<PAGE>
FILED PURSUANT TO RULE 424(b)(5)
REGISTRATION NO. 333-81041
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED JULY 8, 1999.
[PUBLIC STORAGE LOGO APPEARS HERE]
Public Storage, Inc.
1,200,000 Depositary Shares
Each Representing 1/1,000 of a Share of Equity Stock, Series A
------------
The depositary shares, each representing 1/1,000 of a share of our Equity
Stock, Series A, are traded on the New York Stock Exchange under the symbol
"PSA.A." The last reported sale price of the depositary shares on the New York
Stock Exchange on November 29, 2000 was $23.56 per share.
The underwriters have an option to purchase a maximum of 180,000 additional
shares from us to cover over-allotments of shares.
Cash distributions on the depositary shares will be payable when and if
declared on our common stock at the rate of five times the dividends on our
common stock per depositary share, but not more than $2.45 per depositary share
per year. We intend to pay distributions on the depositary shares offered by
this prospectus supplement quarterly, beginning on December 29, 2000.
The depositary shares have no preference over our common stock either as to
dividends or in liquidation.
We may redeem any or all of the depositary shares on or after March 31, 2005
at $24.50 per share. Before March 31, 2005, we may only redeem depositary
shares to preserve our status as a real estate investment trust.
The amount payable per depositary share upon liquidation is the same as the
amount payable per share of our common stock, but cannot exceed $24.50 per
depositary share.
The depositary shares are not convertible into our common stock unless we
fail to preserve our status as a real estate investment trust.
Investing in our depositary shares involves risks. See "Risk Factors" on page
1 of the accompanying prospectus.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Company
-------- ------------- -----------
<S> <C> <C> <C>
Per Depositary Share...................... $23.25 $1.00 $22.25
Total..................................... $27,900,000 $1,200,000 $26,700,000
</TABLE>
Delivery of the depositary shares will be made on or about December 5, 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus supplement or the prospectus to which it relates is truthful or
complete. Any representation to the contrary is a criminal offense.
Credit Suisse First Boston
Deutsche Banc Alex. Brown
A.G. Edwards & Sons, Inc.
First Union Securities, Inc.
The date of this prospectus supplement is November 29, 2000.
<PAGE>
----------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
Page
----
<S> <C>
About this Prospectus Supplement........................................... S-2
Forward-Looking Statements................................................. S-2
The Company................................................................ S-3
Use of Proceeds ........................................................... S-4
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Description of Equity Stock and Depositary Shares.......................... S-5
Federal Income Tax Consequences............................................ S-11
Underwriting............................................................... S-14
Notice to Canadian Residents............................................... S-15
Legal Opinions ............................................................ S-16
</TABLE>
PROSPECTUS
<TABLE>
<S> <C>
Risk Factors................................................................ 1
About this Prospectus....................................................... 3
Where You Can Find More Information......................................... 4
Forward-Looking Statements.................................................. 5
The Company................................................................. 5
Use of Proceeds............................................................. 6
Ratio of Earnings to Fixed Charges.......................................... 6
Description of Common Stock and Class B Common Stock........................ 6
</TABLE>
<TABLE>
<S> <C>
Description of Preferred Stock.............................................. 9
Description of Equity Stock................................................. 13
Description of the Depositary Shares........................................ 16
Description of Warrants..................................................... 19
Federal Income Tax Consequences............................................. 20
Plan of Distribution........................................................ 32
Legal Opinions.............................................................. 34
Experts..................................................................... 34
</TABLE>
----------------
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is
legal to sell these securities. The information in this document may only be
accurate on the date of this document.
ABOUT THIS PROSPECTUS SUPPLEMENT
This document is in two parts. The first is this prospectus supplement,
which describes the specific terms of this depositary shares offering. The
second part, the accompanying prospectus, gives more general information,
some of which may not apply to this offering.
If this description of the offering varies between this prospectus
supplement and the accompanying prospectus, you should rely on the
information in this prospectus supplement.
FORWARD-LOOKING STATEMENTS
This prospectus supplement and the accompanying prospectus, including
documents incorporated by reference, contain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-
looking statements are inherently subject to risk and uncertainties, many of
which cannot be predicted with accuracy and some of which might not even be
anticipated. Future events and actual results, financial and otherwise, may
differ materially from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in "Risk Factors" in the accompanying prospectus
and in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in our most recent annual and quarterly reports.
S-2
<PAGE>
THE COMPANY
We are a fully integrated, self-administered and self-managed real estate
investment trust that acquires, develops, owns and operates self-storage
facilities which offer self-storage spaces for lease for personal and business
use. We are the largest owner and operator of self-storage facilities in the
United States with equity interests (through direct ownership, as well as
general and limited partnership interests), as of September 30, 2000, in 1,351
storage facilities located in 37 states. We also have a significant ownership
in PS Business Parks, Inc., a REIT that, as of September 30, 2000, had equity
interests in 123 commercial properties located in nine states.
The following table reflects the geographic diversification of our storage
facilities:
<TABLE>
<CAPTION>
At September 30, 2000
------------------------------
Number of Net Rentable Square
Facilities Feet (in thousands)
---------- -------------------
<S> <C> <C>
California:
Southern...................................... 158 10,022
Northern...................................... 138 7,704
Texas........................................... 160 10,464
Florida......................................... 135 7,879
Illinois........................................ 92 5,580
Georgia......................................... 62 3,626
Colorado........................................ 50 3,137
Missouri........................................ 36 2,011
Washington...................................... 39 2,466
New Jersey...................................... 37 2,178
Virginia........................................ 37 2,247
Maryland........................................ 36 2,043
New York........................................ 32 1,885
Ohio............................................ 31 1,899
Oregon.......................................... 25 1,171
Tennessee....................................... 25 1,494
South Carolina.................................. 24 1,082
North Carolina.................................. 23 1,202
Kansas.......................................... 22 1,278
Nevada.......................................... 22 1,409
Alabama......................................... 21 838
Indiana......................................... 18 1,036
Pennsylvania.................................... 18 1,224
Other states (15 states)........................ 110 6,667
----- ------
Totals........................................ 1,351 80,542
===== ======
</TABLE>
S-3
<PAGE>
USE OF PROCEEDS
We estimate net proceeds from this offering of approximately $26,600,000,
after all anticipated issuance costs (approximately $30,605,000 if the
underwriters' over-allotment option is exercised in full). We intend to use the
net proceeds from this offering to fund acquisitions of mini-warehouses,
purchases of interests in real estate entities, development activity, general
corporate purposes and additional investments in the portable self-storage
business. For additional information on this business, you should read our most
recent annual and quarterly reports.
Pending investment or repayment of debt, 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 our discretion.
S-4
<PAGE>
DESCRIPTION OF EQUITY STOCK AND DEPOSITARY SHARES
General
Under our restated articles of incorporation, our board of directors is
authorized without further shareholder action to provide for the issuance of up
to 200,000,000 shares of equity stock, in one or more series, with such rights
as are set forth in resolutions providing for the issue of equity stock adopted
by our board of directors. At October 31, 2000, we had outstanding 4,518,897
shares of equity stock.
Our board of directors has adopted resolutions creating the Equity Stock,
Series A (the "Equity Stock"). At October 31, 2000, we had outstanding
4,353.102 shares of Equity Stock represented by 4,353,102 depositary shares
(the "Depositary Shares"), each representing 1/1,000 of a share of Equity
Stock. The Depositary Shares are traded on the New York Stock Exchange under
the symbol "PSA.A." The Equity Stock is fully paid and nonassessable, is not
subject to any sinking fund or other obligation of Public Storage, Inc. (the
"Company") to repurchase or retire the Equity Stock, and has no preemptive
rights.
BankBoston, N.A. is the transfer agent and dividend disbursing agent for the
Equity Stock and the Depositary Shares.
The shares of Equity Stock underlying the Depositary Shares offered by this
prospectus supplement will be deposited with BankBoston, N.A., as depositary,
under a deposit agreement among the Company, the depositary and the holders
from time to time of the depositary receipts issued by the depositary under the
deposit agreement. These depositary receipts will evidence the Depositary
Shares offered by this prospectus supplement. 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 Equity Stock
represented by the Depositary Share (including dividend, voting, redemption and
liquidation rights).
Immediately following our issuance of the Equity Stock underlying the
Depositary Shares offered by this prospectus supplement, we will deposit the
Equity Stock with the depositary, which will then issue and deliver the
depositary receipts to us. We will, in turn, deliver the depositary receipts to
the underwriters. Depositary receipts will be issued evidencing only whole
Depositary Shares.
Ownership Restrictions
For a discussion of ownership limitations that apply to the Equity Stock, see
"Description of Common Stock and Class B Common Stock" in the accompanying
prospectus.
Equity Stock
The following is a brief description of the terms of the Equity 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 Equity 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.
Ranking
With respect to the payment of dividends and amounts upon liquidation,
dissolution or winding up of the Company, the Equity Stock will rank junior to
our outstanding preferred stock and any other shares of preferred stock issued
by us, and will rank on a parity with our outstanding common stock and any
other equity stock issued by us that ranks on a parity with our outstanding
Common Stock, par value $.10 ("Common Stock").
S-5
<PAGE>
Dividends
Each holder of shares of Equity Stock will receive, when and as declared by
our board of directors from our assets legally available for payment, cash
dividends payable when and if paid on our Common Stock at the rate of five
thousand times the per share dividend or distribution on our Common Stock
(equivalent to five times in the case of a Depositary Share), but not more than
$2,450 per year per share of Equity Stock (equivalent to $2.45 per year per
Depositary Share), subject to adjustment in certain circumstances. Dividends on
the shares of Equity Stock will be non-cumulative and will be payable to
holders of record as they appear on our stock register on the respective record
dates, not less than 15 or more than 45 days preceding the respective payment
dates, as shall be fixed by our board of directors. We intend to pay dividends
on the Depositary Shares offered by this prospectus supplement quarterly
beginning on December 29, 2000. After full dividends on the Equity Stock have
been paid or declared and funds set aside for payment for the then current
year, the holders of shares of Equity Stock will not receive any further
dividends with respect to that year.
Unless dividends on all our outstanding preferred stock and any other shares
of preferred stock issued by us have been or contemporaneously are paid in full
for the latest dividend period ending contemporaneously with or prior to the
end of the period for which a dividend is to be paid on the shares of Equity
Stock and for all prior dividend periods, we will pay no dividend or other
distribution on the shares of Equity Stock for that period.
Unless full dividends on our outstanding preferred stock and any other shares
of preferred stock issued by us have been paid for all past dividend periods,
we and our subsidiaries may not redeem, repurchase or otherwise acquire for any
consideration (nor may we or they pay or make available any moneys for a
sinking fund for the redemption of) any shares of Equity Stock except by
conversion into or exchange for shares of capital stock issued by us ranking
junior to the preferred stock as to dividends and upon liquidation.
Our revolving credit facility with a commercial bank restricts our 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. Our management believes that this restriction will not impede our
ability to pay in full the dividends on the Equity Stock.
Conversion Rights
Except as indicated below, the Equity Stock will not be convertible into
shares of any other class or series of our capital stock.
If we fail to qualify as a REIT for federal income tax purposes, the Equity
Stock is convertible at any time thereafter at the option of the holder into
shares of our Common Stock at a conversion rate of approximately 956 shares of
our Common Stock for each share of Equity Stock (equivalent to approximately
.956 shares of our Common Stock for each Depositary Share), subject to
adjustment in certain circumstances.
Liquidation Rights
If we voluntarily or involuntarily liquidate, dissolve or wind up our
affairs, holders of Equity Stock will not be entitled to receive any payment in
respect of their shares until we pay the full respective liquidation
preferences in respect of our outstanding preferred stock and any other shares
of preferred stock issued by us.
After we pay the full respective liquidation preferences in respect of all
preferred stock, holders of the Equity Stock will participate with holders of
our Common Stock and holders of our similarly ranked equity stock in our
remaining assets on the basis that a share of Equity Stock receives 1,000 times
the amount allocated in respect of a share of Common Stock (equivalent to one
time in the case of a Depositary Share), but
S-6
<PAGE>
not to exceed $24,500 per share of Equity Stock (equivalent to $24.50 per
Depositary Share), subject to adjustment in certain circumstances.
For purposes of liquidation rights, our reorganization or consolidation or
merger with or into any other corporation or corporations or a sale of all or
substantially all of our assets is not a liquidation, dissolution or winding
up.
Redemption
We may not redeem the shares of Equity Stock prior to March 31, 2005, except
in certain circumstances relating to our qualification as a REIT. On and after
March 31, 2005, at any time or from time to time, we may redeem the shares of
Equity Stock in whole or in part at our option at a cash redemption price of
$24,500 per share of Equity Stock (equivalent to $24.50 per Depositary Share),
subject to adjustment. Except in case of a redemption to preserve our status as
a REIT, the redemption price of the Equity Stock may be paid solely from the
sale proceeds of common stock or from retained cash and not from any other
source. For purposes of the preceding sentence, "common stock" means our Common
Stock, par value $.10, equity stock or other rights or options to purchase any
of the foregoing (other than debt securities or preferred stock convertible or
exchangeable for common stock or equity stock).
If we redeem shares of Equity Stock between a dividend record date and a
dividend payment date, the cash redemption price will be $24,500 per share of
Equity Stock (equivalent to $24.50 per Depositary Share) plus the amount of the
declared and unpaid dividend.
If fewer than all the outstanding shares of Equity Stock are to be redeemed,
the number of shares to be redeemed will be determined by our board of
directors. The shares will be redeemed pro rata from the holders of record of
the shares in proportion to the number of shares held by holders (with
adjustments to avoid redemption of fractional shares) or by lot in a manner
determined by our board of directors.
Notice of redemption of the Equity 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 us, 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 Equity Stock to be redeemed at their respective
addresses as they appear on our stock transfer records. Each notice will state:
(1) the redemption date; (2) the number of shares of Equity Stock to be
redeemed; (3) the redemption price per share of Equity Stock; (4) the place or
places where certificates for the Equity Stock are to be surrendered for
payment of the redemption price; and (5) that dividends on the shares of Equity
Stock to be redeemed will cease to accrue on such redemption date. If fewer
than all the shares of Equity Stock held by any holder are to be redeemed, the
notice mailed to the holder will also specify the number of shares of Equity
Stock to be redeemed from the holder. In order to facilitate the redemption of
shares of Equity Stock, our board of directors may fix a record date for the
determination of shares of Equity Stock to be redeemed of not less than 30 nor
more than 60 days prior to the date fixed for redemption.
Notice having been given as provided above, from and after the date specified
for redemption, unless we default in providing funds for the payment of the
redemption price on that date, all dividends on the Equity Stock called for
redemption will cease. From and after the redemption date, unless we default,
all rights of the holders of the Equity Stock as our shareholders, except the
right to receive the redemption price (but without interest), will cease. Upon
surrender in accordance with such notice of the certificates representing these
shares (properly endorsed or assigned for transfer, if our board of directors
so requires and the notice so states), the redemption price set forth above
will be paid out of our funds. If fewer than all the shares represented by any
certificate are redeemed, a new certificate will be issued representing the
unredeemed shares without cost to the holder.
S-7
<PAGE>
Subject to applicable law, we may, at any time and from time to time,
purchase any Depositary Shares in the open market, by tender or by private
agreement.
Adjustments
If we subdivide or combine the Common Stock into a greater or smaller number
of shares or pay a dividend in shares of Common Stock, the outstanding shares
of Equity Stock will: (1) be subdivided or combined in the same proportion as
the Common Stock; or (2) receive the same proportionate dividend in shares of
Equity Stock. In that case, however, the per share dollar amounts specified for
computing dividends per quarter or year, the maximum liquidation distribution
and the redemption price will be adjusted so that the respective total for all
outstanding shares of the Equity Stock is the same after as it was before the
event causing the adjustments.
Voting Rights
Holders of Equity Stock are entitled to vote on all matters presented to
holders of the Common Stock for a vote and vote together as one class with
holders of the Common Stock and other series of equity stock that share voting
rights with the Equity Stock. Each outstanding share of Equity Stock entitles
the holder to 100 votes (equivalent to one-tenth ( 1/10) of a vote per
Depositary Share), except that under California law he or she, together with
holders of the Common Stock and other series of equity stock that share voting
rights with the Equity Stock, has cumulative voting rights in electing our
board of directors. Cumulative voting means that each holder of Equity Stock is
entitled to cast as many votes as there are directors to be elected multiplied
by 100 times the number of shares of Equity Stock registered in its name
(equivalent to one-tenth ( 1/10) the number of Depositary Shares registered in
his or her name). A holder of Equity 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.
No consent or approval of the holders of shares of the Equity Stock will be
required for the issuance of any shares of any class or series that rank senior
to, junior to or on a parity with the Equity Stock as to payment of dividends
and distribution of assets, including other shares of Equity 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), 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 Equity 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 us for the Equity 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 us) that it is not feasible
to make such distribution, in which case the depositary may (with our approval)
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.
S-8
<PAGE>
Conversion Rights
If we fail to qualify as a REIT for federal income tax purposes, the
Depositary Shares will be convertible at any time thereafter at the option of
the holder into shares of our Common Stock on the same terms and conditions as
the Equity Stock held by the depositary, except that the conversion rate for
the Depositary Shares will be equal to the conversion rate for the Equity Stock
divided by 1,000 (equivalent to approximately .956 shares of our Common Stock
for each Depositary Share), subject to adjustment in certain circumstances.
Cash will be paid in lieu of fractional shares of Common Stock.
Liquidation Preference
In the event of our liquidation, dissolution or winding up of our affairs,
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
Equity Stock.
Redemption
Whenever we redeem any Equity Stock held by the depositary, the depositary
will redeem as of the same redemption date the number of Depositary Shares
representing the Equity 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 our notice of redemption and will mail the notice of
redemption promptly upon receipt of such notice from us and not less than 30
nor more than 60 days prior to the date fixed for redemption of the Equity
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 will 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
Equity 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 the meeting. Each 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 Equity
Stock represented by the record holder's Depositary Shares. The depositary will
endeavor, insofar as practicable, to vote the Equity Stock represented by such
Depositary Shares in accordance with the instructions, and we 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 Equity Stock to the extent that it does not receive specific instructions
from the holders of depositary receipts.
Withdrawal of Equity 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
Equity Stock and all money and other property, if any, represented by such
Depositary Shares. Partial shares of Equity 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 Equity Stock to be withdrawn, the depositary will deliver to
such holder at the same time a new depositary receipt evidencing the excess
number of Depositary Shares. Holders of Equity Stock thus withdrawn will not be
entitled to deposit those 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 us and the depositary.
S-9
<PAGE>
However, any amendment that materially and adversely alters the rights of the
holders (other than any change in fees) of depositary receipts 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 the
Depositary Shares with instructions to the depositary to deliver to the holder
the Equity 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 us or the depositary only if: (1) all
outstanding Depositary Shares have been redeemed; or (2) there has been a final
distribution in respect of the Equity Stock in connection with our liquidation,
dissolution or winding up and the final distribution has been made to all the
holders of Depositary Shares.
Charges of Depositary
We will pay all transfer and other taxes and governmental charges arising
solely from the existence of the depositary arrangements. We will pay charges
of the depositary in connection with the initial deposit of the Equity Stock
and the initial issuance of the Depositary Shares, and redemption of the Equity
Stock and all withdrawals of Equity Stock by owners of Depositary Shares.
Holders of depositary receipts will pay all other 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 us which are delivered to the depositary and which we
are required to furnish to the holders of the Equity Stock. In addition, the
depositary will make available for inspection by holders of depositary receipts
at the principal office of the depositary, and at any other places as it may
from time to time deem advisable, any reports and communications which are
received by the depositary as the holder of Equity 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 be liable if it is
prevented or delayed by law or any circumstance beyond its control in
performing its obligations under the deposit agreement. The Company and the
depositary are not obligated to prosecute or defend any legal proceeding in
respect of any Depositary Shares, depositary receipts or Equity 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 us notice of its
election to do so, and we 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. The 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.
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<PAGE>
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain federal income tax considerations
pertaining to the acquisition, ownership and disposition of the Depositary
Shares. The following summary relates solely to the tax considerations relevant
specifically to the acquisition, ownership and disposition of Depositary
Shares. For a discussion of the taxation of the Company and the tax
considerations relevant to shareholders generally, see "Federal Income Tax
Consequences--Taxation of the Company" and "--Taxation of U.S. Shareholders
Holding Common Stock" in the accompanying prospectus. 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-
dealers, 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. We have 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 are urged
to consult, and must depend on, their tax advisors regarding the federal,
state, local, foreign and other tax consequences of holding and disposing of
the Depositary Shares.
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 Equity 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 the Equity Stock. See "Description of
the Depositary Shares" and "Federal Income Tax Consequences" in the
accompanying prospectus. Withdrawals of Equity Stock for Depositary Shares are
not taxable events for federal income tax purposes.
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 Consequences--Taxation of the Company" and "--Taxation of
U.S. Shareholders Holding Common Stock" in the accompanying prospectus.
Sale or Exchange of Depositary Shares. Upon the sale, exchange or other
disposition 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, exchange or other
disposition of the Depositary Shares and such holder's adjusted tax basis in
the Depositary Shares (provided the Depositary Shares are held as a capital
asset). Gain recognized by a shareholder who is an individual, estate or trust
upon a sale, exchange or other disposition of Depositary Shares that have been
held for more than 12 months will generally be subject to tax at a rate not to
exceed 20%. Gain recognized from the sale, exchange or other disposition of
Depositary Shares that have been held for 12 months or less will be subject to
tax at ordinary income tax rates. In addition, capital gain recognized by a
corporate shareholder will continue to be subject to tax at the ordinary income
tax rates applicable to corporations. Any loss on a sale, exchange or other
disposition 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 Depositary Shares. For a discussion of capital
gain taxation see "Federal Income Tax Consequences--Taxation of U.S.
Shareholders Holding Common Stock--Taxpayer Relief Act and IRS Restructuring
Act Changes to Capital Gain Taxation" in the accompanying prospectus.
Redemption of Depositary Shares. Whenever the Company redeems any Equity
Stock held by the depositary, the depositary will redeem as of the same
redemption date the number of Depositary Shares representing the Equity 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 Equity 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
S-11
<PAGE>
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 Internal Revenue Code of
1986, as amended (the "Code"), (ii) is "substantially disproportionate" with
respect to the holder under Section 302(b)(2) of the Code, or (iii) 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, 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.
If a particular holder of Depositary Shares owns (actually or constructively)
no shares of Common Stock or preferred stock of the Company or an insubstantial
percentage of the outstanding shares of Common Stock, preferred stock or Equity
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 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 "Federal
Income Tax Consequences--Taxation of U.S. Shareholders Holding 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.
Legislation Affecting REITs
On December 17, 1999, the Work Incentives Improvement Act of 1999 (the
"Act"), which includes certain provisions affecting REITs, was enacted. The
REIT provisions of the Act generally are effective for taxable years beginning
after December 31, 2000. The Act is intended to ease the current restrictions
on a REIT's ability to own the stock of taxable companies. The Act will allow
REITs to own up to 100% of the stock of companies that have made a joint
election with the REIT to be treated as "taxable REIT subsidiaries" ("TRSs"). A
TRS will be subject to federal income tax on income as a regular corporation.
Under prior law, a REIT generally may not own more than 10% of the voting
securities of other issuers, such as the Lock/Box Company (see "Federal Income
Tax Consequences--Taxation of the Company--Asset Tests" in the accompanying
prospectus). Under the Act, the prior law 10% voting securities test is
expanded so that REITs also will be prohibited from owning more than 10% of the
value of outstanding securities of any one corporate issuer, except for
companies that elect to be treated as TRSs or companies that qualify for
certain grandfather provisions in the Act.
An important effect of the Act is that TRSs will be permitted to offer
noncustomary services to the tenants of the REIT (such services could be
provided under prior law only by "independent contractors" from which the REIT
cannot earn any income). TRSs also will be able to engage in other income
producing activities that typically have been undertaken by REITs only through
entities in which a REIT could have a substantial economic interest, but was
limited to a 10% or less voting interest (such as the Lock/Box Company). The
Act includes certain limitations that prevent income shifting between a REIT
and its TRSs (including, for example, interest payments in excess of certain
specified levels), in an effort to ensure that TRSs in fact are taxable on the
income that they earn. (The Act is designed to force REITs to subject their
taxable subsidiaries to the
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<PAGE>
income shifting limitations by prohibiting a REIT from owning more than 10% in
either vote or value of the securities of a corporate issuer that is not a
TRS.) In addition, under prior law, a REIT could not own securities of any
single issuer with a value in excess of 5% of the value of all assets of the
REIT. The Act also relaxes this limitation, so that a REIT may own a TRS (or
TRSs), so long as (1) the aggregate value of the TRSs does not exceed 20% of
the value of all assets of the REIT and (2) the aggregate value of the TRSs,
when combined with all other non-REIT assets, does not exceed 25% of the value
of all assets of the REIT. The Company currently is considering whether it will
request that the Lock/Box Company join with the Company to make the TRS
election.
Other provisions of the Act that are targeted at REITs include: (1) a
reduction in the size of a REIT's required annual dividends-paid deduction to
90% of REIT taxable income (from the prior 95%) (a change that seems likely to
have limited effect, given that REITs typically seek to have a dividends-paid
deduction equal to 100% of their income, so as to avoid paying taxes on any
undistributed portion); (2) provisions directed at other segments of the REIT
industry, principally the lodging and health-care sectors; and (3) various
other technical changes.
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<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated November 29, 2000, we have agreed to sell to the underwriters
named below the following respective number of Depositary Shares:
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation............................. 552,000
Deutsche Bank Securities Inc. ..................................... 216,000
A.G. Edwards & Sons, Inc. ......................................... 216,000
First Union Securities, Inc. ...................................... 216,000
---------
Total............................................................ 1,200,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the Depositary Shares in the offering if any are purchased, other
than those Depositary Shares covered by the over-allotment option described
below. The underwriting agreement also provides that if an underwriter
defaults, the purchase commitments of non-defaulting underwriters may be
increased or the offering may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro rata
basis up to 180,000 additional Depositary Shares at the initial public offering
price less the underwriting discounts and commissions. The option may be
exercised only to cover any over-allotments of Depositary Shares.
The underwriters propose to offer the Depositary Shares initially at the
public offering price on the cover page of this prospectus supplement and to
selling group members at that price less a selling concession of $0.60 per
share. The underwriters and selling group members may allow a discount of $0.10
per Depositary Share on sales to other broker/dealers. After the public
offering of Depositary Shares, the underwriters may change the public offering
price and concession and discount to broker/dealers.
The Depositary Shares are traded on the NYSE under the symbol "PSA.A."
The following table summarizes the compensation and estimated expenses we
will pay:
<TABLE>
<CAPTION>
Per Share Total
----------------------------- -----------------------------
Without With Without With
Over-allotment Over-allotment Over-allotment Over-allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting Discounts
and
Commissions paid by us.. $1.00 $1.00 $1,200,000 $1,380,000
Expenses payable by us.. $0.08 $0.07 $ 100,000 $ 100,000
</TABLE>
In connection with this offering, all of our executive officers and directors
entered into lock-up agreements expiring 45 days from the date of this
prospectus supplement covering all Depositary Shares and shares of Equity Stock
held by each of them. In addition, we entered into a lock-up agreement expiring
45 days from the date of this prospectus supplement covering all Depositary
Shares and shares of Equity Stock. Except under certain circumstances, we and
these persons may sell these securities only with written approval of Credit
Suisse First Boston Corporation during such period.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or to contribute to payments that the underwriters may be
required to make in that respect.
Some of the underwriters have from time to time conducted investment banking
services on our behalf for which they have received customary fees.
S-14
<PAGE>
In connection with the offering the underwriters may engage in stabilizing
transactions, over-allotment transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934, as amended (the "Exchange Act").
. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
. Over-allotment involves sales by the underwriters of shares in excess of
the number of Depositary Shares the underwriters are obligated to
purchase, which creates a syndicate short position. The short position
may be either a covered short position or a naked short position. In a
covered short position, the number of Depositary Shares over-allotted by
the underwriters is not greater than the number of Depositary Shares that
they may purchase in the over-allotment option. In a naked short
position, the Depositary Shares involved is greater than the number of
Depositary Shares in the over-allotment option. The underwriters may
close out any short position by either exercising their over-allotment
option and/or purchasing Depositary Shares in the open market.
. Syndicate covering transactions involve purchases of the Depositary
Shares in the open market after the distribution has been completed in
order to cover syndicate short positions. In determining the source of
Depositary Shares to close out the short position, the underwriters will
consider, among other things, the price of Depositary Shares available
for purchase in the open market as compared to the price at which they
may purchase Depositary Shares through the over-allotment option. If the
underwriters sell more Depositary Shares than could be covered by the
over-allotment option, a naked short position, the position can only be
closed out by buying Depositary Shares in the open market. A naked short
position is more likely to be created if the underwriters are concerned
that there could be downward pressure on the price of the Depositary
Shares in the open market after pricing that could adversely affect
investors who purchase in the offering.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the Depositary Shares originally sold by the
syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may have the effect of raising or maintaining the market price of our
Depositary Shares or preventing or retarding a decline in the market price of
the Depositary Shares. As a result the price of our Depositary Shares may be
higher than the price that might otherwise exist in the open market. These
transactions may be effected on The New York Stock Exchange or otherwise and if
commenced, may be discontinued at any time.
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the Depositary Shares in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of Depositary Shares are made. Any resale of the Depositary Shares in
Canada must be made under applicable securities laws which will vary depending
on the relevant jurisdiction, and which may require resales to be made under
available statutory exemptions or under a discretionary exemption granted by
the applicable Canadian securities regulatory authority. Purchasers are advised
to seek legal advice prior to any resale of the Depositary Shares.
S-15
<PAGE>
Representations of Purchasers
By purchasing Depositary Shares in Canada and accepting a purchase
confirmation a purchaser is representing to us and the dealer from whom the
purchase confirmation is received that
. the purchaser is entitled under applicable provincial securities laws to
purchase the Depositary Shares without the benefit of a prospectus
qualified under those securities laws,
. where required by law, that the purchaser is purchasing as principal and
not as agent, and
. the purchaser has reviewed the text above under Resale Restrictions.
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or such persons. All or a substantial portion of the assets of
the issuer and such persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or such persons
in Canada or to enforce a judgment obtained in Canadian courts against such
issuer or persons outside of Canada.
Notice to British Columbia Residents
A purchaser of Depositary Shares to whom the Securities Act (British
Columbia) applies is advised that the purchaser is required to file with the
British Columbia Securities Commission a report within ten days of the sale of
any Depositary Shares acquired by the purchaser pursuant to this offering. The
report must be in the form attached to British Columbia Securities Commission
Blanket Order BOR #95/17, a copy of which may be obtained from us. Only one
report must be filed for Depositary Shares acquired on the same date and under
the same prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of Depositary Shares should consult their own legal and
tax advisors with respect to the tax consequences of an investment in the
Depositary Shares in their particular circumstances and about the eligibility
of the Depositary Shares for investment by the purchaser under relevant
Canadian legislation.
LEGAL OPINIONS
Certain legal matters relating to the Equity Stock and the Depositary Shares
will be passed upon for us by David Goldberg, our senior vice-president and
general counsel, 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 our status as a REIT. See "Federal Income Tax
Consequences" in the accompanying prospectus. Mr. Goldberg owns 111,214 shares
of Common Stock, 3,396 Depositary Shares, 600 shares of preferred stock, and
has options to acquire an additional 211,167 shares of Common Stock. Skadden,
Arps, Slate, Meagher & Flom LLP has from time to time represented us and our
affiliates on unrelated matters.
S-16
<PAGE>
Prospectus
$800,000,000
Public Storage, Inc.
By this prospectus, we may offer-
Common Stock
Preferred Stock
Equity Stock
Depositary Shares
Warrants
We will provide the
specific terms of these
securities in
supplements to this
prospectus. You should
read this prospectus and
the supplements
carefully before you
invest.
Please read "Risk Factors" beginning on page 1 for a discussion of material
risks you should consider before you invest.
Our common stock is listed and traded on the New York Stock Exchange and the
Pacific Exchange under the symbol "PSA."
-------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
regulator has approved or disapproved the securities to be issued under this
prospectus or determined if this prospectus is accurate or adequate. Any
representation to the contrary is a criminal offense.
-------------------------------------------------------------------------------
This prospectus may not be used to sell securities unless accompanied by a
prospectus supplement.
July 8, 1999
<PAGE>
You should rely only on the information contained in or incorporated by
reference in this prospectus and any accompanying prospectus supplement. We
have not authorized anyone to provide you with different information. We are
not making an offer to sell these securities in any state where the offer is
not permitted. The information contained in or incorporated by reference in
this prospectus is accurate only as of the date on the front of this
prospectus. Our business, financial condition, results of operations and
prospects may have changed since that date.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Risk Factors
The Hughes family could control us...................................... 1
Provisions in our organizational documents may prevent changes in
control................................................................ 1
We would incur adverse tax consequences if we fail to qualify as a
REIT................................................................... 1
We would incur a corporate level tax if we sell certain assets.......... 1
We and our shareholders are subject to financing risks.................. 1
Debt increases risk of loss........................................... 1
Issuing additional shares reduces the interest of existing
shareholders......................................................... 1
Since our business consists primarily of acquiring and operating real
estate, we are subject to real estate operating risks.................. 2
Value of our investments may be reduced by general risks of real
estate ownership..................................................... 2
There is significant competition among mini-warehouses................ 2
We may incur significant environmental costs and liabilities.......... 2
The Hughes family receives the benefit of tenant reinsurance premiums... 3
We have no interest in Canadian mini-warehouses owned by the Hughes
family................................................................. 3
The Hughes family has an interest in our merchandise operations......... 3
Our portable self-storage business has incurred operating losses........ 3
About This Prospectus..................................................... 3
Where You Can Find More Information....................................... 4
Forward-Looking Statements................................................ 5
The Company............................................................... 5
Use of Proceeds........................................................... 6
Ratio of Earnings to Fixed Charges........................................ 6
Description of Common Stock and Class B Common Stock...................... 6
Common Stock............................................................ 6
Ownership Limitations................................................... 7
Class B Common Stock.................................................... 8
Description of Preferred Stock............................................ 9
Outstanding Preferred Stock............................................. 9
Ownership Limitations................................................... 9
Future Series of Preferred Stock........................................ 9
Description of Equity Stock............................................... 13
Ownership Limitations................................................... 14
Terms of Equity Stock................................................... 14
Description of the Depositary Shares...................................... 16
Dividends............................................................... 16
Liquidation Rights...................................................... 17
Redemption.............................................................. 17
Conversion.............................................................. 17
Voting.................................................................. 17
</TABLE>
<PAGE>
TABLE OF CONTENTS--(Continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
Withdrawal of Preferred Stock or Equity Stock........................... 17
Amendment and Termination of Deposit Agreement.......................... 18
Charges of Depositary................................................... 18
Miscellaneous........................................................... 18
Resignation and Removal of Depositary................................... 18
Federal Income Tax Consequences......................................... 19
Description of Warrants................................................... 19
Federal Income Tax Consequences........................................... 20
Taxation of the Company................................................. 20
Taxation of U.S. Shareholders Holding Common Stock...................... 26
Taxation of Non-U.S. Shareholders....................................... 29
Proposed Changes to REIT Qualification Requirements..................... 31
Taxation of Holders of Preferred Stock, Equity Stock, Depositary Shares
and Warrants........................................................... 32
State and Local Taxes................................................... 32
Plan of Distribution...................................................... 32
Legal Opinions............................................................ 34
Experts................................................................... 34
</TABLE>
<PAGE>
RISK FACTORS
Before investing in our securities, you should consider the following risks
and detriments:
The Hughes family could control us.
The Hughes family owns approximately 30% of our outstanding shares of common
stock (approximately 33% upon conversion of our class B common stock).
Consequently, the Hughes family could control matters submitted to a vote of
our shareholders, including electing directors, amending our organizational
documents, dissolving and approving other extraordinary transactions, such as a
takeover attempt.
Provisions in our organizational documents may prevent changes in control.
Restrictions in our organizational documents may further limit changes in
control. Unless our board of directors waives these limitations, no shareholder
may own more than (1) 2.0% of the outstanding shares of our common stock or (2)
9.9% of the outstanding shares of each class or series of our preferred or
equity stock. Our organizational documents in effect provide, however, that the
Hughes family may continue to own the shares of our common stock held at the
time of a 1995 reorganization. These limitations are designed, to the extent
possible, to avoid a concentration of ownership that might jeopardize our
ability to qualify as a real estate investment trust or REIT. These
limitations, however, also make a change of control significantly more
difficult (if not impossible) even if it would be favorable to the interests of
our public shareholders. These provisions will prevent future takeover attempts
not approved by our board of directors even if a majority of our public
shareholders deem it to be in their best interests because they would receive a
premium for their shares over the shares' then market value or for other
reasons. See "Description of Common Stock and Class B Common Stock--Ownership
Limitations."
We would incur adverse tax consequences if we fail to qualify as a REIT.
You will be subject to the risk that we may not qualify as a REIT. As a REIT,
we must distribute at least 95% of our REIT taxable income to our shareholders,
which include not only holders of our common stock but also holders of our
preferred stock. Failure to pay full dividends on the preferred stock would
prevent us from paying dividends on our common stock and could jeopardize our
qualification as a REIT. See "Federal Income Tax Consequences--Taxation of the
Company."
For any taxable year that we fail to qualify as a REIT and the relief
provisions do not apply, we would be taxed at the regular corporate rates on
all of our taxable income, whether or not we make any distributions to our
shareholders. Those taxes would reduce the amount of cash available for
distribution to our shareholders or for reinvestment. As a result, our failure
to qualify during any taxable year as a REIT could have a material adverse
effect upon us and our shareholders. Furthermore, unless certain relief
provisions apply, we would not be eligible to elect REIT status again until the
fifth taxable year that begins after the first year for which we fail to
qualify.
We would incur a corporate level tax if we sell certain assets.
We will generally be subject to a corporate level tax if before November 2005
we sell any of the assets we acquired in a November 1995 reorganization.
We and our shareholders are subject to financing risks.
Debt increases risk of loss. In making real estate investments, we may borrow
money, which increases the risk of loss. At March 31, 1999, our debt of $180.8
million was approximately 4.4% of our total assets.
Issuing additional shares reduces the interest of existing shareholders.
Issuing additional securities can dilute the interest of our shareholders in our
company. We intend to issue additional securities under this registration
statement. See "Description of Common Stock and Class B Common Stock",
"Description of Preferred Stock" and "Description of Equity Stock," for a
discussion of the terms of the preferred stock, common stock and equity stock.
<PAGE>
If we liquidated, holders of our preferred stock will be entitled to receive,
before any distribution of assets to holders of our common stock, liquidating
distributions (a total of approximately $1.1 billion with respect to preferred
stock outstanding at March 31, 1999), plus any accrued and unpaid dividends.
Holders of preferred stock are entitled to receive, when declared by our board
of directors, cash dividends (a total of approximately $95.2 million per year
with respect to preferred stock outstanding at March 31, 1999), in preference
to holders of our common stock.
Since our business consists primarily of acquiring and operating real estate,
we are subject to real estate operating risks.
Value of our investments may be reduced by general risks of real estate
ownership. Since we derive substantially all of our income from real estate
operations, we are subject to the general risks of owning real estate-related
assets, including
. lack of demand for rental spaces or units in a locale;
. changes in general economic or local conditions;
. changes in supply of or demand for similar or competing facilities in an
area;
. the impact of environmental protection laws;
. changes in interest rates and availability of permanent mortgage funds
which may render the sale or financing of a property difficult or
unattractive; and
. changes in tax, real estate and zoning laws.
There is significant competition among mini-warehouses. Most of our
properties are mini-warehouses, which represented 91% of our total revenues
generated during 1998. Competition in the market areas in which many of our
properties are located is significant and has affected the occupancy levels,
rental rates and operating expenses of some of our properties. Any increase in
availability of funds for investment in real estate may accelerate competition.
Recent increases in development of mini-warehouses are expected to further
intensify competition among mini-warehouse operators in certain market areas in
which we operate.
We may incur significant environmental costs and liabilities. As an owner and
operator of real properties, under various federal, state and local
environmental laws, we are required to clean up spills or other releases of
hazardous or toxic substances on or from our properties. Certain environmental
laws impose liability whether or not the owner knew of, or was responsible for,
the presence of the hazardous or toxic substances. In some cases, liability may
not be limited to the value of the property. The presence of these substances,
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.
We have conducted preliminary environmental assessments of most of our
properties (and intend to conduct these assessments in connection with property
acquisitions) to evaluate the environmental condition of, and potential
environmental liabilities associated with, our properties. These assessments
generally consist of an investigation of environmental conditions at the
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
property assessments, our operations and recent property acquisitions, we have
become aware that prior operations or activities at some facilities or from
nearby locations have or may have resulted in contamination to the soil or
groundwater at these facilities. In this regard, some of our facilities are or
may be the subject of federal or state environmental investigations or remedial
actions. We have obtained, with respect to recent acquisitions and intend to
obtain with respect to pending or future acquisitions, appropriate purchase
price adjustments or indemnifications that we believe are sufficient to cover
any related potential liabilities. Although we cannot provide any assurance,
based on the preliminary environmental assessments, we believe we have funds
available to cover any liability (estimated at $4 million) from environmental
contamination or potential contamination and we are not aware of any
environmental contamination of our facilities material to our overall business,
financial condition or results of operation.
2
<PAGE>
The Hughes family receives the benefit of tenant reinsurance premiums.
A corporation owned by the Hughes family reinsures policies insuring against
losses to goods stored by tenants in our mini-warehouses. We believe that the
availability of insurance reduces our potential liability to tenants for losses
to their goods from theft or destruction. That corporation will continue to
receive the premiums and bear the risks associated with the reinsurance. We
have a right of first refusal to acquire the stock or assets of that
corporation if the Hughes family or the corporation agree to sell them, but we
have no interest in its operations and no right to acquire the stock or assets
of the corporation unless the Hughes family decides to sell. If we owned the
reinsurance business, the insurance premiums would be nonqualifying income
under the REIT tax rules. In the absence of a change in tax laws, REIT
requirements would likely preclude us from exercising our right of first
refusal to acquire the stock of the reinsurance corporation.
We have no interest in Canadian mini-warehouses owned by the Hughes family.
The Hughes family owns and operates mini-warehouses in Canada. We have 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. However, we have no interest in the operations of that corporation
and no right to acquire that stock or assets unless the Hughes family decides
to sell.
The Hughes family has an interest in our merchandise operations.
At almost all of our mini-warehouses, a related corporation offers for sale
to the general public, including mini-warehouse tenants, a variety of items
such as locks and boxes to assist in the moving and storage of goods. Because
the revenues received from the sale of these items would be nonqualifying
income under the REIT tax rules, we own the nonvoting preferred stock of that
corporation (representing 95% of the equity). The Hughes family owns the voting
common stock of that corporation (representing 5% of the equity).
Our portable self-storage business has incurred operating losses.
We organized Public Storage Pickup & Delivery in 1996 to operate a portable
self-storage business. We own substantially all of the economic interest of
Pickup & Delivery. Since Pickup & Delivery will operate profitably only if it
can succeed in the relatively new field of portable self-storage, we cannot
provide any assurance as to its profitability. As a start-up enterprise, Pickup
& Delivery incurred operating losses of $31,700,000 in 1997, $31,022,000 in
1998 and $3,936,000 for the first quarter of 1999. See "Federal Income Tax
Consequences--Taxation of the Company" concerning the treatment of income from
and investment in Pickup & Delivery for purposes of the REIT income and asset
tests.
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission using a "shelf" registration process. Under
this shelf process, we may sell from time to time up to $800,000,000 of our
common stock, preferred stock, equity stock, depositary shares and warrants, in
any combination. This prospectus provides a general description of the
securities that we may offer. Each time we offer any of the types of securities
described in this prospectus, we will prepare and distribute a prospectus
supplement that will contain a description of the specific terms of the
securities being offered and of the offering. The prospectus supplement may
also supplement the information contained in this prospectus. You should read
both this prospectus and the applicable prospectus supplement, together with
the additional information described under the heading "Where You Can Find More
Information," before purchasing any securities.
Unless otherwise indicated or unless the context requires otherwise, all
references in this prospectus to "the Company," "we," "us," "our" and similar
references mean Public Storage, Inc. and its subsidiaries.
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<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the reporting requirements of the Securities Exchange Act
of 1934, and are required to file annual, quarterly and special reports with
the Securities and Exchange Commission. You may read and copy any of these
documents at the Commission's public reference rooms at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
regional offices at Seven World Trade Center, 13th Floor, New York, New York
10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. You may telephone the Commission at 1-800-SEC-0330 for
further information on the Commission's public reference facilities. The
Commission also maintains a computer site on the World Wide Web
(http://www.sec.gov) that contains the reports, proxy and information
statements and other information that we and other registrants file
electronically with the Commission. You can also inspect reports and other
information we file at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005, and the Pacific Exchange, 301 Pine Street,
San Francisco, California 94104.
This prospectus is a part of a registration statement on Form S-3 filed with
the Commission to register offers and sales of the securities described in this
prospectus under the Securities Act of 1933. The registration statement
contains additional information about us and the securities. You may obtain the
registration statement and its exhibits from the Commission as indicated above
or from us.
The Commission allows us to provide information about our business and other
important information to you by "incorporating by reference" the information we
file with the Commission, which means that we can disclose that information to
you by referring in this prospectus to the documents we file with the
Commission. Under the Commission's regulations, any statement contained in a
document incorporated by reference in this prospectus is automatically updated
and superseded by any information contained in this prospectus, or in any
subsequently filed document of the types described below.
We incorporate into this prospectus by reference the following documents
filed by us with the Commission, each of which should be considered an
important part of this prospectus:
<TABLE>
<CAPTION>
SEC Filing (File No. 1-8389) Period Covered or Date of Filing
---------------------------- --------------------------------
<S> <C>
Annual Report on Form 10-K...................... Year ended December 31, 1998
Quarterly Report on Form 10-Q................... Quarter ended March 31, 1999
Current Reports on Form 8-K..................... Dated January 13, 1999 and March
4, 1999
Description of our common stock contained in
Registration Statement on Form 8-A, as
supplemented by the description of our common
stock contained in this prospectus............. Effective June 30, 1981
All subsequent documents filed by us under
Sections 13(a), 13(c), 14 or 15(d) of the After the date of this prospectus
Exchange Act of 1934........................... and
before the termination of the
offering
</TABLE>
You may request a copy of each of our filings at no cost, by writing or
telephoning us at the following address, telephone or facsimile number:
Investor Services Department
Public Storage, Inc.
701 Western Avenue
Glendale, California 91201-2397
Telephone: (800) 421-2856
(818) 244-8080
Facsimile: (818) 241-0627
Exhibits to a document will not be provided unless they are specifically
incorporated by reference in that document.
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<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus includes or incorporates by reference forward-looking
statements, including those identified by the words "expects," "believes,"
"anticipates," "should," "estimates," "may," "will," "seeks," "intends,"
"plans," "pro forma," or the negative of these words and phrases or similar
expressions that convey the uncertainty of future events or outcomes.
Discussions of strategy, plans or intentions also include forward-looking
statements. Forward-looking statements are subject to risks and uncertainties
and you should not rely on them as predictions of future events. In addition
to the factors described in this prospectus under "Risk Factors," some of
these factors include:
. the impact of competition from new and existing mini-warehouse and
commercial facilities which could impact rents and occupancy levels at
our facilities;
. our ability to evaluate, finance and integrate acquired and developed
properties into our existing operations;
. our ability to effectively compete in the markets in which we do
business;
. the impact of the regulatory environment as well as national, state and
local laws and regulations, including, without limitation, those
governing real estate investment trusts;
. profitability of the Pickup and Delivery business;
. the impact of general economic conditions upon rental rates and occupancy
levels at our facilities; and
. the availability of permanent capital at attractive rates.
These factors, as well as changes in the mini-warehouse and commercial real
estate markets and the general economy, could cause future events and actual
results to differ materially from those set forth or contemplated in the
forward-looking statements. We undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information
or otherwise. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this prospectus or in the incorporated
documents might not occur and actual results could be substantially different
than expected.
THE COMPANY
We are a fully integrated, self-administered and self-managed real estate
investment trust or REIT that acquires, develops, owns and operates mini-
warehouses. We are the largest owner and operator of mini-warehouses in the
United States. At March 31, 1999, we had equity interests (through direct
ownership, as well as general and limited partnership interests) in 1,313
mini-warehouses located in 37 states. We also own an interest in PS Business
Parks, Inc., a REIT that owns and operates commercial properties.
We elected to be taxed as a REIT beginning with our 1981 taxable year. To
the extent that we continue to qualify as a REIT, we will not be taxed, with
certain limited exceptions, on the net income that we distribute currently to
our shareholders. We were incorporated in California in 1980. Our principal
executive offices are located at 701 Western Avenue, Glendale, California
91201-2397. Our telephone number is (818) 244-8080.
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<PAGE>
USE OF PROCEEDS
We intend to use the net proceeds from the sale of the securities described
in this prospectus to make investments in mini-warehouses, including
development, interests in partnerships and mortgage loans and for general
business purposes, including repayment of debt. Pending their use, we may
invest the net proceeds in short-term, interest bearing securities.
RATIO OF EARNINGS TO FIXED CHARGES
We compute our ratio of earnings to combined fixed charges and preferred
stock dividends by dividing our earnings by the sum of our 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 Three
Months Ended For the Year Ended
March 31, December 31,
------------- ------------------------
1999 1998 1998 1997 1996 1995 1994
------ ------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to combined fixed
charges and preferred stock
dividends......................... 2.67 2.21 2.73 1.91 2.07 2.04 2.22
</TABLE>
DESCRIPTION OF COMMON STOCK AND CLASS B COMMON STOCK
We are authorized to issue up to 200,000,000 shares of common stock and up
to 7,000,000 shares of class B common stock. At May 31, 1999, we had
outstanding 129,253,891 shares of common stock (excluding shares issuable upon
conversion of convertible securities and shares subject to options) and
7,000,000 shares of class B common stock.
Common Stock
The following description of our common stock sets forth certain general
terms and provisions of our common stock to which any prospectus supplement
may relate, including a prospectus supplement providing that common stock will
be issuable upon conversion of preferred stock or equity stock or upon the
exercise of warrants. The statements below describing our common stock are in
all respects subject to and qualified in their entirety by reference to the
applicable provisions of our articles of incorporation and bylaws.
Holders of our common stock will be entitled to receive dividends when, as
and if declared by our board of directors, out of funds legally available for
distribution. If we fail to pay dividends on our outstanding preferred stock,
generally we may not pay dividends on our common stock or repurchase those
shares. If we liquidate, dissolve or wind up our affairs, 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 our debts
and other liabilities and the preferential amounts owing with respect to any
of our outstanding preferred stock. Holders of our common stock have no
preemptive rights, which means they have no right to acquire any additional
shares of common stock that we may issue at a later date. See "Description of
Preferred Stock."
The holders of our common stock are entitled to cast one vote for each share
on all matters presented to our holders for a vote, with the exception that
they have cumulative voting rights with respect to the election of our board
of directors, in accordance with California law. Cumulative voting means that
each holder of our common stock is entitled to cast as many votes as there are
directors to be elected multiplied by the number of shares registered in his
or her name. A holder of our 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 our
common stock are, and additional shares of common stock will be, when issued,
fully paid and nonassessable.
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<PAGE>
The rights, preferences and privileges of holders of our common stock are
subject to, and may be adversely affected by, the rights of the holders of
shares of any series of our preferred stock or our equity stock which are
outstanding or which we may designate and issue in the future. See "Description
of Preferred Stock" and "Description of Equity Stock."
Ownership Limitations
To qualify as a REIT under the Internal Revenue Code of 1986, as amended (the
"Code"), no more than 50% in value of our 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
our qualification as a REIT, our articles of incorporation restrict the number
of shares of capital stock that any shareholder may own.
In a series of transactions among Public Storage Management, Inc. and its
affiliates (collectively, "Public Storage Management"), culminating in the
November 16, 1995 merger of Public Storage Management into Storage Equities,
Inc., Storage Equities became self-administered and self-managed, acquired
substantially all of Public Storage Management's United States real estate
interests and was renamed "Public Storage, Inc."
Our 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 our
common stock and (B) 9.9% of the outstanding shares of each class or series of
shares of our preferred stock or equity stock and that all shares of stock be
imprinted with a legend setting forth that restriction. Our articles of
incorporation provide, however, that no person will be deemed to exceed the
ownership limit solely by reason of the beneficial ownership of shares of any
class of stock to the extent that those shares of stock were beneficially owned
by the person (including the Hughes family) after the merger with Public
Storage Management. Thus, this limitation does not affect the ownership of
common stock held by the Hughes family at the time of the merger. The ownership
limitation is intended to preserve our REIT status in view of the Hughes
family's substantial ownership interest in us. We cannot provide any assurance,
however, that this ownership limit will enable us to satisfy the requirement
that a REIT not be "closely held" within the meaning of Section 856(h) of the
Code for any given taxable year.
Our articles of incorporation and bylaws provide that our board of directors,
in its sole and absolute discretion, may grant exceptions to the ownership
limits, so long as (A) our board has determined that we would not be "closely
held" within the meaning of Section 856(h) of the Code (without regard to
whether the event in question takes place during the second half of a taxable
year) and would not otherwise fail to qualify as a REIT, after giving effect to
an acquisition by an excepted person of beneficial ownership of the maximum
amount of capital stock permitted as a result of the exception to be granted,
and taking into account the existing and permitted ownership by other persons
of stock (taking into account any other exceptions granted) and (B) the
excepted persons provide to our board the representations and undertakings as
our board may require. In any case, 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 capital stock if the ownership or
acquisition (1) would cause more than 50% in value of our 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), (2) would result in our stock being beneficially owned
by less than 100 persons (determined without reference to any rules of
attribution), or (3) would otherwise result in our failing to qualify as a
REIT.
Our articles of incorporation and bylaws generally provide that if any holder
of capital stock purports to transfer shares to a person or there is a change
in our capital structure, and either the transfer or the change in capital
structure would result in our failing to qualify as a REIT, or the transfer or
the change in capital structure would cause the transferee to hold shares in
excess of the applicable ownership limit, then the shares causing the violation
will be automatically transferred to a trust for the benefit of a designated
charitable beneficiary. The purported transferee of those shares will have no
right to receive dividends or other
7
<PAGE>
distributions with respect to them and will have no right to vote the shares.
Any dividends or other distributions paid to the purported transferee prior to
our discovery that the shares have been transferred to a trust will be paid to
the trustee of the trust for the benefit of the charitable beneficiary upon
demand. The trustee will designate a transferee of those shares so long as the
shares would not violate the restrictions on ownership or transfer in our
articles of incorporation in the hands of the designated transferee. Upon the
sale of the shares, the purported transferee will receive out of any proceeds
remaining after payment of expenses of the charitable trust and us the lesser
of (A)(1) the price per share the purported transferee paid for the stock in
the purported transfer that resulted in the transfer of the shares to the
trust, or (2) if the transfer or other event that resulted in the transfer of
the shares to the trust was not a transaction in which the purported transferee
gave full value for the 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. Each
purported transferee will be deemed to have waived any claims the purported
transferee may have against the trustee and us arising from the disposition of
the shares, except for claims arising from the trustee's or our gross
negligence, willful misconduct, or failure to make payments when required by
our articles of incorporation.
In addition, our bylaws provide our 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 the action is
necessary to preserve our status as a REIT.
Class B Common Stock
Our class B common stock:
(1) Does not participate in distributions on our common stock until the
later to occur of (A) funds from operations per common share (as defined
below) totalling $1.80 during any period of four consecutive calendar
quarters and (B) January 1, 2000. After January 1, 2000, our class B common
stock will participate in distributions (other than liquidating
distributions) at the rate of 97% of the per share distributions on our
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 our common stock;
(2) Does not participate in liquidating distributions;
(3) Is not entitled to vote (except as expressly required by California
law); and
(4) Will automatically convert into our common stock, on a share for
share basis, upon the later to occur of (A) funds from operations per
common share aggregating $3.00 during any period of four consecutive
calendar quarters and (B) January 1, 2003.
For these purposes:
(1) Funds from operations means net income (loss) (computed in accordance
with GAAP) before (A) gain (loss) on early extinguishment of debt, (B)
minority interest in income and (C) gain (loss) on disposition of real
estate, adjusted as follows: (1) plus depreciation and amortization
(including our pro-rata share of depreciation and amortization of
unconsolidated equity interests and amortization of assets acquired in the
1995 merger (including property management agreements and goodwill)), and
(2) less funds from operations attributable to minority interest. Funds
from operations is a supplemental performance measure for equity REITs as
defined by the National Association of Real Estate Investment Trusts, Inc.
This definition does not specifically address the treatment of minority
interest in the determination of funds from operations or the treatment of
the amortization of property management agreements and goodwill. In our
case, funds from operations 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. Funds from operations does not take into consideration scheduled
principal payments on debt, capital improvements, distributions and our
other obligations. Accordingly, funds from operations is not a substitute
for our cash flow or net income as a measure of our liquidity or operating
performance or ability to pay distributions.
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<PAGE>
(2) Funds from operations per common share means funds from operations
less dividends on preferred stock (other than dividends on our convertible
preferred stock) divided by the outstanding weighted average shares of our
common stock assuming conversion of all outstanding convertible securities
and our class B common stock.
DESCRIPTION OF PREFERRED STOCK
We are authorized to issue up to 50,000,000 shares of preferred stock. At May
31, 1999, we had outstanding 11,138,850 shares of preferred stock (of which
32,850 shares were represented by 32,850,000 depositary shares). Our articles
of incorporation provide that the preferred stock may be issued from time to
time in one or more series and give our 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 preferred
stock will be, when issued, fully paid and nonassessable.
Although the issuance of preferred stock with special voting rights (or
common stock) could be used to deter attempts to obtain control of us in
transactions not approved by our board of directors, we have no present
intention to issue stock for that purpose.
Outstanding Preferred Stock
At May 31, 1999, we had outstanding 12 series of preferred stock. Each series
(1) has a stated value of $25.00 per share or depositary share, (2) in
preference to the holders of shares of our common stock and any other capital
stock ranking junior to our preferred stock as to payment of dividends,
provides for cumulative quarterly dividends calculated as a percentage of the
stated value (ranging from 8% to 10% per year in the case of 11 series of our
fixed rate preferred stock and a rate adjustable quarterly ranging from 6.75%
to 10.75% per year in the case of a series of our adjustable rate preferred
stock) and (3) is subject to redemption, in whole or in part, at our option 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 our adjustable
rate preferred stock and on or after various dates between December 31, 2000
and April 30, 2005 in the case of the series of our fixed rate preferred
stock).
If we voluntarily or involuntarily liquidate, dissolve or wind up, the
holders of the preferred stock will be entitled to receive out of our assets
available for distribution to shareholders, before any assets are distributed
to holders of our common stock or any other shares of capital stock ranking
junior to the preferred stock, liquidating distributions equal to $25 per share
or depositary share, plus all accrued and unpaid dividends.
Except as expressly required by law and in certain other limited
circumstances, holders of the preferred stock are not entitled to vote. Our
board of directors will not, without the consent of holders of at least 66 2/3%
of the outstanding shares of the preferred stock, voting as a single class,
authorize another class of shares senior to the 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
Below is a description of some general terms and provisions of our preferred
stock which may be specified in a prospectus supplement. 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 our articles of
incorporation (including the applicable form of certificate of determination)
and bylaws.
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<PAGE>
You should read the prospectus supplement relating to the preferred stock
being offered for specific terms, including:
(1) the title and stated value of the preferred stock;
(2) the number of shares of the preferred stock being offered, the
liquidation preference per share and the offering price of the preferred
stock;
(3) the dividend rate, period and payment date or method of calculation
applicable to the preferred stock;
(4) the date from which dividends on the preferred stock accumulates, if
applicable;
(5) the provision for a sinking fund, if any, for the preferred stock;
(6) the provision for redemption, if applicable, of the preferred stock;
(7) any listing of the preferred stock on any securities exchange;
(8) the terms and conditions, if applicable, upon which the preferred
stock will be convertible into common stock, including the conversion price
(or manner of calculation);
(9) the voting rights, if any, of the preferred stock;
(10) any other specific terms, preferences, rights, limitations or
restrictions of the preferred stock;
(11) the relative ranking and preferences of the preferred stock as to
dividend rights and rights upon liquidation, dissolution or winding up of
our affairs; and
(12) any limitations on issuance of any series of preferred stock ranking
senior to or on a parity with the series of preferred stock as to dividend
rights and rights upon liquidation, dissolution or winding up of our
affairs.
Ranking. The ranking of the preferred stock will be set forth in the
applicable prospectus supplement. Unless otherwise specified in the applicable
prospectus supplement, the preferred stock will, with respect to dividend
rights and rights upon liquidation, dissolution or winding up of our affairs,
rank:
(1) senior to the common stock, any additional class of common stock,
existing and future equity stock and any series of preferred stock junior
to the preferred stock;
(2) on a parity with all preferred stock previously issued by us the
terms of which specifically provide that the preferred stock rank on a
parity with the preferred stock being offered; and
(3) junior to all preferred stock previously issued by us the terms of
which specifically provide that the preferred stock rank senior to the
preferred stock being offered.
Dividends. Holders of shares of the preferred stock of each series being
offered will be entitled to receive, when, as and if declared by our board of
directors, out of our assets legally available for payment, cash dividends at
the rates and on the dates as will be set forth in the applicable prospectus
supplement. Each dividend will be payable to holders of record as they appear
on our stock transfer books on the record dates fixed by our board of
directors.
Dividends on any series of the preferred stock being offered 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 our 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, the
holders of the series of the preferred stock will have no right to receive a
dividend in respect of the dividend period ending on that dividend payment
date, and we will have no obligation to pay the dividend accrued for the
period, whether or not dividends on that series are declared payable on any
future dividend payment date.
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<PAGE>
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) will be declared or paid or set aside for payment (nor will any
other distribution be declared or made upon our common stock, or any of our
other capital stock ranking junior to or on a parity with the preferred stock
of the series as to dividends or upon liquidation), nor will any common stock
or any other of our capital stock ranking junior to or on a parity with the
preferred stock of the 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 the
stock) by us (except by conversion into or exchange for our other capital stock
ranking junior to the preferred stock of the series as to dividends and upon
liquidation) unless:
(1) if the series of preferred stock has a cumulative dividend, full
cumulative dividends on the preferred stock of the series have been or
contemporaneously are declared and paid or declared and a sum set apart for
payment for all past dividend periods and the then current dividend period;
and
(2) if the series of preferred stock does not have a cumulative dividend,
full dividends on the preferred stock of the series have been or
contemporaneously are declared and paid or declared and a sum set apart for
payment for the then current dividend period.
Any dividend payment made on shares of a series of cumulative preferred stock
being offered will first be credited against the earliest accrued but unpaid
dividend due with respect to shares of the series which remains payable.
Redemption. The shares of preferred stock will be subject to mandatory
redemption or redemption at our option, in whole or in part, in each case to
the extent set forth in the prospectus supplement relating to the series.
The prospectus supplement relating to a series of preferred stock being
offered that is subject to mandatory redemption will specify the number of
shares of that series that will be redeemed by us 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 will not, if shares of that series do 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
being offered will be redeemed and we will not purchase or otherwise acquire
directly or indirectly any shares of preferred stock of that series (except by
conversion into or exchange for capital stock of us ranking junior to the
preferred stock of that series as to dividends and upon liquidation) unless all
outstanding shares of preferred stock of that series are simultaneously
redeemed unless, in each case:
(1) if that series of preferred stock has a cumulative dividend, full
cumulative dividends on the preferred stock of that series will have been
or contemporaneously are declared and paid or declared and a sum sufficient
for payment for all past dividend periods and the then current dividend
period is set apart; and
(2) if that series of preferred stock does not have a cumulative
dividend, full dividends on the preferred stock of that series have been or
contemporaneously are declared and paid or declared and a sum sufficient
for payment for the then current dividend period is set apart; provided,
however, that we may acquire shares of preferred stock of the series under
a purchase or exchange offer made on the same terms to holders of all
outstanding shares of preferred stock of the series.
If fewer than all of the outstanding shares of preferred stock of any series
being offered are to be redeemed, the number of shares to be redeemed will be
determined by us and these shares may be redeemed pro rata from the holders of
record of these shares in proportion to the number of these shares held by such
holders (with adjustments to avoid redemption of fractional shares) or any
other equitable method determined by us.
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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 our stock transfer books.
Each notice will state:
(1) the redemption date;
(2) the number of shares and series of the preferred stock to be
redeemed;
(3) the redemption price;
(4) the place or places where certificates for that preferred stock are
to be surrendered for payment of the redemption price;
(5) that dividends on the shares to be redeemed will cease to accrue on
the redemption date; and
(6) the date upon which the holder's conversion rights, if any, as to the
shares terminate.
If fewer than all the shares of preferred stock of any series are to be
redeemed, the notice mailed to each holder will also specify the number of
shares of preferred stock to be redeemed from the holder and, upon redemption,
a new certificate will be issued representing the unredeemed shares without
cost to the holder. To facilitate the redemption of shares of preferred stock,
our board of directors may fix a record date for the determination of shares of
preferred stock to be redeemed. The record date may not be not less than 30 or
more than 60 days before the date fixed for redemption.
If notice has been given as provided above, unless we default in providing
funds for the payment of the redemption price on that date, then from and after
the redemption date all dividends on the preferred stock called for redemption
will cease. From and after the redemption date, unless we default, all rights
of the holders of our preferred stock, 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, we 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. If we voluntarily or involuntarily liquidate,
dissolve or wind-up our affairs, then, before we make any distribution or
payment to the holders of any common stock or any other class or series of our
capital stock ranking junior to the preferred stock in the distribution of
assets upon our liquidation, dissolution or winding up, the holders of each
series of preferred stock will be entitled to receive out of our assets legally
available for distribution to shareholders liquidating distributions in the
amount of the liquidation preference per share (set forth in the applicable
prospectus supplement), plus an amount equal to all accrued and unpaid
dividends (which shall not include any accumulation in respect of unpaid
dividends for prior dividend periods if the 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 our remaining assets. In the event that, upon
the voluntary or involuntary liquidation, dissolution or winding up, our
legally available assets 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
our capital stock ranking on a parity with the preferred stock in the
distribution of assets upon liquidation, dissolution or winding up, then the
holders of the preferred stock and all other such classes or series of capital
stock will share ratably in any distribution of assets in proportion to the
full liquidating distributions to which they would otherwise be respectively
entitled.
If liquidating distributions have been made in full to all holders of
preferred stock, our remaining assets will be distributed among the holders of
any other classes or series of capital stock ranking junior to the 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 these purposes, our consolidation or merger
with or into any other corporation, or the sale, lease, transfer or conveyance
of all or substantially all of our property or business, will not be deemed to
constitute a liquidation, dissolution or winding up.
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Voting Rights. Holders of the preferred stock being offered 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 six quarterly dividends payable on any series of preferred stock are in
default (whether or not declared or consecutive), the holders of all the 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.
The right to vote separately to elect directors will, when vested, be
subject, always, to the same provisions for vesting of the right to elect
directors separately in the case of future dividend defaults. At any time when
the right to elect directors separately has vested, we may, and upon the
written request of the holders of record of not less than 20% of our total
number of preferred shares then outstanding will, call a special meeting of
shareholders for the election of directors. In the case of the written request,
a special meeting will be held within 90 days after the delivery of the request
and, in either case, at the place and upon the notice provided by law and in
the bylaws. However, we will not be required to call a special meeting if the
request is received less than 120 days before the date fixed for the next
annual meeting of shareholders, and the holders of all classes of outstanding
preferred stock are offered the opportunity to elect the directors (or fill any
vacancy) at the annual meeting of shareholders. Directors so elected will serve
until the next annual meeting of shareholders or until their respective
successors are elected and qualify. If, before the end of the term of any
director so elected, a vacancy in the office of the director occurs, during the
continuance of a default by reason of death, resignation, or disability, the
vacancy will be filled for the unexpired term of the 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, our articles of
incorporation, including the certificate of determination, if this action would
materially and adversely alter or change the rights, preferences or privileges
of the series of preferred stock.
No consent or approval of the holders of any series of preferred stock being
offered will be required for the issuance from our authorized but unissued
preferred stock of other shares of any series of preferred stock ranking on a
parity with or junior to that series of preferred stock, or senior to a series
of preferred stock expressly made junior to that series of preferred stock as
to payment of dividends and distribution of assets, including other shares of
the same series of preferred stock.
These voting provisions will not apply if, at or prior to the time when the
act with respect to which a vote would otherwise be required is effected, all
outstanding shares of the series of preferred stock had been redeemed or called
for redemption upon proper notice and sufficient funds had been deposited in
trust to effect the redemption.
Conversion Rights. The terms and conditions, if any, upon which shares of any
series of preferred stock being offered are convertible into common stock will
be set forth in the applicable prospectus supplement. The terms will include
the number of shares of common stock into which the preferred stock is
convertible, the conversion price (or manner of calculation), the conversion
period, provisions as to whether conversion will be at our option or at the
option of the holders of the preferred stock or automatically upon the
occurrence of certain events, the events requiring an adjustment of the
conversion price and provisions affecting conversion if we redeem the preferred
stock.
DESCRIPTION OF EQUITY STOCK
We are authorized to issue up to 200,000,000 shares of equity stock. At May
31, 1999, we had outstanding 225,000 shares of equity stock which rank on a
parity with our common stock. Our articles of incorporation provide that the
equity stock may be issued from time to time in one or more series and give our
board of
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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 could be used to
deter attempts by a single shareholder or group of shareholders to obtain
control of us in transactions not approved by our board of directors. We have
no intention to issue the equity stock for these purposes.
Ownership Limitations
For a discussion of the ownership limitations that apply to equity stock, see
"Description of Common Stock and Class B Common Stock--Ownership Limitations."
Terms of Equity Stock
Below is a description of some general terms and provisions of our equity
stock which may be specified in a prospectus supplement. 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 our articles of
incorporation (including the applicable form of certificate of determination)
and bylaws.
You should read the prospectus supplement relating to the equity stock being
offered for specific terms, including:
(1) the designation of that equity stock;
(2) the number of shares of that equity stock offered, the liquidation
rights and the offering price of that equity stock;
(3) the dividend rate, period and payment date or method of calculation
applicable to that equity stock;
(4) the provision for redemption, if applicable, of that equity stock;
(5) any listing of that equity stock on any securities exchange;
(6) the terms and conditions, if applicable, upon which that equity stock
will be convertible into common stock, including the conversion price (or
manner of calculation);
(7) the voting rights, if any, of that equity stock;
(8) any other specific terms, rights, limitations or restrictions of that
equity stock; and
(9) the relative ranking of that equity stock as to dividend rights and
rights if we liquidate, dissolve or wind-up our affairs.
Ranking. Unless otherwise specified in the applicable prospectus supplement,
equity stock will, with respect to dividend rights and rights upon liquidation,
dissolution or winding up of our affairs, rank on a parity with the common
stock.
Dividends. Holders of shares of the equity stock of each series being offered
will be entitled to receive, when, as and if declared by our board of
directors, out of our assets legally available for payment, cash dividends at
the rates and on the dates set forth in the applicable prospectus supplement.
Each dividend will be payable to holders of record as they appear on our stock
transfer books on the record dates fixed by our board of directors. Unless
otherwise specified in the applicable prospectus supplement, dividends on
equity stock will be non-cumulative.
Redemption. The shares of equity stock will be subject to mandatory
redemption or redemption at our option, in whole or in part, in each case to
the extent set forth in the applicable prospectus supplement.
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The prospectus supplement relating to a series of equity stock being offered
that is subject to mandatory redemption will specify the number of shares of
that series that we must redeem 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 (which will not, if that
series 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 are to be redeemed, the number of shares to be redeemed will be
determined by us and those shares may be redeemed pro rata from the holders of
record of those shares in proportion to the number of those shares held by
such holders (with adjustments to avoid redemption of fractional shares) or
any other equitable method determined by us.
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 our stock transfer books.
Each notice will state:
(1) the redemption date;
(2) the number of shares and series of the equity stock to be redeemed;
(3) the redemption price;
(4) the place or places where certificates for shares of that series are
to be surrendered for payment of the redemption price;
(5) that dividends on the shares to be redeemed will cease to accrue on
the redemption date; and
(6) the date upon which the holder's conversion rights, if any, as to
those shares terminates.
If fewer than all the shares of equity stock of any series are to be
redeemed, the notice mailed to each holder will also specify the number of
shares of equity stock to be redeemed from the holder and, upon redemption, a
new certificate will be issued representing the unredeemed shares without cost
to the holder. To facilitate the redemption of shares of equity stock, our
board of directors may fix a record date for the determination of shares of
equity stock to be redeemed. The record date may not be less than 30 or more
than 60 days before the date fixed for redemption.
If notice has been given as provided above, unless we default in providing
funds for the payment of the redemption price on that date, then from and
after the redemption date all dividends on the equity stock called for
redemption will cease. From and after the redemption date, unless we default,
all rights of the holders of our equity stock, except the right to receive the
redemption price (but without interest), will cease.
Liquidation Rights. If we voluntarily or involuntarily liquidate, dissolve
or wind-up our affairs, then, before we make any distribution or payment to
the holders of the equity stock or any other class or series of our capital
stock ranking junior to any series of preferred stock in the distribution of
assets upon our liquidation, dissolution or winding up, the holders of each
series of preferred stock will be entitled to receive out of our assets
legally available for distribution to shareholders liquidating distributions
in the amount of the liquidation preference per share, plus an amount equal to
all accrued and unpaid dividends (which shall not include any accumulation in
respect of unpaid dividends for prior dividend periods if the 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 our remaining assets.
If liquidating distributions have been made in full to all holders of
preferred stock, our remaining assets will be distributed among the holders of
any other classes or series of capital stock ranking junior to the 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 these purposes, our
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consolidation or merger with or into any other corporation, or the sale,
lease, transfer or conveyance of all or substantially all of our property or
business, will not be deemed to constitute a liquidation, dissolution or
winding up.
Unless otherwise specified in the applicable prospectus supplement, if we
voluntarily or involuntarily liquidate, dissolve or wind up our affairs,
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 the applicable prospectus supplement.
Voting Rights. Unless otherwise specified in the applicable prospectus
supplement, holders of the equity stock will vote with 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 our authorized but unissued equity stock of
other shares of any series of equity stock including shares of the same series
of equity stock.
Conversion Rights. The terms and conditions, if any, upon which shares of
any series of equity stock being offered are convertible into common stock
will be set forth in the applicable prospectus supplement. The terms will
include the number of shares of common stock into which the equity stock is
convertible, the conversion price (or manner of calculation), the conversion
period, provisions as to whether conversion will be at our option or at the
option of 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 the
series of equity stock.
DESCRIPTION OF THE DEPOSITARY SHARES
We may, at our option, elect to offer depositary shares, each of which will
represent a fractional interest in a share of preferred stock or equity stock
of a specified series as described in the applicable prospectus supplement.
The shares of preferred stock or equity stock represented by the depositary
shares will be deposited with a depositary named in the applicable prospectus
supplement, under a deposit agreement, among the depositary, the holders of
the depositary receipts and us. Depositary receipts, which are certificates
evidencing depositary shares, 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, our articles of
incorporation and the form of certificate of determination for the applicable
series of preferred stock or equity stock.
Dividends
The depositary will distribute all cash dividends or other cash
distributions received in respect of the series of preferred stock or equity
stock represented by the depositary shares to the record holders of depositary
receipts in proportion to the number of depositary shares owned by those
holders on the relevant record date, which will be the same date as the record
date fixed by us for the applicable series of preferred stock or equity stock.
The depositary, however, will distribute only an amount as can be distributed
without attributing to any depositary share a fraction of one cent with any
undistributed balance 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 that are entitled to receive the distribution, in proportion, as
nearly as may
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be practicable, to the number of depositary shares owned by those holders on
the relevant record date, unless the depositary determines (after consultation
with us) that it is not feasible to make the distribution. If this occurs, the
depositary may (with our approval) sell the property and distribute the net
proceeds from that sale to those holders or adopt another method of
distribution as it deems equitable and appropriate.
Liquidation Rights
If we liquidate, dissolve or wind up our affairs, whether voluntary or
involuntary, the holders of each depositary share will be entitled to the
fraction of the liquidation amount accorded each share of the applicable series
of preferred stock or equity stock, as set forth in the prospectus supplement.
Redemption
If a series of preferred stock or equity stock represented by that series of
depositary shares is redeemable, those depositary shares will be redeemed from
the proceeds received by the depositary resulting from the redemption, in whole
or in part, of that series of preferred stock or equity stock held by the
depositary. Whenever we redeem any preferred stock or equity stock held by the
depositary, the depositary will redeem as of the same redemption date the
number of depositary shares representing the preferred stock or equity stock so
redeemed. The depositary will mail the notice of redemption promptly upon
receipt of such notice from us and not less than 30 nor more than 60 days prior
to the date fixed for redemption of the preferred stock or equity stock and the
depositary shares to the record holders of the depositary receipts.
Conversion
If the series of preferred stock or equity stock represented by the
applicable series of depositary shares is convertible into a different class of
our securities, the depositary shares will be also be convertible on the terms
described in the applicable prospectus supplement.
Voting
Promptly upon receipt of notice of any meeting at which the holders of the
series of preferred stock or equity stock represented by the applicable series
of depositary shares are entitled to vote, the depositary will mail the
information contained in the notice of meeting to the record holders of the
depositary receipts as of the record date for that meeting. Each 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 or equity stock represented by that record holder's depositary shares.
The depositary will then try, as far as practicable, to vote the preferred
stock or equity stock represented by such depositary shares in accordance with
those instructions, and we 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 not vote any of the preferred stock or equity stock to the
extent that it does not receive specific instructions from the holders of
depositary receipts.
Withdrawal of Preferred Stock or Equity 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 holder of the depositary shares
evidenced by the depositary receipts is entitled to delivery of the number of
whole shares of preferred stock or equity stock and all money and other
property, if any, represented by those depositary shares. Partial shares of
preferred stock or equity 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 or equity stock to be withdrawn, the depositary will deliver to
that holder at the same time a new depositary receipt evidencing the excess
number of depositary shares. Holders of withdrawn preferred stock or equity
stock will not be entitled to deposit those shares under the deposit agreement
or to receive depositary receipts evidencing depositary shares.
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Amendment and Termination of Deposit Agreement
The form of depositary receipt evidencing the depositary shares of any series
and any provision of the deposit agreement may at any time be amended by
agreement between the depositary and us. However, any amendment which
materially and adversely alters the rights of the holders (other than any
change in fees) of depositary shares of any series will not be effective unless
that amendment has been approved by the holders of at least a majority of the
depositary shares of that series 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 those
depositary shares with instructions to the depositary to deliver to the holder
the preferred stock or equity stock and all money and other property, if any,
represented by the depositary receipt, except in order to comply with mandatory
provisions of applicable law. The deposit agreement may be terminated by the
depositary or us only if:
(1) all outstanding depositary shares have been redeemed or
(2) there has been a final distribution in respect of the preferred stock
or equity stock in connection with our liquidation, dissolution or winding
up and the distribution has been made to all the holders of depositary
shares.
Charges of Depositary
We will pay all transfer and other taxes and governmental charges arising
solely from the existence of the depositary arrangements. We will pay charges
of the depositary in connection with the initial deposit of the preferred stock
or equity stock and the initial issuance of the depositary shares, and
redemption of the preferred stock or equity stock and all withdrawals of
preferred stock or equity stock by owners of depositary shares. Holders of
depositary receipts will pay transfer, income and other taxes and governmental
charges and those other charges as are provided in the deposit agreement to be
for their accounts. In some circumstances, the depositary may refuse to
transfer depositary shares, may withhold dividends and distributions and sell
the depositary shares evidenced by the depositary receipt if the charges are
not paid.
Miscellaneous
The depositary will forward to the holders of depositary receipts all reports
and communications from us which are delivered to the depositary and which we
are required to furnish to the holders of the preferred stock or equity stock.
In addition, the depositary will make available for inspection by holders of
depositary receipts at the principal office of the depositary, and at other
places as it may from time to time deem advisable, any reports and
communications received from us which are received by the depositary as the
holder of preferred stock or equity stock.
Neither the depositary nor we assume any obligation or liability under the
deposit agreement to holders of depositary receipts other than for its or our
negligence or willful misconduct. Neither the depositary nor we 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. Our
obligations and those of the depositary under the deposit agreement will be
limited to performance in good faith of the depositary's duties under the
deposit agreement. Neither of us will be obligated to prosecute or defend any
legal proceeding in respect of any depositary shares or preferred stock unless
satisfactory indemnity is furnished. We 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 the 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 us notice of its
election to do so, and we may at any time remove the depositary. Any
resignation or removal will take effect upon the appointment of a
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successor depositary and its acceptance of the appointment. The 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
Owners of the depositary shares will be treated for federal income tax
purposes as if they were owners of the preferred stock or equity stock
represented by those depositary shares. Accordingly, the 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 or equity stock. In addition:
(1) no gain or loss will be recognized for federal income tax purposes
upon the withdrawal of preferred stock or equity stock in exchange for
depositary shares;
(2) the tax basis of each share of preferred stock or equity stock to an
exchanging owner of depositary shares will, upon such exchange, be the same
as the aggregate tax basis of the depositary shares being exchanged; and
(3) the holding period for preferred stock or equity stock in the hands
of an exchanging owner of depositary shares will include the period during
which that person owned those depositary shares.
DESCRIPTION OF WARRANTS
We have no warrants outstanding (other than options issued under our stock
option plan). We may issue warrants for the purchase of common stock, preferred
stock or equity 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 those securities. Each series of warrants will be issued
under a separate warrant agreement to be entered into between a warrant agent
specified in the applicable prospectus supplement and us. The warrant agent
will act solely as our agent in connection with the warrants of that 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 being offered. 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 those warrants;
(2) the aggregate number of those warrants;
(3) the price or prices at which those warrants will be issued;
(4) the designation, number and terms of the shares of common stock,
preferred stock or equity stock purchasable upon exercise of those
warrants;
(5) the designation and terms of the other securities, if any, with
which those warrants are issued and the number of those warrants issued
with each security;
(6) the date, if any, on and after which those warrants and the related
common stock, preferred stock or equity stock, if any, will be separately
transferable;
(7) the price at which each share of common stock, preferred stock or
equity stock purchasable upon exercise of those warrants may be purchased;
(8) the date on which the right to exercise those warrants will commence
and the date on which that right expires;
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(9) the minimum or maximum amount of those warrants which may be
exercised at any one time; and
(10) any other terms of those warrants, including terms, procedures and
limitations relating to the exchange and exercise of those warrants.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes certain federal income tax considerations
relating to us and to your acquisition, ownership and disposition of common
stock. The applicable prospectus supplement will contain information about
additional federal income tax considerations, if any, relating to securities
other than common stock. The following discussion, which is not exhaustive of
all possible tax considerations, does not give a detailed description of any
state, local, or foreign tax considerations. Nor does it discuss all of the
aspects of federal income taxation that may be relevant to a prospective
shareholder in light of his or her particular circumstances or to certain types
of Shareholders (including insurance companies, tax-exempt entities, financial
institutions or broker-dealers, foreign corporations and persons who are not
citizens or residents of the United States) who are subject to special
treatment under federal income tax laws. The information in this section is
based on the Code, current, temporary and proposed treasury regulations, the
legislative history of the Code, current administrative interpretations and
practices of the IRS (including its practices and policies as endorsed in
private letter rulings, which are not binding on the IRS except with respect to
the taxpayer that receives such a ruling), and court decisions, all as of the
date hereof. No assurance can be given that future legislation, treasury
regulations, administrative interpretations and court decisions will not
significantly change current law or adversely affect existing interpretations
of current law. Any such change could apply retroactively to transactions
preceding the date of the change. We have not requested and do not plan to
request any rulings from the IRS concerning the tax treatment of the Company
(references to the "Company" are to Public Storage, Inc). Thus, no assurance
can be provided that the statements below (which do not bind the IRS or the
courts) will not be challenged by the IRS or will be sustained by a court if so
challenged.
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.
Taxation of the Company
General. We elected to be taxed as a REIT under Sections 856 through 860 of
the Code commencing with our taxable year ended December 31, 1981. We believe
that we have been organized and operated in a manner so as to qualify as a
REIT, and we intend to continue to operate in such a manner. So long as we
qualify for taxation as a REIT, we generally will not be subject to federal
corporate income taxes on net income that we distribute currently to
shareholders. However, we will be subject to federal income tax in the
following circumstances. First, we will be taxed at regular corporate rates on
any undistributed REIT taxable income, including undistributed net capital
gains. Second, under certain circumstances, we may be subject to the
"alternative minimum tax" on items of tax preference. Third, if we have (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 we have 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 we
fail to satisfy the 75% gross income test or the 95% gross income test (as
discussed below), and
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have nonetheless maintained our qualification as a REIT because certain other
requirements have been met, we will be subject to a 100% tax on the net income
attributable to the greater of the amount by which we fail the 75% or 95% gross
income test. Sixth, if we fail to distribute during each calendar year at least
the sum of (i) 85% of our REIT ordinary income for such year, (ii) 95% of our
REIT capital gain net income for such year, and (iii) any undistributed taxable
income from prior periods, we would be subject to a 4% excise tax on the excess
of such required distribution over the amounts actually distributed. Seventh,
if we acquire or have acquired any asset from a taxable C corporation in a
transaction in which the basis of the asset in the acquiror's hands is
determined by reference to the basis of the asset (or any other asset) in the
hands of the C corporation (such as in the case of our 1995 merger with Public
Storage Management) and the acquiror recognizes gain on the disposition of such
asset during the 10 year period beginning on the date on which such asset was
acquired by it, then to the extent of such asset's "Built-In Gain" (i.e., the
excess of (a) the fair market value of such asset at the time of its
acquisition by us over (b) the adjusted basis in such asset, determined at the
time of such acquisition), such gain will be subject to tax at the highest
regular corporate rate applicable, pursuant to treasury regulations that have
yet to be promulgated. The results described above with respect to the
recognition of Built-In Gain assume that the Company made an election pursuant
to Notice 88-19 with respect to any such acquisition. Public Storage Management
was taxable as a regular C corporation. After the merger with Public Storage
Management, the Company elected to be subject to the Built-In Gain rules of
Notice 88-19.
Requirements for Qualification. The Code defines a REIT as a corporation,
trust or association (1) that is managed by one or more trustees or directors,
(2) the beneficial ownership of which is evidenced by transferable shares of
stock, or by transferable certificates of beneficial interest, (3) that would
be taxable as a domestic corporation, but for Sections 856 through 859 of the
Code, (4) that is neither a financial institution nor an insurance company
subject to certain provisions of the Code, (5) the beneficial ownership of
which is held by 100 or more persons, (6) that during the last half of each
taxable year not more than 50% in value of the outstanding stock of which is
owned, directly or indirectly, by five or fewer individuals (as defined in the
Code to include certain entities), (7) that makes an election to be taxable as
a REIT, or has made such election for a previous taxable year which has not
been revoked or terminated, and satisfies all relevant filing and other
administrative requirements established by the IRS that must be met in order to
elect and maintain REIT status; (8) that uses a calendar year for federal
income tax purposes and complies with recordkeeping requirements of the Code
and regulations promulgated thereunder; and (9) that meets certain other tests,
described below, regarding the nature of its income and assets and the amount
of its distributions. The Code provides that conditions (1) through (4),
inclusive, must be met during the entire taxable year and that condition (5)
must be met during at least 335 days of a taxable year of 12 months, or during
a proportionate part of a taxable year of less than 12 months. For purposes of
determining stock ownership under condition (6), a supplemental unemployment
compensation benefits plan, a private foundation or a portion of a trust
permanently set aside or used exclusively for charitable purposes generally is
considered an individual. However, a trust that is a qualified trust under Code
section 401(a) generally is not considered an individual and beneficiaries of
such trust are treated as holding shares of a REIT in proportion to their
actuarial interests in such trust for purposes of condition (6).
In connection with condition (6), a REIT is required to send annual letters
to its shareholders requesting information regarding the actual ownership of
shares. For our taxable years commencing on or after January 1, 1998, if we
comply with the annual letters requirement and do not know, or exercising
reasonable diligence would not have known, whether we failed to meet
requirement (6) above, we will be treated as having met the requirement. Our
articles of incorporation contain restrictions regarding the transfer of our
capital stock that are intended to assist us in continuing to satisfy the stock
ownership requirements described in conditions (5) and (6). The ownership
restrictions in our articles of incorporation and bylaws generally prohibit the
actual or constructive ownership of more than 2% of the outstanding shares of
common stock (excluding the interest held by the Hughes family) or more than
9.9% of the outstanding shares of each class or series of shares of preferred
stock or equity stock, unless an exception is established by the board of
directors. The restrictions provide that if, at any time, for any reason, those
ownership limitations are violated or more than 50% in value of our outstanding
stock otherwise would be considered owned by five or fewer individuals, then a
number of
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shares of stock necessary to cure the violation will automatically and
irrevocably be transferred from the person causing the violation to a
designated charitable beneficiary. See "Description of Common Stock and Class B
Common Stock--Ownership Limitations." At the time of the merger with Public
Storage Management, to further assist us in meeting the ownership restrictions,
the Hughes family entered into an agreement with us for the benefit of the
Company and certain designated charitable beneficiaries providing that if, at
any time, for any reason, more than 50% in value of our outstanding stock
otherwise would be considered owned by five or fewer individuals, then a number
of shares of our common stock owned by Wayne Hughes necessary to cure such
violation would automatically and irrevocably be transferred to a designated
charitable beneficiary.
The REIT protective provisions of our articles and the agreement with the
Hughes Family 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 the 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 and we
will not seek a private ruling on this or any other issue) or contend that we
failed to enforce these various arrangements. Accordingly, there can be no
assurance that these arrangements necessarily will preserve our REIT status. We
believe, however, that we have issued and outstanding sufficient shares with
sufficient diversity of ownership to allow us to satisfy the REIT ownership
requirements.
A REIT is not permitted to have at the end of any taxable year any
undistributed earnings and profits that are attributable to a "C corporation"
taxable year. As a result of the 1995 merger with Public Storage Management and
the 1999 merger with Storage Trust Realty, the Company succeeded to various tax
attributes of those entities and their predecessors, including any
undistributed C corporation earnings and profits. We do not believe that we
have acquired any undistributed "C corporation earnings and profits." However,
neither of these entities nor the Company has sought an opinion of counsel or
outside accountants to the effect that we did not acquire any "C corporation
earnings and profits." There can be no assurance that the IRS would not contend
otherwise on a subsequent audit. It appears that we could keep from being
disqualified as a REIT by using "deficiency dividend" procedures to distribute
any such acquired "C corporation" earnings and profits. In order to use this
procedure, an affected REIT would have to make an additional distribution to
its shareholders (in addition to distributions made for purposes of satisfying
the normal REIT distribution requirements), within 90 days of the IRS
determination. In addition, the REIT would have to pay to the IRS an interest
charge on 50% of the acquired C corporation earnings and profits that were not
distributed prior to the end of the REIT's taxable year in which they were
acquired. If we were deemed to have acquired C corporation earnings and
profits, there can be no assurance, however, that the IRS would not take the
position either that the procedure is not available at all (in which case we
would fail to qualify as a REIT) or, alternatively, that even if the procedure
is available, we cannot qualify as a REIT for our taxable year in which the
earnings and profits were acquired, but we could qualify as a REIT for
subsequent taxable years.
Income Tests. In order to maintain qualification as a REIT, we must satisfy
certain gross income requirements, which are applied on an annual basis. For
purposes of applying these income tests, a REIT is considered to earn a
proportionate share of the income of any partnership in which it holds a
partnership interest. First, at least 75% of our gross income (excluding gross
income from prohibited transactions) for each taxable year must be derived
directly or indirectly from investments relating to real property or mortgages
on real property (including "rents from real property" and, in certain
circumstances, interest) or from certain types of temporary investments.
Second, at least 95% of our gross income (excluding gross income from
prohibited transactions) for each taxable year must be derived from the same
items which qualify under the 75% income test, and from dividends, interest and
gain from the sale or disposition of stock or securities, or from any
combination of the foregoing.
Rents that we receive 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
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not be excluded from the term "rents from real property" solely by reason of
being based on a fixed percentage or percentages of receipts or sales. We
anticipate that none of our annual gross 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. We do not anticipate that we will receive income from such 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." We do not
anticipate deriving rent attributable to personal property leased in connection
with real property that exceeds 15% of the total rents. Finally, for rents to
qualify as "rents from real property," we generally must not operate or manage
the property or furnish or render services to tenants, other than through an
"independent contractor" that is adequately compensated and from whom we derive
no revenue. The "independent contractor" requirement, however, does not apply
to the extent the services we provide 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 we believe may not be provided by us directly without
jeopardizing the qualification of rent as "rents from real property" will be
performed by "independent contractors."
For our taxable years commencing on or after January 1, 1998, rents received
generally will qualify as rents from real property even if we were to provide
services that are not permissible services so long as the amount received for
such services meets a de minimis standard. The amount received for
"impermissible services" with respect to a property cannot exceed 1% of all
amounts received, directly or indirectly, by the Company with respect to such
property. In computing any such amounts, the amount that we would be deemed to
have received for performing "impermissible services" will be the greater of
the actual amount so received or 150% of the direct cost to us of providing
those services. If the impermissible service income exceeds 1% of our total
income from a property, then all of the income from that property will fail to
qualify as rents from real property.
In connection with the merger with Public Storage Management, the Company and
the various other owners of mini-warehouses and business parks for which we
performed management activities entered into an agreement with PSCC, Inc.
("PSCC") under 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. The
services include the provision of corporate office space and certain equipment,
personnel required for the operation and maintenance of the properties, and
corporate or partnership administration. Each of the owners and the Company pay
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 us under the management agreement for the
management of the properties owned by the owners. At the time of the merger
with Public Storage Management, we 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 our revenues for purposes of the 95% test.
We own substantially all of the economic interest in Pickup & Delivery (the
portable self-storage business). The income from that business would be
nonqualifying income to us and the business is conducted by a limited
partnership between the Company and a subsidiary of PS Orangeco, Inc. (the
"Lock/Box Company"). The share of gross income of that business attributable to
our partnership interest, when combined with our other nonqualifying income,
must be less than 5% of our total gross revenues. We anticipate that we will be
able to continue to satisfy both the 95% and 75% gross income tests.
If we fail to satisfy one or both of the 75% or 95% gross income tests for
any taxable year, we may nevertheless qualify as a REIT for such year if we are
entitled to relief under certain provisions of the Code. It is not possible,
however, to state whether in all circumstances we would be entitled to the
benefit of these relief provisions. Even if these relief provisions were to
apply, however, a 100% tax would be imposed with respect to the "excess net
income" attributable to the failure to satisfy the 75% and 95% gross income
tests.
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Asset Tests. At the close of each quarter of our taxable year, we must
satisfy three tests relating to the nature of our assets. For purposes of
applying these asset tests, a REIT is considered to own a proportionate share
of the assets of any partnership in which it holds a partnership interest.
First, at least 75% of the value of our total assets must be represented by
real estate assets. Our real estate assets include, for this purpose, our
allocable share of real estate assets held by partnerships in which we have an
interest, as well as stock or debt instruments held for less than one year
purchased with the proceeds of a stock offering, or long-term (at least five
years) debt offering of the Company, cash, cash items and government
securities. Second, not more than 25% of our total assets may be represented by
securities other than those in the 75% asset class. Third, of the investments
included in the 25% asset class, the value of any one issuer's securities owned
by us may not exceed 5% of the value of our total assets, and, except for REITs
or "qualified REIT subsidiaries," we may not own more than 10% of any one
issuer's outstanding voting securities.
We believe that we satisfy the asset tests. In this regard, however, the
value of our interest in the Lock/Box Company (including the Lock/Box Company's
interest in Pickup & Delivery) may not exceed 5% of the value of our total
assets and the 10% voting stock prohibition precludes us from controlling the
operations of the Lock/Box Company (in which we own 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), Pickup & Delivery (a subsidiary of the Lock/Box Company)
or PSCC (in which we own a less than 10% voting interest) and may preclude us
from exercising our rights of first refusal with respect to the corporations
owning the Canadian operations and the reinsurance business. See "--Proposed
Changes to REIT Qualification Requirements" below for a discussion of proposals
that, if enacted, might affect Public Storage's ability to derive economic
benefits from the activities of the Lock/Box Company and Pickup & Delivery.
After initially meeting the asset tests at the close of any quarter, we will
not lose our status as a REIT for failure to satisfy the 25% or 5% asset tests
at the end of a later quarter solely by reason of changes in the relative
values of our assets. If the failure to satisfy the 25% or 5% asset tests
results from an acquisition of securities or other property during a quarter,
the failure can be cured by disposition of sufficient nonqualifying assets
within 30 days after the close of that quarter. We intend to maintain adequate
records of the value of our assets to ensure compliance with the asset tests
and to take any available actions within 30 days after the close of any quarter
as may be required to cure any noncompliance with the 25% or 5% asset tests. If
we fail to cure noncompliance with the asset tests within such time period, we
would cease to qualify as a REIT.
Certain Partnership Interests. In the merger with Public Storage Management
and in other transactions, we have acquired interests in various partnerships
that own and operate properties. For purposes of satisfying the REIT asset and
gross income tests, we will be treated as if we directly own a proportionate
share of each of the assets of these partnerships. For these purposes, under
current treasury regulations our interest in each of the partnerships must be
determined in accordance with our "capital interest" in the partnership.
The ownership of these partnership interests creates several issues regarding
our satisfaction of the 95% gross income test. First, we earn property
management fees from these partnerships. Existing treasury regulations do not
address the treatment of management fees derived by a REIT from a partnership
in which the REIT holds a partnership interest, but the IRS has issued a number
of private letter rulings holding that the portion of the management fee that
corresponds to the REIT's interest in the partnership in effect is disregarded
in applying the 95% gross income test where the REIT holds a "substantial"
interest in the partnership. We disregard the portion of management fees
derived from partnerships in which we are a partner that corresponds to our
interest in these partnerships in determining the amount of our nonqualifying
income. 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 our
situation is distinguishable from those addressed in the private letter rulings
(for example, arguing that we do not have a "substantial" interest in the
partnerships).
Second, we acquired interests in certain of these partnerships that entitle
us to a percentage of profits (either from operations, or upon a sale, or both)
in excess of the percentage of total capital originally
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contributed to the partnership with respect to such interest. Existing treasury
regulations do not specifically address how our "capital interest" in
partnerships of this type 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 us
and the percentage of the management fees paid to us that is disregarded in
determining our nonqualifying income. For example, if we take the position that
we have a 25% "capital interest" in a partnership (because we would receive 25%
of the partnership's assets upon a sale and liquidation) but the IRS determines
we only have a 1% "capital interest" (because the original holder of our
interest only contributed 1% of the total capital contributed to the
partnership), our 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 our ability to satisfy the 95% gross income test. In determining our
"capital interest" in the various partnerships, we determine the percentage of
the partnership's assets that would be distributed to us 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 our
"capital interests," which could adversely affect our ability to satisfy the
95% gross income test.
Annual Distribution Requirements. In order to qualify as a REIT, we are
required to distribute dividends (other than capital gain dividends) to our
shareholders in an amount at least equal to (i) the sum of (a) 95% of our "REIT
taxable income" (computed without regard to the dividends paid deduction and
our net capital gain) and (b) 95% of the net income (after tax), if any, from
foreclosure property, minus (ii) the sum of certain items of non-cash income.
In addition, if we dispose of any Built-In Gain Asset during the 10 year period
beginning on the date we acquired that asset, we will be required, pursuant to
Treasury Regulations which have not yet been promulgated, to distribute at
least 95% of the Built-In Gain (after tax), if any, recognized on the
disposition of such asset. See "--General" above for a discussion of "Built-In
Gain Assets." Such distributions must be paid in the taxable year to which they
relate, or in the following taxable year if declared before we timely file our
tax return for such year and if paid on or before the first regular dividend
payment date after such declaration.
To the extent that we do not distribute all of our net capital gain or
distribute at least 95%, but less than 100%, of our "REIT taxable income," as
adjusted, we will be subject to tax at regular ordinary and capital gain
corporate tax rates. We may elect to require the shareholders to include our
undistributed net capital gains in their income by designating, in a written
notice to shareholders, those amounts as undistributed capital gains in respect
of our shareholders' shares. If we make such an election, the shareholders will
(i) include in their income as capital gains their proportionate share of such
undistributed capital gains and (ii) be deemed to have paid their proportionate
share of the tax paid by us on such undistributed capital gains and thereby
receive a credit or refund for such amount. A shareholder will increase the
basis in its common shares by the difference between the amount of capital gain
included in its income and the amount of the tax that we are deemed to have
paid on the shareholder's behalf. Our earnings and profits will be adjusted
appropriately. For a more detailed description of the tax consequences to a
shareholder of such a designation, see "--Taxation of U.S. Shareholders Holding
Common Stock."
In addition, if we should fail to distribute during each calendar year at
least the sum of (i) 85% of our REIT ordinary income for such year, (ii) 95% of
our REIT capital gain income for such year, and (iii) any undistributed taxable
income from prior periods, we would be subject to a 4% excise tax on the excess
of such required distribution over the sum of amounts actually distributed
during the calendar year by us and the amount, if any, on which we paid income
tax for such year.
In years prior to 1990, we made distributions in excess of our REIT taxable
income. During 1990, we reduced our distribution to our shareholders. As a
result, distributions paid by the Company in 1990 were less than 95% of our
REIT taxable income for 1990. We have satisfied the REIT distribution
requirements for 1990 through 1998 by attributing distributions in 1991 through
1999 to the prior year's taxable income, and we expect to satisfy the
distribution requirement for 1999 by attributing distributions in 2000 to the
1999 taxable
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income. We 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 we will be required to
attribute distributions to the prior year will depend on our operating results
and the level of distributions as determined by the board of directors. As
noted above, reliance on subsequent year distributions could cause us to be
subject to an excise tax. We intend to comply with this 85% distribution
requirement in an effort to minimize any excise tax.
We intend to make timely distributions sufficient to satisfy our annual
distribution requirements. It is expected that our REIT taxable income will be
less than our cash flow due to the allowance of depreciation and other non-cash
charges in computing REIT taxable income. Accordingly, we anticipate that we
will generally have sufficient cash or liquid assets to enable us to satisfy
the distribution requirements described above. It is possible, however, that
the Company, from time to time, may not have sufficient cash or other liquid
assets to meet these distribution requirements due to timing differences
between (i) the actual receipt of income and actual payment of deductible
expenses and (ii) the inclusion of such income and deduction of such expenses
in arriving at our taxable income, or due to the need to make nondeductible
payments, such as principal payments on any indebtedness we may have. If such
circumstances occur, in order to meet the distribution requirements, we may
find it necessary to arrange for short-term, or possibly long-term, borrowings
or to pay dividends in the form of taxable stock dividends.
Under certain circumstances, we may be able to rectify a failure to meet the
distribution requirement for a year by paying "deficiency dividends" to
shareholders in a later year, which may be included in our deduction for
dividends paid for the earlier year. Thus, we may be able to avoid being taxed
on amounts distributed as deficiency dividends; however, we will be required to
pay interest based upon the amount of any deduction taken for deficiency
dividends.
Recordkeeping Requirements. Pursuant to applicable Treasury Regulations, we
must comply with certain recordkeeping requirements to qualify for taxation as
a REIT.
Failure of the Company to Qualify as a REIT. For any taxable year that we
fail to qualify as a REIT, we would be taxed at the usual corporate rates on
all of our taxable income. Those taxes would reduce the amount of cash
available to us for distribution to our shareholders. Distributions to
shareholders in any year in which we fail to qualify as a REIT will not be
deductible and will not be required to be made. In addition, if we fail to
qualify as a REIT, all distributions to shareholders will be taxed as ordinary
income, to the extent of our current and accumulated earnings and profits, and,
subject to certain limitations of the Code, corporate distributees may be
eligible for the dividends received deduction.
Unless certain relief provisions apply, our election to be treated as a REIT
will terminate automatically if we fail to meet the qualification requirements
described above and we will not be eligible to elect REIT status again until
the fifth taxable year that begins after the first year for which our election
was terminated (or revoked). If we lose our REIT status, but later qualify and
elect to be taxed as a REIT again, we may face significant adverse tax
consequences.
Taxation of U.S. Shareholders Holding Common Stock
As used below, the term "U.S. Shareholder" means a holder of shares of Common
Stock who (for United States federal income tax purposes) (i) is a citizen or
resident of the United States, (ii) is a corporation, partnership, or other
entity created or organized in or under the laws of the United States or any
political subdivision thereof, (iii) is an estate the income of which is
subject to United States federal income taxation regardless of its source or
(iv) is a trust the administration of which is subject to the primary
supervision of a United States court and which has one or more United States
persons who have the authority to control all substantial decisions of the
trust. Notwithstanding the preceding sentence, to the extent provided in
regulations, certain trusts in existence on August 20, 1996, and treated as
United States persons prior to such date that elect to continue to be treated
as United States persons, shall also be considered U.S. Shareholders.
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Distributions by the Company. As long as we qualify as a REIT, distributions
made to our taxable U.S. Shareholders (and not designated as capital gain
dividends) will generally be taxable to such shareholders as ordinary income to
the extent of our current or accumulated earnings and profits. For purposes of
determining whether distributions on shares of common stock are out of current
or accumulated earnings and profits, our earnings and profits will be allocated
first to shares of preferred stock and second to shares of common stock. There
can be no assurance that we will have sufficient earnings and profits to cover
distributions on any shares of preferred stock. Such distributions will not be
eligible for the dividends received deductions in the case of shareholders that
are corporations. 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 designated by us as capital gain dividends generally will be
taxed as gain from the sale or exchange of a capital asset held for more than
one year (to the extent that the distributions do not exceed our actual net
capital gain for the taxable year) without regard to the period for which the
shareholder has held its stock. Corporate shareholders however, may be required
to treat up to 20% of certain capital gain dividends as ordinary income.
Shareholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company. Instead, such losses would
be carried over by us for potential offset against future income (subject to
certain limitations). Distributions made by us and gain arising from the sale
or exchange by a holder of common stock will not be treated as passive activity
income, and, as a result, holders of common stock generally will not be able to
apply any "passive losses" against such income or gain. 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. In addition, taxable distributions from the Company generally will
be treated as investment income for purposes of the investment interest
limitations. Capital gain dividends and capital gain from the disposition of
shares, including distributions treated as such, however, will be treated as
investment income for purposes of the investment interest limitation only if
the U.S. Shareholder so elects, in which case such capital gains will be taxed
at ordinary income rates. We will notify shareholders after the close of our
taxable year as to the portions of distributions attributable to that year that
constitute ordinary income, return of capital and capital gain.
Distributions in excess of current or accumulated earnings and profits will
not be taxable to a U.S. Shareholder to the extent that they do not exceed the
adjusted basis of the shareholder's shares of common stock, but rather will
reduce the adjusted basis of such shares of common stock. To the extent that
such distributions exceed the adjusted basis of a U.S. Shareholder's shares of
common stock, they will be included in income as capital gains, assuming the
shares of common stock are a capital asset in the hands of the U.S.
Shareholder.
For our taxable years commencing on or after January 1, 1998, we may elect to
require the holders of common stock to include our undistributed net long-term
capital gains in their income. If we make such an election, the holders of
common stock will (i) include in their income as long-term capital gains their
proportionate share of such undistributed capital gains and (ii) be deemed to
have paid their proportionate share of the tax paid by us on such undistributed
capital gains and thereby receive a credit or refund for such amount. A holder
of common stock will increase the basis in its common stock by the difference
between the amount of capital gain included in its income and the amount of the
tax it is deemed to have paid. Our earnings and profits will be adjusted
appropriately. With respect to such long-term capital gain of a taxable
domestic shareholder that is an individual or an estate or trust, the IRS has
authority to issue regulations that could apply the special tax rate applicable
to sales of depreciable real property by an individual or an estate or trust to
the portion of the long-term capital gains of an individual or an estate or
trust attributable to deductions for depreciation taken with respect to
depreciable real property.
Sales of Shares. In general, a U.S. Shareholder will realize gain or loss on
the disposition of shares of common stock equal to the difference between (i)
the amount of cash and the fair market value of any property
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received on such disposition and (ii) the shareholder's adjusted basis of such
shares of common stock. Such gain or loss will be capital gain or loss if the
shares have been held as a capital asset. In the case of a taxable U.S.
Shareholder who is an individual or an estate or trust, such gain or loss will
be long-term capital gain or loss, and such long-term capital gain shall be
subject to the maximum capital gain rate of 20%. In the case of a taxable U.S.
Shareholder that is a corporation, such gain or loss will be long-term capital
gain or loss if such shares have been held for more than one year and any such
capital gain shall be subject to the maximum capital gain rate of 35%. Loss
upon a sale or exchange of shares of common stock by a shareholder who has held
such shares of common stock for six months or less (after applying certain
holding period rules) will be treated as a long-term capital loss to the extent
of distributions from the Company required to be treated by such shareholder as
long-term capital gain.
Taxpayer Relief Act and IRS Restructuring Act Changes to Capital Gain
Taxation. The Taxpayer Relief Act of 1997 (the "Taxpayer Relief Act") altered
the taxation of capital gain income. Under the Taxpayer Relief Act,
individuals, trusts and estates that hold certain investments for more than
18 months may be taxed at a maximum long-term capital gain rate of 20% on the
sale or exchange of those investments. Individuals, trusts and estates that
hold certain assets for more than one year but not more than 18 months may be
taxed at a maximum long-term capital gain rate of 28% on the sale or exchange
of those investments. The Taxpayer Relief Act also provides a maximum rate of
25% for "unrecaptured Section 1250 gain" for individuals, trusts and estates,
special rules for "qualified 5-year gain" and other changes to prior law. The
recently enacted IRS Restructuring Act of 1998, however, reduced the holding
period requirement established by the Taxpayer Relief Act for the application
of the 20% and 25% capital gain tax rates to 12 months from 18 months for sales
of capital gain assets after December 31, 1997 and thus eliminated the 28%
rate. The Taxpayer Relief Act allows the IRS to prescribe regulations on how
the Taxpayer Relief Act's capital gain rates will apply to sales of capital
assets by "pass-through entities," including REITs, such as the Company, and to
sales of interests in "pass-through entities." Shareholders are urged to
consult with their own tax advisors with respect to the rules contained in the
Taxpayer Relief Act and the IRS Restructuring Act.
On November 10, 1997, the IRS issued IRS Notice 97-64, which provides
generally that REITs such as the Company may classify portions of their
designated capital-gain dividends as (i) a 20% rate gain distribution (which
would be taxed as long-term capital gain in the 20% group), (ii) an
unrecaptured Section 1250 gain distribution (which would be taxed as long-term
capital gain in the 25% group), or (iii) a 28% rate gain distribution (which
would be taxed as long-term capital gain in the 28% group). (If no designation
is made, the entire designated capital gain dividend will be treated as a 28%
rate gain distribution.) IRS Notice 97-64 provides that a REIT must determine
the maximum amounts that it may designate as 20% and 25% rate capital gain
dividends by performing the computation required by the Code as if the REIT
were an individual whose ordinary income were subject to a marginal tax rate of
at least 28%. The Notice further provides that designations made by the REIT
will only be effective to the extent that they comply with Revenue
Ruling 89-81, which requires that distributions made to different classes of
shares be composed proportionately of dividends of a particular type. Although
Notice 97-64 will apply to sales of capital gain assets after July 28, 1997 and
before January 1, 1998, it is expected that the IRS will issue clarifying
guidance, most likely applying the same principles set forth in Notice 97-64,
regarding a REIT's designation of capital gain dividends in light of the new
holding period requirements.
Backup Withholding. We will report to our domestic shareholders and the IRS
the amount of dividends paid during each calendar year, and the amount of tax
withheld, if any. Under the backup withholding rules, a shareholder may be
subject to backup withholding at the rate of 31% with respect to dividends paid
unless such holder (a) is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact, or (b) provides a
taxpayer identification number and certifies as to no loss of exemption from
backup withholding. Amounts withheld as backup withholding will be creditable
against the stockholder's income tax liability. In addition, we may be required
to withhold a portion of capital gain distributions made to any shareholders
who fail to certify their non-foreign status to the Company. See "--Taxation of
Non-U.S. Shareholders" below.
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Taxation of Tax-Exempt Shareholders. As a general rule, amounts distributed
to a tax-exempt entity by a corporation do not constitute "unrelated business
taxable income" ("UBTI"), and thus our distributions to a stockholder that is a
tax-exempt entity generally should not constitute UBTI, provided that the tax-
exempt entity has not financed the acquisition of its shares of common stock
with "acquisition indebtedness" within the meaning of the Code and the shares
of common stock are not otherwise used in an unrelated trade or business of the
tax-exempt entity. However, distributions by a REIT to a tax-exempt employee's
pension trust that owns more than 10% of the REIT will be treated as UBTI in an
amount equal to the percentage of gross income of the REIT that is derived from
an "unrelated trade or business" (determined as if the REIT were a pension
trust) divided by the gross income of the REIT for the year in which the
dividends are paid. This rule only applies, however, if (i) the percentage of
gross income of the REIT that is derived from an unrelated trade or business
for the year in which the dividends are paid is at least 5%, (ii) the REIT
qualifies as a REIT only because the pension trust is not treated as a single
individual for purposes of the "five-or-fewer rule" (see "--Taxation of the
Company--Requirements for Qualification" above), and (iii) (A) one pension
trust owns more than 25 percent of the value of the REIT or, (B) a group of
pension trusts individually holding more than 10 percent of the value of the
REIT collectively own more than 50 percent of the value of the REIT. We
currently do not expect that this rule will apply.
Taxation of Non-U.S. Shareholders
The rules governing U.S. federal income taxation of non-U.S. Shareholders 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 federal, state, local and foreign income tax laws on
an investment in the Company, including any reporting requirements.
Distributions by the Company. Distributions to a non-U.S. Shareholder that
are not attributable to gain from sales or exchanges by the Company of U.S.
real property interests and not designated by us as capital gain dividends will
generally be subject to tax as ordinary income to the extent of our current or
accumulated earnings and profits as determined for U.S. federal income tax
purposes. Such distributions will generally be subject to a withholding tax
equal to 30% of the gross amount of the distribution, 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 non-U.S. 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 non-
U.S. Shareholder would otherwise be subject to tax on any gain from the sale or
disposition of its common stock, as described below.
For withholding tax purposes, we currently are required to treat all
distributions as if made out of our current or accumulated earnings and profits
and thus intend to withhold at the rate of 30% (or a reduced treaty rate if
applicable) on the amount of any distribution (other than distributions
designated as capital gain dividends) made to a non-U.S. Shareholder. Under
regulations generally effective for distributions on or after January 1, 1999,
we would not be required to withhold at the 30% rate on distributions we
reasonably estimate to be in excess of our current and accumulated earnings and
profits. If it cannot be determined at the time a distribution is made whether
such distribution will be in excess of current and accumulated earnings and
profits, the distribution will be subject to withholding at the rate applicable
to ordinary dividends. As a result of a legislative change made by the Small
Business Job Protection Act of 1996, under current law, it appears that we will
be required to withhold 10% of any distribution to a non-U.S. Shareholder in
excess of our current and accumulated earnings and profits. Consequently,
although we intend to withhold at a rate of 30% on the entire amount of any
distribution to a non-U.S. Shareholder (or lower applicable treaty rate), to
the extent we do not do so, any portion of such a distribution not subject to
withholding at a rate of 30% (or lower applicable treaty rate) will be subject
to withholding at a rate of 10%. However, the non-U.S. Shareholder may seek a
refund of such amounts from the IRS if it subsequently determined that such
distribution was, in fact, in excess of our
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current or accumulated earnings and profits, and the amount withheld exceeded
the non-U.S. Shareholder's United States tax liability, if any, with respect to
the distribution.
Distributions to a non-U.S. Shareholder that are designated by us at the time
of distribution as capital gain dividends (other than those arising from the
disposition of a United States real property interest) generally will not be
subject to United States federal income taxation, unless (i) the investment in
the common stock is effectively connected with the non-U.S. Shareholder's
United States trade or business, in which case the non-U.S. Shareholder will be
subject to the same treatment as U.S. Shareholders with respect to such gain
(except that a shareholder that is a foreign corporation may also be subject to
the 30% branch profits tax) or (ii) the non-U.S. Shareholder is a nonresident
alien individual who is present in the United States for 183 days or more
during the taxable year and certain other requirements are met, in which case
the nonresident alien individual will be subject to a 30% tax on the
individual's capital gains.
Under the Foreign Investment in Real Property Tax Act ("FIRPTA"),
distributions to a non-U.S. Shareholder that are attributable to gain from
sales or exchanges by the Company of United States real property interests
(whether or not designated as a capital gain dividend) will be taxed to a non-
U.S. Shareholder at the normal capital gains rates applicable to domestic
shareholders (subject to a special alternative minimum tax in the case of
nonresident alien individuals). Also, distributions subject to FIRPTA may be
subject to a 30% branch profits tax in the hands of a non-U.S. Shareholder that
is a corporation and that is not entitled to treaty relief or exemption. We are
required by applicable FIRPTA Treasury Regulations to withhold 35% of any such
distribution that is or could be designated by us as a capital gain dividend.
That amount is creditable against the non-U.S. Shareholder's United States
FIRPTA tax liability.
Even if we do not qualify or cease to be a domestically controlled REIT, gain
arising from the sale or exchange by a non-U.S. Shareholder of common stock
would still not be subject to U.S. taxation under FIRPTA as a sale of a United
States real property interest if (i) the class or series of shares being sold
is "regularly traded," as defined by applicable Treasury Regulations, on an
established securities market such as the New York Stock Exchange, and (ii) the
selling non-U.S. Shareholder owned 5% or less of the value of the outstanding
class or series of shares being sold throughout the five-year period ending on
the date of the sale or exchange.
If gain on the sale or exchange of common stock were subject to taxation
under FIRPTA, the non-U.S. Shareholder would be subject to regular United
States income tax with respect to such gain in the same manner as a taxable
U.S. Shareholder, subject to any applicable alternative minimum tax, a special
alternative minimum tax in the case of nonresident alien individuals and the
possible application of the 30% branch profits tax in the case of foreign
corporations. The purchaser of the common stock would be required to withhold
and remit to the IRS 10% of the purchase price.
Although the law is not entirely clear on the matter, it appears that amounts
designated by us pursuant to the Taxpayer Relief Act as undistributed capital
gains in respect of shares of common stock (see "Taxation of U.S. Shareholders
Holding Common Stock" above) would be treated with respect to non-U.S.
Shareholders in the manner outlined in the preceding paragraph for actual
distributions by us of capital gain dividends. Under that approach, the non-
U.S. Shareholders would be able to offset as a credit against their United
States federal income tax liability resulting therefrom their proportionate
share of the tax paid by us on such undistributed capital gains (and to receive
from the IRS a refund to the extent their proportionate share of such tax paid
by us were to exceed their actual United States federal income tax liability).
Sale of Common Stock. 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 we are
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, we expect to qualify as
a "domestically controlled REIT." Accordingly, a non-U.S. Shareholder should
not be subject to U.S. tax on gains recognized upon disposition of the common
stock, provided that such
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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.
Backup Withholding Tax and Information Reporting. Backup withholding tax
(which generally is a withholding tax imposed at a rate of 31% on certain
payments to persons that fail to furnish certain information under the United
States information reporting requirements) and information reporting will
generally not apply to distributions paid to non-U.S. Shareholders outside the
United States that are treated as (i) dividends subject to the 30% (or lower
treaty rate) withholding tax discussed above, (ii) capital gain dividends, or
(iii) distributions attributable to gain from the sale or exchange by the
Company of United States real property interests. As a general matter, backup
withholding and information reporting will not apply to a payment of the
proceeds of a sale of common stock by or through a foreign office of a foreign
broker. Information reporting (but not backup withholding) will apply, however,
to a payment of the proceeds of a sale of common stock by a foreign office of a
broker that (a) is a United States person, (b) derives 50% or more of its gross
income for certain periods from the conduct of a trade or business in the
United States or (c) is a "controlled foreign corporation" (generally a foreign
corporation controlled by United States shareholders) for United States tax
purposes, 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
shareholder otherwise establishes an exemption. Payment to or through a United
States office of a broker of the proceeds of a sale of common stock is subject
to both backup withholding and information reporting unless the shareholder
certifies under penalty of perjury that the shareholder is a non-U.S.
Shareholder, or otherwise establishes an exemption. A non-U.S. Shareholder may
obtain a refund of any amounts withheld under the backup withholding rules by
filing the appropriate claim for refund with the IRS.
The United States Treasury Department has finalized regulations regarding the
withholding and information reporting rules discussed above. In general, these
regulations do not alter the substantive withholding and information reporting
requirements but unify certification procedures and forms and clarify and
modify reliance standards. These regulations generally are anticipated to be
effective for payments made after December 31, 2000, subject to certain
transition rules. Valid withholding certificates that are held on December 31,
1999, will remain valid until the earlier of December 31, 2000, or the date of
the expiration of the certificate under rules currently in effect, unless
otherwise invalidated due to changes in the circumstances of the person whose
name is on such certificate. A non-U.S. Shareholder should consult its advisor
regarding the effect of the new treasury regulations.
Proposed Changes to REIT Qualification Requirements
The administration's fiscal year 2000 budget proposal, announced February 1,
1999, includes a proposal that would change the 10% voting securities test to a
10% vote or value test. Under the proposal, a REIT would not be able to own
more than 10% of the vote or value of the outstanding securities of any
corporation, except for a qualified REIT subsidiary or another REIT (see
"Taxation of the Company--Asset Tests" above). The proposal also contains an
exception to the 5% and 10% asset tests that would allow a REIT to have
"taxable REIT subsidiaries," including both "qualified independent contractor
subsidiaries," which could perform noncustomary and other currently prohibited
services for tenants and other customers, and "qualified business
subsidiaries," which could undertake third-party management and development
activities as well as other non-real estate related activities. Under the
proposal, no more than 15% of a REIT's total assets could consist of taxable
REIT subsidiaries and no more than 5% of a REIT's total assets could consist of
qualified independent contractor subsidiaries. Under the budget proposal, a
taxable REIT subsidiary would not be entitled to deduct any interest on debt
funded directly or indirectly by the REIT. This proposal would be effective
after the date of enactment and a REIT would be allowed to combine and convert
existing corporate subsidiaries into taxable REIT subsidiaries tax-free prior
to a certain date. A transition period would allow for conversion of existing
corporate subsidiaries before the 10% vote or value test would become
effective. For our taxable years after the effective date of the proposal and
after any applicable transition period, the 10% vote or
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value test would apply to our ownership in any of the non-qualified REIT
subsidiaries not converted into taxable REIT subsidiaries.
On April 28, 1999, the Real Estate Investment Trust Modernization Act of 1999
(the "bill") was introduced in Congress. The bill is similar to the
administration's proposal in several respects. Like the administration's
proposal, the bill would create "taxable REIT subsidiaries" that would not be
subject to the 5% asset test, but that would remain subject to the 25% asset
test (see "Taxation of the Company--Asset Tests" above). The "taxable REIT
subsidiaries" would also be subject to "earnings stripping" limitations on the
deductibility of interest. Under the bill, a REIT would be able to rent up to
10% of a property to a taxable REIT subsidiary and generally have the rent
qualify as good income. The bill would also change the 10% voting securities
test to a 10% vote or value test unless the corporation elects to be a taxable
REIT subsidiary or the securities qualify for the "grandfather rule." In
general, the "grandfather rule" would apply to securities of a corporation in
which the REIT owned an interest on April 28, 1999. The grandfather rule would
also apply to securities acquired in a tax-free exchange for "grandfathered
securities" and to securities acquired in a qualifying tax-free reorganization
with another REIT, if those securities were grandfathered in the hands of the
other REIT. Securities of a corporation will lose their "grandfathered" status
if the corporation acquires any substantial asset or engages in a substantial
new line of business after April 28, 1999 (other than pursuant to a binding
contract in effect on that date).
It is presently uncertain whether any proposal regarding REIT subsidiaries,
including the budget proposal or the bill, will be enacted or, if enacted, what
the terms, including the effective date, of such proposal will be.
Taxation of Holders of Preferred Stock, Equity Stock, Depositary Shares and
Warrants
If we offer 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 our 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 our
shareholders is provided nor is any representation made as to our tax status 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
We may sell the securities:
(1) through underwriters or dealers;
(2) through agents;
(3) directly to purchasers; or
(4) through a combination of any of these methods of sale.
Any underwriter or agent involved in the offer and sale of the securities
will be named in the applicable prospectus supplement.
Direct sales to investors or our shareholders may be accomplished through
subscription offerings or through shareholder purchase rights distributed to
shareholders. In connection with subscription offerings or the distribution of
shareholder purchase rights to shareholders, if all of the underlying
securities are not subscribed for, we may sell any unsubscribed securities to
third parties directly or through underwriters or agents. In
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addition, whether or not all of the underlying securities are subscribed for,
we may concurrently offer additional securities to third parties directly or
through underwriters or agents. If securities are to be sold through
shareholder purchase rights, the shareholder purchase rights will be
distributed as a dividend to the shareholders for which they will pay no
separate consideration. The prospectus supplement with respect to the offer of
securities under shareholder purchase rights will set forth the relevant terms
of the shareholder purchase rights, including:
(1) whether common stock, preferred stock or equity stock, or warrants
for those securities will be offered under the shareholder purchase rights;
(2) the number of those securities or warrants that will be offered under
the shareholder purchase rights;
(3) the period during which and the price at which the shareholder
purchase rights will be exercisable;
(4) the number of shareholder purchase rights then outstanding;
(5) any provisions for changes to or adjustments in the exercise price of
the shareholder purchase rights, and
(6) any other material terms of the shareholder purchase rights.
Underwriters may offer and sell the securities at:
(1) fixed prices, which may be changed;
(2) prices related to the prevailing market prices at the time of sale;
or
(3) negotiated prices.
We also may, from time to time, authorize underwriters acting as our 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 us 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 these dealers may
receive compensation in the form of discounts, concessions or commissions from
the underwriters or commissions from the purchasers for whom they may act as
agent, or both.
The applicable prospectus supplement will disclose (1) any underwriting
compensation we pay to underwriters or agents in connection with the offering
of securities and (2) any discounts, concessions or commissions allowed by
underwriters to participating dealers. Under the Securities Act, (1)
underwriters, dealers and agents participating in the distribution of the
securities may be deemed to be underwriters and (2) 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. We may
agree to indemnify underwriters, dealers and agents against civil liabilities,
including liabilities under the Securities Act and to make contribution to them
in connection with those liabilities.
If indicated in the applicable prospectus supplement, we may also offer and
sell securities through a firm that will remarket the securities. These firms
may act as principals for their own account or as our agents. These firms may
be deemed to be underwriters in connection with the securities being
remarketed. We may agree to indemnify these firms against liabilities,
including liabilities under the Securities Act.
If indicated in the applicable prospectus supplement, we will authorize
dealers acting as our agents to solicit offers by institutions to purchase
securities at the offering price set forth in that prospectus supplement under
delayed delivery contracts providing for payment and delivery on the dates
stated in the prospectus supplement. Each contract will be for an amount not
less than, and the aggregate principal amount of securities
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sold under contracts will 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 our approval. Contracts will not be subject to any conditions except
(1) the purchase by an institution of the securities covered by its contracts
will not at the time of delivery be prohibited under the laws of any
jurisdiction in the United States to which the institution is subject, and (2)
if the securities are being sold to underwriters, we will have sold to them the
total principal amount of the securities less the principal amount of the
securities covered by contracts. Agents and underwriters will have no
responsibility in respect of the delivery or performance of contracts.
Some of the underwriters and their affiliates may engage in transactions with
or perform services for us in the ordinary course of business.
LEGAL OPINIONS
David Goldberg, our senior vice president and general counsel, 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 our status as a REIT. See
"Federal Income Tax Consequences." Mr. Goldberg owns 97,880 shares of common
stock and 600 shares of preferred stock, and has options to acquire an
additional 184,501 shares of common stock.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule included in our Annual Report on Form 10-K
for the year ended December 31, 1998, as set forth in their report, which is
incorporated by reference in this prospectus and elsewhere in the registration
statement. Our financial statements and schedule are incorporated by reference
in reliance on Ernst & Young LLP's report, given on their authority as experts
in accounting and auditing.
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