
the Code.
Canadian Operations. The Hughes Family continues to own and operate mini-
warehouses in Canada. The Company has a right of first refusal to acquire the
stock or assets of the corporation engaged in these operations if the Hughes
Family or the corporation agree to sell them, but the Company has no interest
in its operations and no right to acquire the stock or assets in the absence
of a decision to sell.
PSCP. Prior to the Merger, Public Storage Commercial Properties Group, Inc.
("PSCP"), a subsidiary of PSMI, managed commercial properties for the Company
and others. Because certain of the revenues generated by PSCP would be
nonqualifying income to the Company, prior to the Merger, the common stock of
PSCP held by PSMI was converted into nonvoting preferred stock (representing
95% of the equity) and the voting common stock of PSCP (representing 5% of the
equity) was issued to the Hughes Family. In December 1996, the Hughes Family
sold the voting common stock of PSCP to Ronald L. Havner, Jr., formerly Senior
Vice-President and Chief Financial Officer of the Company, who became the
Chief Executive Officer of PSCP. Additionally, the Company issued additional
voting common stock to two other unaffiliated investors. While the Company
will continue to own a substantial economic interest in PSCP, Mr. Havner and
the unaffiliated investors are able to control the operations of PSCP through
the ownership of PSCP's voting stock.
Merchandise and Portable Self Storage Companies. Prior to the Merger, PSMI
sold locks, boxes and tape to tenants to use in securing their rented spaces
and moving their goods. Because the revenues received from the sale of these
items would be nonqualifying income to the Company, immediately following the
Merger, PSMI transferred this lock and box business to a separate corporation
(the "Lock/Box Company"). The nonvoting preferred stock of the Lock/Box
Company (representing 95% of the equity) was issued to PSI. The voting common
stock of the Lock/Box Company (representing 5% of the equity) was issued to
the Hughes Family, which will be able to control the operations of the
Lock/Box Company by reason of their ownership of its voting stock.
Public Storage Pickup & Delivery, Inc. ("PSPUD") was organized in 1996 to
operate a portable self-storage business. Because the revenues from this
business would be non-qualifying income to the Company, the capital stock of
PSPUD is owned by the Lock/Box Company. In order to continue to meet the
requirements for qualification as a REIT, the value of the nonvoting preferred
stock of the Lock/Box Company held by the Company (which includes the value of
the Lock/Box Company's interest in PSPUD) may not exceed 5% of the value of
the Company's total assets.
Liabilities with Respect to Acquired General Partner Interests. Upon
succeeding to substantially all of the properties and operations of PSMI in
the Merger, there may be certain liabilities and associated costs suffered by
7
<PAGE>
the Company in its capacity as general partner of former PSMI limited
partnerships arising out of facts and circumstances in existence prior to the
Merger, and the Company will also have general partner liability for post-
Merger activities of these partnerships, as it does for other partnerships as
to which it is a general partner. Subject to certain limitations, Hughes has
agreed to indemnify the Company for pre-Merger activities and the Class B
Common Stock will be placed in escrow to support such indemnification.
FINANCING RISKS
Dilution and Subordination. The interest of Shareholders, including persons
who acquire Securities in this offering, can be diluted through the issuance
of additional securities.
Since October 1992 the Company has issued shares of Preferred Stock and
intends to issue additional such shares. These issuances could involve certain
risks to holders of shares of Common Stock. In the event of a liquidation of
the Company, the holders of the Preferred Stock outstanding at December 31,
1996 will be entitled to receive, before any distribution of assets to holders
of Common Stock, liquidating distributions (an aggregate of approximately $835
million in respect of Preferred Stock issued to date), plus any accrued and
unpaid dividends. Holders of Preferred Stock are entitled to receive, when
declared by the Board of Directors, cash dividends (an aggregate of
approximately $77 million per year in respect of Preferred Stock outstanding
at December 31, 1996), in preference to holders of Common Stock. As a REIT,
the Company must distribute to its Shareholders (which include not only
holders of Common Stock but also holders of Preferred Stock) for each taxable
year at least 95% of its annual taxable income. Failure to pay full dividends
on the Preferred Stock could jeopardize the Company's qualification as a REIT.
See "Description of Preferred Stock" and "Certain Federal Income Tax
Considerations--Tax Treatment of the Company."
Risk of Leverage. In making real estate investments, the Company has
incurred and may continue to incur indebtedness to the extent believed
appropriate. The incurrence of indebtedness increases the risk of loss of the
investment.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of Common Stock in the public market
could adversely affect prevailing market prices. At December 31, 1996, the
Company had approximately 88.4 million shares of Common Stock and seven
million shares of Class B Common Stock outstanding. Of these shares,
approximately 52.6 million shares of Common Stock are tradeable without
restriction (except those applicable to affiliates of the Company) or further
registration under the Securities Act. The remaining approximately 35.8
million shares of Common Stock and seven million shares of Class B Common
Stock were issued in the Merger without registration under the Securities Act
in reliance on an exemption from registration and are "restricted securities"
within the meaning of Rule 144 adopted under the Act (the "Restricted
Shares"). The beneficial owners of 15.5 million of the Restricted Shares
(including all of the Class B Common Stock) have agreed not to offer, sell or
otherwise dispose (except for gifts and pledges) of any of their shares until
November 13, 1998, in the case of the Common Stock, or until November 13,
2002, in the case of the Class B Common Stock. Upon expiration of such
periods, each will be entitled to sell his or her shares in the public market
subject to Rule 144, which contains certain public information, volume,
holding period and manner of sale requirements. The remaining approximately
27.3 million Restricted Shares will be available for sale in the public market
pursuant to Rule 144, subject to the foregoing requirements that include, as
the Rule is currently in effect, a two-year holding period. Sales of
substantial amounts of such Common Stock in the public market could adversely
affect the market price of the Common Stock.
8
<PAGE>
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.
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED FOR THE YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
------------- ------------------------
1996 1995 1995 1994 1993 1992 1991
------ ------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to combined fixed
charges and preferred stock divi-
dends............................. 2.03 2.07 2.04 2.22 2.40 2.89 2.71
</TABLE>
DESCRIPTION OF COMMON STOCK AND CLASS B COMMON STOCK
The Company is authorized to issue 200,000,000 shares of Common Stock and
7,000,000 shares of Class B Common Stock. At December 31, 1996, the Company
had outstanding 88,362,026 shares of Common Stock (exclusive of shares
issuable upon conversion of the Company's convertible stock and shares subject
to options) and 7,000,000 shares of Class B Common Stock.
COMMON STOCK
The following description of the Common Stock sets forth certain general
terms and provisions of the Common Stock to which any Prospectus Supplement
may relate, including a Prospectus Supplement providing that Common Stock will
be issuable upon conversion of the Preferred Stock or upon the exercise of the
Warrants. The statements below describing the Common Stock are in all respects
subject to and qualified in their entirety by reference to the applicable
provisions of the Articles of Incorporation and the Company's Bylaws (the
"Bylaws").
Holders of Common Stock will be entitled to receive dividends when, as and
if declared by the Board of Directors, out of funds legally available
therefor. Payment and declaration of dividends on the Common Stock and
purchases of shares thereof by the Company will be subject to certain
restrictions if the Company fails to pay dividends on outstanding preferred
stock. See "Description of Preferred Stock." Upon any liquidation, dissolution
or winding up of the Company, holders of Common Stock will be entitled to
share equally and ratably in any assets available for distribution to them,
after payment or provision for payment of the debts and other liabilities of
the Company and the preferential amounts owing with respect to any outstanding
preferred stock. Holders of Common Stock have no preemptive rights, which
means they have no right to acquire any additional shares of Common Stock that
may be issued by the Company at a subsequent date.
Each outstanding share of Common Stock entitles the holder to one vote on
all matters presented to such holders for a vote, with the exception that they
have cumulative voting rights with respect to the election of the Board of
Directors, in accordance with California law. Cumulative voting means that
each holder of Common Stock is entitled to cast as many votes as there are
directors to be elected multiplied by the number of shares
9
<PAGE>
registered in his or her name. A holder of Common Stock may cumulate the votes
for directors by casting all of the votes for one candidate or by distributing
the votes among as many candidates as he or she chooses. The outstanding
shares of Common Stock are, and additional shares of Common Stock will be,
when issued, fully paid and nonassessable.
OWNERSHIP LIMITATIONS
For the Company to qualify as a REIT under the Code, no more than 50% in
value of its outstanding shares of capital stock may be owned, directly or
constructively under the applicable attribution rules of the Code, by five or
fewer individuals (as defined in the Code to include certain entities) during
the last half of a taxable year. In order to maintain its qualification as a
REIT, the Articles of Incorporation and Bylaws provide certain restrictions on
the shares of capital stock that any Shareholder may own.
The Articles of Incorporation and Bylaws provide that, subject to certain
exceptions, no holder may own, or be deemed to own by virtue of the
attribution provisions of the Code, more than (A) 2.0% of the outstanding
shares of all Common Stock or (B) 9.9% of the outstanding shares of any class
or series of shares of Preferred Stock. The Articles of Incorporation and
Bylaws provide, however, that no person shall be deemed to exceed the
ownership limit solely by reason of the beneficial ownership of shares of any
class of capital stock to the extent that such shares of capital stock were
beneficially owned by such person (including the Hughes Family) at the time of
the Merger. However, in determining whether an acquisition of shares after the
Merger violates the Articles of Incorporation or Bylaws, Shareholders will be
subject to these ownership limitations. This ownership limitation is necessary
in order to assist in preserving the Company's REIT status in view of the
Hughes Family's substantial ownership interest in the Company. See "Risk
Factors--Ownership Limitations" and "Certain Federal Income Tax
Considerations--Tax Treatment of the Company."
The Board of Directors, in its sole and absolute discretion, may grant an
exception to the ownership limits to any person so requesting, so long as (A)
the Board of Directors has determined that, after giving effect to (x) an
acquisition by such person of beneficial ownership (within the meaning of the
Code) of the maximum amount of capital stock of the Company permitted as a
result of the exception to be granted and (y) assuming that the four other
persons who would be treated as "individuals" for the purposes of Section
542(a)(2) of the Code and who would beneficially own the largest amounts of
capital stock of the Company (determined by value) beneficially own the
maximum amount of capital stock of the Company permitted under the ownership
limits (or any exceptions to the ownership limits granted with respect to such
persons), the Company would not be "closely held" within the meaning of
Section 856(h) of the Code and would not otherwise fail to qualify as a REIT,
and (B) such person provides to the Board of Directors such representations
and undertakings as the Board of Directors may require. Notwithstanding any of
the foregoing ownership limits, no holder may own or acquire, either directly,
indirectly or constructively under the applicable attribution rules of the
Code, any shares of any class of the Company's capital stock if such ownership
or acquisition (i) would cause more than 50% in value of the Company's
outstanding capital stock to be owned, either directly or constructively,
under the applicable attribution rules of the Code, by five or fewer
individuals (as defined in the Code to include certain tax-exempt entities,
other than, in general, qualified domestic pension funds), (ii) would result
in the Company's capital stock being beneficially owned by less than 100
persons (determined without reference to any rules of attribution), or (iii)
would otherwise result in the Company failing to qualify as a REIT.
The Articles of Incorporation and Bylaws provide that, if any holder of the
Company's capital stock purports to transfer shares to a person or there is a
change in the capital structure of the Company or other event and either the
transfer, the change in capital structure or such other event would result in
the Company failing to qualify as a REIT, or such transfer, the change in
capital structure or such other event would cause the transferee to hold
shares in excess of the applicable ownership limit, then the stock being
transferred (or in the case of an event other than a transfer, the stock
beneficially owned) which would cause one or more of the restrictions on
ownership or transfer to be violated shall be automatically transferred to a
trust for the benefit of a designated charitable beneficiary. The purported
transferee of such shares shall have no right to receive dividends or other
10
<PAGE>
distributions with respect to such shares and shall have no right to vote such
shares. Any dividends or other distributions paid to such purported transferee
prior to the discovery by the Company that the shares have been transferred to
a trust shall be paid to the trustee of the trust for the benefit of the
charitable beneficiary upon demand. The trustee of the trust will have all
rights to dividends with respect to shares of stock held in trust, which
rights will be exercised for the exclusive benefit of the charitable
beneficiary. Any dividends or distributions paid over to the trustee will be
held in trust for the charitable beneficiary. Within 20 days of receiving
notice from the Company that shares of capital stock have been transferred to
the trust, the trustee shall designate a transferee of such stock so long as
such shares of stock would not violate the restrictions on ownership or
transfer in the Articles of Incorporation or Bylaws in the hands of such
designated transferee. Upon the sale of such shares, the purported transferee
shall receive the lesser of (A)(i) the price per share such purported
transferee paid for the stock in the purported transfer that resulted in the
transfer of the shares to the trust, or (ii) if the transfer or other event
that resulted in the transfer of the shares of the trust was not a transaction
in which the purported transferee gave full value for such shares, a price per
share equal to the market price on the date of the purported transfer or other
event that resulted in the transfer of the shares to the trust and (B) the
price per share received by the trustee from the sale or other disposition of
the shares held in the trust.
In addition, the Company's Bylaws provide the Board of Directors with the
power to prevent the transfer of shares of capital stock or to redeem shares
of capital stock if the Board of Directors determines in good faith that such
action is necessary to preserve the Company's REIT status.
CLASS B COMMON STOCK
The Class B Common Stock (i) does not participate in distributions on the
Common Stock until the later to occur of (x) funds from operations ("FFO") per
Common Share (as defined below) aggregating $1.80 during any period of four
consecutive calendar quarters or (y) January 1, 2000; thereafter, the Class B
Common Stock will participate in distributions (other than liquidating
distributions) at the rate of 97% of the per share distributions on the Common
Stock, provided that cumulative distributions of at least $.22 per quarter
(beginning with the 4th quarter of 1995) per share have been paid on the
Common Stock, (ii) does not participate in liquidating distributions, (iii) is
not entitled to vote (except as expressly required by California law) and (iv)
will automatically convert into Common Stock, on a share for share basis, upon
the later to occur of (A) FFO per Common Share aggregating $3.00 during any
period of four consecutive calendar quarters or (B) January 1, 2003.
For these purposes:
1) FFO means net income (loss) (computed in accordance with GAAP) before
(i) gain (loss) on early extinguishment of debt, (ii) minority interest in
income and (iii) gain (loss) on disposition of real estate, adjusted as
follows: (i) plus depreciation and amortization (including the Company's
pro-rata share of depreciation and amortization of unconsolidated equity
interests and amortization of assets acquired in the Merger (including
property management agreements and goodwill)), and (ii) less FFO
attributable to minority interest. FFO is a supplemental performance
measure for equity REITs as defined by the National Association of Real
Estate Investment Trusts, Inc. ("NAREIT"). The NAREIT definition does not
specifically address the treatment of minority interest in the
determination of FFO or the treatment of the amortization of property
management agreements and goodwill. In the case of the Company, FFO
represents amounts attributable to Shareholders after deducting amounts
attributable to the minority interests and before deductions for the
amortization of property management agreements and goodwill. FFO does not
take into consideration scheduled principal payments on debt, capital
improvements, distributions and other obligations of the Company.
Accordingly, FFO is not a substitute for the Company's cash flow or net
income as a measure of its liquidity or operating performance or ability to
pay distributions.
2) FFO per Common Share means FFO less Preferred Stock dividends (other
than dividends on convertible preferred stock) divided by the outstanding
weighted average shares of Common Stock assuming conversion of all
outstanding convertible securities and the Class B Common Stock.
11
<PAGE>
DESCRIPTION OF PREFERRED STOCK
The Company is authorized to issue 50,000,000 shares of Preferred Stock. At
December 31, 1996, the Company had outstanding 13,421,580 shares of Preferred
Stock (of which 17,650 shares of Preferred Stock are represented by 17,650,000
depositary shares). The Articles of Incorporation provide that the Preferred
Stock may be issued from time to time in one or more series and give the Board
of Directors broad authority to fix the dividend and distribution rights,
conversion and voting rights, if any, redemption provisions and liquidation
preferences of each series of Preferred Stock. Holders of Preferred Stock have
no preemptive rights. The outstanding shares of Preferred Stock are, and
additional shares of Preferred Stock will be, when issued, fully paid and
nonassessable.
The issuance of Preferred Stock with special voting rights (or Common Stock)
could be used to deter attempts by a single Shareholder or group of
Shareholders to obtain control of the Company in transactions not approved by
the Board of Directors. The Company has no intention to issue the Preferred
Stock (or Common Stock) for such purposes.
OUTSTANDING PREFERRED STOCK
At December 31, 1996, the Company had 11 series of Preferred Stock
outstanding: nine series of senior Preferred Stock (the "Senior Preferred
Stock") and two series of convertible Preferred Stock. In all respects, each
of the series of Senior Preferred Stock ranks on a parity with each other and
is senior to both series of convertible Preferred Stock. Each of the series of
Senior Preferred Stock (i) has a stated value of $25.00 per share or
depositary share, (ii) in preference to the holders of shares of the Common
Stock and any other capital stock ranking junior to the Senior Preferred Stock
as to payment of dividends (including both series of convertible Preferred
Stock), provides for cumulative quarterly dividends calculated as a percentage
of the stated value (ranging from 8.45% to 10% per year in the case of the
eight series of fixed rate Senior Preferred Stock and a rate adjustable
quarterly ranging from 6.75% to 10.75% per year in the case of a series of
adjustable rate Senior Preferred Stock) and (iii) is subject to redemption, in
whole or in part, at the option of the Company at a cash redemption price of
$25.00 per share or depositary share, plus accrued and unpaid dividends (on
and after June 30, 1999 in the case of the adjustable rate Senior Preferred
Stock and on or after various dates between December 31, 2000 and April 30,
2005 in the case of the series of fixed rate Senior Preferred Stock).
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of each of the series of Senior
Preferred Stock will be entitled to receive out of the Company's assets
available for distribution to shareholders, before any distribution of assets
is made to holders of Common Stock or any other shares of capital stock
ranking as to such distributions junior to the Senior Preferred Stock
(including both series of convertible Preferred Stock), liquidating
distributions in the amount of $25.00 per share or depositary share, plus all
accrued and unpaid dividends.
Except as expressly required by law and in certain other limited
circumstances, the holders of the Senior Preferred Stock are not entitled to
vote. The consent of holders of at least 66 2/3% of the outstanding shares of
the Senior Preferred Stock (and any other series of Preferred Stock ranking on
a parity therewith), voting as a single class, is required to authorize
another class of shares senior to such Preferred Stock.
In all respects, each of the series of convertible Preferred Stock ranks on
a parity with each other and is senior to the Common Stock. One of the series
of the convertible Preferred Stock (i) has a stated value of $25.00 per share,
(ii) in preference to the holders of shares of the Common Stock and any other
capital stock ranking junior to the convertible Preferred Stock as to payment
of dividends, provides for cumulative quarterly dividends at an annual rate of
8.25% of the stated value thereof, (iii) is convertible at the option of the
holder at any time into Common Stock at a conversion price of 1.6835 shares of
Common Stock for each share of such convertible Preferred Stock (subject to
adjustment in certain circumstances) and (iv) after July 1, 1998, under
certain circumstances, is redeemable for Common Stock at the option of the
Company, in whole or in part, at a
12
<PAGE>
redemption price of 1.6835 shares of Common Stock for each share of such
convertible Preferred Stock (subject to adjustment in certain circumstances).
The other series of convertible Preferred Stock (i) has no stated value,
(ii) in preference to the holders of shares of the Common Stock and any other
capital stock ranking junior to the convertible preferred stock as to payment
of dividends, provides for dividends of $1,916,038 per quarter, (iii) is
convertible at the option of the holder at any time into Common Stock at a
conversion price of 35.014 shares of PSI Common Stock for each share of such
convertible preferred stock (subject to adjustment under certain
circumstances) and (iv) on March 31, 2000 will be automatically converted into
Common Stock at the conversion price described above.
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of the convertible Preferred Stock will
be entitled to receive out of the Company's assets available for distribution
to shareholders, before any distribution of assets is made to holders of
Common Stock or any other shares of capital stock ranking as to such
distributions junior to the convertible Preferred Stock, liquidating
distributions (i) in the amount of $25.00 per share, plus all accrued and
unpaid dividends, in the case of one of the series of convertible Preferred
Stock and (ii) a minimum liquidation preference of $58,955,000, plus all
accrued and unpaid dividends, in the case of the other series of convertible
Preferred Stock.
Except as expressly required by law and in certain other limited
circumstances, the holders of the convertible Preferred Stock are not entitled
to vote. The consent of holders of at least 66 2/3% of the outstanding shares
of one of the series of convertible Preferred Stock and at least 50% of the
outstanding shares of the other series is required to authorize another class
of shares senior to the convertible Preferred Stock and junior to the Senior
Preferred Stock.
OWNERSHIP LIMITATIONS
For a discussion of the ownership limitations that apply to Preferred Stock,
see "Description of Common Stock and Class B Common Stock--Ownership
Limitations."
FUTURE SERIES OF PREFERRED STOCK
The following description of Preferred Stock sets forth certain general
terms and provisions of the Preferred Stock to which any Prospectus Supplement
may relate. The statements below describing the Preferred Stock are in all
respects subject to and qualified in their entirety by reference to the
applicable provisions of the Articles of Incorporation (including the
applicable form of Certificate of Determination) and Bylaws.
Reference is made to the Prospectus Supplement relating to the Preferred
Stock offered thereby for specific terms, including, where applicable, the
following: (1) the title and stated value of such Preferred Stock; (2) the
number of shares of such Preferred Stock offered, the liquidation preference
per share and the offering price of such Preferred Stock; (3) the dividend
rate(s), period(s) and/or payment date(s) or method(s) of calculation thereof
applicable to such Preferred Stock; (4) the date from which dividends on such
Preferred Stock shall accumulate, if applicable; (5) the provision for a
sinking fund, if any, for such Preferred Stock; (6) the provision for
redemption, if applicable, of such Preferred Stock; (7) any listing of such
Preferred Stock on any securities exchange; (8) the terms and conditions, if
applicable, upon which such Preferred Stock will be convertible into Common
Stock, including the conversion price (or manner of calculation thereof); (9)
the voting rights, if any, of such Preferred Stock; (10) any other specific
terms, preferences, rights, limitations or restrictions of such Preferred
Stock; (11) the relative ranking and preferences of such Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up of the
affairs of the Company; and (12) any limitations on issuance of any series of
Preferred Stock ranking senior to or on a parity with such series of Preferred
Stock as to dividend rights and rights upon liquidation, dissolution or
winding up of the affairs of the Company.
Ranking. The ranking of the Preferred Stock is set forth in the applicable
Prospectus Supplement. Unless otherwise specified in the applicable Prospectus
Supplement, such Preferred Stock will, with respect to dividend
13
<PAGE>
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 previously issued by the Company the terms of which
specifically provide that such Preferred Stock rank on a parity with the
Preferred Stock offered hereby with respect to dividend rights or rights upon
liquidation, dissolution or winding up of the Company; and (iii) junior to all
Preferred Stock previously issued by the Company the terms of which
specifically provide that such Preferred Stock rank senior to the Preferred
Stock offered hereby with respect to dividend rights or rights upon
liquidation, dissolution or winding up of the Company.
Dividends. Holders of shares of the Preferred Stock of each series offered
hereby shall be entitled to receive, when, as and if declared by the Board of
Directors, out of assets of the Company legally available for payment, cash
dividends at such rates and on such dates as will be set forth in the
applicable Prospectus Supplement. Each such dividend shall be payable to
holders of record as they appear on the stock transfer books of the Company on
such record dates as shall be fixed by the Board of Directors.
Dividends on any series of the Preferred Stock offered hereby may be
cumulative or non-cumulative, as provided in the applicable Prospectus
Supplement. Dividends, if cumulative, will be cumulative from and after the
date set forth in the applicable Prospectus Supplement. If the Board of
Directors fails to declare a dividend payable on a dividend payment date on
any series of the Preferred Stock for which dividends are noncumulative, then
the holders of such series of the Preferred Stock will have no right to
receive a dividend in respect of the dividend period ending on such dividend
payment date, and the Company will have no obligation to pay the dividend
accrued for such period, whether or not dividends on such series are declared
payable on any future dividend payment date.
No dividends (other than in Common Stock or other capital stock ranking
junior to the Preferred Stock of any series as to dividends and upon
liquidation) shall be declared or paid or set aside for payment, nor shall any
other distribution be declared or made upon the Common Stock, or any other
capital stock of the Company ranking junior to or on a parity with the
Preferred Stock of such series as to dividends or upon liquidation, nor shall
any Common Stock or any other capital stock of the Company ranking junior to
or on a parity with the Preferred Stock of such series as to dividends or upon
liquidation be redeemed, purchased or otherwise acquired for any consideration
(or any moneys be paid to or made available for a sinking fund for the
redemption of any shares of any such stock) by the Company (except by
conversion into or exchange for other capital stock of the Company ranking
junior to the Preferred Stock of such series as to dividends and upon
liquidation) unless (i) if such series of Preferred Stock has a cumulative
dividend, full cumulative dividends on the Preferred Stock of such series have
been or contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof set apart for payment for all past dividend
periods and the then current dividend period and (ii) if such series of
Preferred Stock does not have a cumulative dividend, full dividends on the
Preferred Stock of such series have been or contemporaneously are declared and
paid or declared and a sum sufficient for the payment thereof set apart for
payment for the then current dividend period.
Any dividend payment made on shares of a series of Cumulative Preferred
Stock offered hereby shall first be credited against the earliest accrued but
unpaid dividend due with respect to shares of such series which remains
payable.
Redemption. If so provided in the applicable Prospectus Supplement, the
shares of Preferred Stock will be subject to mandatory redemption or
redemption at the option of the Company, in whole or in part, in each case
upon the terms, at the times and at the redemption prices set forth in such
Prospectus Supplement.
The Prospectus Supplement relating to a series of Preferred Stock offered
hereby that is subject to mandatory redemption will specify the number of
shares of such Preferred Stock that shall be redeemed by the Company in each
year commencing after a date to be specified, at a redemption price per share
to be specified, together with an amount equal to all accrued and unpaid
dividends thereon (which shall not, if such Preferred
14
<PAGE>
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.
Notwithstanding the foregoing, no shares of any series of Preferred Stock
offered hereby shall be redeemed and the Company shall not purchase or
otherwise acquire directly or indirectly any shares of Preferred Stock of such
series (except by conversion into or exchange for capital stock of the Company
ranking junior to the Preferred Stock of such series as to dividends and upon
liquidation) unless all outstanding shares of Preferred Stock of such series
are simultaneously redeemed unless, in each case, (i) if such series of
Preferred Stock has a cumulative dividend, full cumulative dividends on the
Preferred Stock of such series shall have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof set
apart for payment for all past dividend periods and the then current dividend
period and (ii) if such series of Preferred Stock does not have a cumulative
dividend, full dividends on the Preferred Stock of such series have been or
contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof set apart for payment for the then current dividend
period; provided, however, that the foregoing shall not prevent the purchase
or acquisition of shares of Preferred Stock of such series pursuant to a
purchase or exchange offer made on the same terms to holders of all
outstanding shares of Preferred Stock of such series.
If fewer than all of the outstanding shares of Preferred Stock of any series
offered hereby are to be redeemed, the number of shares to be redeemed will be
determined by the Company and such shares may be redeemed pro rata from the
holders of record of such shares in proportion to the number of such shares
held by such holders (with adjustments to avoid redemption of fractional
shares) or any other equitable method determined by the Company.
Notice of redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each holder of record of Preferred Stock of
any series to be redeemed at the address shown on the stock transfer books of
the Company. Each notice shall state: (i) the redemption date; (ii) the number
of shares and series of the Preferred Stock to be redeemed; (iii) the
redemption price; (iv) the place or places where certificates for such
Preferred Stock are to be surrendered for payment of the redemption price; (v)
that dividends on the shares to be redeemed will cease to accrue on such
redemption date; and (vi) the date upon which the holder's conversion rights,
if any, as to such shares shall terminate. If fewer than all the shares of
Preferred Stock of any series are to be redeemed, the notice mailed to each
such holder thereof shall also specify the number of shares of Preferred Stock
to be redeemed from each such holder and, upon redemption, a new certificate
shall be issued representing the unredeemed shares without cost to the holder
thereof. In order to facilitate the redemption of shares of Preferred Stock,
the Board of Directors may fix a record date for the determination of shares
of Preferred Stock to be redeemed, such record date to be not less than 30 or
more than 60 days prior to the date fixed for such redemption.
Notice having been given as provided above, from and after the date
specified therein as the date of redemption, unless the Company defaults in
providing funds for the payment of the redemption price on such date, all
dividends on the Preferred Stock called for redemption will cease. From and
after the redemption date, unless the Company so defaults, all rights of the
holders of the Preferred Stock as shareholders of the Company, except the
right to receive the redemption price (but without interest), will cease.
Subject to applicable law and the limitation on purchases when dividends on
Preferred Stock are in arrears, the Company may, at any time and from time to
time, purchase any shares of Preferred Stock in the open market, by tender or
by private agreement.
Liquidation Preference. Upon any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Company, then, before any
distribution or payment shall be made to the holders of any Common Stock or
any other class or series of capital stock of the Company ranking junior to
any series of the Preferred Stock in the distribution of assets upon any
liquidation, dissolution or winding up of the Company, the holders of such
series of Preferred Stock shall be entitled to receive out of assets of the
Company legally available for
15
<PAGE>
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 amount of the liquidating distributions
to which they are entitled, the holders of Preferred Stock will have no right
or claim to any of the remaining assets of the Company. In the event that,
upon any such voluntary or involuntary liquidation, dissolution or winding up,
the legally available assets of the Company are insufficient to pay the amount
of the liquidating distributions on all outstanding shares of any series of
Preferred Stock and the corresponding amounts payable on all shares of other
classes or series of capital stock of the Company ranking on a parity with the
Preferred Stock in the distribution of assets upon liquidation, dissolution or
winding up, then the holders of such series of Preferred Stock and all other
such classes or series of capital stock shall share ratably in any such
distribution of assets in proportion to the full liquidating distributions to
which they would otherwise be respectively entitled.
If liquidating distributions shall have been made in full to all holders of
Preferred Stock, the remaining assets of the Company shall be distributed
among the holders of any other classes or series of capital stock ranking
junior to such series of Preferred Stock upon liquidation, dissolution or
winding up, according to their respective rights and preferences and in each
case according to their respective number of shares. For such purposes, the
consolidation or merger of the Company with or into any other corporation, or
the sale, lease, transfer or conveyance of all or substantially all of the
property or business of the Company, shall not be deemed to constitute a
liquidation, dissolution or winding up of the Company.
Voting Rights. Holders of the Preferred Stock offered hereby will not have
any voting rights, except as set forth below or as otherwise expressly
required by law or as indicated in the applicable Prospectus Supplement.
If the equivalent of six quarterly dividends payable on any series of
Preferred Stock are in default (whether or not declared or consecutive), the
holders of all such series of Preferred Stock, voting as a single class with
all other series of Preferred Stock upon which similar voting rights have been
conferred and are exercisable, will be entitled to elect two additional
directors until all dividends in default have been paid or declared and set
apart for payment.
Such right to vote separately to elect directors shall, when vested, be
subject, always, to the same provisions for vesting of such right to elect
directors separately in the case of future dividend defaults. At any time when
such right to elect directors separately shall have so vested, the Company
may, and upon the written request of the holders of record of not less than
20% of the total number of preferred shares of the Company then outstanding
shall, call a special meeting of Shareholders for the election of directors.
In the case of such a written request, such special meeting shall be held
within 90 days after the delivery of such request and, in either case, at the
place and upon the notice provided by law and in the Bylaws, provided that the
Company shall not be required to call such a special meeting if such request
is received less than 120 days before the date fixed for the next ensuing
annual meeting of Shareholders, and the holders of all classes of outstanding
preferred stock are offered the opportunity to elect such directors (or fill
any vacancy) at such annual meeting of shareholders. Directors so elected
shall serve until the next annual meeting of Shareholders or until their
respective successors are elected and qualify. If, prior to the end of the
term of any director so elected, a vacancy in the office of such director
shall occur, during the continuance of a default by reason of death,
resignation, or disability, such vacancy shall be filled for the unexpired
term of such former director by the appointment of a new director by the
remaining director or directors so elected.
The affirmative vote or consent of the holders of at least a majority of the
outstanding shares of each series of Preferred Stock will be required to amend
or repeal any provision of or add any provision to, the Articles of
Incorporation, including the Certificate of Determination, if such action
would materially and adversely alter or change the rights, preferences or
privileges of such series of Preferred Stock.
16
<PAGE>
No consent or approval of the holders of any series of Preferred Stock
offered hereby will be required for the issuance from the Company's authorized
but unissued Preferred Stock of other shares of any series of Preferred Stock
ranking on a parity with or junior to such series of Preferred Stock, or
senior to a series of Preferred Stock expressly made junior to other series of
Preferred Stock as to payment of dividends and distribution of assets,
including other shares of such series of Preferred Stock.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of such series of Preferred Stock shall
have been redeemed or called for redemption upon proper notice and sufficient
funds shall have been deposited in trust to effect such redemption.
Conversion Rights. The terms and conditions, if any, upon which shares of
any series of Preferred Stock offered hereby are convertible into Common Stock
will be set forth in the applicable Prospectus Supplement relating thereto.
Such terms will include the number of shares of Common Stock into which the
Preferred Stock is convertible, the conversion price (or manner of calculation
thereof), the conversion period, provisions as to whether conversion will be
at the option of the Company or the holders of the Preferred Stock or
automatically upon the occurrence of certain events, the events requiring an
adjustment of the conversion price and provisions affecting conversion in the
event of the redemption of such Preferred Stock.
DESCRIPTION OF THE DEPOSITARY SHARES
The Company may, at its option, elect to offer Depositary Shares rather than
full shares of Preferred Stock. In the event such option is exercised, each of
the Depositary Shares will represent ownership of and entitlement to all
rights and preferences of a fraction of a share of Preferred Stock of a
specified series (including dividend, voting, redemption and liquidation
rights). The applicable fraction will be specified in the Prospectus
Supplement. The shares of Preferred Stock represented by the Depositary Shares
will be deposited with a Depositary (the "Depositary") named in the applicable
Prospectus Supplement, under a Deposit Agreement (the "Deposit Agreement"),
among the Company, the Depositary and the holders of the Depositary Receipts.
Certificates evidencing Depositary Shares ("Depositary Receipts") will be
delivered to those persons purchasing Depositary Shares in the offering. The
Depositary will be the transfer agent, registrar and dividend disbursing agent
for the Depositary Shares. Holders of Depositary Receipts agree to be bound by
the Deposit Agreement, which requires holders to take certain actions such as
filing proof of residence and paying certain charges.
The summary of terms of the Depositary Shares contained in this Prospectus
does not purport to be complete and is subject to, and qualified in its
entirety by, the provisions of the Deposit Agreement, the Articles of
Incorporation and the form of Certificate of Determination for the applicable
series of Preferred Stock.
DIVIDENDS
The Depositary will distribute all cash dividends or other cash
distributions received in respect of the series of Preferred Stock represented
by the Depositary Shares to the record holders of Depositary Receipts in
proportion to the number of Depositary Shares owned by such holders on the
relevant record date, which will be the same date as the record date fixed by
the Company for the applicable series of Preferred Stock. The Depositary,
however, will distribute only such amount as can be distributed without
attributing to any Depositary Share a fraction of one cent, and any balance
not so distributed will be added to and treated as part of the next sum
received by the Depositary for distribution to record holders of Depositary
Receipts then outstanding.
In the event of a distribution other than in cash, the Depositary will
distribute property received by it to the record holders of Depositary
Receipts entitled thereto, in proportion, as nearly as may be practicable, to
the number of Depositary Shares owned by such holders on the relevant record
date, unless the Depositary determines (after consultation with the Company)
that it is not feasible to make such distribution, in which case the
Depositary may (with the approval of the Company) adopt any other method for
such distribution as it deems
17
<PAGE>
equitable and appropriate, including the sale of such property (at such place
or places and upon such terms as it may deem equitable and appropriate) and
distribution of the net proceeds from such sale to such holders.
LIQUIDATION PREFERENCE
In the event of the liquidation, dissolution or winding up of the affairs of
the Company, whether voluntary or involuntary, the holders of each Depositary
Share will be entitled to the fraction of the liquidation preference accorded
each share of the applicable series of Preferred Stock, as set forth in the
Prospectus Supplement.
REDEMPTION
If the series of Preferred Stock represented by the applicable series of
Depositary Shares is redeemable, such Depositary Shares will be redeemed from
the proceeds received by the Depositary resulting from the redemption, in
whole or in part, of Preferred Stock held by the Depositary. Whenever the
Company redeems any Preferred Stock held by the Depositary, the Depositary
will redeem as of the same redemption date the number of Depositary Shares
representing the Preferred Stock so redeemed. The Depositary will mail the
notice of redemption promptly upon receipt of such notice from the Company and
not less than 30 nor more than 60 days prior to the date fixed for redemption
of the Preferred Stock and the Depositary Shares to the record holders of the
Depositary Receipts.
VOTING
Promptly upon receipt of notice of any meeting at which the holders of the
series of Preferred Stock represented by the applicable series of Depositary
Shares are entitled to vote, the Depositary will mail the information
contained in such notice of meeting to the record holders of the Depositary
Receipts as of the record date for such meeting. Each such record holder of
Depositary Receipts will be entitled to instruct the Depositary as to the
exercise of the voting rights pertaining to the number of shares of Preferred
Stock represented by such record holder's Depositary Shares. The Depositary
will endeavor, insofar as practicable, to vote such Preferred Stock
represented by such Depositary Shares in accordance with such instructions,
and the Company will agree to take all action which may be deemed necessary by
the Depositary in order to enable the Depositary to do so. The Depositary will
abstain from voting any of the Preferred Stock to the extent that it does not
receive specific instructions from the holders of Depositary Receipts.
WITHDRAWAL OF PREFERRED STOCK
Upon surrender of Depositary Receipts at the principal office of the
Depositary, upon payment of any unpaid amount due the Depositary, and subject
to the terms of the Deposit Agreement, the owner of the Depositary Shares
evidenced thereby is entitled to delivery of the number of whole shares of
Preferred Stock and all money and other property, if any, represented by such
Depositary Shares. Partial shares of Preferred Stock will not be issued. If
the Depositary Receipts delivered by the holder evidence a number of
Depositary Shares in excess of the number of Depositary Shares representing
the number of whole shares of Preferred Stock to be withdrawn, the Depositary
will deliver to such holder at the same time a new Depositary Receipt
evidencing such excess number of Depositary Shares. Holders of Preferred Stock
thus withdrawn will not thereafter be entitled to deposit such shares under
the Deposit Agreement or to receive Depositary Receipts evidencing Depositary
Shares therefor.
AMENDMENT AND TERMINATION OF DEPOSIT AGREEMENT
The form of Depositary Receipt evidencing the Depositary Shares and any
provision of the Deposit Agreement may at any time and from time to time be
amended by agreement between the Company and the Depositary. However, any
amendment which materially and adversely alters the rights of the holders
(other than any change in fees) of Depositary Shares will not be effective
unless such amendment has been approved by at
18
<PAGE>
least a majority of the Depositary Shares then outstanding. No such amendment
may impair the right, subject to the terms of the Deposit Agreement, of any
owner of any Depositary Shares to surrender the Depositary Receipt evidencing
such Depositary Shares with instructions to the Depositary to deliver to the
holder the Preferred Stock and all money and other property, if any,
represented thereby, except in order to comply with mandatory provisions of
applicable law. The Deposit Agreement may be terminated by the Company or the
Depositary only if (i) all outstanding Depositary Shares have been redeemed or
(ii) there has been a final distribution in respect of the Preferred Stock in
connection with any dissolution of the Company and such distribution has been
made to all the holders of Depositary Shares.
CHARGES OF DEPOSITARY
The Company will pay all transfer and other taxes and governmental charges
arising solely from the existence of the depositary arrangements. The Company
will pay charges of the Depositary in connection with the initial deposit of
the Preferred Stock and the initial issuance of the Depositary Shares, and
redemption of the Preferred Stock and all withdrawals of Preferred Stock by
owners of Depositary Shares. Holders of Depositary Receipts will pay transfer,
income and other taxes and governmental charges and certain other charges as
are provided in the Deposit Agreement to be for their accounts. In certain
circumstances, the Depositary may refuse to transfer Depositary Shares, may
withhold dividends and distributions and sell the Depositary Shares evidenced
by such Depositary Receipt if such charges are not paid.
MISCELLANEOUS
The Depositary will forward to the holders of Depositary Receipts all
reports and communications from the Company which are delivered to the
Depositary and which the Company is required to furnish to the holders of the
Preferred Stock. In addition, the Depositary will make available for
inspection by holders of Depositary Receipts at the principal office of the
Depositary, and at such other places as it may from time to time deem
advisable, any reports and communications received from the Company which are
received by the Depositary as the holder of Preferred Stock.
Neither the Depositary nor the Company assumes any obligation or will be
subject to any liability under the Deposit Agreement to holders of Depositary
Receipts other than for its negligence or willful misconduct. Neither the
Depositary nor the Company will be liable if the Depositary is prevented or
delayed by law or any circumstance beyond its control in performing its
obligations under the Deposit Agreement. The obligations of the Company and
the Depositary under the Deposit Agreement will be limited to performance in
good faith of their duties thereunder, and they will not be obligated to
prosecute or defend any legal proceeding in respect of any Depositary Shares
or Preferred Stock unless satisfactory indemnity is furnished. The Company and
the Depositary may rely on written advice of counsel or accountants, on
information provided by holders of Depositary Receipts or other persons
believed in good faith to be competent to give such information and on
documents believed to be genuine and to have been signed or presented by the
proper party or parties.
RESIGNATION AND REMOVAL OF DEPOSITARY
The Depositary may resign at any time by delivering to the Company notice of
its election to do so, and the Company may at any time remove the Depositary,
any such resignation or removal to take effect upon the appointment of a
successor Depositary and its acceptance of such appointment. Such successor
Depositary must be appointed within 60 days after delivery of the notice for
resignation or removal and must be a bank or trust company having its
principal office in the United States of America and having a combined capital
and surplus of at least $150,000,000.
FEDERAL INCOME TAX CONSEQUENCES
Owners of the Depositary Shares will be treated for Federal income tax
purposes as if they were owners of the Preferred Stock represented by such
Depositary Shares. Accordingly, such owners will be entitled to take
19
<PAGE>
into account, for Federal income tax purposes, income and deductions to which
they would be entitled if they were holders of such Preferred Stock. In
addition, (i) no gain or loss will be recognized for Federal income tax
purposes upon the withdrawal of Preferred Stock in exchange for Depositary
Shares, (ii) the tax basis of each share of Preferred Stock to an exchanging
owner of Depositary Shares will, upon such exchange, be the same as the
aggregate tax basis of the Depositary Shares exchanged therefor, and (iii) the
holding period for Preferred Stock in the hands of an exchanging owner of
Depositary Shares will include the period during which such person owned such
Depositary Shares.
DESCRIPTION OF EQUITY STOCK
The Company is authorized to issue 200,000,000 shares of Equity Stock. At
December 31, 1996, the Company had no outstanding shares of Equity Stock. The
Articles of Incorporation provide that the Equity Stock may be issued from
time to time in one or more series and give the Board of Directors broad
authority to fix the dividend and distribution rights, conversion and voting
rights, redemption provisions and liquidation rights of each series of Equity
Stock. Holders of Equity Stock have no preemptive rights. The shares of Equity
Stock will be, when issued, fully paid and nonassessable.
The issuance of Equity 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 Equity Stock
(or Common Stock) for such purposes.
TERMS OF EQUITY STOCK
The following description of Equity Stock sets forth certain general terms
and provisions of the Equity Stock to which any Prospectus Supplement may
relate. The statements below describing the Equity Stock are in all respects
subject to and qualified in their entirety by reference to the applicable
provisions of the Articles of Incorporation (including the applicable form of
Certificate of Determination) and Bylaws.
Reference is made to the Prospectus Supplement relating to the Equity Stock
offered thereby for specific terms, including, where applicable, the
following: (1) the designation of such Equity Stock; (2) the number of shares
of such Equity Stock offered, the liquidation rights and the offering price of
such Equity Stock; (3) the dividend rate(s), period(s) and/or payment date(s)
or method(s) of calculation thereof applicable to such Equity Stock; (4) the
provision for redemption, if applicable, of such Equity Stock; (5) any listing
of such Equity Stock on any securities exchange; (6) the terms and conditions,
if applicable, upon which such Equity Stock will be convertible into Common
Stock, including the conversion price (or manner of calculation thereof); (7)
the voting rights, if any, of such Equity Stock; (8) the ownership limitations
that apply to the Equity Stock; (9) any other specific terms, rights,
limitations or restrictions of such Equity Stock; and (10) the relative
ranking of such Equity Stock as to dividend rights and rights upon
liquidation, dissolution or winding up of the affairs of the Company.
Ranking. The ranking of the Equity Stock is set forth in the applicable
Prospectus Supplement. Unless otherwise specified in the applicable Prospectus
Supplement, such Equity Stock will, with respect to dividend rights and rights
upon liquidation, dissolution or winding up of the affairs of the Company,
rank on a parity with the Common Stock.
Dividends. Holders of shares of the Equity Stock of each series offered
hereby shall be entitled to receive, when, as and if declared by the Board of
Directors, out of assets of the Company legally available for payment, cash
dividends at such rates and on such dates as will be set forth in the
applicable Prospectus Supplement. Each such dividend shall be payable to
holders of record as they appear on the stock transfer books of the Company on
such record dates as shall be fixed by the Board of Directors. Unless
otherwise specified in the applicable Prospectus Supplement, dividends on such
Equity Stock will be non-cumulative.
20
<PAGE>
Redemption. If so provided in the applicable Prospectus Supplement, the
shares of Equity 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 Equity Stock offered
hereby that is subject to mandatory redemption will specify the number of
shares of such Equity 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 Equity 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.
If fewer than all of the outstanding shares of Equity Stock of any series
offered hereby are to be redeemed, the number of shares to be redeemed will be
determined by the Company and such shares may be redeemed pro rata from the
holders of record of such shares in proportion to the number of such shares
held by such holders (with adjustments to avoid redemption of fractional
shares) or any other equitable method determined by the Company.
Notice of redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each holder of record of Equity 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 Equity Stock to be redeemed; (iii) the redemption
price; (iv) the place or places where certificates for such Equity 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 Equity Stock of any
series are to be redeemed, the notice mailed to each such holder thereof shall
also specify the number of shares of Equity 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 Equity Stock, the Board of
Directors may fix a record date for the determination of shares of Equity
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 Equity Stock called for redemption will cease. From and after
the redemption date, unless the Company so defaults, all rights of the holders
of the Equity Stock as shareholders of the Company, except the right to
receive the redemption price (but without interest), will cease.
Liquidation Rights. 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 the Equity 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, 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 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
21
<PAGE>
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, including the Equity Stock, according to their respective rights
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.
Unless otherwise specified in the applicable Prospectus Supplement, upon any
voluntary or involuntary liquidation, dissolution or winding up of the affairs
of the Company, holders of the Equity Stock will rank on a parity with the
holders of the Common Stock, subject to any maximum or minimum distribution to
holders of Equity Stock specified in such Prospectus Supplement.
Voting Rights. Unless otherwise specified in the applicable Prospectus
Supplement, holders of the Equity Stock will have the same voting rights as
holders of the Common Stock.
No consent or approval of the holders of any series of Equity Stock will be
required for the issuance from the Company's authorized but unissued Equity
Stock of other shares of any series of Equity Stock including shares of such
series of Equity Stock.
Conversion Rights. The terms and conditions, if any, upon which shares of
any series of Equity Stock offered hereby are convertible into Common Stock
will be set forth in the applicable Prospectus Supplement relating thereto.
Such terms will include the number of shares of Common Stock into which the
Equity 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 Company or the holders of the Equity 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 Equity Stock.
DESCRIPTION OF WARRANTS
The Company has no Warrants outstanding (other than options issued under the
Company's stock option plans). The Company may issue Warrants for the purchase
of Preferred Stock, Equity 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, Equity 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
22
<PAGE>
after which such Warrants and the related Preferred Stock, Equity Stock or
Common Stock, if any, will be separately transferable; (7) the price at which
each share of Preferred Stock, Equity Stock or Common Stock purchasable upon
exercise of such Warrants may be purchased; (8) the date on which the right to
exercise such Warrants shall commence and the date on which such right shall
expire; (9) the minimum or maximum amount of such Warrants which may be
exercised at any one time; and (10) any other terms of such Warrants,
including terms, procedures and limitations relating to the exchange and
exercise of such Warrants.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary of certain federal income tax considerations to the
Company is based on current law, is for general information only, and is not
tax advice. The tax treatment of a holder of any of the Securities will vary
depending upon the terms of the specific securities acquired by such holder,
as well as his or her particular situation, and this discussion does not
attempt to address any aspects of federal income taxation relating to holders
of Securities, except as discussed under "--Taxation of Shareholders." Certain
federal income tax considerations relevant to holders of the Securities may be
provided in the applicable Prospectus Supplement relating thereto.
EACH PROSPECTIVE INVESTOR IS ADVISED TO CONSULT THE APPLICABLE PROSPECTUS
SUPPLEMENT, AS WELL AS HIS OR HER TAX ADVISOR, REGARDING THE TAX CONSEQUENCES
TO HIM OR HER OF THE ACQUISITION, OWNERSHIP AND SALE OF THE SECURITIES,
INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF
SUCH ACQUISITION, OWNERSHIP AND SALE AND OF POTENTIAL CHANGES IN APPLICABLE
TAX LAWS.
TAX TREATMENT OF THE COMPANY
If certain detailed conditions imposed by the Code and the related Treasury
regulations are met, an entity, such as the Company, that invests principally
in real estate and that otherwise would be taxed as a corporation may elect to
be treated as a REIT. The most important consequence to the Company of being
treated as a REIT for federal income tax purposes is that this enables the
Company to deduct dividend distributions to its shareholders, thus effectively
eliminating the "double taxation" (at the corporate and shareholder levels)
that typically results when a corporation earns income and distributes that
income to shareholders in the form of dividends.
The Company has made an election to be taxed as a REIT under Sections 856
through 860 of the Code, beginning with its fiscal year ending December 31,
1981. That election will continue in effect until it is revoked or terminated.
The Company believes that it has qualified during each of the fiscal years for
which such an election has been in effect, and currently qualifies as a REIT,
and the Company expects to continue to be taxed as a REIT for federal income
tax purposes. While the Company intends to operate so that it will continue to
qualify as a REIT, given the highly complex nature of the rules governing
REITs, the ongoing importance of factual determinations, and the possibility
of future changes in the circumstances of the Company, no assurance can be
given by the Company that the Company will qualify as a REIT in any particular
year.
Technical Requirements for Taxation as a REIT. The following is a very brief
overview of certain of the technical requirements that the Company must meet
on an ongoing basis in order to continue to qualify as a REIT. This summary is
qualified in its entirety by the applicable Code provisions, Treasury
regulations and administrative and judicial interpretations thereof.
1. The capital stock must be widely-held and not more than 50% of the value
of the capital stock may be held by five or fewer individuals (determined
after giving effect to various ownership attribution rules). See "--
Consequences of Merger on the Company's Qualification as a REIT--Violation of
Ownership Requirements."
23
<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 (including "rents from real property" and, in certain
circumstances, interest);
(b) at least 95% of the gross income must be from the real estate sources
includable in the 75% income test, and/or from dividends, interest, or
gains from the sale or disposition of stock or securities not held for sale
in the ordinary course of business; and
(c) less than 30% of the gross income may be derived from the sale of
real estate assets held for less than four years, from the sale of certain
"dealer" property, or from the sale of stock or securities held for less
than one year.
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements described above only if several
conditions are met. First, the amount of rent must not be based in whole or in
part on the income or profits of any person. However, an amount received or
accrued generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or percentages
of receipts of sales. The Company anticipates that none of its gross annual
income will be attributable to rents that are based in whole or in part on the
income of any person (excluding rents based on a percentage of receipts or
sales, which, as described above, are permitted). Second, the Code provides
that rents received from a tenant will not qualify as "rents from real
property" if the Company, or an owner of 10% or more of the Company, directly
or constructively owns 10% or more of such tenant (a "Related Party Tenant").
The Company does not anticipate that it will receive income from Related Party
Tenants. Third, if rent attributable to personal property, leased in
connection with a lease of real property, is greater than 15% of the total
rent received under the lease, then the portion of rent attributable to such
personal property will not qualify as "rents from real property." The Company
does not anticipate deriving rent attributable to personal property leased in
connection with real property that exceeds 15% of the total rents. Finally,
for rents received to qualify as "rents from real property," the Company
generally must not operate or manage the property or furnish or render
services to tenants, other than through an "independent contractor" which is
adequately compensated and from whom the Company derives no revenue. The
"independent contractor" requirement, however, does not apply to the extent
the services provided by the Company are "usually or customarily rendered" in
connection with the rental of space for occupancy only and are not otherwise
considered "rendered to the occupant." Any services with respect to certain
Properties that the Company believes may not be provided by the Company
directly without jeopardizing the qualification of rent as "rents from real
property" will be performed by "independent contractors."
See "--Consequences of the Merger on the Company's Qualification as a REIT--
The Company's Assumption of Management Activities With Respect to its
Properties," "--Consequences of the Merger on the Company's Qualification as a
REIT--Nonqualifying Income," and "--Consequences of the Merger on the
Company's Qualification as a REIT--Acquisition of Affiliated Partnership
Interests in the Merger" for a discussion of specific aspects of the Merger
that may impact upon the Company's ability to satisfy the 95% gross income
test.
3. Generally, 75% of the value of the Company's total assets must be
represented by real estate, mortgages secured by real estate, cash, or
government securities (including its allocable share of real estate assets
held by any partnerships in which the Company owns an interest). Not more than
25% of the Company's total assets may be represented by securities other than
those in the 75% asset class. Of the investments included in the 25% asset
class, the value of any one issuer's securities owned by the Company may not
exceed 5% of the value of the Company's total assets, and the Company may not
own more than 10% of any one issuer's outstanding voting securities. The 5%
test generally must be met for any quarter in which the Company acquires
securities of an issuer. The Company believes that it satisfies these tests.
In this regard, however, the 10% voting stock prohibition will preclude the
Company from controlling the operations of PSCP, the Lock/Box Company and
PSPUD (in which the Company owns 95% of the equity in the form of non-voting
stock and the Hughes Family owns 5% of the equity but 100% of the voting
stock) or PSCC (in which the Company owns a less than
24
<PAGE>
10% equity interest) and may preclude the Company from exercising its rights
of first refusal with respect to the corporations owning the Canadian
operations and the reinsurance business.
4. The Company must distribute to its shareholders in each taxable year an
amount at least equal to 95% of the Company's "REIT Taxable Income" (which is
generally equivalent to net taxable ordinary income). Under certain
circumstances, the Company can rectify a failure to meet the 95% distribution
test by paying dividends after the close of a particular taxable year.
In years prior to 1990, the Company made distributions in excess of its REIT
Taxable Income. During 1990, the Company reduced its distribution to its
shareholders.
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 through 1995 by attributing distributions
in 1991 through 1996 to the prior year's taxable income, and PSI expects to
satisfy the distribution requirement for 1996 by attributing distributions in
1997 to the 1996 taxable income. The Company may be required, over each of the
next several years, to make distributions after the close of a taxable year
and to attribute those distributions to the prior year, but shareholders will
be treated for federal income tax purposes as having received such
distributions in the taxable years in which they were actually made. The
extent to which the Company will be required to attribute distributions to the
prior year will depend on the Company's operating results and the level of
distributions as determined by the Board of Directors. Reliance on subsequent
year distributions could cause the Company to be subject to certain penalty
taxes. In that regard, if the Company should fail to distribute during each
calendar year at least the sum of (i) 85% of its REIT ordinary income for such
calendar year, (ii) 95% of its REIT capital gain net income for such calendar
year, and (iii) any undistributed taxable income from prior periods, the
Company would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed during such calendar year
(not taking into account distributions made in subsequent years but attributed
to such calendar year). The Company intends to comply with this 85%
distribution requirement in an effort to minimize any excise tax. Any
distributions required to be made by the Company in order to eliminate any
accumulated earnings and profits of PSMI would not be counted in determining
whether the Company satisfies the 95% distribution test and could adversely
impact upon the Company's ability to satisfy the 95% distribution test. See
"--Consequences of the Merger on the Company's Qualification as a REIT--
Elimination of Any Accumulated Earnings and Profits Attributable to Non-REIT
Years."
For purposes of applying the income and asset tests mentioned above, a REIT
is considered to own a proportionate share of the assets of any partnership in
which it holds a partnership interest. See "--Consequences of the Merger on
the Company's Qualification as a REIT--Acquisition of Affiliated Partnership
Interests in the Merger."
Applicable Federal Income Tax. If the Company qualifies for taxation as a
REIT, it generally will not be subject to federal corporate income taxes on
net income that it distributes currently to shareholders. However, the Company
will be subject to federal income tax in the following circumstances. First,
the Company will be taxed at regular corporate rates on any undistributed REIT
taxable income, including undistributed net capital gains. Second, under
certain circumstances, the Company may be subject to the "alternative minimum
tax" on its items of tax preference. Third, if the Company has (i) net income
from the sale or other disposition of "foreclosure property" (which is, in
general, property acquired by foreclosure or otherwise on default of a lease
or a loan secured by the property) which is held primarily for sale to
customers in the ordinary course of business or (ii) other nonqualifying
income from foreclosure property, it will be subject to tax at the highest
corporate rate on such income. Fourth, if the Company has net income from
prohibited transactions (which are, in general, certain sales or other
dispositions of property (other than foreclosure property) held primarily for
sale to customers in the ordinary course of business), such income will be
subject to a 100% tax. Fifth, if the Company should fail to satisfy the 75%
gross income test or the 95% gross income test (as discussed above), and has
nonetheless maintained its qualification as a REIT because certain other
requirements have been met, it will be
25
<PAGE>
subject to a 100% tax on the net income attributable to the greater of the
amount by which the Company fails the 75% or 95% gross income test.
Under the "Built-in Gain Rules" of IRS Notice 88-19, 1988-1 C.B. 486, the
Company will be subject to a corporate level tax if it disposes of any of the
assets acquired in the Merger at any time during the 10-year period beginning
on the closing date of the Merger (the "Restriction Period"). This tax would
be imposed on the Company at the top regular corporate rate (currently 35%) in
effect at the time of the disposition on the excess of (i) the lesser of (a)
the fair market value at the time of the Merger of the assets disposed of and
(b) the selling price of such assets over (ii) the Company's adjusted basis in
such assets at the time of the Merger (such excess being referred to as the
"Built-in Gain"). The Company currently does not intend to dispose of any of
the assets acquired in the Merger during the Restriction Period, but there can
be no assurance that one or more such dispositions will not occur.
Failure to Qualify as a REIT. For any taxable year that the Company fails to
qualify as a REIT and the relief provisions do not apply, the Company would be
taxed at the regular corporate rates on all of its taxable income, whether or
not it makes any distribution to its shareholders. Those taxes would reduce
the amount of cash available to the Company for distributions to its
shareholders or for reinvestment. As a result, failure of the Company to
qualify during any taxable year as a REIT could have a material adverse effect
upon the Company and its shareholders.
Termination of REIT Election. The Company's election to be treated as a REIT
will terminate automatically if the Company fails to meet the REIT
qualification requirements described above. If a termination (or a voluntary
revocation) occurs, unless certain relief provisions apply, the Company would
not be eligible to elect REIT status again until the fifth taxable year that
begins after the first year for which the Company's election was terminated
(or revoked). If the Company loses its REIT status, but later qualifies and
elects to be taxed as a REIT again, the Company may face significant adverse
tax consequences. Immediately prior to the effectiveness of the election to
return to REIT status, the Company would be treated as if 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.
CONSEQUENCES OF THE MERGER ON THE COMPANY'S QUALIFICATION AS A REIT
In light of the unique federal income tax requirements applicable to REITs,
the Merger could have adverse consequences on the Company's continued
qualification as a REIT, as discussed in greater detail below. Hogan & Hartson
L.L.P. ("Hogan & Hartson"), counsel to the Company, is of the opinion that the
Company continues to qualify as a REIT following the Merger so long as (A) the
Company has met at all times since the Merger and continues to meet the stock
ownership and gross income requirements applicable to REITs and (B) either
PSMI at the time of (and giving effect to) the Merger was not considered to
have any current or accumulated earnings and profits for tax purposes or the
Company made distributions prior to the end of 1995 in an amount sufficient to
eliminate such earnings and profits. See "--Nonqualifying Income," "--
Violation of Ownership Requirements," and "--Elimination of Any Accumulated
Earnings and Profits Attributable to Non-REIT Years." Hogan & Hartson,
however, has not opined that the Company continues to meet the stock ownership
and gross income requirements applicable to REITs following the Merger or that
PSMI did not have current or accumulated earnings and profits at the time of
the Merger, due to the numerous factual determinations and future events that
bear on those conclusions.
Nonqualifying Income. The Company must meet several annual gross income
tests to retain its REIT qualification. See "--Tax Treatment of the Company--
Technical Requirements for Taxation as a REIT." Under
26
<PAGE>
the 95% gross income test, the Company must derive at least 95% of its total
gross income from specified classes of income related to real property,
dividends, interest or gains from the sale or other disposition of stock or
other securities that do not constitute "dealer property." Income related to
real property includes: (i) proceeds from the rental of mini-warehouse
facilities; (ii) interest on obligations secured by mortgages on real
property; and (iii) gains from the sale or other disposition of real property
(other than real property held by the Company as a dealer).
After the Merger, the Company assumed and performs property management
activities for the various partnerships and REITs in which the Company has an
interest that own Properties, as well as for various other entities that own
mini-warehouse properties and/or business parks. The Company will receive
management fees from such partnerships, REITs, and other owners in exchange
for the performance of such management activities. The gross income received
by the Company from these property management activities with respect to
Properties owned by other entities (including the REITs in which the Company
has an ownership interest) and advisory services rendered to such other
entities is treated as income not qualifying under the 95% gross income test
("Nonqualifying Income"). See "--Acquisition of Affiliated Partnership
Interests."
In order to reduce the amount of Nonqualifying Income, in December 1995
certain Properties pre-paid to the Company approximately $4.5 million of
management fees that the Company otherwise would have been expected to receive
for 1996, discounted to compensate for early payment. Pre-payment of
management fees reduced the percentage of Nonqualifying Income received by the
Company in taxable years subsequent to such prepayment. In connection with the
Merger, Hogan & Hartson delivered an opinion that it is more likely than not
that the IRS would respect the inclusion of the prepaid management fees in the
gross income of the Company when they are received. Hogan & Hartson's opinion
is based on numerous cases where courts have upheld the IRS's position that
fees should be included in income when they are received, rather than when the
services to which such fees relate are performed. There are, however, several
contrary authorities where courts, over the IRS's objections, have held that
prepaid amounts are not included in income in advance of performance. Because
of these contrary authorities, there can be no assurance that the IRS might
not assert that such management fees should be included in the gross income of
the Company as the related management services are provided, rather than being
included in the gross income when they are received. If the IRS were to
successfully challenge the treatment of such management fees and the inclusion
of such fees in the Company's gross income resulted in it failing the 95%
gross income test for a taxable year ending after the Merger, the Company's
REIT status may terminate for such year and future years unless it meets the
"good cause" exception described above.
The Company and the various other owners of mini-warehouses and business
parks for which the Company performs management activities (the "Owners") have
entered into an agreement (the "Administrative and Cost-Sharing Agreement")
with PSCC, Inc. ("PSCC") pursuant to which PSCC provides the Owners and the
Company certain administrative and cost-sharing services in connection with
the operation of the Properties and the performance of certain administrative
functions. Each of the Owners and the Company pay the PSCC directly for
services rendered by PSCC in connection with the Administrative and Cost
Sharing Agreement. That payment is separate from and in addition to the
compensation paid to the Company under the management agreement for the
management of the Properties owned by the Owners. The Company has received a
private letter ruling from the IRS to the effect that the reimbursements and
other payments made to PSCC by the Owners will not be treated as revenues of
the Company for purposes of the 95% gross income test.
If the Company fails to meet the 95% gross income test during any taxable
year, its REIT status would terminate for that year and future years unless it
qualifies for the "good cause" exception. In order to qualify for the "good
cause" exception, the Company would have to satisfy each of the following: (i)
it reported the source and nature of each item of its gross income in its
federal income tax return for such year; (ii) the inclusion of any incorrect
information in its return is not due to fraud with intent to evade tax; and
(iii) the failure to meet such test is due to a reasonable cause and not to
willful neglect. The Company intends to conduct its operations and affairs so
that it meets the 95% gross income test for each taxable year. The Company
also intends to operate so that, in the event it were to fail to meet the 95%
gross income test, it would satisfy the "reasonable cause" requirement of the
"good cause" exception because it exercised ordinary business care and
prudence in
27
<PAGE>
attempting to satisfy the 95% gross income test (including by receiving
opinions of counsel where appropriate). There can be no assurance, however,
that if the Company were unable to satisfy the 95% gross income test, the IRS
would necessarily agree that the Company had operated in a manner that
qualifies for the "good cause" exception. Furthermore, even if the Company's
REIT status were not terminated because of the "good cause" exception, the
Company still would be subject to an excise tax on any excess nonqualifying
income. Generally, if the Company fails the 95% gross income test but still
retains its qualification as a REIT under the "good cause" exception, it would
be subject to a 100% excise tax on the amount of the excess nonqualifying
income multiplied by a fraction, the numerator of which would be the Company's
taxable income (computed without its distribution deduction) and the
denominator of which would be the Company's gross income from all sources.
This excise tax would have the general effect of causing the Company to pay
all net profits generated from this excess nonqualifying income to the IRS.
Violation of Ownership Requirements. For the Company to qualify as a REIT
under the Code, no more than 50% in value of its outstanding stock may be
owned, directly or constructively under certain attribution rules of the Code,
by five or fewer individuals (as defined in the Code to include certain
entities) during the last half of a taxable year. Following the Merger, the
value of the outstanding capital stock held by the Hughes Family was estimated
to be approximately 45% and such percentage has been reduced to approximately
36% as of November 30, 1996. In order to assist the Company in meeting these
ownership restrictions, the Articles of Incorporation and Bylaws prohibit the
actual or constructive ownership of more than 2.0% of the outstanding shares
of all common stock of the Company or more than 9.9% of the outstanding shares
of each class or series of shares of preferred stock of the Company. (The
Articles of Incorporation and Bylaws provide, however, that no person is
deemed to exceed this ownership limitation solely by reason of the beneficial
ownership of shares of any class of stock to the extent that such shares of
stock were beneficially owned by such person at the time of the Merger.)
However, even with these ownership limitations, the Company could still be in
violation of the ownership restrictions if four individuals unrelated to the
Hughes Family were to own the maximum amount of capital stock permitted under
the Articles of Incorporation and Bylaws. Therefore, to further assist the
Company in meeting the ownership restrictions, the Hughes Family entered into
an agreement with the Company for the benefit of the Company and certain
designated charitable beneficiaries restricting their acquisition of
additional shares of the Company's capital stock and providing that if, at any
time, for any reason, more than 50% in value of the Company's outstanding stock
otherwise would be considered owned by five or fewer individuals, then a number
of shares of Common Stock of the Company owned by Wayne Hughes necessary to cure
such violation will automatically and irrevocably be transferred to a designated
charitable beneficiary. These provisions are modeled after certain arrangements
that the IRS has ruled in private letter rulings will preclude a REIT from being
considered to violate the ownership restrictions so long as such arrangements
are enforceable as a matter of state law and the REIT seeks to enforce them as
and when necessary. There can be no assurance, however, that the IRS might not
seek to take a different position with respect to the Company (a private letter
ruling is legally binding only with respect to the taxpayer to whom it was
issued) or contend that the Company failed to enforce these various arrangements
and, hence, there can be no assurance that these arrangements will necessarily
preserve the Company's REIT status. No private letter ruling has been sought by
the Company from the IRS with respect to the effect of these arrangements.
Elimination of Any Accumulated Earnings and Profits Attributable to Non-REIT
Years. A REIT is not allowed to have accumulated earnings and profits
attributable to non-REIT years. A REIT has until the close of its first
taxable year in which it has non-REIT earnings and profits to distribute any
such accumulated earnings and profits. In a corporate reorganization
qualifying as a tax free statutory merger, the acquired corporation's current
and accumulated earnings and profits are carried over to the surviving
corporation. Any earnings and profits treated as having been acquired by a
REIT through such a merger will be treated as accumulated earnings and profits
of a REIT attributable to non-REIT years. Accordingly, any accumulated
earnings and profits of PSMI and its predecessors (including earnings and
profits resulting from transactions undertaken in contemplation of the Merger
or from the Merger itself) carried over to the Company in the Merger and the
Company would have been required to distribute any such accumulated earnings
and profits prior to the close of 1995 (the year in which
28
<PAGE>
the Merger occurred). Failure to do so would result in disqualification of the
Company as a REIT (unless the "deficiency dividend" procedures described below
apply and the Company complies with those procedures).
The amount of the accumulated earnings and profits of PSMI acquired by the
Company is based on the consolidated earnings and profits of PSMI (including
each of its predecessors) through and including the date of the Merger
("Consolidated Accumulated Earnings"). In connection with the Merger, the
Company received a study prepared by PSMI of the earnings and profits of PSMI
and its subsidiaries, taking into account projected income of PSMI and its
predecessors to and including the time of the Merger and distributions to the
PSMI shareholders made at or prior to the time of the Merger, that showed that
PSMI had no Consolidated Accumulated Earnings at the time of the Merger. The
determination of accumulated earnings and profits acquired by the Company in
the Merger ("Acquired Earnings") depends upon a number of factual matters
related to the activities and operations of PSMI and its predecessors during
their entire corporate existence and is subject to review and challenge by the
IRS. There can be no assurance that the IRS will not examine the tax returns
of PSMI and its predecessors for years prior to and including the Merger and
propose adjustments to increase their taxable income. Because the earnings and
profits study used to calculate the amount of Acquired Earnings is based on
these returns, any such adjustments could increase the amount of the Acquired
Earnings. In this regard, the IRS can consider all taxable years of PSMI and
its predecessors as open for review for purposes of determining the amount of
earnings and profits.
Although not free from doubt, "deficiency dividend" procedures may be
available for the Company to distribute any Acquired Earnings that were
subsequently determined to exist as a result of an IRS audit. In order to use
this "deficiency dividend" procedure, the Company would have to make an
additional dividend distribution to its shareholders (in addition to
distributions made for purposes of satisfying the normal REIT distribution
requirements), in the form of cash, notes, other property, or stock in a
taxable stock dividend, within 90 days of the IRS determination. In addition,
the Company would have to pay to the IRS an interest charge on 50% of the
Acquired Earnings that were not distributed prior to December 31, 1995, from
the date on which its 1995 tax return was due to the date the IRS
determination was made. The statute and Treasury regulations related to the
application of the "earnings and profits distribution" requirement to a REIT
that acquires a "non-REIT" in a reorganization and the availability of the
"deficiency dividend" procedure in those circumstances are not entirely clear,
and there can be no assurance that the IRS would not take the position either
that the "deficiency dividend" procedure is not available (in which case, the
Company would cease to qualify as a REIT effective for its taxable year in
which the Merger occurred) or, alternatively, that even if the procedure is
available, the Company cannot qualify as a REIT for the taxable year in which
the Merger occurred (but it could qualify as a REIT for subsequent years).
Acquisition of Affiliated Partnership Interests. The Company has acquired
interests in various partnerships that own and operate Properties in the
Merger and in other transactions. The Company, for purposes of satisfying the
REIT asset and gross income tests, will be treated as if it directly owns a
proportionate share of each of the assets of these partnerships. For these
purposes, under current Treasury regulations the Company's interest in each of
the partnerships must be determined in accordance with its "capital interest"
in such partnership. The character of the various assets in the hands of the
partnership and the items of gross income of the partnership will retain their
same character in the hands of the Company for these purposes. Accordingly, to
the extent the partnership receives real estate rentals and holds real
property, a proportionate share of such qualified income and assets will be
treated as qualified rental income and real estate assets of the Company for
purposes of determining its REIT qualification. The Company expects that
substantially all of the properties of the partnerships will constitute real
estate assets and will generate qualifying rental income for purposes of the
REIT gross income tests.
The acquisition of these partnership interests creates several issues
regarding the Company's satisfaction of the 95% gross income test. First, the
Company earns property management fees from these partnerships. Existing
Treasury regulations do not address the treatment of management fees derived
by a REIT from a partnership in which the REIT holds a partnership interest,
but the IRS has issued a number of private letter rulings holding that the
portion of the management fee that corresponds to the REIT interest in the
partnership in effect is
29
<PAGE>
disregarded in applying the 95% gross income test where the REIT holds a
"substantial" interest in the partnership. The Company disregards the portion
of management fees derived from partnerships in which it is a partner that
corresponds to its interest in these partnerships in determining the amount of
its Nonqualifying Income, and the Company's prepayment of management fees set
forth above was computed based upon this approach. There can be no assurance,
however, that the IRS would not take a contrary position with respect to the
Company, either rejecting the approach set forth in the private letter rulings
mentioned above or contending that the Company's situation is distinguishable
from those addressed in the private letter rulings (for example, because the
Company does not have a "substantial" interest in the partnerships).
Second, the Company acquired interests in certain of these partnerships that
entitle the Company to a percentage of profits (either from operations, or
upon a sale, or both) in excess of the percentage of total capital originally
contributed to the partnership with respect to such interest. Existing
Treasury Regulations do not specifically address this situation, and it is
uncertain, based on existing authority, how the Company's "capital interest"
in these partnerships should be determined. This determination is relevant
because it affects both the percentage of the gross rental income of the
partnership that is considered gross rental income (or qualifying income) to
the Company and the percentage of the management fees paid to the Company that
are disregarded in determining the Company's Nonqualifying Income. For
example, if the Company takes the position that it has a 25% "capital
interest" in a partnership (because it would receive 25% of the partnership's
assets upon a sale and liquidation) but the IRS determines it only has a 1%
"capital interest" (because the original holder of the Company's interest only
contributed 1% of the total capital contributed to the partnership), the
Company's share of the qualifying income from the partnership would be reduced
and the portion of the management fee from the partnership that would be
treated as Nonqualifying Income would be increased, thereby adversely
affecting the Company's ability to satisfy the 95% gross income test.
In determining its "capital interest" in the various partnerships in which
the Company acquired an interest in the Merger, the Company determines the
percentage of the partnership's assets that would be distributed to it if
those assets were sold and distributed among the partners in accordance with
the applicable provisions of the partnership agreements. There can be no
assurance, however, that the IRS will agree with this methodology and not
contend that another, perhaps less favorable, method must be used for purposes
of determining the Company "capital interests." If that were to occur, it
could adversely affect the Company's ability to satisfy the 95% gross income
test following the Merger.
TAXATION OF HOLDERS OF COMMON STOCK
Taxation of Taxable Domestic Shareholders. As long as the Company qualifies
as a REIT, distributions made to the Company's taxable domestic shareholders
will generally be taxable to Shareholders as ordinary income to the extent of
the Company's earnings and profits. For this purpose, earnings and profits of
the Company will first be allocated to distributions paid on preferred stock
until an amount equal to such distributions has been allocated thereto. As a
result, it is likely that any distributions paid on preferred stock will be
taxable in full as dividends to the holders of preferred stock. Dividends
declared during the last quarter of a calendar year and actually paid during
January of the immediately following calendar year generally are treated as if
received by the shareholders on December 31 of the calendar year during which
they were declared. Distributions paid to Shareholders will not constitute
passive activity income and as a result, generally cannot be offset by losses
from passive activities of Shareholders subject to the passive activity rules.
Distributions designated by the Company as capital gain dividends generally
will be taxed as long-term capital gain to Shareholders, to the extent that
the distributions do not exceed the Company's actual net capital gain for the
taxable year. Corporate Shareholders may be required to treat up to 20% of any
such capital gain dividends as ordinary income. Distributions by the Company,
whether characterized as ordinary income or as capital gain, are not eligible
for the 70% dividends received deduction for corporations. If the Company
should realize a loss, Shareholders will not be permitted to deduct any share
of that loss. Future regulations may require that Shareholders take into
account, for purposes of computing their individual alternative minimum tax
liability, certain tax preference items of the Company.
30
<PAGE>
The Company may distribute cash in excess of its net taxable income. Upon
distribution of such cash by the Company to Shareholders (other than as a
capital gain dividend), if all of the Company's current and accumulated
earnings and profits have been distributed, the excess cash will be deemed to
be a non-taxable return of capital to each Shareholder to the extent of the
adjusted tax basis of the Shareholder's capital stock. Distributions in excess
of the adjusted tax basis will be treated as gain from the sale or exchange of
the capital stock. A Shareholder who has received a distribution in excess of
current and accumulated earnings and profits of the Company may, upon the sale
of the capital stock, realize a higher taxable gain or a smaller loss because
the basis of the Common Stock as reduced will be used for purposes of
computing the amount of the gain or loss. Generally, gain or loss realized by
a Shareholder upon the sale of capital stock will be reportable as capital
gain or loss. If a Shareholder receives a long-term capital gain dividend from
the Company and has held the capital stock for six months or less, any loss
incurred on the sale or exchange of the capital stock is treated as a long-
term capital loss, to the extent of the corresponding long-term capital gain
dividend received.
If a Shareholder is subject to "backup withholding," the Company will be
required to deduct and withhold from any dividends payable to such Shareholder
a tax of 31%. These rules may apply when a Shareholder fails to supply a
correct taxpayer identification number, or when the IRS notifies the Company
that a Shareholder is subject to the rules or has furnished an incorrect
taxpayer identification number. The Treasury Department has recently issued
proposed regulations regarding the withholding and information reporting rules
discussed above. In general, the proposed regulations do not alter the
substantive withholding and information reporting requirements but unify
current clarification procedures and forms and clarify and modify reliance
standards. If finalized in their current form, the proposed regulations would
generally be effective for payments made after December 31, 1997, subject to
certain transition rules.
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.
TAXATION OF TAX EXEMPT INVESTORS
In general, a tax exempt entity that is a Shareholder is not subject to tax
on distributions from the Company or gain realized on the sale of capital
stock, provided that the tax exempt entity has not financed the acquisition of
its capital stock with "acquisition indebtedness" within the meaning of the
Code. Special rules apply to organizations exempt under Code Sections
501(c)(7), (c)(9), (c)(17) and (c)(20), and such prospective investors should
consult their own tax advisors concerning the applicable "set aside" and
reserve requirements. In addition, certain distributions by a REIT to a tax-
exempt employee's pension trust that owns more than 10% of the REIT will, in
certain circumstances, be treated as "unrelated business taxable income."
TAXATION OF NON-U.S. SHAREHOLDERS
The rules governing U.S. Federal income taxation of non-U.S. shareholders
(as defined below) are complex, and the following discussion is intended only
as a summary of such rules. Prospective non-U.S. shareholders should consult
with their tax advisors to determine the impact of U.S. Federal, state, and
local income tax laws on an investment in the REIT, including any reporting
requirements, as well as the tax treatment of such an investment under their
home country laws. For purposes of this discussion, a non-U.S. shareholder is
a holder of 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
31
<PAGE>
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 Common Stock is held as a "capital asset" under
the Code.
Distributions to a non-U.S. shareholder 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. shareholder'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 shareholder's adjusted basis in the Common
Stock. To the extent that such distributions exceed the adjusted basis of a
non-U.S. shareholder's Common Stock, such distributions will generally be
subject to tax if such shareholder 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 is subsequently determined that such
distribution was, in fact, in excess of current and accumulated earnings and
profits of the Company, unless the non-U.S. shareholder 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. shareholder 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. shareholders (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 shareholder 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. shareholder's
FIRPTA tax liability.
Gain recognized by a non-U.S. shareholder 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 directly or indirectly by non-U.S. persons. Because only a
minority of the Shareholders are non-U.S. shareholders, the Company expects to
qualify as a "domestically controlled REIT." Accordingly, a non-U.S.
shareholder 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 shareholder, such holder is not present in the United
States for 183 days or more during the year of sale and certain other
requirements are met.
Under temporary United States Treasury regulations, United States
information reporting requirements and backup withholding tax will generally
not apply to dividends paid on the Common Stock to a non-U.S. shareholder 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. shareholder status under penalties of perjury or
otherwise establishes an exemption. Information reporting requirements (but
not backup withholding) will also apply to payments of the proceeds of sales
of the Securities by foreign offices of United States brokers, or foreign
brokers with certain types of relationships to the United States, unless the
broker has documentary evidence in its records that the holder is a non-U.S.
shareholder 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.
shareholder's U.S. Federal income tax liability, provided that the required
information is furnished to the IRS.
32
<PAGE>
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.
TAXATION OF HOLDERS OF PREFERRED STOCK, EQUITY STOCK, DEPOSITARY SHARES AND
WARRANTS
If the Company offers one or more series of Preferred Stock, Equity Stock,
Depositary Shares or Warrants, there may be tax consequences for the holders
of such Securities not discussed herein. For a discussion of any such
additional consequences, see the applicable Prospectus Supplement.
STATE AND LOCAL TAXES
The tax treatment of the Company and the Shareholders in states having
taxing jurisdiction over them may differ from the federal income tax
treatment. Accordingly, no discussion of state taxation of the Company and the
Shareholders is provided nor is any representation made as to the tax status
of the Company in such states. All investors should consult their tax advisors
as to the treatment of the Company under the respective state tax laws
applicable to them.
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 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
33
<PAGE>
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.
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.
LEGAL OPINIONS
David Goldberg, senior vice president and general counsel of the Company,
has delivered an opinion to the effect that the securities offered by this
Prospectus will be validly issued, fully paid and nonassessable. Hogan &
Hartson L.L.P., Washington, D.C., has delivered an opinion as to the status of
the Company as a REIT. Mr. Goldberg owns 74,500 shares of Common Stock, 1,000
shares of convertible preferred stock and 600 shares of Senior Preferred
Stock, and has options to acquire an additional 157,500 shares of Common
Stock. See "Certain Federal Income Tax Considerations."
EXPERTS
The consolidated financial statements of the Company for the year ended
December 31, 1995 appearing in the Company's Annual Report on Form 10-K, as
amended by a Form 10-K/A (Amendment No. 3) dated May 15, 1996, and the
combined summary of historical information relating to operating revenues and
specified expenses-- certain properties (the "Combined Summary") for the
properties and periods indicated in Note 1 to such Combined Summary, appearing
in the Company's Current Report on Form 8-K dated September 6, 1996 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 the Company's
Current Report on Form 8-K dated September 6, 1996 and incorporated herein by
reference. Such consolidated financial statements and Combined Summary are
incorporated herein by reference in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
34
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS SUPPLE-
MENT AND THE ACCOMPANYING PROSPECTUS, AND, IF GIVEN OR MADE, ANY SUCH INFORMA-
TION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE COMPANY OR ANY UNDERWRITER, DEALER OR AGENT. THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLIC-
ITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY BY ANYONE IN
ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO
OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PRO-
SPECTUS 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.
---------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Use of Proceeds ........................................................... S-2
Description of Preferred Stock and Depositary Shares....................... S-3
Federal Income Tax Considerations.......................................... S-9
Underwriting............................................................... S-12
Legal Opinions ............................................................ S-13
Experts.................................................................... S-13
PROSPECTUS
Available Information...................................................... 2
Incorporation of Certain Documents by Reference............................ 2
The Company................................................................ 3
Risk Factors............................................................... 4
Use of Proceeds............................................................ 9
Ratio of Earnings to Fixed Charges......................................... 9
Description of Common Stock and Class B Common Stock....................... 9
Description of Preferred Stock............................................. 12
Description of the Depositary Shares....................................... 17
Description of Equity Stock................................................ 20
Description of Warrants.................................................... 22
Certain Federal Income Tax Considerations.................................. 23
Plan of Distribution....................................................... 33
Legal Opinions............................................................. 34
Experts.................................................................... 34
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
6,000,000 SHARES
PUBLIC STORAGE, INC.
Depositary Shares Each Representing 1/1,000 of a Share of
8% Cumulative Preferred Stock, Series J
[LOGO OF PUBLIC STORAGE(R)]
---------------
PROSPECTUS SUPPLEMENT
August 25, 1997
---------------
SMITH BARNEY INC.
DONALDSON LUFKIN & JENRETTE
SECURITIES CORPORATION
MORGAN STANLEY DEAN WITTER
PAINEWEBBER INCORPORATED
ROBERTSON, STEPHENS & COMPANY
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
