PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED FEBRUARY 26, 1997
1,400,000 SHARES
[logo]
STORAGE USA, INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
Storage USA, Inc. (the "Company") is a self-managed, self-advised real
estate investment trust engaged in the business of owning, managing, acquiring,
developing and franchising self-storage facilities. As of December 31, 1996, the
Company owned 242 self-storage facilities containing approximately 16.4 million
net rentable square feet, managed for others 27 facilities containing an
additional 1.6 million net rentable square feet and had under development an
additional 1.3 million net rentable square feet.
All of the shares of Common Stock offered hereby are being sold by the
Company.
The Common Stock is listed on the New York Stock Exchange under the symbol
"SUS." On March 11, 1997, the last reported sale price of the Common Stock was
$38.25 per share. The shares of Common Stock are subject to certain restrictions
on ownership designed to preserve the Company's qualification as a real estate
investment trust for federal income tax purposes. In addition, the Company's
charter documents contain certain restrictions on ownership of the Common Stock
by foreign investors. See "Restrictions on Transfer of Capital Stock" in the
accompanying Prospectus.
Security Capital U.S. Realty ("USRealty") currently owns 34.6% of the
outstanding shares of Common Stock. USRealty has indicated that it intends to
purchase 739,733 shares of Common Stock directly from the Company prior to March
31, 1997, at the same effective purchase price paid by public investors in the
Offering (plus up to 110,960 additional shares in the event the Underwriter's
over-allotment option is exercised). Assuming this purchase is consummated,
USRealty will have a 34.6% ownership interest in the Company immediately
following the Offering. See "Underwriting."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH
IT RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Goldman, Sachs & Co. has agreed to purchase from the Company 1,400,000
shares of Common Stock for an aggregate purchase price of $50,738,625. The
Company has granted Goldman, Sachs & Co. an option for 30 days to purchase up to
210,000 additional shares of Common Stock, solely to cover over-allotments. If
such option is exercised in full, the total proceeds to the Company will be
$58,349,419 before deducting expenses payable by the Company, estimated to be
approximately $100,000.
Goldman, Sachs & Co. proposes to offer the 1,400,000 shares of Common Stock
included in the Offering from time to time for sale in one or more transactions
on the New York Stock Exchange, in the over-the-counter market or otherwise, at
market prices prevailing at the time of sale, at prices related to prevailing
market prices or at negotiated prices, subject to prior sale when, as and if
delivered to and accepted by Goldman, Sachs & Co. See "Underwriting."
The Company and its principal operating subsidiary, SUSA Partnership, L.P.,
have agreed to indemnify Goldman, Sachs & Co. against certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
The shares of Common Stock offered hereby are offered by Goldman, Sachs &
Co., as specified herein, subject to receipt and acceptance by them and subject
to their right to reject any order in whole or in part. It is expected that the
certificates for the shares will be ready for delivery in New York, New York on
or about March 17, 1997, against payment therefor in immediately available
funds.
GOLDMAN, SACHS & CO.
The date of this Prospectus Supplement is March 11, 1997.
<PAGE>
THE UNDERWRITER MAY ENGAGE IN TRANSACTIONS THAT MAINTAIN OR OTHERWISE
AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING OVER-ALLOTMENT AND
SHORT-COVERING TRANSACTIONS IN SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY
BID, DURING AND AFTER THE OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
<PAGE>
THE COMPANY
The Company is a self-managed, self-advised real estate investment trust
("REIT") engaged in the business of owning, managing, acquiring, developing and
franchising self-storage facilities. The Company operates through SUSA
Partnership, L.P. (the "Partnership"), in which it is the sole general partner
and in which it owned an approximately 93% partnership interest as of December
31, 1996. At December 31, 1996, the Company owned 242 facilities containing
approximately 16.4 million net rentable square feet in 29 states and the
District of Columbia and managed for others 27 facilities containing an
additional 1.6 million net rentable square feet, making it the fourth largest
operator of self-storage facilities in the United States. The Company had under
development at that date an additional 1.3 million net rentable square feet. The
facilities are located in or near major metropolitan areas, operate under the
Storage USAt name, and offer low-cost, easily accessible and enclosed storage
space for personal and business use. Average physical and economic occupancy for
the facilities owned by the Company at December 31, 1996, were 86% and 79%,
respectively. Average weighted annual rent per square foot for these facilities
was $9.73.
The Company is a fully-integrated organization that has expertise in
acquisition, development, construction and management of self-storage facilities
and has approximately 950 employees. The Company's primary business objectives
are to increase its cash flow from operations and the value of the Company's
facilities. The Company plans to achieve these objectives by improving the
operations of its facilities and selectively expanding its portfolio of
facilities through acquisition and development. The Company believes that it is
distinguishable from most of its competitors by its access to capital markets,
the management information systems it has developed, the skilled personnel it
has gathered and trained for managing self-storage facilities and its expertise
in acquiring and developing self-storage facilities in diverse locales with
potential for increased occupancy and rental rates.
RECENT DEVELOPMENTS
On January 29, 1997, the Company announced its unaudited results of
operations for the fourth quarter and year ended December 31, 1996. Revenues,
net income and funds from operations for the fourth quarter of 1996 were
$32,391,000, $13,344,000 and $16,742,000, respectively, versus $20,571,000,
$8,145,000 and $10,453,000, respectively, for the fourth quarter of 1995. Net
income per share was $0.54 for the fourth quarter of 1996, a 17.4% increase over
the $0.46 per share for the same period of 1995. For the year ended December 31,
1996, revenues, net income and funds from operations were $107,517,000,
$43,526,000 and $54,572,000, respectively, compared to the $68,007,000,
$29,153,000 and $36,452,000, respectively, for the year ended December 31, 1995.
Net income per share was $2.09 for the year ended December 31, 1996, an 11.8%
increase over the $1.87 per share for 1995.
During the year ended December 31, 1996, the Company acquired 82
self-storage facilities totaling 5,401,000 square feet for a cost of
approximately $304,000,000, including the issuance of 901,374 Partnership units
valued at $30,728,000. Subsequent to the end of the year, the Company acquired
five facilities totaling 313,000 square feet at a cost of $13,360,000 and
currently has contracts to acquire six facilities at an aggregate cost of
$21,265,000. In addition to its acquisitions during 1996, the Company opened two
newly constructed facilities in northern Virginia totaling 123,000 square feet
for a cost of $9,268,000 and completed five expansions to existing facilities in
Sarasota and North Lauderdale, Florida; Memphis, Tennessee; Albuquerque, New
Mexico; and Wethersfield, Connecticut, totaling 129,000 square feet. The Company
currently has plans to develop 21 new facilities containing 1,650,000 square
feet, primarily in the Washington, DC, San Francisco, California and Memphis,
Tennessee areas. Of these, 12 projects are under construction or in construction
planning, with expected costs totaling $46,000,000 and completion dates
anticipated to range from the second quarter of 1997 through the first quarter
of 1998. Expansions are planned for 23 existing facilities, and of these, 18 are
under way with planned completion dates ranging from the second to fourth
quarters of 1997. Estimated costs and square feet of the 18 expansions under way
are $12,800,000 and 320,000, respectively.
S-3
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of 1,400,000 shares of Common
Stock are estimated at $50,638,625 ($58,249,419 if the Underwriter's
overallotment option (the "Option") is exercised in full). The Company presently
intends to contribute the net proceeds to the Partnership in exchange for
additional units of partnership interest and, after such contribution, will own
approximately a 93.2% partnership interest in the Partnership (93.3% if the
Option is exercised in full). The Partnership will use the net proceeds to repay
debt incurred under its revolving lines of credit to finance the acquisition of
self-storage facilities. Amounts outstanding under the lines of credit bore
interest at a weighted average interest rate of 6.78% during February 1997.
Pending such repayment, the net proceeds may be invested in short-term
income-producing investments such as commercial paper, government securities or
money market funds that invest in government securities. The $75 million line of
credit is payable on February 6, 1998, and the $30 million line of credit is
payable on demand.
PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS
The Common Stock has been traded on the New York Stock Exchange ("NYSE")
under the symbol "SUS" since March 16, 1994. The following table sets forth the
quarterly high and low sales prices per share reported on the NYSE.
<TABLE>
<CAPTION>
DIVIDENDS
1994 HIGH LOW DECLARED
- ---- ---- --- ---------
<S> <C> <C> <C>
1st Quarter (from March 16 through March 31)................................. $ 26 1/2 $ 24 $0.03(1)
2nd Quarter.................................................................. 28 23 1/8 0.46
3rd Quarter.................................................................. 27 1/4 24 1/2 0.46
4th Quarter.................................................................. 27 1/2 23 1/2 0.46
<CAPTION>
1995
- ----
<S> <C> <C> <C>
1st Quarter.................................................................. 29 1/4 26 1/2 0.51
2nd Quarter.................................................................. 29 3/4 27 3/4 0.51
3rd Quarter.................................................................. 31 1/4 28 3/8 0.51
4th Quarter.................................................................. 32 3/4 28 3/4 0.51
<CAPTION>
1996
- ----
<S> <C> <C> <C>
1st Quarter.................................................................. 34 7/8 30 0.5625
2nd Quarter.................................................................. 34 5/8 31 3/8 0.5625
3rd Quarter.................................................................. 34 1/4 32 0.5625
4th Quarter.................................................................. 38 3/4 32 0.5625
<CAPTION>
1997
- ----
<S> <C> <C> <C>
1st Quarter (through March 11, 1997)......................................... 39 1/4 36 3/8 - (2)
</TABLE>
(1) For the period March 24 through March 31, 1994.
(2) A dividend for the first quarter of 1997 has not yet been declared.
On March 11, 1997, the last reported sale price of the Common Stock on the
NYSE was $38.25 per share. On March 11, 1997, the Company had 334 shareholders
of record. Included in this number are nominees or "street name" holders.
S-4
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
This discussion supplements the discussion set forth in the accompanying
Prospectus under the heading "Federal Income Tax Considerations." Hunton &
Williams has acted as counsel to the Company in connection with the Offering and
the Company's election to be taxed as a REIT. In the opinion of Hunton &
Williams, the Company qualified to be taxed as a REIT pursuant to sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), for
its taxable years ended December 31, 1994 through December 31, 1996, and the
Company's organization and proposed method of operation will enable it to
qualify to be taxed as a REIT for its taxable year ending December 31, 1997, and
future taxable years. Investors should be aware, however, that opinions of
counsel are not binding upon the Internal Revenue Service or any court. It must
be emphasized that Hunton & Williams' opinion is based on various assumptions
and is conditioned upon certain representations made by the Company as to
factual matters, including representations regarding the nature of the Company's
properties and the future conduct of its business. Such factual assumptions and
representations are set out in the federal income tax opinion that will be
delivered by Hunton & Williams at the closing of the Offering. Moreover, such
qualification and taxation as a REIT depends upon the Company's ability to meet
on a continuing basis, through actual annual operating results, distribution
levels and stock ownership, the various qualification tests imposed under the
Code. Hunton & Williams will not review the Company's compliance with those
tests on a continuing basis. Accordingly, no assurance can be given that the
actual results of the Company's operations for any particular taxable year will
satisfy such requirements. For a discussion of the tax consequences of failure
to qualify as a REIT, see "Federal Income Tax Considerations -- Failure to
Qualify" in the accompanying Prospectus.
UNDERWRITING
Subject to the terms and conditions contained in the Underwriting Agreement
and the related Pricing Agreement (collectively, the "Underwriting Agreement"),
the Company has agreed to sell to Goldman, Sachs & Co. (the "Underwriter"), and
Goldman, Sachs & Co. has agreed to purchase from the Company, an aggregate of
1,400,000 shares of Common Stock. Under the terms and conditions of the
Underwriting Agreement, Goldman, Sachs & Co. is committed to take and pay for
all of the shares of Common Stock included in the Offering, if any are taken.
The Underwriter has advised the Company that it proposes initially to offer
the shares of Common Stock to the public from time to time for sale in one or
more transactions on the NYSE, in the over-the-counter market or otherwise, at
market prices prevailing at the time of sale, at prices related to prevailing
market prices or at negotiated prices, subject to prior sale when, as and if
delivered to and accepted by the Underwriter. In connection with the sale of the
1,400,000 shares of Common Stock included in the Offering, the Underwriter may
be deemed to have received compensation from the Company in the form of
underwriting discounts. The Underwriter may effect such transactions by selling
Common Stock to or through dealers, and such dealers may receive compensation in
the form of discounts, concessions or commissions from the Underwriter and/or
the purchasers of such Common Stock for whom they may act as agents or to whom
they may sell as principal.
The Company has granted Goldman, Sachs & Co. an Option, exercisable for 30
days after the date of this Prospectus Supplement, to purchase up to 210,000
additional shares of Common Stock solely to cover over-allotments, if any. If
the Option is exercised in full, the total proceeds to the Company will be
$58,349,419 before deducting expenses payable by the Company, estimated to be
approximately $100,000.
During and after the Offering, the Underwriter may purchase and sell shares
of Common Stock in the open market. These transactions may include overallotment
transactions and purchases to cover short positions created in connection with
the Offering. The Underwriter also may impose a penalty bid, whereby selling
concessions allowed to broker-dealers in respect of the shares of Common Stock
sold in the Offering for their account may be reclaimed by the Underwriter.
These activities may maintain or otherwise affect the market price of the Common
Stock which may be higher than the price that might otherwise prevail in the
open market. These transactions may be effected on the NYSE or otherwise, and
these activities, if commenced, may be discontinued at any time.
The Company has agreed that during the period beginning from the date of
this Prospectus Supplement and continuing to and including the date 90 days
after the date of this Prospectus Supplement not to offer, sell, contract to
sell or otherwise dispose of any securities of the Company (other than pursuant
to employee stock incentive plans or dividend reinvestment plans existing, or on
the conversion or exchange of convertible or exchangeable securities
outstanding, on the date of this Prospectus Supplement) that are substantially
similar to the shares of
S-5
<PAGE>
Common Stock or that are convertible or exchangeable into securities that are
substantially similar to the shares of Common Stock, without the prior written
consent of Goldman, Sachs & Co., except for the shares of Common Stock offered
hereby or to be sold to USRealty as described herein or units of partnership
interest in the Partnership (provided that, with respect to any units issued
after the date hereof, the conversion of such units to Common Stock will be
subject to the 90 day restriction described above).
In addition to the 1,400,000 shares of Common Stock offered by the
Underwriter hereby, USRealty, which currently holds 34.6% of the outstanding
shares of the Common Stock of the Company, has indicated that it intends to
purchase 739,733 shares of Common Stock directly from the Company prior to March
31, 1997 (850,693 shares, if the Option is exercised in full), at the same
effective purchase price paid by public investors in the Offering. See "Plan of
Distribution" in the accompanying Prospectus for a description of USRealty's
contractual rights to participate in certain issuances of the Company's equity
securities. Goldman, Sachs & Co. will not participate in, or receive any
discount or commission on, the sale of the Common Stock to USRealty.
In the Underwriting Agreement, the Company and the Partnership have agreed
to indemnify Goldman, Sachs & Co. against certain liabilities, including
liabilities under the Securities Act of 1933, as amended.
EXPERTS
The consolidated financial statements of the Company incorporated by
reference in its Annual Report on Form 10-K for the year ended December 31,
1995, and the historical summaries of combined gross revenue and direct
operating expenses included in the Company's Current Reports on Form 8-K, dated
April 5, 1996, Form 8-K/A, dated July 17, 1996, Form 8-K/A, dated September 16,
1996, Form 8-K, dated October 24, 1996, Form 8-K/A, dated October 31, 1996, and
Form 8-K/A dated February 18, 1997, have been audited by Coopers & Lybrand
L.L.P., independent accountants, as set forth in their reports thereon included
therein and incorporated herein by reference. Such financial statements and
summaries are incorporated herein by reference in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Hunton & Williams, Richmond, Virginia, and for Goldman,
Sachs & Co. by Sullivan & Cromwell, New York, New York, who will rely on the
opinion of Hunton & Williams as to matters of Tennessee law.
S-6
<PAGE>
PROSPECTUS
$250,000,000
STORAGE USA, INC.
PREFERRED STOCK, DEPOSITARY SHARES,
COMMON STOCK AND WARRANTS
$350,000,000
SUSA PARTNERSHIP, L.P.
DEBT SECURITIES
Storage USA, Inc. (the "Company") may from time to time offer its (i)
shares of Preferred Stock, $.01 par value ("Preferred Stock"), (ii) depositary
shares representing entitlement to all rights and preferences of a fraction of a
share of Preferred Stock of a specified series and represented by depositary
receipts ("Depositary Shares"), (iii) shares of Common Stock, $.01 par value
("Common Stock"), and (iv) warrants exercisable for either Preferred Stock or
Common Stock ("Warrants"), having an aggregate initial public offering price not
to exceed $250,000,000, on terms to be determined at the time of offering.
SUSA Partnership, L.P. (the "Partnership") may from time to time offer in
one or more series unsecured, non-convertible debt securities ("Debt
Securities") having an aggregate initial public offering price not to exceed
$350,000,000, on terms to be determined at the time of offering. The Preferred
Stock, the Depositary Shares, the Common Stock, the Warrants and the Debt
Securities offered hereby (collectively, the "Offered Securities") may be
offered, separately or as units with other Offered Securities, in separate
series, in amounts, at prices and on terms to be determined at the time of sale
and to be set forth in a supplement to this Prospectus (a "Prospectus
Supplement").
The Debt Securities will be effectively subordinated to any secured
indebtedness of the Partnership and any indebtedness of the Partnership's
subsidiaries. At December 31, 1996, the Partnership and its subsidiaries had
$45.7 million in secured indebtedness outstanding. The Partnership's
subsidiaries had no unsecured indebtedness outstanding at December 31, 1996. The
Debt Securities will rank in pari passu with all other unsecured and
unsubordinated indebtedness of the Partnership. Subject to certain limitations
set forth in the indenture regarding the Debt Securities, the Partnership may
incur additional secured or unsecured indebtedness. See "Description of Debt
Securities -- Certain Covenants -- Limitations on Incurrence of Indebtedness."
Except as described under "Description of Debt Securities -- Merger,
Consolidation or Sale" or "Description of Debt Securities -- Certain Covenants"
or as may be set forth in any Prospectus Supplement, the applicable indenture
will not contain any provisions that would limit the ability of the Partnership
or its subsidiaries to incur indebtedness or that would afford holders of the
Debt Securities protection in the event of a significant transaction involving
the Partnership that may adversely affect the holders of the Debt Securities.
The specific terms of the Offered Securities in respect of which this
Prospectus is being delivered will be set forth in the applicable Prospectus
Supplement and will include, where applicable, (i) in the case of Preferred
Stock, the series designation and number of shares, the dividend, liquidation,
redemption, conversion, voting and other rights, the initial public offering
price and whether interests in the Preferred Stock will be represented by
Depositary Shares; (ii) in the case of Depositary Shares, the fractional share
of Preferred Stock represented by each such Depositary Share; (iii) in the case
of Common Stock, the number of shares and initial public offering price; (iv) in
the case of Warrants, the specific title and aggregate number, the number of
shares purchasable upon exercise of the Warrants, the issue price and the
exercise price and in the case of Warrants for Preferred Stock, the designation,
aggregate number and terms of the series of Preferred Stock purchasable upon
exercise of such Warrants; (v) in the case of Debt Securities, the specific
title, aggregate principal amount, form (which may be certificated or global),
authorized denominations, maturity, rate (or manner of calculation thereof) and
time of payment of interest, terms for redemption at the option of the
Partnership or repayment at the option of the holder, terms for sinking fund
payments, covenants and any initial public offering price; and (vi) in the case
of all Offered Securities, whether such Offered Securities will be offered
separately or as a unit with other Offered Securities. In addition, such
specific terms may include limitations on direct or beneficial ownership and
restrictions on transfer of the Offered Securities, in each case as may be
appropriate to preserve the status of the Company as a real estate investment
trust ("REIT") for federal income tax purposes.
The applicable Prospectus Supplement will also contain information, where
applicable, concerning material United States federal income tax considerations
relating to, and any listing on a securities exchange of, the Offered Securities
covered thereby.
The Offered Securities may be offered directly, through agents designated
from time to time by the Company or the Partnership or to or through
underwriters or dealers. If any designated agents or any underwriters are
involved in the sale of Offered Securities, they will be identified and their
compensation will be described in the applicable Prospectus Supplement. See
"Plan of Distribution." No Offered Securities may be sold without delivery of
the applicable Prospectus Supplement describing such Offered Securities and the
method and terms of the offering thereof.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is February 26, 1997.
<PAGE>
AVAILABLE INFORMATION
The Partnership and the Company, its general partner, are subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and, in accordance therewith, the Company and the
Partnership file reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The reports, proxy
statements and other information filed by the Company and the Partnership with
the Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at its Regional Offices at Suite 1400, Northwestern Atrium
Center, 500 West Madison Street, Chicago, Illinois 60661 and Suite 1300, 7 World
Trade Center, New York, New York 10048, can also be inspected and copied at the
offices of the New York Stock Exchange, 20 Broad Street, New York, New York
10005. The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding the Company and the
Partnership and other registrants that have been filed electronically with the
Commission. The address of such site is http://www.sec.gov.
This Prospectus is part of a registration statement on Form S-3 (together
with all amendments and exhibits thereto, the "Registration Statement") filed
with the Commission under the Securities Act of 1933, as amended (the
"Securities Act"). This Prospectus does not contain all the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules of the Commission. For further information, reference
is made to the Registration Statement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company (File No. 001-12910) and the
Partnership (File No. 333-3344) with the Commission are incorporated herein by
reference:
(i) the Company's Annual Report on Form 10-K, for the year ended
December 31, 1995, as amended by the Annual Report on Form
10-K/A-1, filed on June 27, 1996;
(ii) the Company's Quarterly Reports on Form 10-Q, for the quarter ended
March 31, 1996, as amended by the Quarterly Report on Form 10-Q/A
filed on June 27, 1996, for the quarter ended June 30, 1996, filed
on August 14, 1996, and for the quarter ended September 30, 1996,
filed on November 14, 1996;
(iii) the Company's Current Reports on Form 8-K filed on March 7, April
1, April 5, June 21, as amended by the Current Report on Form 8-K/A
filed on July 17, August 2, as amended by the Current Report on
Form 8-K/A filed on September 16, October 24, as amended by the
Current Report on Form 8-K/A filed on October 31, November 1,
November 8 and December 19, 1996, as amended by the Current Report
on Form 8-K/A filed on February 18, 1997, and February 18, 1997;
(iv) the Partnership's Quarterly Reports on Form 10-Q, for the quarter
ended June 30, 1996, filed on August 14, 1996, and the
Partnership's Quarterly Report on Form 10-Q, for the quarter ended
September 30, 1996, filed on November 14, 1996;
(v) the Partnership's Current Reports on Form 8-K filed on October 24,
November 1, November 5, as amended by the Current Report on Form
8-K/A filed on November 12, and December 19, 1996, as amended by
the Current Report on Form 8-K/A filed on February 18, 1997, and
February 18, 1997;
(vi) the financial statements of the Partnership included on pages F-29
to F-49 of the Partnership's Registration Statement on Form S-3
(File No. 333-3344) filed on July 23, 1996; and
(vii) the description of the Company's Common Stock contained in the
Company's Registration Statement on Form 8-A dated March 15, 1994.
All documents filed by the Company and the Partnership pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date hereof and prior to
the termination of the offering of all of the Offered Securities shall be deemed
to be incorporated by reference herein. Any statement contained herein or in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein, in any accompanying Prospectus
Supplement relating to a specific offering of Offered Securities or in any other
subsequently filed document, as the case may be, which also is or is deemed to
be incorporated by reference herein, modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus or any
accompanying Prospectus Supplement.
The Company and the Partnership will provide on request and without charge
to each person to whom this Prospectus is delivered a copy (without exhibits) of
any or all documents incorporated by reference into this Prospectus. Requests
for such copies should be directed to Storage USA, Inc., 10440 Little Patuxent
Parkway, Suite 1100, Columbia, Maryland 21044, Attention: Secretary (telephone
(410) 730-9500).
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<PAGE>
THE COMPANY AND THE PARTNERSHIP
The Company is a self-managed, self-advised real estate investment trust
("REIT") engaged in the business of owning, managing, acquiring, developing and
franchising self-storage facilities. The Company operates through the
Partnership, in which it is the sole general partner and in which it owned an
approximately 93% partnership interest as of December 31, 1996. The description
of business, property information, policies with respect to certain activities
and management information for the Partnership are substantially identical to
that of the Company. Such information may be found in the Company's Annual
Report on Form 10-K for the year ended December 31, 1995, as amended, and in the
Company's 1996 Annual Meeting Proxy Statement filed April 5, 1996.
At December 31, 1996, the Company, through the Partnership, owned 242
facilities containing 16.4 million net rentable square feet in 29 states and the
District of Columbia and managed for others 27 facilities containing an
additional 1.6 million net rentable square feet. Average physical and economic
occupancy for the facilities owned by the Partnership at December 31, 1996, were
86% and 79%, respectively. Average weighted annual rent per square foot for
these facilities was $9.73. At December 31, 1996, the Company, through the
Partnership, had under construction or in development approximately 1.3 million
net rentable square feet contained in 12 new facilities and in expansions to 18
existing facilities.
The Company is a Tennessee corporation and the Partnership is a Tennessee
limited partnership. Their executive offices are located at 10440 Little
Patuxent Parkway, Suite 1100, Columbia, Maryland 21044 and their telephone
number is (410) 730-9500.
USE OF PROCEEDS
The Company will contribute the net proceeds of any sale of Preferred
Stock, Depository Shares, Common Stock or Warrants to the Partnership in
exchange for additional units of general or limited partnership interest. Unless
otherwise set forth in the applicable Prospectus Supplement, the net proceeds
from the sale of any Offered Securities will be used by the Partnership for
general purposes, which may include repayment of indebtedness, making
improvements to properties and the acquisition and development of additional
properties.
RATIOS OF EARNINGS TO FIXED CHARGES
The Company's ratio of earnings to fixed charges for the nine months ended
September 30, 1996, was 5.25 and for the year ended December 31, 1995, was 7.45.
The Partnership's ratio of earnings to fixed charges for the nine months ended
September 30, 1996, was 5.5 and for the year ended December 31, 1995, was 7.73.
The Company completed its initial public offering and commenced business as
a REIT on March 24, 1994. For the period January 1, 1994, through March 23,
1994, fixed charges of the Company exceeded its earnings by $165,000. The
Company's ratio of earnings to fixed charges for the period March 24, 1994, to
December 31, 1994, was 9.18 and the Company's pro forma ratio of earnings to
fixed charges for the year ended December 31, 1994, was 8.54. For the period
January 1, 1994, through March 23, 1994, fixed charges of the Partnership
exceeded its earnings by $165,000. The Partnership's ratio of earnings to fixed
charges for the period March 24, 1994, to December 31, 1994, was 9.38 and the
Partnership's pro forma ratio of earnings to fixed charges for the year ended
December 31, 1994, was 8.63.
The pro forma results of operations from which the ratio of earnings to
fixed charges for 1994 is calculated reflect the Company's and the Partnership's
annual results of operations and assume that the Company's initial public
offering and related transactions, including the contribution of the net
proceeds from such offering to the Partnership, were completed on January 1,
1994. The Company's ratio of earnings to fixed charges for the year ended
December 31, 1993, was 1.10. For the years ended December 31, 1992, and 1991,
respectively, fixed charges exceeded earnings by $3.0 and $4.2 million.
The ratios of earnings to fixed charges were computed by dividing earnings
by fixed charges. For purposes of computing these ratios, earnings consist of
income before extraordinary items plus fixed charges other than capitalized
interest, and fixed charges consist of interest on borrowed funds (including
capitalized interest) and amortization of debt discount and expense. To date,
the Company and the Partnership have not issued any preferred equity interests;
therefore, the ratios of earnings to combined fixed charges and preferred share
dividends are the same as the ratios of earnings to fixed charges.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is authorized to issue 150,000,000 shares of Common Stock, $.01
par value, and 5,000,000 shares of Preferred Stock, $.01 par value. At December
31, 1996, there were 24,722,737 shares of Common Stock outstanding and no shares
of Preferred Stock outstanding.
The following information with respect to the capital stock of the Company
is subject to the detailed provisions of the Company's Amended Charter (the
"Charter") and Amended and Restated Bylaws (the "Bylaws"), as currently in
effect. These statements do not purport to be complete, or to give full effect
to the provisions of statutory or common law, and are subject to, and are
qualified in their entirety by reference to, the terms of the Charter and
Bylaws, which are incorporated by reference herein.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters voted on by shareholders, including elections of directors. Except as
otherwise required by law or provided in any resolution adopted by the Board of
Directors with respect to any series of Preferred Stock, the holders of such
shares of Common Stock exclusively possess all voting power. The Charter does
not provide for cumulative voting in the election of directors. Subject to any
preferential rights of any outstanding series of Preferred Stock, the holders of
Common Stock are entitled to such distributions as may be declared from time to
time by the Board of Directors from funds available therefor, and upon
liquidation are entitled to receive pro rata all assets of the Company available
for distribution to such holders. All shares of Common Stock issued will be
fully paid and nonassessable, and the holders thereof will not have preemptive
rights.
The Transfer Agent for the Common Stock is First Union National Bank of
North Carolina, Charlotte, North Carolina. The Common Stock is traded on the
NYSE under the symbol "SUS." The Company will apply to the NYSE to list the
additional shares of Common Stock to be sold pursuant to any Prospectus
Supplement, and the Company anticipates that such shares will be so listed.
PREFERRED STOCK
The following description of the terms of the Preferred Stock sets forth
certain general terms and provisions of the Preferred Stock to which a
Prospectus Supplement may relate. Specific terms of any series of Preferred
Stock offered by a Prospectus Supplement will be described in that Prospectus
Supplement. The description set forth below is subject to and qualified in its
entirety by reference to the Articles of Amendment to the Charter fixing the
preferences, limitations and relative rights of a particular series of Preferred
Stock.
GENERAL. Under the Charter, the Board of Directors of the Company is
authorized, without further shareholder action, to provide for the issuance of
up to 5,000,000 shares of Preferred Stock, in such series, with such
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications or other provisions, as may be fixed
by the Board of Directors.
The Preferred Stock will have the dividend, liquidation, redemption,
conversion and voting rights set forth below unless otherwise provided in the
Prospectus Supplement relating to a particular series of Preferred Stock.
Reference is made to the Prospectus Supplement relating to the particular series
of Preferred Stock offered thereby for specific terms, including: (i) the title
and liquidation preference per share of such Preferred Stock and the number of
shares offered; (ii) the price at which such series will be issued; (iii) the
dividend rate (or method of calculation), the dates on which dividends shall be
payable and the dates from which dividends shall commence to accumulate; (iv)
any redemption or sinking fund provisions of such series; (v) any conversion
provisions of such series; and (vi) any additional dividend, liquidation,
redemption, sinking fund and other rights, preferences, privileges, limitations
and restrictions of such series.
The Preferred Stock will, when issued, be fully paid and nonassessable.
Unless otherwise specified in the Prospectus Supplement relating to a particular
series of Preferred Stock, each series will rank on a parity as to dividends and
distributions in the event of a liquidation with each other series of Preferred
Stock and, in all cases, will be senior to the Common Stock.
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DIVIDEND RIGHTS. Holders of Preferred Stock of each series will be entitled
to receive, when, as and if declared by the Board of Directors, out of assets of
the Company legally available therefor, cash dividends at such rates and on such
dates as are set forth in the Prospectus Supplement relating to such series of
Preferred Stock. Such rate may be fixed or variable or both and may be
cumulative, noncumulative or partially cumulative.
If the applicable Prospectus Supplement so provides, as long as any shares
of Preferred Stock are outstanding, no dividends will be declared or paid or any
distributions be made on the Common Stock, other than a dividend payable in
Common Stock, unless the accrued dividends on each series of Preferred Stock
have been fully paid or declared and set apart for payment and the Company shall
have set apart all amounts, if any, required to be set apart for all sinking
funds, if any, for each series of Preferred Stock.
If the applicable Prospectus Supplement so provides, when dividends are not
paid in full upon any series of Preferred Stock and any other series of
Preferred Stock ranking on a parity as to dividends with such series of
Preferred Stock, all dividends declared upon such series of Preferred Stock and
any other series of Preferred Stock ranking on a parity as to dividends will be
declared pro rata so that the amount of dividends declared per share on such
series of Preferred Stock and such other series will in all cases bear to each
other the same ratio that accrued dividends per share on such series of
Preferred Stock and such other series bear to each other.
Each series of Preferred Stock will be entitled to dividends as described
in the Prospectus Supplement relating to such series, which may be based upon
one or more methods of determination. Different series of Preferred Stock may be
entitled to dividends at different dividend rates or based upon different
methods of determination. Except as provided in the applicable Prospectus
Supplement, no series of Preferred Stock will be entitled to participate in the
earnings or assets of the Company.
RIGHTS UPON LIQUIDATION. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the holders of each
series of Preferred Stock will be entitled to receive out of the assets of the
Company available for distribution to shareholders the amount stated or
determined on the basis set forth in the Prospectus Supplement relating to such
series, which may include accrued dividends, if such liquidation, dissolution or
winding up is involuntary, or may equal the current redemption price per share
(otherwise than for the sinking fund, if any, provided for such series) provided
for such series set forth in such Prospectus Supplement, if such liquidation,
dissolution or winding up is voluntary, and on such preferential basis as is set
forth in such Prospectus Supplement. If, upon any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the amounts payable with
respect to Preferred Stock of any series and any other shares of stock of the
Company ranking as to any such distribution on a parity with such series of
Preferred Stock are not paid in full, the holders of Preferred Stock of such
series and of such other shares will share ratably in any such distribution of
assets of the Company in proportion to the full respective preferential amounts
to which they are entitled or on such other basis as is set forth in the
applicable Prospectus Supplement. The rights, if any, of the holders of any
series of Preferred Stock to participate in the assets of the Company remaining
after the holders of other series of Preferred Stock have been paid their
respective specified liquidation preferences upon any liquidation, dissolution
or winding up of the Company will be described in the Prospectus Supplement
relating to such series.
REDEMPTION. A series of Preferred Stock may be redeemable, in whole or in
part, at the option of the Company, and may be subject to mandatory redemption
pursuant to a sinking fund, in each case upon terms, at the times, the
redemption prices and for the types of consideration set forth in the Prospectus
Supplement relating to such series. The Prospectus Supplement relating to a
series of Preferred Stock which is subject to mandatory redemption shall specify
the number of shares of such series that shall be redeemed by the Company in
each year commencing after a date to be specified, at a redemption price per
share to be specified, together with an amount equal to any accrued and unpaid
dividends thereon to the date of redemption.
If, after giving notice of redemption to the holders of a series of
Preferred Stock, the Company deposits with a designated bank funds sufficient to
redeem such Preferred Stock, then from and after such deposit, all shares called
for redemption will no longer be outstanding for any purpose, other than the
right to receive the redemption price and the right to convert such shares into
other classes of stock of the Company. The redemption price will be stated in
the Prospectus Supplement relating to a particular series of Preferred Stock.
Except as indicated in the applicable Prospectus Supplement, the Preferred
Stock is not subject to any mandatory redemption at the option of the holder.
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SINKING FUND. The Prospectus Supplement for any series of Preferred Stock
will state the terms, if any, of a sinking fund for the purchase or redemption
of that series.
CONVERSION RIGHTS. The Prospectus Supplement for any series of Preferred
Stock will state the terms, if any, on which shares of that series are
convertible into shares of Common Stock or another series of Preferred Stock.
The Preferred Stock will have no preemptive rights.
VOTING RIGHTS. Except as indicated in the Prospectus Supplement relating to
a particular series of Preferred Stock, or except as expressly required by
Tennessee law, a holder of Preferred Stock will not be entitled to vote. Except
as indicated in the Prospectus Supplement relating to a particular series of
Preferred Stock, in the event the Company issues full shares of any series of
Preferred Stock, each such share will be entitled to one vote on matters on
which holders of such series of Preferred Stock are entitled to vote.
Under Tennessee law, the affirmative vote of the holders of a majority of
the outstanding shares of all series of Preferred Stock entitled to vote, voting
as a separate voting group, will be required for (i) the authorization of any
class of stock ranking prior to or on a parity with Preferred Stock or the
increase in the number of authorized shares of any such stock, (ii) any increase
in the number of authorized shares of Preferred Stock and (iii) certain
amendments to the Articles that may be adverse to the rights of Preferred Stock
outstanding.
TRANSFER AGENT AND REGISTRAR. The transfer agent, registrar and dividend
disbursement agent for a series of Preferred Stock will be selected by the
Company and be described in the applicable Prospectus Supplement. The registrar
for shares of Preferred Stock will send notices to shareholders of any meetings
at which holders of Preferred Stock have the right to vote on any matter.
DESCRIPTION OF DEPOSITARY SHARES
GENERAL
The Company may, at its option, elect to offer fractional shares of
Preferred Stock, rather than full shares of Preferred Stock. In such event, the
Company will issue to the public receipts for Depositary Shares, each of which
will represent a fraction (to be set forth in the Prospectus Supplement relating
to a particular series of Preferred Stock) of a share of a particular series of
Preferred Stock as described below.
The shares of any series of Preferred Stock represented by Depositary
Shares will be deposited under a Deposit Agreement (the "Deposit Agreement")
between the Company and the depositary named in the applicable Prospectus
Supplement (the "Depositary"). Subject to the terms of the Deposit Agreement,
each owner of a Depositary Share will be entitled, in proportion to the
applicable fraction of a share of Preferred Stock represented by such Depositary
Share, to all the rights and preferences of the Preferred Stock represented
thereby (including dividend, voting, redemption and liquidation rights).
The Depositary Shares will be evidenced by depositary receipts issued
pursuant to the Deposit Agreement ("Depositary Receipts"). Depositary Receipts
will be distributed to those persons purchasing the fractional shares of
Preferred Stock in accordance with the terms of the offering. If Depositary
Shares are issued, copies of the forms of Deposit Agreement and Depositary
Receipt will be incorporated by reference in the Registration Statement of which
this Prospectus is a part, and the following summary is qualified in its
entirety by reference to such documents.
Pending the preparation of definitive engraved Depositary Receipts, the
Depositary may, upon the written order of the Company, issue temporary
Depositary Receipts substantially identical to (and entitling the holders
thereof to all the rights pertaining to) the definitive Depositary Receipts but
not in definitive form. Definitive Depositary Receipts will be prepared
thereafter without unreasonable delay, and temporary Depositary Receipts will be
exchangeable for definitive Depositary Receipts at the Company's expense.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Depositary will distribute all cash dividends or other cash
distributions received in respect of the Preferred Stock to the record holders
of Depositary Shares relating to such Preferred Stock in proportion to the
number of such Depositary Shares owned by such holders. The Depositary shall
distribute only such amount, however, as can be distributed without attributing
to any holder of Depositary Shares a fraction of one cent, and the balance not
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so distributed shall be added to and treated as part of the next sum received by
the Depositary for distribution to record holders of Depositary Shares.
In the event of a distribution other than in cash, the Depositary will
distribute property received by it to the record holders of Depositary Shares
entitled thereto, unless the Depositary determines that it is not feasible to
make such distribution, in which case the Depositary may, with the approval of
the Company, sell such property and distribute the net proceeds from such sale
to such holders.
The Deposit Agreement will also contain provisions relating to the manner
in which any subscription or similar rights offered by the Company to holders of
the Preferred Stock shall be made available to the holders of Depositary Shares.
REDEMPTION OF DEPOSITARY SHARES
If a series of Preferred Stock represented by Depositary Shares is subject
to redemption, the Depositary Shares will be redeemed from the proceeds received
by the Depositary resulting from the redemption, in whole or in part, of such
series of Preferred Stock held by the Depositary. The redemption price per
Depositary Share will be equal to the applicable fraction of the redemption
price per share payable with respect to such series of Preferred Stock. Whenever
the Company redeems shares of Preferred Stock held by the Depositary, the
Depositary will redeem as of the same redemption date the number of Depositary
Shares representing the shares of Preferred Stock so redeemed. If fewer than all
the Depositary Shares are to be redeemed, the Depositary Shares to be redeemed
will be selected by lot or pro rata as may be determined by the Depositary.
After the date fixed for redemption, the Depositary Shares so called for
redemption will no longer be outstanding and all rights of the holders of the
Depositary Shares will cease, except the right to receive the money, securities
or other property payable upon such redemption and any money, securities or
other property to which the holders of such Depositary Shares were entitled upon
such redemption upon surrender to the Depositary of the Depositary Receipts
evidencing such Depositary Shares.
VOTING THE PREFERRED STOCK
Upon receipt of notice of any meeting at which the holders of Preferred
Stock are entitled to vote, the Depositary will mail the information contained
in such notice of meeting to the record holders of the Depositary Shares
relating to such Preferred Stock. Each record holder of such Depositary Shares
on the record date (which will be the same date as the record date for the
Preferred Stock) will be entitled to instruct the Depositary as to the exercise
of the voting rights pertaining to the amount of Preferred Stock represented by
such holder's Depositary Shares. The Depositary will endeavor, insofar as
practicable, to vote the amount of Preferred Stock represented by such
Depositary Shares in accordance with such instructions, and the Company will
agree to take all action which may be deemed necessary by the Depositary in
order to enable the Depositary to do so. The Depositary may abstain from voting
shares of Preferred Stock to the extent it does not receive specific
instructions from the holders of Depositary Shares representing such Preferred
Stock.
AMENDMENT AND TERMINATION OF THE DEPOSITARY AGREEMENT
The form of Depositary Receipt evidencing the Depositary Shares and any
provision of the Deposit Agreement may at any time be amended by agreement
between the Company and the Depositary. However, any amendment that materially
and adversely alters the rights of the holders of Depositary Shares will not be
effective unless such amendment has been approved by the holders of at least a
majority of the Depositary Shares then outstanding. The Deposit Agreement may be
terminated by the Company or the Depositary only if (i) all outstanding
Depositary Shares have been redeemed or (ii) there has been a final distribution
in respect of the Preferred Stock in connection with any liquidation,
dissolution or winding up of the Company and such distribution has been
distributed to the holders of Depositary Receipts.
CHARGES OF DEPOSITARY
The Company will pay all transfer and other taxes and governmental charges
arising solely from the existence of the depositary arrangements. The Company
will pay charges of the Depositary in connection with the initial deposit of the
Preferred Stock and any redemption of the Preferred Stock. Holders of Depositary
Receipts will pay
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other transfer and other taxes and governmental charges and such other charges,
including a fee for the withdrawal of shares of Preferred Stock upon surrender
of Depositary Receipts, as are expressly provided in the Deposit Agreement to be
for their accounts.
MISCELLANEOUS
The Depositary will forward to holders of Depository Receipts all reports
and communications from the Company that are delivered to the Depositary and
that the Company is required to furnish to holders of Preferred Stock.
Neither the Depositary nor the Company will be liable if it is prevented or
delayed by law or any circumstance beyond its control in performing its
obligations under the Deposit Agreement. The obligations of the Company and the
Depositary under the Deposit Agreement will be limited to performance in good
faith of their duties thereunder and they will not be obligated to prosecute or
defend any legal proceeding in respect of any Depositary Shares or Preferred
Stock unless satisfactory indemnity is furnished. They may rely upon written
advice of counsel or accountants, or upon information provided by persons
presenting Preferred Stock for deposit, holders of Depositary Receipts or other
persons believed to be competent and on documents believed to be genuine.
RESIGNATION AND REMOVAL OF DEPOSITARY
The Depositary may resign at any time by delivering to the Company notice
of its election to do so, and the Company may at any time remove the Depositary,
any such resignation or removal to take effect upon the appointment of a
successor Depositary and its acceptance of such appointment. Such successor
Depositary must be appointed within 60 days after delivery of the notice of
resignation or removal.
RESTRICTIONS ON OWNERSHIP
In order to safeguard the Company against an inadvertent loss of REIT
status, the Deposit Agreement will contain provisions restricting the ownership
and transfer of Depositary Shares. Such restrictions will be described in the
applicable Prospectus Supplement and will be referenced on the applicable
Depositary Receipts.
DESCRIPTION OF WARRANTS
The Company may issue Warrants for the purchase of Preferred Stock
("Preferred Stock Warrants") or Common Stock ("Common Stock Warrants"). Warrants
may be issued independently or together with any other Offered Securities
offered by any Prospectus Supplement and may be attached to or separate from
such Securities. Each series of Warrants will be issued under a separate warrant
agreement (each, a "Warrant Agreement") to be entered into between the Company
and a warrant agent specified in the applicable Prospectus Supplement (the
"Warrant Agent"). The Warrant Agent will act solely as an agent of the Company
in connection with the Warrants of such series and will not assume any
obligation or relationship of agency or trust for or with any holders or
beneficial owners of Warrants. The following summaries of certain provisions of
the Warrant Agreement and the Warrants do not purport to be complete and are
subject to, and are qualified in their entirety by reference to, all the
provisions of the Warrant Agreement and the Warrant certificates relating to
each series of Warrants that will be filed with the Commission and incorporated
by reference as an exhibit to the Registration Statement of which this
Prospectus is a part at or prior to the time of the issuance of such series of
Warrants.
The applicable Prospectus Supplement will describe the terms of such
Warrants, including the following where applicable: (i) the offering price; (ii)
the aggregate number of shares purchasable upon exercise of such Warrants, the
exercise price, and in the case of Warrants for Preferred Stock, the
designation, aggregate number and terms of the series of Preferred Stock
purchasable upon exercise of such Warrants; (iii) the designation and terms of
any series of Preferred Stock with which such Warrants are being offered and the
number of such Warrants being offered with such Preferred Stock; (iv) the date,
if any, on and after which such Warrants and the related series of Preferred
Stock or Common Stock will be transferable separately; (v) the date on which the
right to exercise such Warrants shall commence and the date on which such right
shall expire (the "Expiration Date"); (vi) any special United States federal
income tax consequences; and (vii) any other material terms of such Warrants.
Warrant certificates may be exchanged for new Warrant certificates of
different denominations, may (if in registered form) be presented for
registration of transfer and may be exercised at the corporate trust office of
the Warrant agent or any other office indicated in the applicable Prospectus
Supplement. Prior to the exercise of any
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Warrants, holders of such Warrants will not have any rights of holders of such
Preferred Stock or Common Stock, including the right to receive payments of
dividends, if any, on such Preferred Stock or Common Stock, or to exercise any
applicable right to vote.
EXERCISE OF WARRANTS
Each Warrant will entitle the holder thereof to purchase such number of
shares of Preferred Stock or Common Stock, as the case may be, at such exercise
price as shall in each case be set forth in, or calculable from, the Prospectus
Supplement relating to the offered Warrants. After the close of business on the
Expiration Date (or such later date to which such Expiration Date may be
extended by the Company), unexercised Warrants will become void.
Warrants may be exercised by delivering to the Warrant Agent payment as
provided in the applicable Prospectus Supplement of the amount required to
purchase the Preferred Stock or Common Stock, as the case may be, purchasable
upon such exercise together with certain information set forth on the reverse
side of the Warrant certificate. Warrants will be deemed to have been exercised
upon receipt of payment of the exercise price, subject to the receipt within
five business days, of the Warrant certificate evidencing such Warrants. Upon
receipt of such payment and the Warrant certificate properly completed and duly
executed at the corporate trust office of the Warrant Agent or any other office
indicated in the applicable Prospectus Supplement, the Company will, as soon as
practicable, issue and deliver the Preferred Stock or Common Stock, as the case
may be, purchasable upon such exercise. If fewer than all of the Warrants
represented by such Warrant certificate are exercised, a new Warrant certificate
will be issued for the remaining amount of Warrants.
AMENDMENTS AND SUPPLEMENTS TO WARRANT AGREEMENTS
The Warrant Agreements may be amended or supplemented without the consent
of the holders of the Warrants issued thereunder to effect changes that are not
inconsistent with the provisions of the Warrants and that do not adversely
affect the interests of the holders of the Warrants.
COMMON STOCK WARRANT ADJUSTMENTS
Unless otherwise indicated in the applicable Prospectus Supplement, the
exercise price of, and the number of shares of Common Stock covered by, a Common
Stock Warrant are subject to adjustment in certain events, including (i) payment
of a dividend on the Common Stock payable in capital stock and stock splits,
combinations or reclassification of the Common Stock; (ii) issuance to all
holders of Common Stock of rights or warrants to subscribe for or purchase
shares of Common Stock at less than their current market price (as defined in
the Warrant Agreement for such series of Warrants); and (iii) certain
distributions of evidences of indebtedness or assets (including securities but
excluding cash dividends or distributions paid out of consolidated earnings or
retained earnings or dividends payable other than in Common Stock) or of
subscription rights and warrants (excluding those referred to above).
No adjustment in the exercise price of, and the number of shares of Common
Stock covered by, a Common Stock Warrant will be made for regular quarterly or
other periodic or recurring cash dividends or distributions or for cash
dividends or distributions to the extent paid from consolidated earnings or
retained earnings. No adjustment will be required unless such adjustment would
require a change of at least 1% in the exercise price then in effect. Except as
stated above, the exercise price of, and the number of shares of Common Stock
covered by, a Common Stock Warrant will not be adjusted for the issuance of
Common Stock or any securities convertible into or exchangeable for Common
Stock, or carrying the right or option to purchase or otherwise acquire the
foregoing, in exchange for cash, other property or services.
In the event of any (i) consolidation or merger of the Company with or into
any entity (other than a consolidation or a merger that does not result in any
reclassification, conversion, exchange or cancellation of outstanding shares of
Common Stock); (ii) sale, transfer, lease or conveyance of all or substantially
all of the assets of the Company; or (iii) reclassification, capital
reorganization or change of the Common Stock (other than solely a change in par
value or from par value to no par value), then any holder of a Common Stock
Warrant will be entitled, on or after the occurrence of any such event, to
receive on exercise of such Common Stock Warrant the kind and amount of shares
of stock or other securities, cash or other property (or any combination
thereof) that the holder would have received had such holder exercised such
holder's Common Stock Warrant immediately prior to the
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occurrence of such event. If the consideration to be received upon exercise of
the Common Stock Warrant following any such event consists of common stock of
the surviving entity, then from and after the occurrence of such event, the
exercise price of such Common Stock Warrant will be subject to the same
anti-dilution and other adjustments described in the second preceding paragraph,
applied as if such common stock were Common Stock.
RESTRICTIONS ON TRANSFER OF CAPITAL STOCK
For the Company to qualify as a REIT under the Internal Revenue Code of
1986, as amended (the "Code"), shares of capital stock must be held by a minimum
of 100 persons for at least 335 days in each taxable year or during a
proportionate part of a shorter taxable year. In addition, at all times during
the second half of each taxable year, no more than 50% in value of the shares of
beneficial interest of the Company may be owned, directly or indirectly, by
applying certain constructive ownership rules, by five or fewer individuals (the
"5/50 Rule"). Because the Board of Directors believes it is essential for the
Company to continue to qualify as a REIT, the Charter restricts the acquisition
of shares of capital stock (the "Ownership Limitation").
The Ownership Limitation provides that, subject to certain exceptions
specified in the Charter, no shareholder may own, or be deemed to own by virtue
of the attribution provisions of the Code, more than 9.8% of the outstanding
shares of Common Stock or more than 9.8% of the outstanding shares of any series
of Preferred Stock. Pursuant to a Strategic Alliance Agreement, dated as of
March 19, 1996 (the "Strategic Alliance Agreement"), among the Company, Security
Capital U.S. Realty and Security Capital Holdings, S.A. (Security Capital U.S.
Realty and Security Capital Holdings, S.A. are collectively referred to herein
as "Security Capital"), the Board of Directors of the Company proposed, and the
shareholders approved, an amendment to the Charter that provides that Security
Capital and its affiliates may beneficially own, in the aggregate, up to 37.5%
of the common stock of the Company (the "Special Shareholder Limit"). The
Ownership Limitation prevents any non-U.S. holder (other than Security Capital
and its affiliates) from acquiring additional shares of the Company's capital
stock if, as a result of such acquisition, the Company would fail to qualify as
a domestically-controlled REIT (computed assuming that Security Capital owns the
maximum percentage of the Company's capital stock that it is permitted to own
under the Special Shareholder Limit).
The Ownership Limitation also provides that if any holder of capital stock
of the Company purports to transfer shares to a person or there is a change in
the capital structure of the Company, and either the purported transfer or the
change in capital structure would result in the Company failing to qualify as a
REIT, or such transfer or the change in capital structure would cause the
transferee to hold shares in excess of the applicable ownership limit, then the
capital stock being transferred (or in the case of an event other than a
transfer, the capital stock beneficially owned) that would cause one or more of
the restrictions on ownership or transfer to be violated shall be automatically
transferred to a trust for the benefit of a designated charitable beneficiary.
The purported transferee of such shares shall have no right to receive dividends
or other distributions with respect to such shares and shall have no right to
vote such shares. Any dividends or other distributions paid to such purported
transferee prior to the discovery by the Company that the shares have been
transferred to a trust shall be paid upon demand to the trustee of the trust for
the benefit of the charitable beneficiary. The trustee of the trust will have
all rights to dividends with respect to shares of capital stock held in trust,
which rights will be exercised for the exclusive benefit of the charitable
beneficiary. Any dividends or distributions paid over to the trustee will be
held in trust for the charitable beneficiary. The trustee shall designate a
transferee of such stock so long as the ownership of such shares of stock by the
transferee would not violate the restrictions on ownership or transfer. Upon the
sale of such shares, the purported transferee shall receive the lesser of (A)
(i) the price per share such purported transferee paid for the capital stock in
the purported transfer that resulted in the transfer of shares of capital stock
to the trust, or (ii) if the transfer or other event that resulted in the
transfer of shares of capital stock to the trust was not a transaction in which
the purported record transferee gave full value for such shares, a price per
share equal to the market price on the date of the purported transfer or other
event that resulted in the transfer of the shares to the trust, and (B) the
price per share received by the trustee from the sale or other disposition of
the shares held in the trust.
The Board of Directors may grant an exemption for the Ownership Limitation
to any person so requesting, so long as (A) the Board has determined that such
exemption will not result in the Company being "closely held" within the meaning
of Section 856(h) of the Code, and (B) such person provides to the Board such
representations and undertakings as the Board may require.
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DESCRIPTION OF DEBT SECURITIES
The following description sets forth certain general terms and provisions
of the Debt Securities to which any Prospectus Supplement may relate. The
particular terms of the Debt Securities being offered and the extent to which
such general provisions may apply will be described in a Prospectus Supplement
relating to such Debt Securities.
The Debt Securities will be issued under an indenture dated as of November
1, 1996, as amended or supplemented from time to time (the "Indenture"), between
the Partnership and The First National Bank of Chicago, as trustee (the
"Trustee"). The Indenture has been incorporated by reference to the Registration
Statement of which this Prospectus is a part and is available for inspection at
the corporate trust services office of the Trustee at One First National
Plaza -- Suite 0126, Chicago, Illinois 60670 or as described above under
"Available Information." The Indenture is subject to, and governed by, the Trust
Indenture Act of 1939, as amended (the "TIA"). The statements made hereunder
relating to the Indenture and the Debt Securities to be issued thereunder are
summaries of certain provisions thereof and do not purport to be complete and
are subject to, and are qualified in their entirety by reference to, all
provisions of the Indenture and such Debt Securities. Capitalized terms used but
not defined herein shall have the respective meanings set forth in the
Indenture.
Wherever particular Sections or defined terms of the Indenture are referred
to herein or in a Prospectus Supplement, such Sections or defined terms are
incorporated by reference herein or therein, as the case may be.
GENERAL
The Debt Securities will be direct, unsecured obligations of the
Partnership and will rank in pari passu with all other unsecured and
unsubordinated indebtedness of the Partnership. The Debt Securities are
non-convertible and will be effectively subordinated to any secured indebtedness
of the Partnership and any indebtedness of the Partnership's subsidiaries. At
least one nationally-recognized statistical rating organization will have
assigned an investment grade rating to the Debt Securities at the time of sale.
At December 31, 1996, the Partnership and its subsidiaries had $45.7 million in
secured indebtedness outstanding. The Partnership's subsidiaries had no
unsecured indebtedness outstanding at December 31, 1996. The Debt Securities may
be issued without limit as to aggregate principal amount, in one or more series,
in each case as established from time to time in or pursuant to authority
granted by a resolution of the Board of Directors of the Company as sole general
partner of the Partnership or as established in the Indenture or in one or more
indentures supplemental to the Indenture. All Debt Securities of one series need
not be issued at the same time and, unless otherwise provided, a series may be
reopened, without the consent of the holders of the Debt Securities of such
series, for issuances of additional Debt Securities of such series (Section
301).
The Indenture provides that there may be more than one Trustee thereunder,
each with respect to one or more series of Debt Securities. Any Trustee under
the Indenture may resign or be removed with respect to one or more series of
Debt Securities, and a successor Trustee may be appointed to act with respect to
such series (Section 610). In the event that two or more persons are acting as
Trustee with respect to different series of Debt Securities, each such trustee
shall be a Trustee of a trust under the applicable Indenture separate and apart
from the trust administered by any other Trustee (Section 609), and, except as
otherwise indicated herein, any action described herein to be taken by a Trustee
may be taken by each such Trustee with respect to, and only with respect to, the
one or more series of Debt Securities for which it is Trustee under the
applicable Indenture.
The applicable Prospectus Supplement will set forth the price or prices at
which the Debt Securities to be offered will be issued and will describe the
following terms of such Debt Securities: (i) the title of such Debt Securities;
(ii) any limit on the aggregate principal amount of such Debt Securities or the
series of which they are a part; (iii) the Person to whom any interest on a Debt
Security shall be payable, if other than the Person in whose name the Debt
Security is registered; (iv) the date or dates on which the principal of any of
such Debt Securities will be payable; (v) the rate or rates at which any of such
Debt Securities will bear interest, if any, the date or dates from which any
such interest will accrue, the Interest Payment Dates on which any such interest
will be payable and the Regular Record Date for any such interest payable on any
Interest Payment Date; (vi) the place or places where the principal of and any
premium and interest on any of such Debt Securities will be payable; (vii) the
period or periods within which, the price or prices at which and the terms and
conditions on which any of such Debt Securities may be redeemed, in whole or in
part, at the option of the Partnership; (viii) the obligation, if any, of the
Partnership to redeem or purchase any of such Debt Securities pursuant to any
sinking fund or analogous provision or
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at the option of the Holder thereof, and the period or periods within which, the
price or prices at which, and the terms and conditions on which, any of such
Debt Securities will be redeemed or purchased, in whole or in part, pursuant to
any such obligation; (ix) the denominations in which any of such Debt Securities
will be issuable, if other than denominations of $1,000 and any integral
multiple thereof; (x) if the amount of principal of or any premium or interest
on any of such Debt Securities may be determined with reference to an index or
pursuant to a formula, the manner in which such amounts will be determined; (xi)
if other than the entire principal amount thereof, the portion of the principal
amount of any of such Debt Securities which will be payable upon declaration of
acceleration of the Maturity thereof; (xii) if the principal amount payable at
the Stated Maturity of any of such Debt Securities will not be determinable as
of any one or more dates prior to the Stated Maturity, the amount which will be
deemed to be such principal amount as of any such date for any purpose,
including the principal amount thereof which will be due and payable upon any
Maturity other than the Stated Maturity or which will be deemed to be
Outstanding as of any such date (or, in any such case, the manner in which such
deemed principal amount is to be determined); (xiii) if applicable, that such
Debt Securities, in whole or any specified part, are defeasible pursuant to the
provisions of the Indenture described under " -- Defeasance and Covenant
Defeasance-Defeasance and Discharge" or " -- Defeasance and Covenant
Defeasance -- Covenant Defeasance," or under both such captions; (xiv) whether
any of such Debt Securities will be issuable in whole or in part in the form of
one or more Global Debt Securities and, if so, the respective Depositaries for
such Global Debt Securities, the form of any legend or legends to be borne by
any such Global Debt Security in addition to or in lieu of the legend referred
to under
" -- Form, Exchange and Transfer -- Global Debt Securities" and, if different
from those described under such caption, any circumstances under which any such
Global Debt Security may be exchanged in whole or in part for Debt Securities
registered, and any transfer of such Global Debt Security in whole or in part
may be registered, in the names of Persons other than the Depositary for such
Global Debt Security or its nominee; (xv) any addition to or change in the
Events of Default applicable to any of such Debt Securities and any change in
the right of the Trustee or the Holders thereof to declare the principal amount
of any of such Debt Securities due and payable; (xvi) any addition to or change
in the covenants in the Indenture described under " -- Certain Covenants"
applicable to any of such Debt Securities; and (xvii) any other terms of such
Debt Securities not inconsistent with the provisions of the Indenture. (Section
301)
Debt Securities, including Original Issue Discount Debt Securities, may be
sold at a substantial discount below their principal amount. Certain special
United States federal income tax considerations (if any) applicable to Debt
Securities sold at an original issue discount may be described in the applicable
Prospectus Supplement.
Except as described under " -- Merger, Consolidation or Sale" or
" -- Certain Covenants" or as may be set forth in any Prospectus Supplement, the
Indenture does not contain any provisions that would limit the ability of the
Partnership to incur indebtedness or that would afford holders of the Debt
Securities protection in the event of (i) a highly leveraged or similar
transaction involving the Partnership, the management of the Partnership or any
affiliate of any such party, (ii) a change of control or (iii) a reorganization,
restructuring, merger or similar transaction involving the Partnership that may
adversely affect the holders of the Debt Securities. In addition, subject to the
limitations set forth under " -- Merger, Consolidation or Sale," the Partnership
may, in the future, enter into certain transactions, such as the sale of all or
substantially all of its assets or the merger or consolidation of the
Partnership, that would increase the amount of the Partnership's indebtedness or
substantially reduce or eliminate the Partnership's assets, which may have an
adverse effect on the Partnership's ability to service its indebtedness,
including the Debt Securities. However, restrictions on ownership and transfers
of the Company's Common Stock designed to preserve its status as a REIT may act
to prevent or hinder a change of control. Reference is made to the applicable
Prospectus Supplement for information with respect to any deletions from,
modifications of or additions to the events of default or covenants that are
described below, including any addition of a covenant or other provision
providing event risk or similar protection.
DENOMINATIONS, REGISTRATION AND TRANSFER
The Debt Securities of each series will be issuable only in fully
registered form, without coupons, and, unless otherwise specified in the
applicable Prospectus Supplement, only in denominations of $1,000 and integral
multiples thereof. (Section 302)
At the option of the Holder, subject to the terms of the Indenture and the
limitations applicable to Global Debt Securities, Debt Securities of each series
will be exchangeable for other Debt Securities of the same series of any
authorized denomination and of a like tenor and aggregate principal amount.
(Section 305)
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Subject to the terms of the Indenture and the limitations applicable to
Global Debt Securities, Debt Securities may be presented for exchange as
provided above or for registration of transfer (duly endorsed or with the form
of transfer endorsed thereon duly executed) at the office of the Security
Registrar or at the office of any transfer agent designated by the Partnership
for such purpose. No service charge will be made for any registration of
transfer or exchange of Debt Securities, but the Partnership may require payment
of a sum sufficient to cover any tax or other governmental charge payable in
connection therewith. Such transfer or exchange will be effected upon the
Security Registrar or such transfer agent, as the case may be, being satisfied
with the documents of title and identity of the person making the request. The
Partnership has appointed the Trustee as Security Registrar. Any transfer agent
(in addition to the Security Registrar) initially designated by the Partnership
for any Debt Securities will be named in the applicable Prospectus Supplement.
(Section 305) The Partnership may at any time designate additional transfer
agents or rescind the designation of any transfer agent or approve a change in
the office through which any transfer agent acts, except that the Partnership
will be required to maintain a transfer agent in each Place of Payment for the
Debt Securities of each series. (Section 1002)
If the Debt Securities of any series (or of any series and specified terms)
are to be redeemed in part, the Partnership will not be required to (i) issue,
register the transfer of or exchange any Debt Security of that series (or of
that series and specified terms, as the case may be) during a period beginning
at the opening of business 15 days before the day of mailing of a notice of
redemption of any such Debt Security that may be selected for redemption and
ending at the close of business on the day of such mailing, (ii) register the
transfer of or exchange any Debt Security so selected for redemption, in whole
or in part, except the unredeemed portion of any such Debt Security being
redeemed in part or (iii) to issue, register the transfer of or exchange any
Debt Security that has been surrendered for payment at the option of the Holder,
except the portion, if any, of such Debt Security not to be so repaid. (Section
305)
GLOBAL DEBT SECURITIES
Some or all of the Debt Securities of any series may be represented, in
whole or in part, by one or more Global Debt Securities which will have an
aggregate principal amount equal to that of the Debt Securities represented
thereby. Each Global Debt Security will be registered in the name of a
Depositary or a nominee thereof identified in the applicable Prospectus
Supplement, will be deposited with such Depositary or nominee or a custodian
therefor and will bear a legend regarding the restrictions on exchanges and
registration of transfer thereof referred to below and any such other matters as
may be provided for pursuant to the Indenture. (Section 305)
Notwithstanding any provision of the Indenture or any Debt Security
described herein, no Global Debt Security may be exchanged in whole or in part
for Debt Securities registered, and no transfer of a Global Debt Security in
whole or in part may be registered, in the name of any Person other than the
Depositary for such Global Debt Security or any nominee of such Depositary
unless (i) the Depositary has notified the Partnership that it is unwilling or
unable to continue as Depositary for such Global Debt Security or has ceased to
be qualified to act as such as required by the Indenture, (ii) there shall have
occurred and be continuing an Event of Default with respect to the Debt
Securities represented by such Global Debt Security or (iii) there shall exist
such circumstances, if any, in addition to or in lieu of those described above
as may be described in the applicable Prospectus Supplement (Section 305). All
securities issued in exchange for a Global Debt Security or any portion thereof
will be registered in such names as the Depositary may direct. (Sections 204 and
305)
As long as the Depositary, or its nominee, is the registered Holder of a
Global Debt Security, the Depositary or such nominee, as the case may be, will
be considered the sole owner and Holder of such Global Debt Security and the
Debt Securities represented thereby for all purposes under the Debt Securities
and the Indenture (Section 308). Except in the limited circumstances referred to
above, owners of beneficial interests in a Global Debt Security will not be
entitled to have such Global Debt Security or any Debt Securities represented
thereby registered in their names, will not receive or be entitled to receive
physical delivery of certificated Debt Securities in exchange therefor and will
not be considered to be the owners or Holders of such Global Debt Security or
any Debt Securities represented thereby for any purpose under the Debt
Securities or the Indenture. All payments of principal of and any premium and
interest on a Global Debt Security will be made to the Depositary or its
nominee, as the case may be, as the Holder thereof. The laws of some
jurisdictions require that certain purchasers of securities take physical
delivery of such securities in definitive form. These laws may impair the
ability to transfer beneficial interests in a Global Debt Security.
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Ownership of beneficial interests in a Global Debt Security will be limited
to institutions that have accounts with the Depositary or its nominee
("participants") and to persons that may hold beneficial interests through
participants. In connection with the issuance of any Global Debt Security, the
Depositary will credit, on its book-entry registration and transfer system, the
respective principal amounts of Debt Securities represented by the Global Debt
Security to the accounts of its participants. Ownership of beneficial interests
in a Global Debt Security will be shown only on, and the transfer of those
ownership interests will be effected only through, records maintained by the
Depositary (with respect to participants' interests) or any such participant
(with respect to interests of persons held by such participants on their
behalf). Payments, transfers, exchanges and others matters relating to
beneficial interests in a Global Debt Security may be subject to various
policies and procedures adopted by the Depositary from time to time. None of the
Partnership, the Trustee or any agent of the Partnership or the Trustee will
have any responsibility or liability for any aspect of the Depositary's or any
participant's records relating to, or for payments made on account of,
beneficial interests in a Global Debt Security, or for maintaining, supervising
or reviewing any records relating to such beneficial interests.
Secondary trading in notes and debentures of corporate issuers is generally
settled in clearing-house or next-day funds. In contrast, beneficial interests
in a Global Debt Security, in some cases, may trade in the Depositary's same-day
funds settlement system, in which secondary market trading activity in those
beneficial interests would be required by the Depositary to settle in
immediately available funds. The Partnership cannot predict the effect, if any,
that settlement in immediately available funds would have on trading activity in
such beneficial interests. Also, settlement for purchases of beneficial
interests in a Global Debt Security upon the original issuance thereof may be
required to be made in immediately available funds.
PAYMENT AND PAYING AGENTS
Unless otherwise indicated in the applicable Prospectus Supplement, payment
of interest on a Debt Security on any Interest Payment Date will be made to the
Person in whose name such Debt Security (or one or more Predecessor Debt
Securities) is registered at the close of business on the Regular Record Date
for such interest. (Section 307)
Unless otherwise indicated in the applicable Prospectus Supplement,
principal of and any premium and interest on the Debt Securities of a particular
series will be payable at the office of such Paying Agent or Paying Agents as
the Partnership may designate for such purpose from time to time, except that at
the option of the Partnership payment of any interest may be made by check
mailed to the address of the Person entitled thereto as such address appears in
the Security Register. Unless otherwise indicated in the applicable Prospectus
Supplement, the corporate trust office of the Trustee in the City of New York
will be designated as the Partnership's sole Paying Agent for payments with
respect to Debt Securities of each series. Any other Paying Agents initially
designated by the Partnership for the Debt Securities of a particular series
will be named in the applicable Prospectus Supplement. The Partnership may at
any time designate additional Paying Agents or rescind the designation of any
Paying Agent or approve a change in the office through which any Paying Agent
acts, except that the Partnership will be required to maintain a Paying Agent in
each Place of Payment for the Debt Securities of a particular series. (Section
1002)
All moneys paid by the Partnership to a Paying Agent for the payment of the
principal of, or any premium or interest on, any Debt Security that remain
unclaimed at the end of two years after such principal, premium or interest has
become due and payable will be repaid to the Partnership, and the Holder of such
Debt Security thereafter may look only to the Partnership for payment thereof.
(Section 1003)
Any interest not punctually paid or duly provided for on any Interest
Payment Date with respect to a Debt Security ("Defaulted Interest") will
forthwith cease to be payable to the holder on the applicable regular record
date and may either be paid to the person in whose name such Debt Security is
registered at the close of business on a special record date (the "Special
Record Date") for the payment of such Defaulted Interest to be fixed by the
Trustee, notice whereof shall be given to the holder of such Debt Security not
less than 10 days prior to such Special Record Date, or may be paid at any time
in any other lawful manner, all as more completely described in the applicable
supplement (Section 307).
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MERGER, CONSOLIDATION OR SALE
The Partnership may not consolidate with or merge into, or convey, transfer
or lease its properties and assets substantially as an entirety to, any Person
(a "successor Person"), and may not permit any Person to merge into, or convey,
transfer or lease its properties and assets substantially as an entirety to, the
Partnership, unless (i) the successor Person (if any) is a corporation,
partnership or trust organized and validly existing under the laws of any
domestic jurisdiction and assumes, by a supplemental indenture, the
Partnership's obligations on the Debt Securities and under the Indenture, (ii)
immediately after giving effect to the transaction, and treating any
indebtedness which becomes an obligation of the Partnership or any Subsidiary as
a result of the transaction as having been incurred by it at the time of the
transaction, no Event of Default, and no event which, after notice or lapse of
time or both, would become an Event of Default, shall have occurred and be
continuing and (iii) certain other conditions are met. (Section 801)
CERTAIN COVENANTS
EXISTENCE. Except as permitted under " -- Merger, Consolidation or Sale,"
the Partnership will be required to do or cause to be done all things necessary
to preserve and keep in full force and effect its existence, rights and
franchises; provided, however, that the Partnership shall not be required to
preserve any right or franchise if it determines that the preservation thereof
is no longer desirable in the conduct of its business and that the loss thereof
is not disadvantageous in any material respect to the holders of the Debt
Securities (Section 1005).
MAINTENANCE OF PROPERTIES. The Partnership will be required to cause all
properties used or useful in the conduct of its business or the business of any
subsidiary to be maintained and kept in good condition, repair and working order
and supplied with all necessary equipment and to cause to be made all necessary
repairs, renewals, replacements, betterments and improvements thereof, all as in
the judgment of the Partnership may be necessary so that the business carried on
in connection therewith may be properly and advantageously conducted at all
times; provided, however, that the Partnership shall not be prevented from
discontinuing the operation or maintenance of any of its properties if such
discontinuance is, in the judgment of the Partnership, desirable in the conduct
of its business or the business of any Subsidiary and not disadvantageous in any
material respect to the Holders. (Section 1006).
INSURANCE. The Partnership will be required to, and to cause each of its
subsidiaries to, keep all of its insurable properties insured against loss or
damage with insurers of recognized responsibility in commercially reasonable
amounts and types (Section 1008).
PAYMENT OF TAXES AND OTHER CLAIMS. The Partnership will be required to pay
or discharge or cause to be paid or discharged, before the same shall become
delinquent, (i) all taxes, assessments and governmental charges levied or
imposed upon the Partnership or any subsidiary or upon the income, profits or
property of the Partnership or any subsidiary, and (ii) all lawful claims for
labor, materials and supplies which, if unpaid, might by law become a lien upon
the property of the Partnership or any subsidiary; provided, however, that the
Partnership shall not be required to pay or discharge or cause to be paid or
discharged any such tax, assessment, charge or claim whose amount, applicability
or validity is being contested in good faith by appropriate proceedings.
(Section 1007).
PROVISION OF FINANCIAL INFORMATION. Whether or not the Partnership is
subject to Section 13 or Section 15(d) of the Exchange Act and for so long as
any Debt Securities are outstanding, the Partnership will, to the extent
permitted under the Exchange Act, file with the Commission the annual reports,
quarterly reports and other documents which the Partnership would have been
required to file with the Commission pursuant to such Section 13 or Section
15(d) (the "Financial Statements") if the Partnership were so subject, such
documents to be filed with the Commission on or prior to the respective dates
(the "Required Filing Dates") by which the Partnership would have been required
so to file such documents if the Partnership were so subject. The Partnership
will also in any event (x) within 15 days of each Required Filing Date (i)
transmit by mail to all holders of Debt Securities whose names appear in the
security register for such Debt Securities (the "Holders"), as their names and
addresses appear in the security register for such Debt Securities, without cost
to such Holders, copies of the annual reports and quarterly reports which the
Partnership would have been required to file with the Commission pursuant to
Section 13 or Section 15(d) of the Exchange Act if the Partnership were subject
to such Sections and (ii) file with any Trustee copies of the annual reports,
quarterly reports and other documents which the Partnership would have been
required to file with the Commission pursuant to Section 13 or Section 15(d) of
the Exchange Act if the Partnership were subject to such Sections and (y) if
filing such documents by the Partnership with the Commission is not
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permitted under the Exchange Act, promptly upon written request and payment of
the reasonable cost of duplication and delivery, supply copies of such documents
to any prospective Holder. (Section 1010).
LIMITATIONS ON INCURRENCE OF INDEBTEDNESS. The Partnership will not, and
will not permit any Subsidiary to, incur any Indebtedness (as defined below),
other than inter-company debt representing Indebtedness to which the only
parties are the Company, the Partnership and any of their Subsidiaries (but only
so long as such Indebtedness is held solely by any of the Company, the
Partnership and any Subsidiary) that is subordinate in right of payment to
Outstanding Debt Securities if, immediately after giving effect to the
incurrence of such additional Indebtedness, the aggregate principal amount of
all outstanding Indebtedness of the Partnership and its Subsidiaries on a
consolidated basis is greater than 60% of the sum of (i) Total Assets (as
defined below) as of the end of the calendar quarter covered in the
Partnership's Annual Report on Form 10-K or Quarterly Report on Form 10-Q, as
the case may be, most recently filed with the Trustee (or such reports of the
Company if filed by the Partnership with the Trustee in lieu of filing its own
reports) prior to the incurrence of such additional Indebtedness and (ii) the
increase in Total Assets from the end of such quarter including, without
limitation, any increase in Total Assets resulting from the incurrence of such
additional Indebtedness (such increase, together with the Total Assets, is
referred to as "Adjusted Total Assets"). (Section 1009)
In addition to the foregoing limitation on the incurrence of Indebtedness,
the Partnership will not, and will not permit any Subsidiary to, incur any
Indebtedness if the ratio of Consolidated Income Available for Debt Service to
the Annual Service Charge (in each case as defined below) for the four
consecutive fiscal quarters most recently ended prior to the date on which such
additional Indebtedness is to be incurred shall have been less than 1.5 to 1, on
a pro forma basis, after giving effect to the incurrence of such Indebtedness
and to the application of the proceeds therefrom and calculated on the
assumption that (i) such Indebtedness and any other Indebtedness incurred by the
Partnership or its Subsidiaries since the first day of such four-quarter period
and the application of the proceeds therefrom, including to refinance other
Indebtedness, had occurred at the beginning of such period, (ii) the repayment
or retirement of any other Indebtedness by the Partnership or its Subsidiaries
since the first day of such four-quarter period and had been incurred, repaid or
retired at the beginning of such period (except that, in making such
computation, the amount of Indebtedness under any revolving credit facility
shall be computed based upon the average daily balance of such Indebtedness
during such period), (iii) the income earned on any increase in Adjusted Total
Assets since the end of such four-quarter period had been earned on an
annualized basis, during such period, and (iv) in the case of any acquisition or
disposition by the Partnership or any Subsidiary of any asset or group of assets
since the first day of such four-quarter period, including, without limitation,
by merger, stock purchase or sale, or asset purchase or sale, such acquisition
or disposition or any related repayment Indebtedness had occurred as of the
first day of such period with appropriate adjustments with respect to such
acquisition or disposition being included in such pro forma calculation.
(Section 1009) Further the Partnership will not, and will not permit any
Subsidiary to, incur any Secured Indebtedness of the Partnership or any
Subsidiary if, immediately after giving effect to the incurrence of such
additional Secured Indebtedness, the aggregate principal amount of all
outstanding Secured Indebtedness of the Partnership and its Subsidiaries on a
consolidated basis would be greater than 40% of Adjusted Total Assets. As used
herein, "Secured Indebtedness" means indebtedness secured by any mortgage,
trust, deed, deed of trust, deed to secure debt, security agreement, pledge,
conditional sale or other title retention agreement, capitalized lease, or other
like agreement granting or conveying security title to or a security interest in
real property or other tangible assets.
For purposes of the foregoing provisions regarding the limitation on the
incurrence of Indebtedness, Indebtedness shall be deemed to be "incurred" by the
Partnership or a Subsidiary whenever the Partnership and its Subsidiary shall
create, assume, guarantee or otherwise become liable in respect thereof.
(Section 1009)
Maintenance of Total Unencumbered Assets. For so long as there are
Outstanding any Debt Securities (other than Debt Securities that are not, by
their terms, entitled to the benefit of this covenant), the Partnership is
required to maintain Total Unencumbered Assets of not less than 150% of the
aggregate outstanding principal amount of all outstanding Unsecured
Indebtedness. (Section 1009)
As used herein:
"Annual Service Charge" as of any date means the maximum amount which
is payable in any 12-month period from such date for interest and required
amortization (including amounts payable to sinking funds or similar
arrangements for the retirement of debt which matures serially, but
excluding principal payable at final maturity of such debt) on Indebtedness
of the Partnership and its Subsidiaries.
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"Consolidated Income Available For Debt Service" for any period means
Consolidated Net Income plus amounts which have been deducted for (i)
interest on Indebtedness of the Partnership and its Subsidiaries, (ii)
provision for taxes of the Partnership and its Subsidiaries based on
income, (iii) amortization of Indebtedness discount, (iv) provisions for
gains and losses on properties, (v) depreciation and amortization, (vi) the
effect of any noncash charge resulting from a change in accounting
principles in determining Consolidated Net Income for such period, (vii)
amortization of deferred charges and (viii) the effect of net income (or
loss) of joint ventures in which the Partnership or any Subsidiary owns an
interest to the extent not providing a source of, or requiring a use of,
cash, respectively.
"Consolidated Net Income" for any period means the amount of
consolidated net income (or loss) of the Partnership and its Subsidiaries
for such period determined on a consolidated basis in accordance with
generally accepted accounting principles.
"Indebtedness" of the Partnership or any Subsidiary means any
indebtedness of the Partnership or such Subsidiary, as applicable, whether
or not contingent, in respect of (i) borrowed money evidenced by bonds,
notes, debentures or similar instruments, (ii) indebtedness secured by a
mortgage, pledge, lien, charge, encumbrance of any security interest
existing on property owned by the Partnership or such Subsidiary, (iii) the
reimbursement obligations, contingent or otherwise, in connection with any
letters of credit actually issued or amounts representing the balance that
constitutes an accrued expense or trade payable or (iv) any lease of
property by the Partnership or such Subsidiary as lessee which is reflected
in the Partnership's consolidated balance sheet as a capitalized lease in
accordance with generally accepted accounting principles, in the case of
items of indebtedness under (i) through (iii) above to the extent that any
such items (other than letters of credit) would appear as a liability on
the Partnership's consolidated balance sheet in accordance with generally
accepted accounting principles, and also includes, to the extent not
otherwise included, any obligation by the Partnership or such Subsidiary to
be liable for, or to pay, as obligor, guarantor or otherwise (other than
for purposes of collection in the ordinary course of business),
indebtedness of another person (other than the Partnership or any
Subsidiary).
"Subsidiary" means a corporation, partnership or limited liability
company more than 50% of the outstanding voting stock, partnership
interests or membership interests, as the case may be, of which is owned or
controlled, directly or indirectly, by the Partnership or by one or more
other Subsidiaries, or by the Partnership and one or more other
Subsidiaries. For the purposes of this definition, "voting stock" means
stock which ordinarily has voting power for the election of directors,
whether at all times or only so long as no senior class of stock has such
voting power by reason of any contingency.
"Total Assets" as of any date means the sum of (i) Undepreciated Real
Estate Assets and (ii) all other assets of the Partnership and its
Subsidiaries on a consolidated basis determined in accordance with
generally accepted accounting principles (but excluding intangibles and
accounts receivable).
"Total Unencumbered Assets" means the sum of (i) those Undepreciated
Real Estate Assets which have not been pledged, mortgaged or otherwise
encumbered by the owner thereof to secure Indebtedness, excluding
infrastructure assessment bonds and (ii) all other assets of the
Partnership and its Subsidiaries determined in accordance with generally
accepted accounting principles (but excluding intangibles and accounts
receivable) which have not been pledged, mortgaged or otherwise encumbered
by the owner thereof to secure Indebtedness.
"Undepreciated Real Estate Assets" as of any date means the cost
(original cost plus capital improvements) of real estate assets of the
Partnership and its Subsidiaries on such date, before depreciation and
amortization, determined on a consolidated basis in accordance with
generally accepted accounting principles.
"Unsecured Indebtedness" means Indebtedness which is (i) not
subordinated to any other Indebtedness and (ii) not secured by any
mortgage, lien, charge, pledge, encumbrance or security interest of any
kind upon any of the properties of the Partnership or any Subsidiary.
Additional Covenants. Any additional or different covenants of the
Partnership with respect to any series of Debt Securities will be set forth in
the applicable Prospectus Supplement.
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EVENTS OF DEFAULT
Each of the following will constitute an Event of Default under the
Indenture with respect to Debt Securities of any series: (i) failure to pay any
interest on any Debt Securities of that series when due, that has continued for
30 days; (ii) failure to pay principal of or any premium on any Debt Security of
that series when due; (iii) failure to deposit any sinking fund payment, when
due, in respect of any Debt Security of that series; (iv) failure to perform any
other covenant of the Partnership in the Indenture (other than a covenant
included in the Indenture solely for the benefit of a series other than that
series), that has continued for 60 days after written notice has been given by
the Trustee, or the Holders of at least 25% in aggregate principal amount of the
Outstanding Debt Securities of that series, as provided in the Indenture; (v)
failure to pay when due (subject to any applicable grace period) the principal
of, or acceleration of, any indebtedness for money borrowed by the Partnership,
if, in the case of any such failure, such indebtedness has not been discharged
or, in the case of any such acceleration, such indebtedness has not been
discharged or such acceleration has not been rescinded or annulled, in each case
within 10 days after written notice has been given by the Trustee, or the
Holders of at least 25% in aggregate principal amount of the Outstanding Debt
Securities of that series, as provided in the Indenture, if the aggregate
outstanding principal amount of indebtedness under the instrument with respect
to which such default or acceleration has occurred exceeds $10 million; (vi)
certain events of bankruptcy, insolvency or reorganization of the Partnership or
any Significant Subsidiary or any of their respective property; and (vii) any
other event of default provided with respect to a particular series of Debt
Securities. (Section 501)
If an Event of Default (other than an Event of Default described in clause
(vi) above) with respect to the Debt Securities of any series at the time
Outstanding shall occur and be continuing, either the Trustee or the Holders of
at least 25% in aggregate principal amount of the Outstanding Debt Securities of
that series by notice as provided in the Indenture may declare the principal
amount of the Debt Securities of that series (or, in the case of any Debt
Security that is an Original Issue Discount Debt Security or the principal
amount of which is not then determinable, such portion of the principal amount
of such Debt Security, or such other amount in lieu of such principal amount, as
may be specified in the terms of such Debt Security) to be due and payable
immediately. If an Event of Default described in clause (vi) above with respect
to the Debt Securities of any series at the time Outstanding shall occur, the
principal amount of all the Debt Securities of that series (or, in the case of
any such Original Issue Discount Debt Security or other Debt Security, such
specified amount) will automatically, and without any action by the Trustee or
any Holder, become immediately due and payable. After any such acceleration, but
before a judgment or decree based on acceleration, the Holders of a majority in
aggregate principal amount of the Outstanding Debt Securities of that series
may, under certain circumstances, rescind and annul such acceleration if all
Events of Default, other than the non-payment of accelerated principal (or other
specified amount), have been cured or waived as provided in the Indenture.
(Section 502) For information as to waiver of defaults, see " -- Modification
and Waiver."
Subject to the provisions of the Indenture relating to the duties of the
Trustee in case an Event of Default shall occur and be continuing, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any of the Holders, unless such Holders
shall have offered to the Trustee reasonable indemnity. (Section 603) Subject to
such provisions for the indemnification of the Trustee, the Holders of a
majority in aggregate principal amount of the Outstanding Debt Securities of any
series will have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee or exercising any trust
or power conferred on the Trustee with respect to the Debt Securities of that
series. (Section 512)
No Holder of a Debt Security of any series will have any right to institute
any proceeding with respect to the Indenture, or for the appointment of a
receiver or a trustee, or for any other remedy thereunder, unless (i) such
Holder has previously given to the Trustee written notice of a continuing Event
of Default with respect to the Debt Securities of that series, (ii) the Holders
of at least 25% in aggregate principal amount of the Outstanding Debt Securities
of that series have made written request, and such Holder or Holders have
offered reasonable indemnity, to the Trustee to institute such proceeding as
trustee and (iii) the Trustee has failed to institute such proceeding, and has
not received from the Holders of a majority in aggregate principal amount of the
Outstanding Debt Securities of that series a direction inconsistent with such
request, within 60 days after such notice, request and offer. (Section 507)
However, such limitations do not apply to a suit instituted by a Holder of a
Debt Security for the enforcement of payment of the principal of or any premium
or interest on such Debt Security on or after the applicable due date specified
in such Debt Security. (Section 508)
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Within 120 days after the close of each fiscal year, the Partnership will
be required to furnish to the Trustee a statement by certain of the Company's
officers as to whether the Partnership, to their knowledge, is in default in the
performance or observance of any of the terms, provisions and conditions of the
Indenture and, if so, specifying all such known defaults. (Section 1004)
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the
Partnership and the Trustee with the consent of the Holders of a majority in
principal amount of the Outstanding Debt Securities of each series affected by
such modification or amendment; provided, however, that no such modification or
amendment may, without the consent of the Holder of each Outstanding Debt
Security affected thereby, (i) change the Stated Maturity of the principal of,
or any installment of principal of or interest on, any Debt Security, (ii)
reduce the principal amount of, or any premium or interest on, any Debt
Security, (iii) reduce the amount of principal of an Original Issue Discount
Debt Security or any other Debt Security payable upon acceleration of the
Maturity thereof, (iv) change the place or currency of payment of principal of,
or any premium or interest on, any Debt Security, (v) impair the right to
institute suit for the enforcement of any payment on or with respect to any Debt
Security, (vi) reduce the percentage in principal amount of Outstanding Debt
Securities of any series, the consent of whose Holders is required for
modification or amendment of the Indenture, (vii) reduce the percentage in
principal amount of Outstanding Debt Securities of any series necessary for
waiver of compliance with certain provisions of the Indenture or for waiver of
certain defaults or (viii) modify such provisions with respect to modification
and waiver. (Section 902)
The Holders of a majority in principal amount of the Outstanding Debt
Securities of any series may waive compliance by the Partnership with certain
restrictive provisions of the Indenture. (Section 1011) The Holders of a
majority in principal amount of the Outstanding Debt Securities of any series
may waive any past default under the Indenture, except a default in the payment
of principal, premium or interest and certain covenants and provisions of the
Indenture that cannot be amended without the consent of the Holder of each
Outstanding Debt Security of such series affected. (Section 513)
The Indenture provides that in determining whether the Holders of the
requisite principal amount of the Outstanding Debt Securities have given or
taken any direction, notice, consent, waiver or other action under the Indenture
as of any date (i) the principal amount of an Original Issue Discount Debt
Security that will be deemed to be Outstanding will be the amount of the
principal thereof that would be due and payable as of such date upon
acceleration of the Maturity thereof to such date and (ii) if, as of such date,
the principal amount payable at the Stated Maturity of a Debt Security is not
determinable (for example, because it is based on an index), the principal
amount of such Debt Security deemed to be Outstanding as of such date will be an
amount determined in the manner prescribed for such Debt Security. Certain Debt
Securities, including those for whose payment or redemption money has been
deposited or set aside in trust for the Holders and those that have been fully
defeased pursuant to Section 1302, will not be deemed to be Outstanding.
(Section 101)
Except in certain limited circumstances, the Partnership will be entitled
to set any day as a record date for the purpose of determining the Holders of
Outstanding Debt Securities of any series entitled to give or take any
direction, notice, consent, waiver or other action under the Indenture, in the
manner and subject to the limitations provided in the Indenture. In certain
limited circumstances, the Trustee will be entitled to set a record date for
action by Holders. If a record date is set for any action to be taken by Holders
of a particular series, such action may be taken only by persons who are Holders
of Outstanding Debt Securities of that series on the record date. To be
effective, such action must be taken by Holders of the requisite principal
amount of such Debt Securities within a specified period following the record
date. For any particular record date, this period will be 180 days or such
shorter period as may be specified by the Partnership (or the Trustee, if it set
the record date), and may be shortened or lengthened (but not beyond 180 days)
from time to time. (Section 104)
Modifications and amendments of the Indenture may be made by the
Partnership and the Trustee without the consent of any holders of Debt
Securities for any of the following purposes: (i) to evidence the succession of
another person to the Partnership and the assumption by such successor of the
covenants of the Partnership in the Indenture and the Debt Securities; (ii) to
add to the covenants of the Partnership for the benefit of the holders of all or
any series of Debt Securities or to surrender any right or power conferred upon
the Partnership in the Indenture; (iii) to add events of default for the benefit
of the holders of all or any series of Debt Securities; (iv) to add to or change
any provisions of the Indenture as necessary to permit or facilitate the
issuance of Debt Securities in
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uncertificated form; (v) to add to, change or eliminate any of the provisions of
the Indenture with respect to one or more series of Debt Securities, so long as
the changes (A) do not (1) apply to any Debt Securities of any series created
prior to such modification or amendment and entitled to the benefit of such
provision or (2) modify the rights of the holder of any such Debt Security with
respect to such provision, or (B) will only become effective when there is no
such Debt Security Outstanding; (vi) to secure the Debt Securities; (vii) to
establish the form or terms of Debt Securities of any series as permitted in the
Indenture; or (viii) to provide for the acceptance of appointment by a successor
Trustee. (Section 901)
DEFEASANCE AND COVENANT DEFEASANCE
If and to the extent indicated in the applicable Prospectus Supplement, the
Partnership may elect, at its option at any time, to have the provisions of
Section 1302 of the Indenture, relating to defeasance and discharge of
indebtedness, or Section 1303, relating to defeasance of certain restrictive
covenants in the Indenture, applied to the Debt Securities of any series, or to
any specified part of a series. (Section 1301)
DEFEASANCE AND DISCHARGE. The Indenture provides that, upon the
Partnership's exercise of its option (if any) to have Section 1302 applied to
any Debt Securities, the Partnership will be discharged from all its obligations
with respect to such Debt Securities (except for certain obligations to exchange
or register the transfer of Debt Securities, to replace stolen, lost or
mutilated Debt Securities, to maintain paying agencies and to hold moneys for
payment in trust) upon the deposit in trust for the benefit of the Holders of
such Debt Securities of money or U.S. Government Obligations, or both, which,
through the payment of principal and interest in respect thereof in accordance
with their terms, will provide money in an amount sufficient to pay the
principal of and any premium and interest on such Debt Securities on the
respective Stated Maturities in accordance with the terms of the Indenture and
such Debt Securities. Such defeasance or discharge may occur only if, among
other things, the Partnership has delivered to the Trustee an Opinion of Counsel
to the effect that the Partnership has received from, or there has been
published by, the United States Internal Revenue Service a ruling, or there has
been a change in tax law, in either case to the effect that Holders of such Debt
Securities will not recognize gain or loss for federal income tax purposes as a
result of such deposit, defeasance and discharge and will be subject to federal
income tax on the same amount, in the same manner and at the same times as would
have been the case if such deposit, defeasance and discharge were not to occur.
(Sections 1302 and 1304)
DEFEASANCE OF CERTAIN COVENANTS. The Indenture provides that, upon the
Partnership's exercise of its option (if any) to have Section 1303 applied to
any Debt Securities, the Partnership may omit to comply with certain restrictive
covenants, including those described under "Certain Covenants," in the last
sentence under "Merger, Consolidation or Sale" and any that may be described in
the applicable Prospectus Supplement, and the occurrence of certain Events of
Default, which are described above in clause (iv) (with respect to such
restrictive covenants) and clauses (v) and (vii) under "Events of Default" and
any that may be described in the applicable Prospectus Supplement, will be
deemed not to be or result in an Event of Default, in each case with respect to
such Debt Securities. The Partnership, in order to exercise such option, will be
required to deposit, in trust for the benefit of the Holders of such Debt
Securities, money or U.S. Government Obligations, or both, which, through the
payment of principal and interest in respect thereof in accordance with their
terms, will provide money in an amount sufficient to pay the principal of and
any premium and interest on such Debt Securities on the respective Stated
Maturities in accordance with the terms of the Indenture and such Debt
Securities. The Partnership will also be required, among other things, to
deliver to the Trustee an Opinion of Counsel to the effect that Holders of such
Debt Securities will not recognize gain or loss for federal income tax purposes
as a result of such deposit and defeasance of certain obligations and will be
subject to federal income tax on the same amount, in the same manner and at the
same times as would have been the case if such deposit and defeasance were not
to occur. In the event the Partnership exercised this option with respect to any
Debt Securities and such Debt Securities were declared due and payable because
of the occurrence of any Event of Default, the amount of money and U.S.
Government Obligations so deposited in trust would be sufficient to pay amounts
due on such Debt Securities at the time of their respective Stated Maturities
but may not be sufficient to pay amounts due on such Debt Securities upon any
acceleration resulting from such Event of Default. In such case, the Partnership
would remain liable for such payments. (Sections 1303 and 1304) "U.S. Government
Obligations" means securities which are (i) direct obligations of the United
States of America for the payment of which its full faith and credit is pledged
or (ii) obligations of a person controlled or supervised by and acting as a
agency or instrumentality of the United States of America, the payment of which
is unconditionally guaranteed as a full faith and credit obligation by the
United States of America, which, in
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either case, are not callable or redeemable at the option of the issuer thereof,
and shall also include a depository receipt issued by a bank or trust company as
custodian with respect to any such U.S. Government Obligation or a specific
payment of interest on or principal of any such U.S. Government Obligation held
by such custodian of the account of the holder of a depository receipt, provided
that (except as required by law) such custodian is not authorized to make any
deduction from the amount payable to the holder of such depository receipt from
any amount received by the custodian in respect of the U.S. Government
Obligation or the specific payment of interest on or principal of the U.S.
Government Obligation evidenced by such depository receipt. (Section 1304)
NOTICES
Notices to Holders of Debt Securities will be given by mail to the
addresses of such Holders as they may appear in the Security Register. (Sections
101 and 106)
TITLE
The Partnership, the Trustee and any agent of the Partnership or the
Trustee may treat the Person in whose name a Debt Security is registered as the
absolute owner thereof (whether or not such Debt Security may be overdue) for
the purpose of making payment and for all other purposes. (Section 308)
NO CONVERSION RIGHTS
The Debt Securities will not be convertible into or exchangeable for any
capital stock of the Company or equity interest in the Partnership.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax considerations that
may be relevant to a prospective holder of the Offered Securities is based on
current law, is for general information only, and is not tax advice. The
discussion contained herein does not purport to deal with all aspects of
taxation that may be relevant to particular investors in light of their personal
investment or tax circumstances, or to certain types of investors (including
insurance companies, tax exempt organizations, financial institutions or
broker-dealers, foreign corporations and persons who are not citizens or
residents of the United States) subject to special treatment under the federal
income tax laws.
The statements in this discussion are based on current provisions of the
Code, existing, temporary and currently proposed Treasury regulations
promulgated under the Code (the "Treasury Regulations"), the legislative history
of the Code, existing administrative rulings and practices of the Internal
Revenue Service (the "Service"), and judicial decisions. No assurance can be
given that future legislative, judicial or administrative actions or decisions,
which may be retroactive in effect, will not affect the accuracy of any
statements in this Prospectus with respect to the transactions entered into or
contemplated prior to the effective date of such changes.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP AND
SALE OF THE OFFERED SECURITIES AND OF THE COMPANY'S ELECTION TO BE TAXED AS A
REIT, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF
SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION, AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
The Company made an election to be taxed as a REIT under sections 856
through 860 of the Code, effective for its taxable year ended December 31, 1994.
The Company believes that, commencing with such taxable year, it has been
organized and has operated in such a manner as to qualify for taxation as a REIT
under the Code, and the Company intends to continue to operate in such a manner,
but no assurance can be given that the Company will operate in a manner so as to
qualify or remain qualified as a REIT.
The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following discussion sets forth the
material aspects of the Code sections that govern the federal income tax
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treatment of a REIT. The discussion is qualified in its entirety by the
applicable Code provisions, Treasury Regulations and administrative and judicial
interpretations thereof, all of which are subject to change prospectively or
retrospectively.
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income tax on its net income that is distributed
currently to its shareholders. That treatment substantially eliminates the
"double taxation" (i.e., taxation at both the corporate and shareholder levels)
that generally results from an investment in a corporation. However, the Company
will be subject to federal income tax in the following circumstances. First, the
Company will be taxed at regular corporate rates on any undistributed REIT
taxable income, including undistributed net capital gains. Second, under certain
circumstances, the Company may be subject to the "alternative minimum tax" on
its undistributed items of tax preference. Third, if the Company has (i) net
income from the sale or other disposition of "foreclosure property" that is held
primarily for sale to customers in the ordinary course of business or (ii) other
nonqualifying income from foreclosure property, it will be subject to tax at the
highest corporate rate on such income. Fourth, if the Company has net income
from prohibited transactions (which are, in general, certain sales or other
dispositions of property (other than foreclosure property) held primarily for
sale to customers in the ordinary course of business), such income will be
subject to a 100% tax. Fifth, if the Company should fail to satisfy the 75%
gross income test or the 95% gross income test (as discussed below), and has
nonetheless maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on the net income
attributable to the greater of the amounts by which the Company fails the 75%
and 95% gross income tests. Sixth, if the Company should fail to distribute
during each calendar year at least the sum of (i) 85% of its REIT ordinary
income for such year, (ii) 95% of its REIT capital gain net income for such year
and (iii) any undistributed taxable income from prior periods, the Company would
be subject to a 4% excise tax on the excess of such required distribution over
the amounts actually distributed. Seventh, if the Company acquires any asset
from a C corporation (i.e., a corporation generally subject to full
corporate-level tax) in a transaction in which the basis of the asset in the
Company's hands is determined by reference to the basis of the asset (or any
other asset) in the hands of the C corporation and the Company recognizes gain
on the disposition of such asset during the 10-year period beginning on the date
on which such asset was acquired by the Company, then to the extent of such
asset's "built-in gain" (i.e., the excess of the fair market value of such asset
at the time of acquisition by the Company over the adjusted basis in such asset
at such time), the Company will be subject to tax at the highest regular
corporate rate applicable (as provided in Treasury Regulations that have not yet
been promulgated). The results described above with respect to the recognition
of "built-in gain" assume that the Company would make an election pursuant to
IRS Notice 88-19 if it were to make any such acquisition.
REQUIREMENTS FOR QUALIFICATION
The Code defines a REIT as a corporation, trust or association (i) that is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation, but
for sections 856 through 860 of the Code; (iv) that is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(v) the beneficial ownership of which is held by 100 or more persons; (vi) not
more than 50% in value of the outstanding stock of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of each taxable year (the "5/50 Rule");
(vii) that makes an election to be a REIT (or has made such election for a
previous taxable year) and satisfies all relevant filing and other
administrative requirements established by the Service that must be met in order
to elect and to maintain REIT status; (viii) that uses a calendar year for
federal income tax purposes and complies with the recordkeeping requirements of
the Code and Treasury Regulations; and (ix) that meets certain other tests,
described below, regarding the nature of its income and assets. The Code
provides that conditions (i) to (iv), inclusive, must be met during the entire
taxable year and that condition (v) must be met during at least 335 days of a
taxable year of 12 months, or during a proportionate part of a taxable year of
less than 12 months. Conditions (v) and (vi) will not apply until after the
first taxable year for which an election is made by the Company to be taxed as a
REIT. The Company believes that it has issued sufficient shares of Common Stock
with sufficient diversity of ownership to allow it to satisfy requirements (v)
and (vi). In addition, the Company's Charter provides for restrictions regarding
transfer of the Common Stock that are intended to assist the Company in
continuing to satisfy the stock ownership requirements described in (v) and (vi)
above. Such transfer restrictions are described above under "Restrictions on
Transfer of Capital Stock."
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For purposes of determining stock ownership under the 5/50 Rule, a
supplemental unemployment compensation benefits plan, a private foundation or a
portion of a trust permanently set aside or used exclusively for charitable
purposes generally is considered an individual. A trust that is a qualified
trust under Code section 401(a), however, generally is not considered an
individual and the beneficiaries of such trust are treated as holding shares of
a REIT in proportion to their actuarial interests in the trust for purposes of
the 5/50 Rule.
The Company currently has one direct corporate subsidiary, Storage USA
Trust, a Maryland real estate investment trust (the "Trust"), and may have
additional corporate subsidiaries in the future. Code section 856 (i) provides
that a corporation that is a "qualified REIT subsidiary" is not treated as a
separate corporation, and all assets, liabilities, and items of income,
deduction, and credit of a qualified REIT subsidiary are treated as assets,
liabilities and items of income, deduction and credit of the REIT. A "qualified
REIT subsidiary" is a corporation, all of the capital stock of which has been
held by the REIT at all times during the period such corporation has been in
existence. Thus, in applying the requirements described herein, any qualified
REIT subsidiaries of the Company are ignored, and all assets, liabilities and
items of income, deduction and credit of such subsidiaries are treated as
assets, liabilities, and items of income, deduction, and credit of the Company.
The Trust is a qualified REIT subsidiary. The Trust, therefore, is not subject
to federal corporate income taxation, although it may be subject to state and
local taxation.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT is deemed to own its proportionate share of
the assets of the partnership and is deemed to be entitled to the gross income
of the partnership attributable to such share. In addition, the assets and gross
income of the partnership will retain the same character in the hands of the
REIT for purposes of section 856 of the Code, including satisfying the gross
income and asset tests described below. Thus, the Company's proportionate share
of the assets, liabilities and items of income of the Partnership and the
subsidiary partnerships of the Partnership (each, a "Subsidiary Partnership"),
are treated as assets and gross income of the Company for purposes of applying
the requirements described herein.
INCOME TESTS
In order for the Company to maintain its qualification as a REIT, there are
three requirements relating to the Company's gross income that must be satisfied
annually. First, at least 75% of the Company's gross income (excluding gross
income from prohibited transactions) for each taxable year must consist of
defined types of income derived directly or indirectly from investments relating
to real property or mortgages on real property (including "rents from real
property" and, in certain circumstances, interest) or temporary investment
income. Second, at least 95% of the Company's gross income (excluding gross
income from prohibited transactions) for each taxable year must be derived from
such real property or temporary investments, and from dividends, other types of
interest and gain from the sale or disposition of stock or securities, or from
any combination of the foregoing. Third, not more that 30% of the Company's
gross income (including gross income from prohibited transactions) for each
taxable year may be gain from the sale or other disposition of (i) stock or
securities held for less than one year, (ii) dealer property that is not
foreclosure property and (iii) certain real property held for less than four
years (apart from involuntary conversions and sales of foreclosure property).
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in whole
or in part on the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or percentages
of receipts or sales. Second, the Code provides that rents received from a
tenant will not qualify as "rents from real property" in satisfying the gross
income tests if the Company, or an owner of 10% or more of the Company, directly
or constructively owns 10% or more of such tenant (a "Related Party Tenant").
Third, if rent attributable to personal property leased in connection with a
lease of real property is greater than 15% of the total rent received under the
lease, then the portion of rent attributable to such personal property will not
qualify as "rents from real property." Finally, for rents received to qualify as
"rents from real property," the Company generally must not operate or manage the
property or furnish or render services to the tenants of such property, other
than through an "independent contractor" who is adequately compensated and from
whom the Company derives no revenue. The "independent contractor" requirement,
however, does not apply to the extent the services provided by the Company are
customarily furnished or rendered in connection with the rental of real property
for occupancy only and are not otherwise considered "rendered to the occupant."
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The Company, through the Partnership, derives the bulk of its revenues from
rent from storage unit leases, additional first month rent and late charges
attributable to such rents (collectively, the "Primary Revenues"). The Company
derives additional revenues from ancillary services such as moving truck rental
commissions, packing and shipping commissions, rent from leasing space utilized
for sales of locks and packing supplies to SUSA Management, Inc., a Tennessee
corporation ("Management"), 5% of whose voting stock and 94% of whose nonvoting
stock (which together constitute 99% of the beneficial economic interest
therein) are owned by the Partnership, rent from vehicle and boat storage leases
(including additional first month rent and late charges attributable thereto),
and similar items (collectively, the "Ancillary Revenues"). The Company also
receives dividends from Management, Storage USA Franchise Corp., a Tennessee
corporation ("Franchise"), and Storage USA Construction, Inc., a Tennessee
corporation ("Construction"). The Partnership owns 100% of the nonvoting stock
of each of Franchise and, through Franchise, Construction, representing 97.5% of
the beneficial economic interest of each of Franchise and Construction. The
Company believes that, other than the late charges attributable to rent, which
are treated as interest that qualifies for the 95% gross income test, but not
the 75% gross income test, the Primary Revenues qualify as rents from real
property and that dividends from Management, Franchise and Construction (the
"Nonqualified Subsidiaries") qualify as dividends for purposes of the 95% test.
Furthermore, the Company believes that the Ancillary Revenues and other types of
potentially nonqualifying gross income earned by the Company in each taxable
year are equal to, and will continue to be equal to, less than 5% of the
Company's total gross income and, thus, that such items of income do not
adversely affect the Company's qualification as a REIT.
The Company does not receive any rent that is based on the income or
profits of any person. In addition, other than with respect to its leasing
arrangement with Management with respect to the sale of lock and packing
supplies (the revenue from which the Company treats as nonqualifying income for
purposes of the 75% and 95% tests), the Company does not own, directly or
indirectly, 10% or more of any tenant or receive any rent based on the income or
profits of any tenant. Furthermore, the Company believes that any personal
property leased in connection with its storage facilities is well within the 15%
restriction. However, in order for the Primary Revenues to constitute "rents
from real property," the Company must not provide services to its tenants that
are not customarily furnished or rendered in connection with the rental of the
self-storage units, other than through an independent contractor.
The Company, through the Partnership and the Subsidiary Partnerships (each,
a "Partnership") (which are not independent contractors), provides certain
services with respect to the facilities. Such services include (i) common area
services, such as cleaning and maintaining public entrances, exits, stairways,
walkways, lobbies and rest rooms, removing snow and debris, collecting trash and
painting the exteriors of the facilities and common areas, (ii) providing
general security for the facilities, (iii) cleaning and repairing of units at
the facilities as tenants move in and out, (iv) at the request of the tenant,
and without additional charge, accepting delivery of goods from carriers or
unlocking a particular unit when goods are delivered to a facility (however, the
Partnerships do not otherwise assist tenants in the storage or removal of goods
or belongings from the units), (v) permitting tenants to use the facsimile
machine at a facility for sending occasional local facsimiles without additional
charge and for sending occasional long-distance facsimiles for a nominal charge,
(vi) maintaining underground utilities and structural elements of the
facilities, (vii) paying real and personal property taxes or the cost of
replacing or refurbishing personal property with respect to real and personal
property owned by a Partnership at a facility, (viii) for a fee, acting as an
agent for moving truck rental companies for tenants of certain facilities and
walk-in customers, (ix) for a fee, providing packing and shipping services to
tenants of certain facilities and walk-in customers and (x) at a few facilities,
allowing tenants to use trucks owned by the Company or a Partnership to move
their goods and belongings into and out of the units without additional charge.
The Company believes that the services provided by the Partnerships are
customarily furnished or rendered in connection with the rental of space for
occupancy only by self-storage facilities in the geographic areas in which its
facilities are located.
The Company's investment, through the Partnerships, in the facilities in
major part gives rise to rental income that is qualifying income for purposes of
the 75% and 95% gross income tests. Gains on sales of the facilities (other than
from prohibited transactions, as described below) or of the Company's interests
in the Partnerships generally will be qualifying income for purposes of the 75%
and 95% gross income tests. The Company anticipates that income on its other
investments, including its indirect investments in the Nonqualified
Subsidiaries, will not result in the Company failing the 75% or 95% gross income
test for any year.
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends in
whole or in part on the income or profits of any person. However, an
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amount received or accrued generally will not be excluded from the term
"interest" solely by reason of being based on a fixed percentage or percentages
of receipts or sales.
Any gross income derived from a prohibited transaction is taken into
account in applying the 30% income test necessary to qualify as a REIT (and the
net income from that transaction is subject to a 100% tax). The term "prohibited
transaction" generally includes a sale or other disposition of property (other
than foreclosure property) that is held primarily for sale to customers in the
ordinary course of a trade or business. The Company believes that no asset owned
by the Company or a Partnership is held for sale to customers and that a sale of
any such asset will not be in the ordinary course of business of the Company or
a Partnership. Whether property is held "primarily for sale to customers in the
ordinary course of a trade or business" depends, however, on the facts and
circumstances in effect from time to time, including those related to a
particular property. Nevertheless, the Company and the Partnerships have
complied, and will continue to comply, with the terms of safe-harbor provisions
in the Code prescribing when asset sales will not be characterized as prohibited
transactions. Complete assurance cannot be given, however, that the Company or
the Partnerships can comply with the safe-harbor provisions of the Code or avoid
owning property that may be characterized as property held "primarily for sale
to customers in the ordinary course of a trade or business."
It is possible that, from time to time, the Company or a Partnership will
enter into hedging transactions with respect to one or more of its assets or
liabilities. Any such hedging transactions could take a variety of forms,
including interest rate swap contracts, interest rate cap or floor contracts,
futures or forward contracts, and options. To the extent that the Company or a
Partnership enters into an interest rate swap or cap contract to hedge any
variable rate indebtedness incurred to acquire or carry real estate assets, any
periodic income or gain from the disposition of such contract should be
qualifying income for purposes of the 95% gross income test, but not the 75%
gross income test. Furthermore, any such contract would be considered a
"security" for purposes of applying the 30% gross income test. To the extent
that the Company or a Partnership hedges with other types of financial
instruments or in other situations, it may not be entirely clear how the income
from those transactions will be treated for purposes of the various income tests
that apply to REITs under the Code. The Company intends to structure any hedging
transactions in a manner that does not jeopardize its status as a REIT.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. Those relief
provisions generally will be available if (i) the Company's failure to meet such
tests is due to reasonable cause and not due to willful neglect, (ii) the
Company attaches a schedule of the sources of its income to its return and (iii)
any incorrect information on the schedule was not due to fraud with intent to
evade tax. It is not possible, however, to state whether in all circumstances
the Company would be entitled to the benefit of those relief provisions. As
discussed above in "Federal Income Tax Considerations-Taxation of the Company,"
even if those relief provisions apply, a 100% tax would be imposed with respect
to the net income attributable to the greater of the amounts by which the
Company fails the 75% and 95% income tests. No such relief is available for
violations of the 30% income test.
ASSET TESTS
The Company, at the close of each quarter of each taxable year, also must
satisfy two tests relating to the nature of its assets. First, at least 75% of
the value of the Company's total assets must be represented by cash or cash
items (including certain receivables), government securities, or "real estate
assets," including, in cases where the Company raises new capital through stock
or long-term (at least five-year) debt offerings, stock or debt instruments
attributable to the temporary investment of such new capital during the one-year
period following the Company's receipt of such capital. The term "real estate
assets" also includes real property (including interests in real property and
interests in mortgages on real property) and shares of other REITs. For purposes
of the 75% asset test, the term "interest in real property" includes an interest
of land or improvements thereon, such as buildings or other inherently permanent
structures (including items that are structural components of such buildings or
structures), a leasehold of land or improvements thereon, and an option to
acquire land or improvements thereon (or a leasehold of land or improvements
thereon). Second, of the investments not included in the 75% asset class, the
value of any one issuer's securities owned by the Company (other than its
ownership interest in the Partnerships, the Trust and any other qualified REIT
subsidiary) may not exceed 5% of the value of the Company's total assets, and
the Company may not own more than 10% of any one issuer's outstanding voting
securities (except for its ownership interest in the Partnerships, the Trust and
any other qualified REIT subsidiary).
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The Partnership owns 5% of the voting stock and 94% of the nonvoting stock
of Management (which together constitute 99% of the beneficial economic interest
therein). In addition, the Partnership owns 100% of the nonvoting stock of each
of Franchise and, through Franchise, Construction, which represents 97.5% of the
beneficial economic interest in each of Franchise and Construction. By virtue of
its partnership interest in the Partnership, the Company is deemed to own its
pro rata share of the assets of the Partnership, including the stock of the
Nonqualified Subsidiaries held by the Partnership.
The Partnership does not own more than 10% of the voting securities of any
Nonqualified Subsidiary. In addition, based upon its analysis of the estimated
value of the stock of each Nonqualified Subsidiary owned by the Partnership
relative to the estimated value of the other assets owned by the Company, the
Company believes that its pro rata share of the stock of each Nonqualified
Subsidiary owned by the Partnership does not exceed 5% of the total value of the
Company's assets. No independent appraisals have been obtained to support this
conclusion. This 5% limitation must be satisfied at the end of each quarter in
which the Company or the Partnership increases its interest in a Nonqualified
Subsidiary (including as a result of the Company increasing its interest in the
Partnership in connection with a stock offering or as limited partners of the
Partnership exercise their rights to redeem their limited partnership
interests). Although the Company plans to take steps to ensure that it satisfies
the 5% asset test for any quarter with respect to which retesting is to occur,
there can be no assurance that such steps will always be successful or will not
require a reduction in the Partnership's overall interest in a Nonqualified
Subsidiary. The Company does not expect to own securities of any other issuer in
excess of the restrictions set forth above.
If the Company should fail to satisfy the asset tests at the end of a
calendar quarter, such a failure would not cause it to lose its REIT status if
(i) it satisfied all of the asset tests at the close of the preceding calendar
quarter and (ii) the discrepancy between the value of the Company's assets and
the asset test requirements arose from changes in the market values of its
assets and was not wholly or partly caused by an acquisition of one or more
nonqualifying assets. If the condition described in clause (ii) of the preceding
sentence were not satisfied, the Company still could avoid disqualification by
eliminating any discrepancy within 30 days after the close of the quarter in
which it arose.
DISTRIBUTION REQUIREMENTS
The Company, in order to avoid corporate income taxation of the earnings
that it distributes, is required to distribute dividends (other than capital
gain dividends) to its shareholders in an amount at least equal to (i) the sum
of (A) 95% of its "REIT taxable income" (computed without regard to the
dividends paid deduction and its net capital gain) and (B) 95% of the net income
(after tax), if any, from foreclosure property, minus (ii) the sum of certain
items of noncash income. Such distributions must be paid in the taxable year to
which they relate, or in the following taxable year if declared before the
Company timely files its tax return for such year and if paid on or before the
first regular dividend payment date after such declaration. To the extent that
the Company does not distribute all of its net capital gain or distributes at
least 95%, but less than 100%, of its REIT taxable income, as adjusted, it will
be subject to tax thereon at regular ordinary and capital gains corporate tax
rates. Furthermore, if the Company should fail to distribute during each
calendar year at least the sum of (i) 85% of its REIT ordinary income for such
year, (ii) 95% of its REIT capital gain income for such year and (iii) any
undistributed taxable income from prior periods, the Company would be subject to
a 4% nondeductible excise tax on the excess of such required distribution over
the amounts actually distributed. The Company has made, and will continue to
make, timely distributions sufficient to satisfy the annual distribution
requirement.
It is possible that, from time to time, the Company may experience timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of that income and deduction of such
expenses in arriving at its REIT taxable income. Further, it is possible that,
from time to time, the Company may be allocated a share of net capital gain
attributable to the sale of depreciated property that exceeds its allocable
share of cash attributable to that sale. Therefore, the Company may have less
cash available for distribution than is necessary to meet its annual 95%
distribution requirement or to avoid corporate income tax or the excise tax
imposed on certain undistributed income. In such a situation, the Company may
find it necessary to arrange for short-term (or possibly long-term) borrowings
or to raise funds through the issuance of additional Offered Securities.
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Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirement for a year by paying "deficiency dividends"
to its shareholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Although the Company may be
able to avoid being taxed on amounts distributed as deficiency dividends, it
will be required to pay to the Service interest based upon the amount of any
deduction taken for deficiency dividends.
RECORDKEEPING REQUIREMENT
Pursuant to applicable Treasury Regulations, in order to be taxed as a
REIT, the Company must maintain certain records and request on an annual basis
certain information from its shareholders designed to disclose the actual
ownership of its outstanding stock. The Company has complied, and will continue
to comply, with such requirements.
PARTNERSHIP ANTI-ABUSE RULE
A final regulation (the "Anti-Abuse Rule") under the partnership provisions
of the Code (the "Partnership Provisions") authorizes the Service, in certain
abusive transactions involving partnerships, to disregard the form of the
transaction and recast it for federal tax purposes as the Service deems
appropriate. The Anti-Abuse Rule applies where a partnership is formed or
utilized in connection with a transaction (or series of related transactions)
with a principal purpose of substantially reducing the present value of the
partners' aggregate federal tax liability in a manner inconsistent with the
intent of the Partnership Provisions. The Anti-Abuse Rule states that the
Partnership Provisions are intended to permit taxpayers to conduct joint
business (including investment) activities through a flexible arrangement that
accurately reflects the partners' economic agreement and clearly reflects the
partners' income without incurring any entity-level tax. The purposes for
structuring a transaction involving a partnership are determined based on all of
the facts and circumstances, including a comparison of the purported business
purpose for a transaction and the claimed tax benefits resulting from the
transaction. A reduction in the present value of the partners' aggregate federal
tax liability through the use of a partnership does not, by itself, establish
inconsistency with the intent of the Partnership Provisions.
The Anti-Abuse Rule contains an example in which a corporation that elects
to be taxed as a REIT contributes substantially all of the proceeds from a
public offering to a partnership in exchange for a general partnership interest.
The limited partners of the partnership contribute real property assets to the
partnership, subject to liabilities that exceed their respective aggregate bases
in such property. In addition, some of the limited partners have the right,
beginning two years after the formation of the partnership, to require the
redemption of their limited partnership interests in exchange for cash or REIT
stock (at the REIT's option) equal to the fair market value of their respective
interests in the partnership at the time of the redemption. The example
concludes that the use of the partnership is not inconsistent with the intent of
the Partnership Provisions and, thus, cannot be recast by the Service. However,
because the Anti-Abuse Rule is extraordinarily broad in scope and is applied
based on an analysis of all of the facts and circumstances, there can be no
assurance that the Service will not attempt to apply the Anti-Abuse Rule to the
Company. If the conditions of the Anti-Abuse Rule are met, the Service is
authorized to take appropriate enforcement action, including disregarding a
Partnership for federal tax purposes or treating one or more of the partners as
nonpartners. Any such action could jeopardize the Company's status as a REIT.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to the shareholders in any year in which
the Company fails to qualify will not be deductible by the Company nor will they
be required to be made. In such event, to the extent of current and accumulated
earnings and profits, all distributions to shareholders will be taxable as
ordinary income and, subject to certain limitations of the Code, corporate
distributees may be eligible for the dividends received deduction. Unless
entitled to relief under specific statutory provisions, the Company also will be
disqualified from taxation as a REIT for the four taxable years following the
year during which the Company ceased to qualify as a REIT. It is not possible to
state whether in all circumstances the Company would be entitled to such
statutory relief.
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OTHER TAX CONSEQUENCES
STATE AND LOCAL TAXES
The Company, the Trust, the Partnerships or the investors in the Company
may be subject to state or local taxation in various state or local
jurisdictions, including those in which it or they own property, transact
business or reside. Such state and local tax treatment may not conform to the
federal income tax consequences discussed above. In addition, the Company, the
Trust or the Partnerships may be subject to certain state and local taxes
imposed on owners of property, such as ad valorem property taxes, transfer taxes
and rent taxes. CONSEQUENTLY, PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE EFFECT OF STATE AND LOCAL TAX LAWS ON AN INVESTMENT IN
THE COMPANY.
TAX ASPECTS OF THE COMPANY'S INVESTMENTS IN THE PARTNERSHIPS
The following discussion summarizes certain federal income tax
considerations applicable to the Company's direct or indirect investments in the
Partnership. The discussion does not cover state or local tax laws or any
federal tax laws other than income tax laws.
CLASSIFICATION AS PARTNERSHIPS
The Company is entitled to include in its income its distributive share of
each Partnership's income and to deduct its distributive share of each
Partnership's losses only if the Partnerships are classified for federal income
tax purposes as partnerships rather than as corporations or associations taxable
as corporations. An entity will be classified as a partnership rather than as a
corporation for federal income tax purposes if the entity (i) is treated as a
partnership under Treasury regulations, effective January 1, 1997, relating to
entity classification (the "Check-the-Box Regulations") and (ii) is not a
"publicly traded" partnership. Pursuant to the Check-the-Box Regulations, an
unincorporated entity with at least two members may elect to be classified
either as an association or as a partnership. If such an entity fails to make an
election, it generally will be treated as a partnership for federal income tax
purposes. The federal income tax classification of an entity that was in
existence prior to January 1, 1997, such as the Partnerships, will be respected
for all periods prior to January 1, 1997, if (i) the entity had a reasonable
basis for its claimed classification, (ii) the entity and all members of the
entity recognized the federal tax consequences of any changes in the entity's
classification within the 60 months prior to January 1, 1997, and (iii) neither
the entity nor any member of the entity was notified in writing on or before May
8, 1996, that the classification of the entity was under examination. The
Company believes that each Partnership will be treated as a partnership under
the Check-the-Box Regulations.
A publicly traded partnership is a partnership whose interests are traded
on an established securities market or are readily tradable on a secondary
market (or the substantial equivalent thereof). A publicly traded partnership
will not, however, be treated as a corporation for any taxable year if 90% or
more of the partnership's gross income for such year consists of certain
passive-type income, including (as may be relevant here) real property rents,
gains from the sale or other disposition of real property, interest and
dividends (the "90% Passive Income Exception").
The U.S. Department of the Treasury has issued regulations effective for
taxable years beginning after December 31, 1995 (the "PTP Regulations"), that
provide limited safe harbors from the definition of a publicly traded
partnership. Pursuant to one of those safe harbors (the "Private Placement
Exclusion"), interests in a partnership will not be treated as readily tradable
on a secondary market or the substantial equivalent thereof if (i) all interests
in the partnership were issued in a transaction (or transactions) that was not
required to be registered under the Securities Act and (ii) the partnership does
not have more than 100 partners at any time during the partnership's taxable
year. In determining the number of partners in a partnership, a person owning an
interest in a flow-through entity (i.e., a partnership, grantor trust or S
corporation) that owns an interest in the partnership is treated as a partner in
such partnership only if (i) substantially all of the value of the owner's
interest in the flow-through entity is attributable to the flow-through entity's
interest (direct or indirect) in the partnership and (ii) a principal purpose of
the use of the flow-through entity is to permit the partnership to satisfy the
100- partner limitation. Each Partnership qualifies for the Private Placement
Exclusion.
If a Partnership is considered a publicly traded partnership under the PTP
Regulations because it is deemed to have more than 100 partners, such
Partnership should not be treated as a corporation because it should be
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eligible for the 90% Passive Income Exception. If, however, for any reason a
Partnership were taxable as a corporation, rather than as a partnership, for
federal income tax purposes, the Company would not be able to qualify as a REIT.
See "Federal Income Tax Considerations -- Requirements for
Qualification -- Income Tests" and
" -- Requirements for Qualification -- Asset Tests." In addition, any change in
a Partnership's status for tax purposes might be treated as a taxable event, in
which case the Company might incur tax liability without any related cash
distribution. See "Federal Income Tax Considerations -Requirements for
Qualification -- Distribution Requirements." Further, items of income and
deduction of such Partnership would not pass through to its partners, and its
partners would be treated as stockholders for tax purposes. Consequently, such
Partnership would be required to pay income tax at corporate tax rates on its
net income, and distributions to its partners would constitute dividends that
would not be deductible in computing such Partnership's taxable income.
INCOME TAXATION OF THE PARTNERSHIPS AND THEIR PARTNERS
Partners, Not the Partnerships, Subject to Tax. A partnership is not a
taxable entity for federal income tax purposes. Rather, the Company is required
to take into account its allocable share of each Partnership's income, gains,
losses, deductions and credits for any taxable year of such Partnership ending
within or with the taxable year of the Company, without regard to whether the
Company has received or will receive any distribution from such Partnership.
Partnership Allocations. Although a partnership agreement generally will
determine the allocation of income and losses among partners, such allocations
will be disregarded for tax purposes under section 704(b) of the Code if they do
not comply with the provisions of section 704(b) of the Code and the Treasury
Regulations promulgated thereunder. If an allocation is not recognized for
federal income tax purposes, the item subject to the allocation will be
reallocated in accordance with the partners' interests in the partnership, which
will be determined by taking into account all of the facts and circumstances
relating to the economic arrangement of the partners with respect to such item.
Each Partnership's allocations of taxable income, gain and loss are intended to
comply with the requirements of section 704(b) of the Code and the Treasury
Regulations promulgated thereunder.
Tax Allocations With Respect to Contributed Properties. Pursuant to section
704(c) of the Code, income, gain, loss and deduction attributable to appreciated
or depreciated property that is contributed to a partnership in exchange for an
interest in the partnership must be allocated in a manner such that the
contributing partner is charged with, or benefits from, respectively, the
unrealized gain or unrealized loss associated with the property at the time of
the contribution. The amount of such unrealized gain or unrealized loss is
generally equal to the difference between the fair market value of the
contributed property at the time of contribution, and the adjusted tax basis of
such property at the time of contribution (a "Book-Tax Difference"). The
Treasury Department recently issued regulations requiring partnerships to use a
"reasonable method" for allocating items affected by section 704(c) of the Code
and outlining several reasonable allocation methods.
Under the partnership agreements governing the Partnerships, depreciation
or amortization deductions of the Partnership generally are allocated among the
partners in accordance with their respective interests in the Partnership,
except to the extent that Code section 704(c) requires otherwise. In addition,
gain on the sale of a contributed property will be specially allocated to the
contributing partner (including the Company) to the extent of any "built-in"
gain with respect to such property for federal income tax purposes. The
application of section 704(c) to the Partnerships is not entirely clear,
however, and may be affected by Treasury Regulations promulgated in the future.
BASIS IN PARTNERSHIP INTEREST. The Company's adjusted tax basis in its
partnership interest in a Partnership generally is equal to (i) the amount of
cash and the basis of any other property contributed to the Partnership by the
Company, (ii) increased by (A) its allocable share of the Partnership's income
and (B) its allocable share of indebtedness of the Partnership and (iii)
reduced, but not below zero, by (A) the Company's allocable share of the
Partnership's loss and (B) the amount of cash distributed to the Company, and by
constructive distributions resulting from a reduction in the Company's share of
indebtedness of the Partnership.
If the allocation of the Company's distributive share of a Partnership's
loss would reduce the adjusted tax basis of the Company's partnership interest
in the Partnership below zero, the recognition of such loss will be deferred
until such time as the recognition of such loss would not reduce the Company's
adjusted tax basis below zero. To the extent that the Partnership's
distributions, or any decrease in the Company's share of the indebtedness of the
Partnership (such decrease being considered a constructive cash distribution to
the partners), would reduce the Company's adjusted tax basis below zero, such
distributions (including such constructive distributions)
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constitute taxable income to the Company. Such distributions and constructive
distributions normally will be characterized as capital gain, and, if the
Company's partnership interest in the Partnership has been held for longer than
the long-term capital gain holding period (currently one year), the
distributions and constructive distributions will constitute long-term capital
gain.
Depreciation Deductions Available to the Partnerships. The Partnerships
have acquired equity interests in certain facilities, and expect to acquire
additional facilities in the future, for cash. To that extent, a Partnership's
initial basis in such a facility for federal income tax purpose generally equals
the purchase price paid by the Partnership. The Partnerships depreciate such
depreciable property for federal income tax purposes under the alternative
depreciation system of depreciation ("ADS"). Under ADS, the Partnerships
generally depreciate furnishings and equipment over a 10-year recovery period
using a straight-line method and a half-year convention. If, however, a
Partnership places more than 40% of its furnishings and equipment in service
during the last three months of a taxable year, a mid-quarter depreciation
convention must be used for the furnishings and equipment placed in service
during that year. Under ADS, the Partnerships generally depreciate buildings and
improvements over a 40-year recovery period using a straight-line method and a
mid-month convention. However, to the extent that a Partnership has acquired or
will acquire equity interests in facilities in exchange for partnership
interests in the Partnership, the Partnership's initial basis in each such
facility for federal income tax purposes should be the same as the transferor's
basis in that facility on the date of acquisition. The Partnerships depreciate
such depreciable property for federal income tax purposes under ADS. Although
the law is not entirely clear, the Partnerships depreciate such depreciable
property for federal income tax purposes over the same remaining useful lives
and under the same methods used by the transferors. A Partnership's tax
depreciation deductions will be allocated among the partners in accordance with
their respective interests in the Partnership (except to the extent that the
Partnership is required under Code section 704(c) to use a method of allocating
depreciation deductions attributable to the contributed properties that results
in the Company receiving a disproportionate share of such deductions).
SALE OF A PARTNERSHIP'S PROPERTY
Generally, any gain realized by a Partnership on the sale of property held
by the Partnership for more than one year will be long-term capital gain, except
for any portion of such gain that is treated as depreciation or cost recovery
recapture. Any gain recognized by a Partnership on the disposition of
contributed properties will be allocated first to the partners of the
Partnership under section 704(c) of the Code to the extent of their "built-in
gain" on those properties for federal income tax purposes. The partners'
"built-in gain" on the contributed properties sold will equal the excess of the
partners' proportionate share of the book value of those properties over the
partners' tax basis allocable to those properties at the time of the sale. Any
remaining gain recognized by the Partnership on the disposition of the
contributed properties, and any gain recognized by the Partnership or the
disposition of the other properties, will be allocated among the partners in
accordance with their respective percentage interests in the Partnership.
The Company's share of any gain realized by a Partnership on the sale of
any property held by the Partnership as inventory or other property held
primarily for sale to customers in the ordinary course of the Partnership's
trade or business will be treated as income from a prohibited transaction that
is subject to a 100% penalty tax. Such prohibited transaction income also may
have an adverse effect upon the Company's ability to satisfy the income tests
for REIT status. See "Federal Income Tax Considerations -- Requirements for
Qualification -- Income Tests." The Company, however, does not presently intend
to allow any Partnership to acquire or hold any property that represents
inventory or other property held primarily for sale to customers in the ordinary
course of the Company's or such Partnership's trade or business.
NONQUALIFIED SUBSIDIARIES
The Partnership owns 94% of the nonvoting stock, and 5% of the voting
stock, of Management, representing in the aggregate a 99% economic interest
therein. In addition, the Partnership owns 100% of the nonvoting stock of
Franchise, representing a 97.5% economic interest therein. By virtue of its
ownership of the Partnership, the Company is considered to own its pro rata
share of the stock of the Nonqualified Subsidiaries held by the Partnership.
As noted above, for the Company to qualify as a REIT the Company's
proportionate share of the value of the securities of each Nonqualified
Subsidiary held by the Partnership may not exceed 5% of the total value of the
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Company's assets. In addition, the Company's proportionate share of each
Nonqualified Subsidiary's equity securities may not constitute more than 10% of
the voting securities of such Nonqualified Subsidiary. The Partnership owns 5%
of the voting securities of Management, but does not own any of the voting
securities of Franchise. In addition, the Company believes that its
proportionate share of the value of the securities of each Nonqualified
Subsidiary owned by the Partnership does not exceed 5% of the total value of the
Company's assets. If the Service were to challenge successfully those
determinations, however, the Company likely would fail to qualify as a REIT.
Each Nonqualified Subsidiary will be organized as a corporation and will
pay federal, state and local income taxes on its taxable income at normal
corporate rates. Any such taxes will reduce amounts available for distribution
by such Nonqualified Subsidiary, which in turn will reduce amounts available for
distribution to the Company's stockholders.
PLAN OF DISTRIBUTION
The Company and the Partnership may sell Offered Securities to or through
underwriters and also may sell Offered Securities directly to other purchasers
or through agents.
The distribution of the Offered Securities may be effected from time to
time in one or more transactions at a fixed price or prices, which may be
changed, or at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices.
In connection with the sale of Offered Securities, underwriters may receive
compensation from the Company, the Partnership or from purchasers of Offered
Securities for whom they may act as agents in the form of discounts, concessions
or commissions. Underwriters may sell Offered Securities to or through dealers,
and such dealers may receive compensation in the form of discounts, concessions
or commissions from the underwriters and/or commissions from the purchasers for
whom they may act as agents. Underwriters, dealers and agents that participate
in the distribution of Offered Securities may be deemed to be underwriters, and
any discounts or commissions received by them from the Company or the
Partnership and any profit on the resale of Offered Securities by them may be
deemed to be underwriting discounts and commissions, under the Securities Act.
Any such underwriter or agent will be identified, and any such compensation
received from the Company or the Partnership will be described, in the
Prospectus Supplement.
Under agreements which may be entered into by the Company or the
Partnership, underwriters and agents who participate in the distribution of Debt
Securities may be entitled to indemnification by the Company or the Partnership
against certain liabilities, including liabilities under the Securities Act.
Certain of the underwriters and their affiliates may be customers of,
engage in transactions with and perform services for the Company and the
Partnership in the ordinary course of business.
If so indicated in the applicable Prospectus Supplement, the Company or the
Partnership will authorize dealers acting as the Company's or the Partnership's
agents to solicit offers by certain institutions to purchase Offered Securities
from the Company or the Partnership at the public offering price set forth in
such Prospectus Supplement pursuant to Delayed Delivery Contracts (the
"Contracts") providing for payment and delivery on the date or dates stated in
such Prospectus Supplement. Each Contract will be for an amount not less than,
and the principal amount of Offered Securities sold pursuant to Contracts shall
not be less nor more than, the respective amounts stated in such Prospectus
Supplement. Institutions with which Contracts, when authorized, may be made
include commercial and savings banks, insurance companies, pension funds,
investment companies, educational and charitable institutions and other
institutions, but will in all cases be subject to the approval of the Company or
the Partnership. Contracts will not be subject to any conditions except (i) the
purchase by an institution of the Offered Securities covered by its Contract
shall not at the time of delivery be prohibited under the laws of any
jurisdiction in the United States to which such institution is subject and (ii)
the Company or the Partnership shall have sold to such underwriters the total
principal amount of the Offered Securities less the principal amount thereof
covered by Contracts. A commission indicated in the Prospectus Supplement will
be paid to agents and underwriters soliciting purchases of Offered Securities
pursuant to Contracts accepted by the Company or the Partnership. Agents and
underwriters shall have no responsibility in respect of the delivery or
performance of Contracts.
Pursuant to the Strategic Alliance Agreement, so long as Security Capital
owns at least 15% of the outstanding Common Stock, Security Capital will be
entitled (except in certain limited circumstances), upon compliance with
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certain specified conditions, to a participation right to purchase or subscribe
for, either as part of such issuance or a concurrent issuance, a total number of
shares of Common Stock or Preferred Stock or of Warrants or Depositary Shares,
as the case may be, equal to up to 37.5% (depending on Security Capital's
ownership percentage at the time of the offering) of the total number of shares
of Commmon Stock or Preferred Stock or of Warrants or Depositary Shares, as
applicable, proposed to be issued by the Company. All purchases pursuant to such
participation rights will be at the same price and on the same terms and
conditions as are applicable to the other purchasers thereof.
VALIDITY OF OFFERED SECURITIES
The validity of the Offered Securities will be passed upon for the Company
and the Partnership by Hunton & Williams, Richmond, Virginia.
EXPERTS
The consolidated financial statements of the Company incorporated by
reference in its annual report on Form 10-K for the year ended December 31,
1995, and the historical summaries of combined gross revenue and direct
operating expenses included in the Company's Current Reports on Form 8-K, dated
April 5, 1996, Form 8-K/A, dated July 17, 1996, Form 8-K/A, dated September 16,
1996, Form 8-K, dated October 24, 1996, Form 8-K/A, dated October 31, 1996, and
Form 8-K/A dated February 18, 1997, have been audited by Coopers & Lybrand
L.L.P., independent accountants, as set forth in their reports thereon included
therein and incorporated herein by reference. Such financial statements and
summaries are incorporated herein by reference in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of the Partnership for the year ended
December 31, 1995, appearing on pages F29-F49 of the Partnership's Registration
Statement on Form S-3 (File No. 333-3344), and the historical summaries of
combined gross revenue and direct operating expenses included in the
Partnerships's Current Reports on Form 8-K/A, dated September 16, 1996, Form
8-K, dated October 24, 1996, Form 8-K/A, dated October 31, 1996, and Form 8-K/A
dated February 18, 1997, have been audited by Coopers & Lybrand L.L.P.,
independent accountants, as set forth in their reports thereon included therein
and incorporated herein by reference. Such financial statements and summaries
are incorporated herein by reference in reliance upon such reports given upon
the authority of such firm as experts in accounting and auditing.
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON
STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE
FACTS SET FORTH IN THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS OR IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
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The Company........................................ S-3
Recent Developments................................ S-3
Use of Proceeds.................................... S-4
Price Range of Common Stock
and Distributions................................ S-4
Certain Federal Income Tax
Considerations................................... S-5
Underwriting....................................... S-5
Experts............................................ S-6
Legal Matters...................................... S-6
PROSPECTUS
PAGE
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Available Information.............................. 2
Incorporation of Certain Documents by Reference.... 2
The Company and the Partnership.................... 3
Use of Proceeds.................................... 3
Ratios of Earnings to Fixed Charges................ 3
Description of Capital Stock....................... 4
Description of Depositary Shares................... 6
Description of Warrants............................ 8
Restrictions on Transfer of Capital Stock.......... 10
Description of Debt Securities..................... 11
Federal Income Tax Considerations.................. 21
Plan of Distribution............................... 31
Validity of Offered Securities..................... 32
Experts............................................ 32
1,400,000 SHARES
STORAGE USA, INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
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GOLDMAN, SACHS & CO.
