<PAGE>
FILED PURSUANT TO RULE NO. 424(b)(5)
REGISTRATION NO. 333-51169
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT PURSUANT +
+TO RULE 424 UNDER THE SECURITIES ACT OF 1933. A REGISTRATION STATEMENT +
+RELATING TO THESE SECURITIES HAS BEEN DECLARED EFFECTIVE BY THE SECURITIES +
+AND EXCHANGE COMMISSION PURSUANT TO RULE 415 OF THE SECURITIES ACT OF 1933. A +
+FINAL PROSPECTUS SUPPLEMENT AND PROSPECTUS WILL BE DELIVERED TO THE +
+PURCHASERS OF THESE SECURITIES. THIS PROSPECTUS SUPPLEMENT AND THE +
+ACCOMPANYING PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE +
+SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS SUPPLEMENT DATED JULY 9, 1998
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JULY 9, 1998)
$75,000,000
[LOGO OF SOVRAN ACQUISITION LIMITED PARTNERSHIP]
SOVRAN ACQUISITION LIMITED PARTNERSHIP
% SENIOR NOTES DUE 2005
-----------
The % Senior Notes Due July , 2005 (the "Senior Notes") offered hereby
(the "Offering") are being issued by Sovran Acquisition Limited Partnership, a
Delaware limited partnership (the "Operating Partnership"), in an aggregate
principal amount of $75 million. Interest on the Senior Notes will be payable
semi-annually in arrears on January 15, and July 15 of each year commencing
January 15, 1999. See "Description of Senior Notes--Principal and Interest."
The Senior Notes are redeemable at any time at the option of the Operating
Partnership, in whole or in part, at a redemption price equal to the sum of (i)
the principal amount of the Senior Notes being redeemed plus accrued interest
to the redemption date, and (ii) the Make-Whole Amount (as defined in
"Description of the Senior Notes--Optional Redemption"), if any. The Senior
Notes are unsecured obligations of the Operating Partnership and are
effectively subordinated to secured indebtedness of the Operating Partnership,
which as of July 7, 1998 aggregated approximately $3 million. The Senior Notes
will rank equally with all unsecured and unsubordinated indebtedness of the
Operating Partnership, which as of July 7, 1998 aggregated approximately
$159 million. The Senior Notes are not subject to any mandatory sinking fund.
The Senior Notes contain certain restrictions on the Operating Partnership's
ability to incur additional indebtedness. See "Description of Senior Notes."
The Senior Notes constitute a separate series of debt securities which will
be represented by a single fully registered global note in book-entry form
without coupons (a "Global Note") registered in the name of The Depository
Trust Company ("DTC") or its nominee. Beneficial interests in the Global Note
will be shown on, and transfers thereof will be effected only through, records
maintained by DTC (with respect to beneficial interests of participants) or by
participants or persons that hold interests through participants (with respect
to beneficial interests of beneficial owners). Owners of beneficial interests
in the Global Note will be entitled to physical delivery of Senior Notes in
certificated form equal in principal amount to their respective beneficial
interests only under the limited circumstances described under "Description of
Senior Notes--Book-Entry System." Settlement of the Senior Notes will be made
in immediately available funds. The Senior Notes will trade in DTC's Same-Day
Funds Settlement System until maturity or earlier redemption, as the case may
be, or until the Senior Notes are issued in certificated form, and secondary
market trading activity in the Senior Notes will therefore settle in
immediately available funds. All payments of principal and interest in respect
of the Senior Notes will be made by the Operating Partnership in immediately
available funds. See "Description of Senior Notes--Same-Day Settlement and
Payment."
SEE "RISK FACTORS" COMMENCING ON PAGE 4 OF THE ACCOMPANYING PROSPECTUS FOR
CERTAIN FACTORS RELEVANT TO AN INVESTMENT IN THE SENIOR NOTES.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts Operating
Public (1) and Commissions (2) Partnership (1)(3)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Senior Note... % % %
- -------------------------------------------------------------------------------
Total............. $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Plus accrued interest, if any, from , 1998.
(2) See "Underwriting."
(3) Before deducting expenses estimated at $150,000, which are payable by the
Operating Partnership.
-----------
The Senior Notes are offered by the Underwriters, subject to prior sale,
when, as and if delivered to and accepted by the Underwriters and subject to
their right to withdraw, cancel or modify such offer and to reject orders in
whole or in part. It is expected that delivery of the Senior Notes will be made
through the book-entry facilities of DTC, against payment therefor in
immediately available funds, on or about , 1998.
-----------
PAINEWEBBER INCORPORATED
A.G. EDWARDS & SONS, INC.
SALOMON SMITH BARNEY
-----------
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS , 1998.
<PAGE>
FORWARD-LOOKING STATEMENTS
This Prospectus Supplement and the accompanying Prospectus, including the
information incorporated by reference herein and therein, contain forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. The foregoing provisions by their express terms do not apply to
forward-looking statements made in connection with an initial public offering,
including the initial public offering of the Operating Partnership described
in this Prospectus Supplement. The words "believe," "expect," "anticipate,"
"intend," "estimate," "assume" and other similar expressions which are
predictions of or indicate future events and trends and which do not relate
solely to historical matters identify forward-looking statements. Reliance
should not be placed on forward-looking statements because they involve known
and unknown risks, uncertainties and other factors, which are in some cases
beyond the control of the Company (as defined herein) and may cause the actual
results, performance or achievements of the Company to differ materially from
anticipated future results, performance or achievements expressed or implied
by such forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
the following: occupancy rates and market rents may be adversely affected by
local economic and market conditions which are beyond management's control;
financing may not be available, or may not be available on favorable terms;
the Operating Partnership's cash flow may be insufficient to meet required
payments of principal and interest; and existing indebtedness may mature in an
unfavorable credit environment, preventing such indebtedness from being
refinanced, or, if refinanced, causing such refinancing to occur on terms that
are not as favorable as the terms of existing indebtedness. In addition, the
factors described under "Risk Factors" commencing on page 4 of the
accompanying Prospectus may result in such differences. Prospective purchasers
of the Senior Notes offered hereby should carefully review all of these
factors.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SENIOR NOTES.
SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF THE SENIOR NOTES IN THE OPEN
MARKET TO STABILIZE THE MARKET PRICE AND THE PURCHASE OF SENIOR NOTES TO COVER
SHORT POSITIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
S-2
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by the more detailed
information included elsewhere in this Prospectus Supplement and the
accompanying Prospectus or incorporated herein or therein by reference. Unless
the context otherwise requires, all references in this Prospectus Supplement to
the "Company" shall mean Sovran Self Storage, Inc., a Maryland corporation, and
its subsidiaries on a consolidated basis (including the Operating Partnership)
or, where the context so requires, Sovran Self Storage, Inc. only, and, as the
context may require, their predecessors.
THE COMPANY
The Senior Notes offered hereby are being issued by Sovran Acquisition
Limited Partnership, which is the operating partnership of Sovran Self Storage,
Inc., a fully integrated, self-administered, and self-managed real estate
investment trust ("REIT") whose common shares, par value $0.01 per share (the
"Common Shares"), are listed on the New York Stock Exchange (the "NYSE") under
the symbol "SSS." Substantially all of the Company's business is conducted
through, and all of the Company's interests in property are held by or through,
the Operating Partnership. As of July 7, 1998, Sovran Self Storage, Inc. owned
93.4% of the outstanding units of partnership interest ("Units") of the
Operating Partnership. The Company operates as a REIT under the Internal
Revenue Code of 1986, as amended ("the Code").
The Company is one of the largest owners and operators of self-storage
facilities in the United States. As of July 7, 1998, the Company owned and
operated 196 self-storage facilities containing an aggregate of 10.9 million
rentable square feet comprised of approximately 99,000 units (the
"Properties"). The Properties are located in 19 states, primarily in the
Eastern United States and Texas. The Properties as a whole have over 65,000
tenants and a majority of the Properties have been constructed within the past
10 years. At May 31, 1998, the weighted average occupancy level of the
Properties was approximately 85%.
The self-storage industry is characterized by numerous small, local
operators, with over 80% of all operators owning five or fewer facilities. The
Company believes that the shortage of skilled operators, the limited
availability of financing to small operators for acquisitions and expansions,
and the potential for savings through economies of scale are leading to a
consolidation in the self-storage industry. With its 13-year operating history,
in-house acquisition, development and management expertise, and significant
access to cost-effective capital, the Company believes it is well-positioned to
continue to take advantage of potential growth opportunities resulting from the
further consolidation of the self-storage industry. The Company has a $150
million unsecured credit facility to finance acquisitions of additional self-
storage facilities, expansion and improvement of the Properties, development of
new facilities and for general working capital purposes (the "Unsecured Credit
Facility"). In addition, in June 1998 the Company obtained a $30 million short
term unsecured term loan to fund certain pending acquisitions (the "Term
Note").
The Company also seeks to grow internally by improving cash flow from the
Properties through intensive, proactive property management that focuses on
quality property maintenance, customer satisfaction and retention, increases in
rents and occupancy levels, and control of operating expenses. The Company has
designed its incentive compensation program to financially motivate its Area
Managers and Property Managers to maximize revenues and net operating income.
Most of the Properties conduct business under the trade name Uncle BoB's Self
Storage(R). The Company converts newly acquired self-storage facilities to the
trade name Uncle BoB's Self Storage(R) upon expiration of prepaid advertising
arrangements employing names acquired with the Properties. The Company believes
the name Uncle BoB's Self Storage(R) is particularly user-friendly and conveys
the feeling of personalized service.
S-3
<PAGE>
RECENT DEVELOPMENTS
Unsecured Credit Facility. In February 1998, the Company entered into a $150
million unsecured revolving credit facility with a syndicate of banks, for
which Fleet Bank acts as agent, replacing the previous $75 million secured
credit facility. The Unsecured Credit Facility matures in February 2001 and
outstanding borrowings under the Unsecured Credit Facility bear interest at an
annual rate equal to LIBOR plus 1.25%. Presently, 99% of the Company's assets
are unencumbered. To manage its exposure to interest rate fluctuations, the
Company has entered into LIBOR-based interest rate swap agreements in amounts
of $75 million through October 1998 and $40 million through June 1999.
Property Acquisitions. From January 1, 1998 through July 7, 1998, the Company
acquired 40 Properties containing containing 2.6 million rentable square feet
for an aggregate purchase price of $132.5 million. In addition, the Company
currently has four properties under contracts of purchase for an aggregate
purchase price of $9.4 million. The closings of these acquisitions are subject
to several customary conditions including, among other things, satisfactory
completion of the Company's due diligence. There can be no assurance that any
or all of these acquisitions will be consummated on the terms currently
contemplated or at all.
S-4
<PAGE>
RISK FACTORS
An investment in the Senior Notes involves various risks. Prospective
investors should carefully consider the matters discussed under "Risk Factors"
commencing on page 4 of the accompanying Prospectus before making an investment
in the Senior Notes. Certain statements contained in this Prospectus Supplement
or incorporated herein by reference are "forward-looking statements," which
investors should not rely on because they are subject to a variety of risks
that may cause material differences between actual and anticipated results,
performance or achievements. See "Forward-Looking Statements" on page S-2.
THE OFFERING
All capitalized terms used herein and not defined shall have the meanings
provided under "Description of Senior Notes."
Securities Offered.......... $75 million aggregate principal amount of the %
Senior Notes Due 2005.
Maturity.................... July , 2005.
Interest Payment Dates...... Interest on the Senior Notes is payable semi-
annually on each January 15 and July 15,
commencing January 15, 1999, and at maturity.
Ranking..................... The Senior Notes will be senior unsecured
obligations of the Operating Partnership and will
rank equally with the Operating Partnership's
other unsecured and unsubordinated indebtedness,
including indebtedness under the Company's
Unsecured Credit Facility and the Term Note. The
outstanding principal balances under the
Unsecured Credit Facility and the Term Note vary
from time to time and as of July 7, 1998 the
total amounts outstanding aggregated
approximately $150 million and $9 million,
respectively. The Senior Notes will be
effectively subordinated to secured indebtedness
of the Operating Partnership, which as of July 7,
1998 aggregated approximately $3 million
(representing 0.7% of the Company's assets at
July 7, 1998).
Optional Redemption......... The Senior Notes are redeemable at any time at
the option of the Operating Partnership, in whole
or in part, at a redemption price equal to the
sum of (i) the principal amount of the Senior
Notes being redeemed plus accrued interest to the
redemption date and (ii) the Make-Whole Amount,
if any. See "Description of Senior Notes--
Optional Redemption."
Use of Proceeds............. The net proceeds from the sale of the Senior
Notes will be used to partially repay
indebtedness under the Unsecured Credit Facility
and fully repay indebtedness under the Term Note,
which indebtedness was used primarily to acquire
Properties. See "Use of Proceeds" and
"Underwriting."
Certain Covenants........... The Senior Notes contain various covenants
including the following:
--Neither the Operating Partnership nor any
Subsidiary may incur any Debt, other than
intercompany Debt, if, after giving effect
thereto, the aggregate principal amount of all
outstanding Debt of the Operating Partnership
and its Subsidiaries on a consolidated
S-5
<PAGE>
basis is greater than 60% of the sum of (i) the
Operating Partnership's Adjusted Total Assets as
of the end of the most recent fiscal quarter
prior to the incurrence of such additional Debt,
(ii) the purchase price of any real estate
assets or mortgages receivable (or interests
therein) acquired by the Operating Partnership
or any Subsidiary since the end of such fiscal
quarter, including those obtained in connection
with the incurrence of such additional Debt and
(iii) the amount of any securities offering
proceeds received by the Operating Partnership
or any Subsidiary since the end of such fiscal
quarter (to the extent that such proceeds were
not used to acquire such real estate assets or
mortgages receivable or used to reduce Debt).
--Neither the Operating Partnership nor any
Subsidiary may incur any Debt, other than
intercompany Debt, if, after giving effect
thereto, the ratio of Consolidated Income
Available for Debt Service to the Annual Debt
Service Charge for the four consecutive fiscal
quarters most recently ended prior to the date
on which such additional Debt is to be incurred
shall have been less than 1.5:1, on a pro forma
basis after giving effect to certain
assumptions.
--Neither the Operating Partnership nor any
Subsidiary may incur any Secured Debt, whether
the collateral is owned at the date of the
Indenture or thereafter acquired, if, after
giving effect thereto, the aggregate principal
amount of all outstanding Secured Debt of the
Operating Partnership and its Subsidiaries on a
consolidated basis is greater than 40% of the
sum of (i) the Operating Partnership's Adjusted
Total Assets as of the end of the most recent
fiscal quarter prior to the incurrence of such
additional Secured Debt, (ii) the purchase price
of any real estate assets or mortgages
receivable (or interests therein) acquired by
the Operating Partnership or any Subsidiary
since the end of such fiscal quarter, including
those obtained in connection with the incurrence
of such additional Secured Debt and (iii) the
amount of any securities offering proceeds
received by the Operating Partnership or any
Subsidiary since the end of such fiscal quarter
(to the extent that such proceeds were not used
to acquire such real estate assets or mortgages
receivable or used to reduce Debt).
--The Operating Partnership will at all times
maintain an Unencumbered Total Asset Value in an
amount not less than 150% of the aggregate
principal amount of all outstanding unsecured
Debt of the Operating Partnership and its
Subsidiaries on a consolidated basis.
For a more complete description of the terms and
definitions used in the foregoing summary, see
"Description of Senior Notes--Certain Covenants."
S-6
<PAGE>
INDUSTRY OVERVIEW
Self-storage facilities offer inexpensive storage space to residential and
commercial users. In addition to fully enclosed, secure storage space, some
operators, including the Company, also offer outside storage for vehicles and
boats at certain facilities. Facilities are usually fenced-in, have locked
gates and are lighted. Facilities generally have a manager on-site during
business hours and, in many cases, the manager resides in an apartment at the
facility. Customers have access to their storage area during business hours
and some commercial customers are provided 24-hour access. Individual storage
units are typically secured by a lock furnished by the customer to provide the
customer with control of access to the unit.
The Company believes that the self-storage industry is characterized by a
trend toward consolidation, continuing increase in demand, relatively slow
growth in supply and a targeted market of primarily residential customers.
TREND TOWARD CONSOLIDATION
The self-storage industry is characterized by numerous, small local
operators, with over 80% of all operators owning five or fewer facilities
according to the Self Storage Association. However, the Company believes that,
at a time when demand for the service appears strong, the self-storage
industry is showing a trend toward consolidation resulting from the following
factors:
. Shortage of Skilled Operators--The smaller, local operators generally
lack the expertise necessary to manage multiple facilities, to market
their self-storage facilities effectively, to develop and introduce
innovative management systems, and to selectively identify and acquire
new facilities.
. Limited Availability of Financing for Small Operators--In recent years,
small operators have had limited access to financing for the
acquisition, development and expansion of commercial real estate
projects, particularly self-storage facilities, and the Company
anticipates that this trend will continue.
. Economies of Scale--Successful centralized management systems can be
easily applied to new facilities regardless of location and permit an
operator to spread fixed costs over a larger base.
The Company believes that as a result of these factors, significant growth
opportunities exist for operators with proven management systems and
sufficient capital resources.
CONTINUING INCREASE IN DEMAND
Demand for self-storage services has increased significantly, as indicated
by an increase in industry average occupancy from 81.5% in 1990 to 85.1% in
1997 and by an increase in industry average rents, as reported by the Self-
Storage Almanac. The Company believes that demand for self-storage services
continues to increase for the following reasons:
. Demographics--Population growth and increasing population mobility
continue to increase demand for storage space.
. Consumer Awareness--Residential and commercial customers are becoming
increasingly familiar with the advantages of self-storage and its
favorable comparison to traditional alternatives. Commercial users in
particular are taking advantage of self-storage as a low-cost
alternative to warehouses and other commercial storage options.
. Demand Inelasticity--Self-storage consumers are generally less sensitive
to price increases than consumers of other services because of the lack
of reasonable alternatives and the inconvenience of moving stored goods
to a new location. This phenomenon has allowed aggressive operators to
increase rents on a regular basis without experiencing a material
decrease in occupancy levels.
MARKET SEGMENTATION
The self-storage market is generally segmented into two parts: residential
users and commercial users. According to data published by MiniCo., Inc. in
1997, residential users constitute approximately 80% of the
S-7
<PAGE>
United States market while commercial users account for approximately 20%,
based on square footage leased. Residential users may include single family
homeowners with insufficient storage; apartment, condominium, townhouse and
mobile home dwellers; military base occupants; recreational vehicle owners;
and households in transition. Commercial users may include salespersons and
distributors; retail businesses; professionals; and small contractors.
THE COMPANY
The Company is a fully integrated, self-administered and self-managed REIT
which has acquired, developed, owned and managed self-storage facilities since
1985. As of July 7, 1998, the Company owned and operated 196 Properties
containing an aggregate of 10.9 million rentable square feet comprised of
approximately 99,000 units. The Properties are located in 19 states,
predominantly in the Eastern United States and Texas. At May 31, 1998, the
occupancy level of the Properties was approximately 85%.
Most of the Properties conduct business under the trade name Uncle BoB's
Self Storage(R). The Company intends to convert the remaining Properties and
all newly acquired self-storage facilities to this trade name upon expiration
of prepaid advertising arrangements employing names acquired with the
Properties. The Company believes the name Uncle BoB's Self Storage(R) is
particularly user-friendly and conveys the feeling of personalized service.
GROWTH STRATEGY
The Company seeks to increase cash flow and enhance shareholder value by
aggressively managing its Properties, selectively acquiring new self-storage
facilities and strategically expanding and improving its Properties.
The following table sets forth certain historical data for the Company's
Properties since 1993:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
----- ----- ----- ----- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
Actual average rent per occupied
square foot..................... $6.03 $6.44 $6.81 $7.14 $7.67 $7.52
Occupancy level (for the period
ended).......................... 86.7% 88.7% 86.4% 87.0% 85.1% 84.1%
Net operating margin............. 67.7% 71.1% 72.6% 72.8% 72.3% 72.1%
</TABLE>
PROPERTY MANAGEMENT
The Company possesses substantial expertise in the management of self-
storage facilities. Key elements of the Company's management expertise
include:
. Recruiting, training and retaining capable, aggressive on-site Property
Managers
. Motivating Property Managers and Area Managers by providing an
opportunity to earn additional incentive-based compensation based on
Property performance
. Linking all Properties to its central customized management information
system which enhances control and property specific management
. Developing and maintaining for each Property an integrated marketing
plan which emphasizes commercial tenants
. Performing regular preventive maintenance to avoid significant repair
obligations
S-8
<PAGE>
The Company's philosophy is to thoroughly train each Property Manager and
Area Manager to operate effectively within the Company's management systems,
and to recognize and reward performance which increases revenues and decreases
expenses.
Each Property is managed by a full-time Property Manager and one or more
part-time Assistant Managers. A Property Manager typically resides on-site in
an apartment furnished by the Company, except where prohibited by local
ordinance. A Property Manager is responsible for nearly all day-to-day
operational decisions with respect to his or her Property, including rent
charges and routine maintenance, subject to certain monetary limits. Property
Managers generally have authority to either increase rental rates in response
to demand or promote specials to raise occupancies, both of which have a
direct impact on their incentive compensation. See "Incentive Compensation."
An Assistant Manager is employed on a part-time basis to give a Property
Manager sufficient time to perform marketing functions. Each Property Manager
reports to an Area Manager. The Area Managers report to one of four Regional
Vice-Presidents, who are each responsible for up to 50 properties. The four
Regional Vice Presidents report to the Company's President and Chief Operating
Officer.
Recruiting and Training of Property Managers
The Company actively recruits capable, aggressive Property Managers. Once
hired, new Property Managers attend an orientation program which includes a
thorough review of the Company's property management systems. The orientation
program emphasizes telephone skills, closing techniques, identification of
selected marketing opportunities (e.g., local industrial parks, office suites
and apartment complexes) and familiarization with the Company's customized
management information system.
The Company places great importance on developing a Property Manager's
telephone skills because most inquiries by potential customers are received by
telephone. The telephone skills of each Property Manager are surveyed at least
quarterly by having Company representatives pose as potential customers. The
results of the survey are immediately presented to the Property Manager,
together with suggestions for improvement. Property Managers who score
particularly well on telephone surveys receive a cash award.
Incentive Compensation
In addition to base salary, the Company's Property Managers, Area Managers
and Regional Vice Presidents may earn incentive compensation based on
increases in the gross income and net operating income of their Properties.
The Company annually establishes a target gross income and net operating
income for each Property. A Property Manager earns a percentage of all gross
income in excess of the target level. Similarly, Area Managers and Regional
Vice Presidents earn a percentage of net operating income in excess of the
combined target levels for all Properties reporting to them. The incentive
awards are not subject to any caps or increment requirements. Under the
Company's program, it is not unusual for such employees to earn incentive
compensation equal to 25% of base salary.
The Company believes that the structure of its incentive compensation
program causes its managers to exercise their operational autonomy in a manner
to maximize net operating income through increased rental income and increased
occupancy levels and, in the case of Area Managers and Regional Vice
Presidents, decreased expenses.
Customized Management Information System
The Company utilizes a customized management information system linking each
of the Properties with the Company's headquarters. The system is designed with
significant security, control and efficiency features to perform daily
billing, collection and reservation functions for each Property and tracks
information regarding occupancy levels, tenant demographics and histories, and
expenses. Newly acquired self-storage facilities are usually linked to the
customized system within 45-60 days of the date of acquisition. The system
generates daily, weekly and monthly financial reports for each Property that
are transmitted to the Company's headquarters each night via modem. The system
automatically imposes and reports late fees and also requires a Property
Manager
S-9
<PAGE>
to input a descriptive explanation for all debt and credit transactions, paid-
to-date charges, and all other discretionary activities, which allows the
accounting staff at the Company's headquarters to review all such transactions
within 24 hours. More sensitive activities such as rental rate decreases, unit
size changes and adding or deleting units into a Property's system are only
accessible by Area Managers and Regional Vice Presidents and are password
protected.
The tenant data tracked by the customized management information system has
proven to be a valuable marketing resource. For example, the system
automatically tracks historical tenant address and demographic information and
generates solicitations to be sent to seasonal tenants.
The Company's management is committed to continued significant investment in
information technology so that information systems will continue to be
adequate to support the growth of the Company.
Property Marketing
As of May 31, 1998, 153 of the Properties conducted business under the trade
name Uncle BoB's Self Storage(R). The Company intends to convert the remaining
Properties and all newly acquired self-storage facilities to the trade name
Uncle BoB's Self Storage(R) upon expiration of prepaid advertising employing
names acquired with the Properties. The Company believes the name Uncle BoB's
Self Storage(R) is particularly user-friendly and conveys the feeling of
personalized service.
The Company annually develops a written marketing plan for each of its
Properties. The focus of each marketing plan is, in part, determined by
occupancy rates. If all storage units of a same size at a Property are at or
near 90% occupancy, the plan will generally include increases in rental rates
for units of that size. If a Property has excess capacity, the marketing plan
will target selected markets such as local industrial parks, medical centers,
retail shopping malls, office suites, military bases, colleges, and apartment
and condominium complexes.
The Company's customized management information system allows it to maintain
historical data regarding its customers, such as type of customer and length
of stay, which is used in developing marketing plans. The Company also
conducts quarterly surveys of its competitors' practices, which include
"shopping" at competing facilities.
The Company believes that it is desirable to have a greater proportion of
commercial customers because commercial customers tend to rent larger units
for longer terms and are more reliable payors. Accordingly, the Company has
marketing programs which target commercial users. The Company estimates that
commercial users account for approximately 30% to 35% of its total occupancy,
which is substantially higher than the industry average of approximately 20%.
Property Maintenance
The Company's self-storage facilities are significantly less expensive to
maintain than most other types of real estate due to the simple construction
techniques and durable construction materials. The Properties are typically
constructed with metal roofs, concrete or masonry exterior walls, metal
interior walls and concrete floors. Most of the Company's storage units are
ground level thereby providing customers with the convenience of direct
vehicle access to their storage units. Typical maintenance includes door,
masonry, fence and driveway repair, and painting and landscaping. Climate
controlled units also require periodic maintenance of air conditioning
equipment. Maintenance within a storage unit is generally limited to sweeping
between rentals. Maintenance is the primary responsibility of the Property
Manager who may engage third party contractors to perform some types of
maintenance.
Capital Structure
Management intends to finance the Company's future growth through the
maintenance of a flexible capital structure designed to allow the Company to
take advantage of acquisition opportunities while providing access to the
public debt and equity capital markets on favorable terms. The Company intends
to maintain a strong
S-10
<PAGE>
financial position by: (i) maintaining a low level of leverage (i.e. a ratio
of debt and Preferred Stock to Real Estate Value of 50% or less, with "Real
Estate Value" defined as annualized net operating income of the most recent
fiscal quarter divided by 10.50%), (ii) maintaining almost 100% of
unencumbered properties, (iii) managing its exposure to variable interest
rates, and (iv) extending and staggering its debt maturities. Management
currently expects that all future indebtedness will be incurred by the
Operating Partnership.
Management believes the following indicators reflect the strong financial
position of the Company:
. As of July 7, 1998, on a pro forma basis giving effect to the Offering
and the application of the net proceeds therefrom, the Company and its
subsidiaries had $459 million of total unencumbered assets supporting
unsecured debt of the Company and its subsidiaries of $159 million.
. As of July 7, 1998, on a pro forma basis giving effect to the Offering
and the application of the net proceeds therefrom, the Company and its
subsidiaries had a ratio of debt to total assets of 35%, a ratio of
secured debt to total assets of 0.7%, and a ratio of total unencumbered
assets to unsecured debt of 289%.
. For the three months ended March 31, 1998, the Company's DSCR was 7.8.
"DSCR" is defined as EBITDA, divided by the sum of interest expense and
scheduled principal payments. "EBITDA" is defined as income before
extraordinary items, provisions for gains and losses of properties and
minority interest and federal income taxes, plus depreciation and
amortization and interest expense. EBITDA should not be considered as an
alternative to operating income, as determined in accordance with
generally accepted accounting principles ("GAAP"), as an indicator of
the Company's operating performance, or to cash flows from operating
activities as a measure of liquidity.
PROPERTIES
As of July 7, 1998, the Company owned 196 Properties containing an aggregate
of approximately 10.9 million rentable square feet, located in 19 states.
DISTRIBUTION OF PROPERTIES AS OF JULY 7, 1998
<TABLE>
<CAPTION>
# PROPERTIES % SQ. FEET % # OF UNITS %
------------ ------ ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Alabama............. 7 3.57% 382,706 3.51% 2,834 2.87%
Connecticut......... 3 1.53 123,925 1.14 992 1.01
Florida............. 44 22.45 2,672,654 24.48 25,525 25.88
Georgia............. 20 10.21 1,047,267 9.59 8,879 9.00
Louisiana........... 2 1.02 116,835 1.07 862 0.87
Maryland............ 4 2.04 173,669 1.59 1,977 2.00
Massachusetts....... 6 3.06 250,369 2.29 2,355 2.39
Michigan............ 6 3.06 428,295 3.92 4,270 4.33
Mississippi......... 3 1.53 142,727 1.31 1,078 1.09
New Hampshire....... 1 0.51 62,075 0.57 546 0.55
New York............ 9 4.59 484,371 4.44 4,168 4.23
North Carolina...... 12 6.12 590,790 5.41 5,882 5.96
Ohio................ 17 8.68 950,025 8.70 7,969 8.08
Pennsylvania........ 7 3.57 371,736 3.41 3,262 3.31
Rhode Island........ 2 1.02 109,015 1.00 1,067 1.08
South Carolina...... 7 3.57 345,833 3.17 2,780 2.82
Tennessee........... 4 2.04 208,495 1.91 1,712 1.74
Texas............... 24 12.25 1,433,846 13.13 12,872 13.05
Virginia............ 18 9.18 1,022,369 9.36 9,611 9.74
--- ------ ---------- ------ ------ ------
Totals............ 196 100.00% 10,917,002 100.00% 98,641 100.00%
=== ====== ========== ====== ====== ======
</TABLE>
S-11
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected financial and other data on a
historical basis for the Operating Partnership and on a combined historical
basis for the Partnership's Predecessors. The following information should be
read in conjunction with all of the financial statements and notes thereto
incorporated by reference herein. The selected financial data for the three
months ended March 31, 1998 has been derived from the unaudited financial
statements of the Operating Partnership. The selected financial data of the
Operating Partnership for the years ended December 31, 1997, and 1996 and for
the period from June 26, 1995 to December 31, 1995 have been derived from the
financial statements audited by Ernst & Young LLP, independent auditors, whose
report with respect thereto is incorporated by reference herein. The combined
selected financial data for the period ended June 25, 1995 and the years ended
December 31, 1994 and 1993 has been derived from audited combined financial
statements of the Company Predecessors not included in such report.
<TABLE>
<CAPTION>
OPERATING PARTNERSHIP COMPANY PREDECESSORS(1)
----------------------------------------------------------- ---------------------------
YEAR ENDED
THREE MONTHS THREE MONTHS YEAR YEAR FROM FROM DECEMBER 31,
ENDED ENDED ENDED ENDED 6/26/95 TO 1/1/95 TO ----------------
3/31/98 3/31/97 12/31/97 12/31/96 12/31/95 6/25/95 1994 1993
------------ ------------ ---------- --------- ---------- --------- ------- ----
(DOLLARS IN THOUSANDS, EXCEPT UNIT DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Operating revenues...... $ 14,375 $ 10,732 $ 49,354 $ 33,597 $ 12,942 $ 9,532 $18,530 $13,660
Income (loss) before
extraordinary item..... 6,203 4,935 23,763 15,682 6,744 311 1,836 (825)
Earnings (losses)....... 5,853 4,935 23,763 15,682 6,744 311 1,836 (825)
Net income per Unit--
basic.................. .46 .46 1.97 1.88 0.91 -- -- --
Net income per Unit--
diluted................ .46 .46 1.96 1.87 0.91 -- -- --
Distributions declared
per Unit............... .54 .52 2.12 2.05 1.04 -- -- --
Weighted average units:
Basic.................. 12,773,076 10,839,168 12,090,141 8,344,065 7,429,872 -- -- --
Diluted................ 12,785,861 10,870,390 12,152,166 8,379,350 7,439,415 -- -- --
BALANCE SHEET DATA:
Storage facilities
before accumulated
depreciation........... $ 390,349 $ 280,112 $ 333,036 $ 220,711 $ 159,461 $114,008 $91,889 $83,727
Total assets............ 384,467 279,170 327,073 235,415 160,437 84,527 82,733 78,918
Total debt.............. 91,059 35,559 39,559 -- 5,000 69,102 66,340 61,550
Total liabilities....... 105,419 45,243 50,319 8,131 10,697 71,311 69,014 64,096
Limited partners'
capital interest....... 13,170 11,564 14,454 4,435 -- -- -- --
Partners' capital....... 265,878 222,363 262,300 222,849 149,740 13,216 13,719 14,822
OTHER DATA:
Net cash provided by
operating activities... $ 10,476 $ 7,865 $ 31,159 $ 20,152 $ 7,188 $ 2,003 $ 5,428 $ 1,470
Net cash used in
investing activities... (54,717) (48,547) (98,765) (59,146) (157,965) (3,340) (6,609) (15,217)
Net cash provided by
financing activities... 44,661 26,391 53,486 54,949 151,509 507 1,030 14,283
Funds from
operations(2).......... 8,242 6,364 30,294 19,816 9,904 -- -- --
Number of facilities.... 173 138 155 111 82 74 60 54
Weighted average
occupancy.............. 84.1% 85.2% 85.1% 86.0% 86.1% 86.6% 88.7% 86.7%
</TABLE>
- --------
(1) The Operating Partnership began operations on June 26, 1995, and had no
historical results of operations before that date. Results of operations
prior to June 26, 1995 relate to Sovran Capital, Inc. and the Sovran
Partnerships ("Company Predecessors").
S-12
<PAGE>
(2) Funds from operations ("FFO") means income (loss) (computed in accordance
with GAAP) plus depreciation of real estate assets and amortization of
intangible assets exclusive of deferred financing costs. FFO is a
supplemental performance measure for REITs as defined by the National
Association of Real Estate Investment Trusts, Inc. FFO is presented
because analysts consider FFO to be one measure of the performance of the
Operating Partnership. FFO does not take into consideration scheduled
principal payments on debt, capital improvements and other obligations.
Accordingly, FFO is not a substitute for the Operating Partnership's cash
flow or net income as a measure of the Operating Partnership liquidity or
operating performance or ability to pay distributions.
S-13
<PAGE>
SELECTED PRO FORMA FINANCIAL DATA
The following table sets forth selected unaudited pro forma operating and
other data for the Operating Partnership as if (i) the acquisition of 44
Properties in 1997 and 40 Properties in 1998 had occurred as of the beginning
of 1997, and (ii) the proceeds of the Company's April 1997 common stock
offering were received at the beginning of 1997. The pro forma balance sheet
data was prepared as if the 22 Properties acquired since March 31, 1998 had
all been acquired at March 31, 1998. The following information should be read
in conjunction with all of the financial statements and notes thereto
incorporated by reference herein. The pro forma financial information is not
necessarily indicative of what the actual financial position and results of
operations of the Operating Partnership would have been as of the dates or for
the periods indicated, nor does it purport to represent the Operating
Partnership's future financial position and results of operations.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
THREE MONTHS YEAR ENDED
ENDED 3/31/98 12/31/97
(UNAUDITED) (UNAUDITED)
------------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT UNIT DATA)
<S> <C> <C>
OPERATING DATA:
Operating revenues.............................. $ 18,070 $ 71,106
Income before extraordinary item................ 6,636 26,713
Earnings........................................ 6,286 26,713
Net income per Unit--basic...................... .48 2.02
Net income per Unit--diluted.................... .47 2.01
Distributions declared per Unit................. .54 2.12
Weighted average Units:
Basic......................................... 13,206,794 13,206,794
Diluted....................................... 13,259,579 13,268,819
BALANCE SHEET DATA:
Storage facilities before accumulated deprecia-
tion........................................... $ 470,395 $ --
Total assets.................................... 464,545 --
Total debt...................................... 158,814 --
Total liabilities............................... 173,824 --
Limited partners' capital interest.............. 24,843 --
Partners' capital............................... 265,878 --
OTHER DATA:
Net cash provided by operating activities....... $ 11,460 $ 37,553
Net cash used in investing activities........... (122,472) (215,436)
Net cash provided by financing activities....... 111,432 163,763
Funds from operations........................... 9,226 36,688
Number of facilities............................ 196 196
Weighted average occupancy...................... 84.1% 85.1%
</TABLE>
S-14
<PAGE>
RATIOS OF EARNINGS TO FIXED CHARGES
The following table sets forth the Company and the Operating Partnership's
and their predecessor's consolidated ratios of earnings to fixed charges for
the period shown:
<TABLE>
<CAPTION>
COMPANY AND OPERATING PARTNERSHIP COMPANY PREDECESSORS
------------------------------------------------------------------------
YEAR ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31,
THREE MONTHS --------------------------- -------------
ENDED JANUARY 1, 1995
MARCH 31, TO JUNE 25,
1998 1997 1996 1995 1995 1994 1993
------------ -------- -------- --------- --------------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
5.27 9.43 7.56 21.88 1.09 1.31 0.84
</TABLE>
The ratios of earnings to fixed charges were computed by dividing earnings
by fixed charges. For this purpose, earnings consist of pre-tax income from
continuing operations plus fixed charges. Fixed charges consist of interest
expense and the amortization of debt issuance costs. To date, the Company has
not issued any Preferred Stock; therefore, the ratios of earnings to combined
fixed charges and preferred stock dividend requirements are the same as the
ratios of earnings to fixed charges presented above.
USE OF PROCEEDS
The net proceeds to the Operating Partnership from the sale of the Senior
Notes are estimated to be approximately $ million after deducting fees and
expenses of the Offering payable by the Operating Partnership. The Operating
Partnership intends to use such proceeds to partially repay indebtedness under
the Unsecured Credit Facility and fully repay indebtedness under the Term
Note. The Operating Partnership borrows under the Unsecured Credit Facility
and the Term Note to fund its acquisitions of additional self-storage
facilities. Borrowings under the Unsecured Credit Facility and the Term Note
bear interest at a rate of LIBOR plus 1.25% per year (6.9% as of June 30,
1998). The Unsecured Credit Facility matures in February, 2001. The Term Note
matures in September, 1998.
S-15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Operating
Partnership (i) on a historical basis as of March 31, 1998, (ii) on a pro
forma basis giving effect to the acquisition of 22 Properties since March 31,
1998, and additional borrowings since March 31, 1998 for capital improvements,
and (iii) as adjusted to give effect to the sale by the Operating Partnership
of the Senior Notes at their face value and the application of the assumed net
proceeds therefrom as if such event had occurred on March 31, 1998. See "Use
of Proceeds." The information set forth in the table below should be read in
conjunction with the financial statements and the notes thereto incorporated
by reference herein.
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------------------------
HISTORICAL PRO FORMA AS ADJUSTED
---------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
DEBT:
Senior Notes Due 2005................... $ -- $ -- $ 75,000
Unsecured Credit Facility and Term
Note................................... 88,000 159,000 83,381
Mortgage notes payable.................. 3,059 3,059 3,059
-------- -------- --------
Total debt............................ $ 91,059 $162,059 $161,440
Limited partners' capital interest--
443,609 Units
outstanding as of March 31, 1998,
863,037 Units
outstanding pro forma.................. $ 13,170 $ 24,843 $ 24,843
PARTNERS' CAPITAL:
General partner--219,567 Units outstand-
ing as of
March 31, 1998......................... 5,244 5,244 5,244
Limited partner--12,111,396 Units out-
standing as of March 31, 1998.......... 260,634 260,634 260,634
-------- -------- --------
Total partners' capital............... 265,878 265,878 265,878
-------- -------- --------
Total capitalization.................. $370,107 $452,780 $452,161
======== ======== ========
</TABLE>
S-16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS
The following discussion and analysis of the financial condition and results
of operations should be read in conjunction with the financial statements and
the notes thereto incorporated by reference herein.
The following discussion is based on the financial statements of the
Operating Partnership as of March 31, 1998, December 31, 1997, December 31,
1996, December 31, 1995, and for the period from June 26, 1995 (commencement
of operations) to December 31, 1995; and the combined statements of the
Company Predecessors for the period from January 1, 1995 to June 25, 1995. The
combined financial statements of the Company Predecessors are presented for
comparative purposes.
This Prospectus Supplement and the accompanying Prospectus, including the
information incorporated by reference herein and therein, contain forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. The foregoing provisions by their express terms do not apply to
forward-looking statements made in connection with an initial public offering,
including the Offering made hereby. The words "believe," "expect,"
"anticipate," "intend," "estimate," "assume" and other similar expressions
which are predictions of or indicate future events and trends and which do not
relate solely to historical matters identify forward-looking statements.
Reliance should not be placed on forward-looking statements because they
involve known and unknown risks, uncertainties and other factors, which are in
some cases beyond the control of the Company and may cause the actual results,
performance or achievements of the Company to differ materially from
anticipated future results, performance or achievements expressed or implied
by such forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
the following: occupancy rates and market rents may be adversely affected by
local economic and market conditions which are beyond management's control;
financing may not be available, or may not be available on favorable terms;
the Company's cash flow may be insufficient to meet required payments of
principal and interest; and existing indebtedness may mature in an unfavorable
credit environment, preventing such indebtedness from being refinanced, or, if
refinanced, causing such refinancing to occur on terms that are not as
favorable as the terms of existing indebtedness.
RESULTS OF OPERATIONS
For the period January 1, 1998 through March 31, 1998
The Operating Partnership reported revenues of $14.4 million during the
period and incurred $4 million in operating expenses. General and
administrative expenses of $0.9 million, interest expense of $1.2 million and
depreciation and amortization expenses of $2.1 million resulted in income of
$6.2 million before extraordinary item. An extraordinary loss of $0.35 million
resulted from the write-off of the unamortized financing costs of the
revolving credit facility that was replaced in February 1998. Net income
amounted to $5.9 million.
Three Months Ended March 31, 1998, compared to Three Months Ended March 31,
1997
The following discussion compares the activities of the Operating
Partnership for the three months ended March 31, 1998 with the activities of
the Operating Partnership for the three months ended March 31, 1997.
Total revenues increased from $10.7 million for the three months ended March
31, 1997 to $14.4 for the three months ended March 31, 1998, an increase of
$3.7 million or 34%. Of this, $3.4 million resulted from the acquisition of 62
Properties during the period January 1, 1997 through March 31, 1998 and $0.3
million was realized as a result of increased rental rates at the 111
Properties owned by the Operating Partnership at December 31, 1996. Interest
income decreased slightly. Overall, same-store revenues grew 3.7% for the
three month period ended March 31, 1998 as compared to the same period in
1997.
S-17
<PAGE>
Property operating and real estate tax expense increased $1 million or 33%
during the period. $0.9 million was a result of absorbing additional expenses
from operating the newly acquired Properties, and $0.1 million related to the
operations of Properties operated more than one year.
General and administrative expenses, which includes losses of $0.1 million
realized as the result of replacement of equipment, increased $0.1 million
principally as a result of the need for additional personnel and increased
administrative costs associated with managing the 62 additional Properties.
Interest expense increased $0.7 million due to the $52 million drawn on the
Operating Partnership's line of credit during the first three months of 1998.
Earnings before minority interest, extraordinary item, interest expense, and
depreciation and amortization increased from $7.0 million to $9.5 million, an
increase of $2.5 million or 36%.
Year Ended December 31, 1997 compared to Year Ended December 31, 1996
Rental revenues improved from $32.9 million for the year ended December 31,
1996 to $48.6 million for the year ended December 31, 1997, an increase of
$15.7 million, or 48%. Of this, $10.4 million resulted from the acquisition of
44 Properties during 1997, $4.3 million resulted from having the 1996
acquisitions included for a full year of operations, and $1 million resulted
from increased revenues at the 82 core Properties considered in same store
sales. For this core group, revenues increased 3.5%, primarily as the result
of rental rate increases, as average occupancy was unchanged from 1996's level
of 87.8%. Interest and other income increased just slightly to $0.8 million in
1997.
Property operating and real estate tax expense increased $4.5 million or 49%
during the period. Of this, $3.1 million was incurred by the facilities
acquired in 1997, $1.3 million resulted from the having the 1996 acquisitions
included for a full year of operations, and $0.1 million additional cost was
incurred in the operation of the eighty-two core Properties.
General and administrative expenses increased $0.5 million, primarily as a
result of increased supervisory and accounting costs associated with the
operation of an increased number of Properties.
Interest expense of $2.2 million in 1997 resulted primarily from borrowings
on the Operating Partnership's line of credit facility (a mortgage loan
assumed in an acquisition transaction required interest payments of
$0.2 million). The Operating Partnership had borrowings outstanding of $42
million before paying off the balance with the proceeds of an offering of the
Company's Common Shares in April 1997. The credit facility was then utilized
throughout the balance of the year to fund further acquisitions, so that by
the end of the year, the amount outstanding on the line was $36 million.
Depreciation and amortization expense increased to $7 million from $4.6
million, primarily as a result of the additional depreciation taken on the
$112 million of real estate assets acquired in 1997 and a full year of
depreciation on 1996 acquisitions.
Earnings before minority interest, interest expense, and depreciation and
amortization increased $10.7 million or 48%, in 1997 as a result of the
aforementioned items.
Year Ended December 31, 1996 compared to Year Ended December 31, 1995
Rental revenues improved from $21.8 million for the year ended December 31,
1995 to $32.9 million for the year ended December 31, 1996, an increase of
$11.1 million, or 51%. Of this, $5.1 million resulted from the acquisition of
29 properties during 1996, $4.9 million resulted from having 1995 acquisitions
included for a full year of operations, and $1.1 million resulted from
increased occupancy levels and rental rates. Interest and other income
remained unchanged at approximately $0.7 million.
S-18
<PAGE>
Property operating and real estate tax expense increased $3 million or 48%
during the period. Of this, $1.5 million was incurred by the Properties
acquired in 1996, $1.4 million resulted from having the 1995 acquisitions
included for a full year of operations, and $0.1 million of additional cost
was incurred in the operation of the 60 Properties owned by the Operating
Partnership since January 1, 1995.
General and administrative expenses decreased $0.3 million, primarily as a
result of non-recurring legal, accounting and other professional fees
associated with the winding up of partnership activities and the merger and
formation transactions.
Interest expenses of $1.9 million in 1996 resulted exclusively from
borrowings on the Operating Partnership's line of credit facility. The
Operating Partnership had borrowings outstanding of $59.3 million before
paying off the balance with the proceeds of an offering of the Company's
Common Shares in October 1996. Interest expense in 1995 was $3.4 million, or
$1.5 million higher than in 1996. This was primarily due to the fact that
until the Initial Offering in June 1995, the Company Predecessors had incurred
substantial mortgage debt as a means to finance its acquisitions, and paid
approximately $3.3 million to carry that debt through June 1995. Upon
completion of the Initial Offering, this mortgage debt was paid in full, and
there was only a line of credit borrowing of $5 million outstanding at the end
of 1995.
Depreciation and amortization expense increased to $4.6 million from $3.3
million, primarily as a result of the additional depreciation taken on the $60
million or real estate assets acquired in 1996.
Earnings before interest, and depreciation and amortization increased $8.4
million or 61% in 1996 as a result of the aforementioned items.
LIQUIDITY AND CAPITAL RESOURCES CAPITAL RESOURCES
The Company's principal liquidity demands are expected to be distributions
to shareholders, capital improvements and repairs and maintenance for the
Properties, acquisition of additional properties and selective property
development.
The Company intends to meet its short-term liquidity requirements through
net cash flows provided by operating activities and the Unsecured Credit
Facility. The Company considers its ability to generate cash to continue to be
adequate to meet all operating requirements and make distributions to its
shareholders in accordance with the provisions of the Code to enable the
Company to qualify as a REIT.
The Company's $150 million Unsecured Credit Facility matures in February,
2001. Borrowings under the Unsecured Credit Facility bear interest at LIBOR
plus 1.25% per annum. In addition, in June 1998 the Company obtained a $30
million unsecured Term Note, which matures in September, 1998. Borrowings
under the unsecured Term Note bear interest at LIBOR plus 1.25% per annum. To
manage its exposure to interest rate fluctuations, the Company has entered
into LIBOR-based interest rate swap agreements in the amounts of $75 million
through October 1998 and $40 million through June 1999.
To the extent that the Company does not satisfy its long-term liquidity
requirements through net cash flows provided by operating activities and the
Unsecured Credit Facility, it intends to satisfy such requirements through the
issuance of long-term unsecured indebtedness or the issuance of additional
equity securities. As of July 7, 1998, the Company owned three Properties
which are encumbered by debt aggregating approximately $3 million.
The issuance of Units for property acquisitions continues to be an
additional source of equity capital for the Company. The Operating Partnership
issued $3.6 million, $9.2 million and $11.7 million of Units in 1996, 1997 and
1998, respectively, in exchange for self-storage facilities.
On June 24, 1998, the Company announced that its Board of Directors
authorized the repurchase of up to 1,000,000 of its outstanding Common Shares.
The Common Shares may be purchased from time-to-time at the discretion of
management in the open market or in privately negotiated transactions. As of
July 7, 1998, the Company had repurchased 35,000 Common Shares.
S-19
<PAGE>
DESCRIPTION OF SENIOR NOTES
The following description of the particular terms of the Senior Notes
offered hereby supplements, and to the extent inconsistent therewith replaces,
the description of the general terms and provisions of the "Senior Securities"
set forth under "Description of Debt Securities" in the accompanying
Prospectus, to which reference is hereby made.
GENERAL
The Senior Notes constitute a separate series of Senior Securities (which
are more fully described in the accompanying Prospectus) to be issued under an
Indenture, dated as of July , 1998, as supplemented by Supplemental Indenture
No. 1, dated as of July , 1998 (the "Supplemental Indenture" and together
with the Original Indenture, the "Indenture") between the Operating
Partnership and Marine Midland Bank (the "Trustee"). The form of the Indenture
has been filed as an exhibit to the Registration Statement of which this
Prospectus Supplement is a part and is available for inspection at the offices
of the Operating Partnership. 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 Senior Notes are summaries of
certain provisions thereof, 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 the Senior Notes. All capitalized terms used but not defined
herein shall have the respective meanings set forth in the Indenture.
The Senior Notes will be limited to an aggregate principal amount of $75
million and will be direct, senior unsecured recourse obligations of the
Operating Partnership and will rank equally with all other unsecured and
unsubordinated indebtedness of the Operating Partnership from time to time
outstanding, including indebtedness outstanding from time to time under the
Operating Partnership's Unsecured Credit Facility. The Senior Notes will be
effectively subordinated to the claims of mortgage lenders and others holding
secured indebtedness of the Operating Partnership now existing or that may be
formed by the Operating Partnership in the future as to the specific
properties securing such indebtedness. As of July 7, 1998, the total amount of
secured indebtedness of the Operating Partnership was approximately $3
million. In addition, the Senior Notes will be effectively subordinated to
unsecured indebtedness and other liabilities of any Subsidiaries now existing
or that may be formed by the Operating Partnership in the future. All such
secured indebtedness or unsecured indebtedness will have to be satisfied in
full before holders of the Senior Notes will be able to realize any value from
encumbered or indirectly-held properties. The Senior Notes will be recourse to
all of the assets of the Operating Partnership, but will be non-recourse to
any general partner or limited partner of the Operating Partnership, including
Sovran Self Storage, Inc.
As of July 7, 1998, on a pro forma basis after giving effect to the issuance
and sale of the Senior Notes offered hereby and the application of the
proceeds therefrom, the total outstanding indebtedness of the Operating
Partnership would have been approximately $162 million, of which approximately
$3 million in the aggregate would have been secured indebtedness and
approximately $159 million would have been unsecured indebtedness. The
outstanding principal balances under the Unsecured Credit Facility and the
Term Note vary from time to time and as of July 7, 1998 were approximately
$150 million and $9 million, respectively.
The Senior Notes will mature on July 15, 2005 (the "Maturity Date"). The
Senior Notes will not be subject to any sinking fund provisions and will not
be convertible into or exchangeable for any equity interest in the Operating
Partnership or Sovran Self Storage Inc. The Senior Notes will be issued only
in fully registered book-entry form without coupons, in denominations of
$1,000 and integral multiples thereof.
Except as described below under "--Certain Covenants--Limitations on
Incurrence of Debt" and under "--Merger, Consolidation or Sale of Assets," the
Indenture does not contain any provisions that would limit the ability of the
Operating Partnership to incur indebtedness or that would afford holders of
the Senior Notes protection in the event of: (i) a highly leveraged or similar
transaction involving the Operating Partnership or Sovran Self Storage Inc. or
any affiliate of either such party; (ii) a change of control; or (iii) a
reorganization,
S-20
<PAGE>
restructuring, merger or similar transaction involving the Operating
Partnership that may adversely affect the holders of the Senior Notes.
However, certain restrictions on the ownership and transfer of the Common
Shares designed to preserve Sovran Self Storage, Inc.'s status as a REIT may
act to prevent or hinder a change of control. The Operating Partnership and
its management have no present intention of engaging in a transaction which
would result in the Operating Partnership's being highly leveraged or that
would result in a change of control.
PRINCIPAL AND INTEREST
The Senior Notes will bear interest at % per annum from July , 1998 or
from the immediately preceding Interest Payment Date (as defined below) to
which interest has been paid, payable semi-annually in arrears on January 15
and July 15 of each year, commencing January 15, 1999 (each, an "Interest
Payment Date"), to the persons (the "Holders") in whose name the applicable
Senior Notes are registered in the Security Register at the close of business
15 calendar days prior to such Interest Payment Date, i.e., December 31 and
June 30, respectively (regardless of whether such day is a Business Day, as
defined below), as the case may be (each, a "Regular Record Date"). Interest
on the Senior Notes will be computed on the basis of a 360-day year of twelve
30-day months.
Any interest not punctually paid or duly provided for on any Interest
Payment Date with respect to a Senior Note ("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 Senior Note 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 Senior Note not
less than ten days prior to such Special Record Date, or may be paid at any
time in any other lawful manner, as more particularly described in the
Indenture.
If any Interest Payment Date or Maturity falls on a day that is not a
Business Day, the required payment shall be on the next Business Day as if it
were made on the date such payment was due and no interest shall accrue on the
amount so payable for the period from and after such Interest Payment Date or
Maturity, as the case may be. "Business Day" means any day, other than a
Saturday or Sunday, that is neither a legal holiday nor a day on which banking
institutions in the City of New York are required or authorized by law,
regulation or executive order to close.
The principal of (and premium or Make-Whole Amount, if any) and interest on
the Senior Notes will be payable at the corporate trust office of the agent of
the Trustee in New York, in such coin or currency of the United States of
America as at the time of payment is legal tender for payment of public and
private debt, provided that, at the option of the Operating Partnership,
payment of interest may be made by check mailed to the address of the Person
entitled thereto as it appears in the Security Register or by wire transfer of
funds to such Person at an account maintained within the United States.
CERTAIN COVENANTS
Limitations on incurrence of debt. The Operating Partnership will not, and
will not permit any Subsidiary to, incur any Debt (as defined below), other
than intercompany Debt (representing Debt to which the only parties are the
Company, any of its Subsidiaries or the Operating Partnership, but only so
long as such Debt is held solely by any of the foregoing), if, immediately
after giving effect to the incurrence of such additional Debt and the
application of the proceeds thereof, the aggregate principal amount of all
outstanding Debt of the Operating Partnership on a consolidated basis
determined in accordance with generally accepted accounting principles is
greater than 60% of the sum of (without duplication) (i) the Operating
Partnership's Adjusted Total Assets (as defined below) as of the end of the
calendar quarter covered in the Operating 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 Securities and Exchange Commission (or, if such filing is not
permitted under the Securities Exchange Act of 1934, as amended, filed with
the Trustee) prior to the incurrence of such additional Debt, (ii) the
purchase price of any real estate assets or mortgages receivable (or interests
therein) acquired by the Operating Partnership or any Subsidiary since the end
of such calendar quarter, including those obtained in connection with the
incurrence of
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such additional Debt and (iii) the amount of any securities offering proceeds
received by the Operating Partnership or any Subsidiary since the end of such
calendar quarter (to the extent that such proceeds were not used to acquire
such real estate assets or mortgages receivable or used to reduce Debt).
The Operating Partnership will not, and will not permit any Subsidiary to,
incur any Debt, other than intercompany Debt, if the ratio of Consolidated
Income Available for Debt Service (as defined below) to the Annual Debt
Service Charge (as defined below) for the four consecutive fiscal quarters
most recently ended prior to the date on which such additional Debt is to be
incurred shall have been less than 1.5:1, on a pro forma basis after giving
effect to the incurrence of such Debt and to the application of the proceeds
therefrom, and calculated on the assumption that (i) such Debt and any other
Debt incurred by the Operating Partnership and its Subsidiaries since the
first day of such four-quarter period and the application of the proceeds
therefrom, including to refinance other Debt, had occurred at the beginning of
such period; (ii) the repayment or retirement of any other Debt by the
Operating Partnership and its Subsidiaries since the first day of such four-
quarter period had been repaid or retired at the beginning of such period
(except that, in making such computation, the amount of Debt under any
revolving credit facility shall be computed based upon the average daily
balance of such Debt during such period); (iii) in the case of Acquired Debt
(as defined below) or Debt incurred in connection with any acquisition since
the first day of such four-quarter period, the related acquisition had
occurred as of the first day of such period with the appropriate adjustments
with respect to such acquisition being included in such pro forma calculation;
and (iv) in the case of any acquisition or disposition by the Operating
Partnership or its Subsidiaries of any asset or group of assets since the
first day of such four-quarter period, whether by merger, stock purchase or
sale, or asset purchase or sale, such acquisition or disposition or any
related repayment of Debt had occurred as of the first day of such period with
the appropriate adjustments with respect to such acquisition or disposition
being included in such pro forma calculation.
The Operating Partnership will not, and will not permit any Subsidiary to,
incur any Debt secured by any mortgage, lien, charge, pledge, encumbrance or
security interest of any kind upon any of the property of the Operating
Partnership or any Subsidiary ("Secured Debt"), whether owned at the date of
the Indenture or thereafter acquired, if, immediately after giving effect to
the incurrence of such Secured Debt and the application of the proceeds
therefrom, the aggregate principal amount of all outstanding Secured Debt of
the Operating Partnership and its Subsidiaries on a consolidated basis is
greater than 40% of the sum of (without duplication) (i) the Operating
Partnership's Adjusted Total Assets as of the end of the calendar quarter
covered in the Operating 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
Securities and Exchange Commission (or, if such filing is not permitted under
the Securities Exchange Act of 1934, as amended, filed with the Trustee) prior
to the incurrence of such additional Secured Debt, (ii) the purchase price of
any real estate assets or mortgages receivable (or interests therein) acquired
by the Operating Partnership or any Subsidiary since the end of such calendar
quarter, including those obtained in connection with the incurrence of such
additional Secured Debt and (iii) the amount of any securities offering
proceeds received by the Operating Partnership or any Subsidiary since the end
of such calendar quarter (to the extent that such proceeds were not used to
acquire such real estate assets or mortgages receivable or used to reduce
Debt).
The Operating Partnership will at all times maintain an Unencumbered Total
Asset Value (as defined below) in an amount not less than 150% of the
aggregate principal amount of all outstanding unsecured Debt of the Operating
Partnership and its Subsidiaries on a consolidated basis.
As used herein, and in the Indenture:
"Acquired Debt" means Debt of a Person (i) existing at the time such
Person becomes a Subsidiary or (ii) assumed in connection with the
acquisition of assets from such Person, in each case, other than Debt
incurred in connection with, or in contemplation of, such Person becoming a
Subsidiary or such acquisition. Acquired Debt shall be deemed to be
incurred on the date of the related acquisition of assets from any Person
or the date the acquired Person becomes a Subsidiary.
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"Adjusted Total Assets" as of any date means the sum of (i) the amount
determined by multiplying the price at which the Company's Common Shares
were offered in the Initial Offering by the sum of (A) the Common Shares
issued in the Initial Offering and (B) the Units of the Operating
Partnership not held by the Company that were issued in connection with the
Initial Offering, (ii) the principal amount of outstanding Debt of the
Operating Partnership immediately following the Initial Offering and (iii)
the purchase price or cost of any real estate assets or mortgages
receivable (or interests therein) acquired (including the value of any
Units issued in connection therewith) or developed after the Initial
Offering and the amount of any securities offering proceeds and other
proceeds of Debt received after the Initial Offering (to the extent such
proceeds were not used to acquire real estate assets or mortgages
receivable or used to reduce Debt), adjusted for the proceeds of any real
estate assets disposed of by the Operating Partnership. This definition of
"Adjusted Total Assets" values the assets owned by the Operating
Partnership at the time of the Initial Offering at the market
capitalization of the Operating Partnership at that time, which the
Operating Partnership believes to be a more appropriate measure of the
value of those assets than undepreciated book value, which reflect their
pre-Initial Offering cost before accumulated depreciation.
"Annual Debt Service Charge" as of any date means the amount of any
interest expensed during the four consecutive fiscal quarters most recently
ended prior to such date.
"Consolidated Income Available for Debt Service" for any period means
Consolidated Net Income (as defined below) of the Operating Partnership and
its Subsidiaries plus amounts which have been deducted for (i) interest on
Debt of the Operating Partnership and its Subsidiaries, (ii) provision for
taxes of the Operating Partnership and its Subsidiaries based on income,
(iii) amortization of debt 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) extraordinary items.
"Consolidated Net Income" for any period means the amount of net income
(or loss) of the Operating Partnership and its Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP.
"Debt" of the Operating Partnership or any Subsidiary means any
indebtedness of the Operating Partnership or any Subsidiary, whether or not
contingent, in respect of (i) borrowed money evidenced by bonds, notes,
debentures or similar instruments, (ii) indebtedness secured by any
mortgage, pledge, lien, charge, encumbrance or any security interest
existing on property owned by the Operating Partnership or any Subsidiary,
(iii) reimbursement obligations in connection with any letters of credit
actually issued or amounts representing the balance deferred and unpaid of
the purchase price of any property except any such balance that constitutes
an accrued expense or trade payable or (iv) any lease of property by the
Operating Partnership or any Subsidiary as lessee which is reflected on the
Operating Partnership's consolidated balance sheet as a capitalized lease
in accordance with GAAP; in the case of items of indebtedness incurred
under (i) through (iii) above to the extent that any such items (other than
letters of credit) would appear as a liability on the Operating
Partnership's consolidated balance sheet in accordance with GAAP; and also
includes, to the extent not otherwise included, any obligation of the
Operating Partnership or any 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 Operating Partnership or any Subsidiary).
"Subsidiary" means, with respect to any Person, any corporation or other
entity of which a majority of (i) the voting power of the voting equity
securities or (ii) the outstanding equity interests of which are owned,
directly or indirectly, by such Person. For the purposes of this
definition, "voting equity securities" means equity securities having
voting power for the election of directors, whether at all times or only so
long as no senior class of security has such voting power by reason of any
contingency.
"Undepreciated Real Estate Assets" as of any date means the cost
(original cost plus capital improvements) of real estate assets of the
Operating Partnership and its Subsidiaries on such date, before
depreciation and amortization, determined on a consolidated basis in
accordance with GAAP.
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"Unencumbered Total Asset Value" as of any date means the sum of (i) the
portion of Adjusted Total Assets allocable to the Operating Partnership's
real estate assets and (ii) the value of all other assets of the Operating
Partnership and its Subsidiaries on a consolidated basis determined in
accordance with GAAP (but excluding intangibles and accounts receivable),
in each case which are unencumbered by any mortgage, lien, charge, pledge
or security interest.
Compliance with the covenants described herein and with respect to the
Senior Notes generally may not be waived by the Operating Partnership, or by
the Trustee unless the Holders of at least a majority in principal amount of
all outstanding Senior Notes consent to such waiver; provided, however, that
the defeasance and covenant defeasance provisions of the Indenture described
under "Discharge, Defeasance and Covenant Defeasance," below, will apply to
the Senior Notes, including with respect to the covenants described in this
Prospectus Supplement.
OPTIONAL REDEMPTION
The Senior Notes may be redeemed at any time at the option of the Operating
Partnership, in whole or in part, at a redemption price equal to the sum of
(i) the principal amount of the Senior Notes being redeemed plus accrued
interest thereon to the redemption date and (ii) the Make-Whole Amount, if
any, with respect to such Senior Notes (the "Redemption Price").
If notice of redemption has been given as provided in the Indenture and
funds for the redemption of any Senior Notes called for redemption shall have
been made available on the redemption date referred to in such notice, such
Senior Notes will cease to bear interest on the date fixed for such redemption
specified in such notice and the only right of the Holders of the Senior Notes
from and after the redemption date will be to receive payment of the
Redemption Price.
Notice of any optional redemption of any Senior Notes will be given to
Holders at their addresses, as shown in the Security Register, not more than
60 nor less than 30 days prior to the date fixed for redemption. The notice of
redemption will specify, among other items, the Redemption Price and the
principal amount of the Senior Notes held by such Holder to be redeemed.
If less than all the Senior Notes are to be redeemed at the option of the
Operating Partnership, the Operating Partnership will notify the Trustee at
least 45 days prior to giving the notice of redemption (or such shorter period
as is satisfactory to the Trustee) of the aggregate principal amount of Senior
Notes to be redeemed and their redemption date. The Trustee shall select, in
such manner as it shall deem fair and appropriate, Senior Notes to be redeemed
in whole or in part. Senior Notes may be redeemed in part in the minimum
authorized denomination for Senior Notes or in any integral multiple thereof.
Neither the Operating Partnership nor the Trustee shall be required to: (i)
issue, register the transfer of or exchange Senior Notes during a period
beginning at the opening of business 15 days before any selection of Senior
Notes to be redeemed and ending at the close of business on the day of mailing
of the relevant notice of redemption; (ii) register the transfer of or
exchange any Note, or portion thereof, called for redemption, except the
unredeemed portion of any Note being redeemed in part; or (iii) issue,
register the transfer of or exchange any Note that has been surrendered for
repayment at the option of the Holder, except the portion, if any, of such
Note not to be so repaid.
As used herein and in the Indenture:
"Make-Whole Amount" means, in connection with any optional redemption or
accelerated payment of any Note, the excess, if any, of (i) the aggregate
present value as of the date of such redemption or accelerated payment of
each dollar of principal being redeemed or paid and the amount of interest
(exclusive of interest accrued to the date of redemption or accelerated
payment) that would have been payable in respect of such dollar if such
redemption or accelerated payment had not been made, determined by
discounting, on a semi-annual basis, such principal and interest at the
Reinvestment Rate (determined on
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the third Business Day preceding the date such notice of redemption is
given or declaration of acceleration is made) from the respective dates on
which such principal and interest would have been payable if such
redemption or accelerated payment had not been made, over (ii) the
aggregate principal amount of the Senior Notes being redeemed or paid.
"Reinvestment Rate" means the yield on Treasury securities at a constant
maturity corresponding to the remaining life (as of the date of redemption,
and rounded to the nearest month) to stated maturity of the principal being
redeemed (the "Treasury Yield"), plus 0.25%. For purposes hereof, the
Treasury Yield shall be equal to the arithmetic mean of the yields
published in the Statistical Release (as defined below) under the heading
"Week Ending" for the "U.S. Government Securities--Treasury Constant
Maturities" with a maturity equal to such remaining life; provided, that if
no published maturity exactly corresponds to such remaining life, then the
Treasury Yield shall be interpolated or extrapolated on a straight-line
basis from the arithmetic means of the yields for the next shortest and
next longest published maturities. For purposes of calculating the
Reinvestment Rate, the most recent Statistical Release published prior to
the date of determination of the Make-Whole Amount shall be used. If the
format or content of the Statistical Release changes in a manner that
precludes determination of the Treasury Yield in the above manner, then the
Treasury Yield shall be determined in the manner that most closely
approximates the above manner, as reasonably determined by the Operating
Partnership.
"Statistical Release" means the statistical release designated
"H.15(519)" or any successor publication which is published weekly by the
Federal Reserve System and which establishes yields on actively traded
United States government securities adjusted to constant maturities or, if
such statistical release is not published at the time of any determination
of the Make-Whole Amount, then such other reasonably comparable index which
shall be designated by the Operating Partnership.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Indenture provides that the Operating Partnership may, without the
consent of the holders of any outstanding Debt Securities, consolidate with,
or sell, lease or convey all or substantially all of its assets to, or merge
with or into, any other entity provided that (a) either the Operating
Partnership shall be the continuing entity, or the successor entity (if other
than the Operating Partnership) formed by or resulting from any such
consolidation or merger or which shall have received the transfer of such
assets is organized under the laws of any domestic jurisdiction and assumes
the Operating Partnership's obligations to pay principal of (and premium or
Make-Whole Amount, if any) and interest on all of the Debt Securities and the
due and punctual performance and observance of all of the covenants and
conditions contained in the Indenture; (b) immediately after giving effect to
such transaction and treating any indebtedness that becomes an obligation of
the Operating Partnership or any Subsidiary as a result thereof as having been
incurred by the Operating Partnership or such Subsidiary at the time of such
transaction, no Event of Default under the Indenture, and no event which,
after notice or the lapse of time, or both, would become such an Event of
Default, shall have occurred and be continuing; and (c) an officers'
certificate and legal opinion covering such conditions shall be delivered to
the Trustee.
EVENTS OF DEFAULT, NOTICE AND WAIVER
The Indenture provides that the following events are "Events of Default"
with respect to the Senior Notes: (a) default in the payment of any interest
on any Senior Notes when such interest becomes due and payable that continues
for a period of 30 days; (b) default in the payment of the principal of (or
premium or Make-Whole Amount, if any, on) any Senior Notes when due and
payable that continues for a period of 5 days; (c) default in the performance,
or breach, of any other covenant or warranty of the Operating Partnership in
the Indenture with respect to the Senior Notes and continuance of such default
or breach for a period of 60 days after there has been given to the Operating
Partnership by the Trustee, or to the Operating Partnership and the Trustee by
the Holders of at least 25% in principal amount of the Senior Notes, a written
notice specifying such default or breach and requiring it to be remedied and
stating that such notice is a "Notice of Default" under the Indenture; (d)
default under any bond, debenture, note, mortgage, indenture or instrument
under which there may be issued or by which there may be secured or evidenced
any indebtedness for money borrowed by the Operating
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Partnership (or by any Subsidiary, the repayment of which the Operating
Partnership has guaranteed or for which the Operating Partnership is directly
responsible or liable as obligor or guarantor), having an aggregate principal
amount outstanding of at least $10,000,000, whether such indebtedness now
exists or shall hereafter be created, which default shall have resulted in
such indebtedness becoming or being declared due and payable prior to the date
on which it would otherwise have become due and payable, without such
indebtedness having been discharged, or such acceleration having been
rescinded or annulled, within a period of 10 days after there shall have been
given, by registered or certified mail, to the Operating Partnership by the
Trustee, or to the Operating Partnership and the Trustee by the Holders of at
least 25% in principal amount of the outstanding Senior Notes, a written
notice specifying such default and requiring the Operating Partnership to
cause such indebtedness to be discharged or cause such acceleration to be
rescinded or annulled and stating that such notice is a "Notice of Default"
under the Indenture, provided, however, that such a default on indebtedness
which constitutes tax-exempt financing having an aggregate principal amount
outstanding not exceeding $25,000,000 that results solely from a failure of an
entity providing credit support for such indebtedness to honor a demand for
payment on a letter of credit shall not constitute an Event of Default; or (e)
certain events of bankruptcy, insolvency or reorganization, or court
appointment of a receiver, liquidator or trustee of the Operating Partnership
or any significant Subsidiary or for all or substantially all of either of its
property.
See "Description of Debt Securities--Events of Default, Notice and Waiver"
in the accompanying Prospectus for a description of rights, remedies and other
matters relating to Events of Default.
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
The provisions of Article of the Indenture relating to defeasance and
covenant defeasance which are described in the accompanying Prospectus will
apply to the Senior Notes, including without limitation the covenants
described under "Description of Senior Notes--Certain Covenants."
BOOK-ENTRY SYSTEM
The Senior Notes will be issued in the form of one or more fully registered
Global Notes which will be deposited with, or on behalf of DTC, and registered
in the name of DTC's nominee, Cede & Co. Except under the circumstance
described below, the Senior Notes will not be issuable in definitive form.
Unless and until it is exchanged in whole or in part for the individual Senior
Notes represented thereby, a Global Note may not be transferred except as a
whole by DTC to a nominee of DTC or by a nominee of DTC to DTC or another
nominee of DTC or by DTC or any nominee of DTC to a successor depository or
any nominee of such successor.
Upon the issuance of a Global Note, DTC or its nominee will credit on its
book-entry registration and transfer system the respective principal amounts
of the individual Senior Notes represented by such Global Note to the accounts
of persons that have accounts with DTC ("Participants"). Such accounts shall
be designated by the underwriters, dealers or agents with respect to the
Senior Notes. Ownership of beneficial interests in a Global Note will be
limited to Participants or persons that may hold interests through
Participants. Ownership of beneficial interests in such Global Note will be
shown on, and the transfer of that ownership will be effected only through,
records maintained by DTC or its nominee (with respect to beneficial interests
of Participants) and records of Participants (with respect to beneficial
interests of persons who hold through Participants). The laws of some states
require that certain purchasers of securities take physical delivery of such
securities in definitive form. Such limits and laws may impair the ability to
own, pledge or transfer any beneficial interest in a Global Note.
So long as DTC or its nominee is the registered owner of such Global Note,
DTC or its nominee, as the case may be, will be considered the sole owner or
holder of the Senior Notes represented by such Global Note for all purposes
under the Indenture and the beneficial owners of the Senior Notes will be
entitled only to those rights and benefits afforded to them in accordance with
DTC's regular operating procedures. Except as provided below, owners of
beneficial interest in a Global Note will not be entitled to have any of the
individual Senior Notes registered in their names, will not receive or be
entitled to receive physical delivery of any such notes in definitive form and
will not be considered the owners or holders thereof under the Indenture.
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Payments of principal of and any interest on, individual Senior Notes
represented by a Global Note registered in the name of DTC or its nominee will
be made to DTC or its nominee, as the case may be, as the registered owner of
the Global Note representing such Senior Notes. None of the Operating
Partnership, the Trustee, any Paying Agent or the Security Registrar will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Note
for such Senior Notes or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests.
The Operating Partnership expects that DTC or its nominee, upon receipt of
any payment of principal or interest in respect of a permanent Global Note
representing any Senior Notes, immediately will credit Participants' accounts
with payments in amounts proportionate to their respective beneficial
interests in the principal amount of such Global Note as shown on the records
to DTC or its nominee. The Operating Partnership also expects that payments by
Participants to owners of beneficial interests in such Global Note held
through such Participants will be governed by standing instructions and
customary practices, as is the case with securities held for the account of
customers in bearer form or registered in "street name." Such payments will be
the responsibility of such Participants.
If DTC is at any time unwilling, unable or ineligible to continue as
depository and a successor depository is not appointed by the Operating
Partnership within 90 days, the Operating Partnership will issue individual
Senior Notes in exchange for the Global Note or Senior Notes representing the
Senior Notes. In addition, the Operating Partnership may, at any time and in
its sole discretion, determine not to have any Senior Notes represented by one
or more Global Senior Notes and, in such event, will issue individual Senior
Notes in exchange for the Global Note or Notes representing the Senior Notes.
DTC has advised the Operating Partnership of the following information
regarding DTC: DTC is a limited-purpose trust company organized under the New
York Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended. DTC holds securities that its Participants
deposit with DTC. DTC also facilitates the settlement among its Participants
of securities transactions, such as transfers and pledges, in deposited
securities through electronic computerized book-entry charges in its
Participants' accounts, thereby eliminating the need for physical movement of
securities certificates. Direct Participants of DTC include securities brokers
and dealers (including the Underwriter), banks, trust companies, clearing
corporations and certain other organizations. DTC is owned by a number of its
direct Participants and by the New York Stock Exchange, Inc., the American
Stock Exchange, Inc. and the National Association of Securities Dealers, Inc.
Access to the DTC system is also available to others such as securities
brokers and dealers, banks and trust companies that clear through or maintain
a custodial relationship with a direct Participant of DTC, either directly or
indirectly. The rules applicable to DTC and its Participants are on file with
the Securities and Exchange Commission.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Senior Notes will be made by the Underwriters in
immediately available funds. All payments of principal and interest in respect
of the Senior Notes will be made by the Operating Partnership in immediately
available funds.
Secondary trading in long-term notes and debentures of corporate issuers is
generally settled in clearing house or next-day funds. In contrast, the Senior
Notes will trade in DTC's Same-Day Funds Settlement System until maturity or
until the Senior Notes are issued in certificated form, and secondary market
trading activity in the Senior Notes will therefore be required by DTC to
settle in immediately available funds. No assurance can be given as to the
effect, if any, of settlement in immediately available funds on trading
activity in the Senior Notes.
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GOVERNING LAW
The Indenture is governed by and shall be construed in accordance with the
laws of the State of New York applicable to agreements made and to be
performed entirely in such state.
NO PERSONAL LIABILITY OR RECOURSE
No recourse under or upon any obligation, covenant or agreement contained in
the Indenture or the Senior Notes, or because of any indebtedness evidenced
thereby, shall be had (i) against the Company or any other past, present or
future partner in the Operating Partnership, (ii) against any other person or
entity which owns an interest, directly or indirectly, in any partner of the
Operating Partnership, or (iii) against any past, present or future
shareholder, employee, officer or director, as such, of the Company or any
successor, either directly or through the Company or the Operating Partnership
or any successor, under any rule of law, statute or constitutional provision
or by the enforcement of any assessment or by any legal or equitable
proceeding or otherwise. Each holder of Senior Notes waives and releases all
such liability by accepting such Senior Notes. The waiver and release are part
of the consideration for the issue of the Senior Notes.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes, subject to the limitations set forth
below, the material U.S. Federal income tax consequences of the acquisition,
ownership and disposition of the Senior Notes. The discussion is based upon
provisions of the Code, its legislative history, judicial authority, current
administrative rulings and practice, and existing and proposed Treasury
Regulations, all as in effect and existing on the date hereof. Legislative,
judicial or administrative changes or interpretations may be forthcoming that
could alter or modify the validity of the statements and conclusions set forth
below. Any such changes or interpretations may be retroactive and could
adversely affect a holder of the Senior Notes. Except as otherwise described
herein, this discussion applies both to a person who is (i) a citizen or
resident of the United States, (ii) a corporation, partnership or other entity
created or organized in or under the laws of the United States or any
political subdivision thereof (other than a partnership that is not treated as
a United States person under any applicable Treasury regulations), (iii) an
estate or trust the income of which is subject to U.S. Federal income taxation
regardless of its source, (iv) a trust if (a) a U.S. court may exercise
primary supervision over its administration and (b) one or more U.S. persons
have authority to control all substantial decisions of the trust, or (v) any
other person whose income or gain in respect of a Note is effectively
connected with the conduct of a United States trade or business (a "U.S.
Holder") and a person who is not a U.S. Holder (a "Non-U.S. Holder"). This
discussion deals only with the Senior Notes held as capital assets (within the
meaning of Section 1221 of the Code) by holders and does not purport to deal
with all aspects of U.S. Federal income taxation that might be relevant to
particular holders in light of their personal investment circumstances or
status, nor does it discuss the U.S. Federal income tax consequences to
certain types of holders subject to special treatment under the U.S. Federal
income tax laws, such as certain financial institutions, insurance companies,
dealers in securities or foreign currency, tax-exempt organizations, or
persons that hold Senior Notes that are a hedge against, or that are hedged
against, currency risk or that are part of a straddle, a constructive sale
transaction, conversion transaction, or persons whose functional currency is
not the U.S. Dollar. Moreover, the effect of any applicable state, local or
foreign tax laws, or any estate or gift tax laws, is not discussed.
Phillips, Lytle, Hitchcock, Blaine & Huber LLP counsel to the Operating
Partnership, has reviewed the following discussion and is of the opinion that,
to the extent that it constitutes matters of law or legal conclusions or
purports to describe certain provisions of the U.S. Federal tax laws, the
following discussion is a correct summary in all material respects of the
matters discussed therein.
THE FOLLOWING DISCUSSION IS FOR GENERAL INFORMATION ONLY. EACH INVESTOR IS
URGED TO CONSULT WITH ITS OWN TAX ADVISORS TO DETERMINE THE IMPACT OF SUCH
INVESTOR'S PERSONAL TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES,
INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN OR OTHER TAX LAWS,
OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF THE SENIOR NOTES.
U.S. HOLDERS: INTEREST, ORIGINAL ISSUE DISCOUNT
A U.S. Holder of a Note will be required to report as ordinary interest
income for U.S. Federal income tax purposes interest earned with respect to a
Note in accordance with the U.S. Holder's regular method of tax accounting.
Although the Senior Notes may be issued at a price that is less than their
stated principal amount, the discount is not expected to exceed 0.25% of the
stated redemption price at maturity multiplied by the number of whole years to
maturity. Therefore, for U.S. Federal income tax purposes, the amount of
original issue discount on the Senior Notes that is attributable to the
difference between their purchase price and their stated redemption price is
considered to be de minimis and is treated as zero.
U.S. HOLDERS: MARKET DISCOUNT, ACQUISITION PREMIUM
If a U.S. Holder acquires a Note for an amount that is less than the sum of
all payments (other than payments with respect to stated interest) due with
respect to such Note at the time of acquisition, the amount of such difference
will be treated as "market discount" for U.S. Federal income tax purposes,
unless such
S-29
<PAGE>
difference is less than a specified de minimis amount. Under the market
discount rules, a U.S. Holder will be required to treat any principal payment
on, or any gain on the sale, exchange, retirement or other disposition of, a
Note as ordinary income to the extent that such gain does not exceed the
accrued market discount on such Note. If a U.S. Holder makes a gift of a Note,
accrued market discount, if any, will be recognized as if such U.S. Holder had
sold such Note for a price equal to its fair market value. In addition, the
U.S. Holder may be required to defer, until the maturity of the Note or the
earlier disposition of the Note in a taxable transaction, the deduction of a
portion of the interest expense on any indebtedness incurred or continued to
purchase or carry such Note.
Any market discount will be considered to accrue on a straight-line basis
during the period from the date of acquisition to the maturity date of the
Note, unless the U.S. Holder elects to accrue such market discount on a
constant yield to maturity basis. Such an election is applicable only to the
Note with respect to which it is made and is irrevocable. A U.S. Holder of a
Note may elect to include market discount in income currently as it accrues
(on either a straight-line basis or constant yield to maturity basis), in
which case the rules described above regarding the deferral of interest
deductions will not apply. This election to include market discount in income
currently, once made, applies to all market discount obligations acquired on
or after the first day of the first taxable year to which the election applies
and may not be revoked without the consent of the Internal Revenue Service.
A U.S. Holder that purchases a Note for an amount in excess of the sum of
all payments (other than payments with respect to stated interest) due with
respect to such Note will be considered to have purchased the Note at a
"premium." A U.S. Holder generally may elect to amortize the premium over the
remaining term of the Note on a constant yield to maturity basis. The amount
amortized in any year will be treated as a reduction of the U.S. Holder's
interest income from the Note. A U.S. Holder that elects to amortize such
premium must also reduce its tax basis in a Note by the amount of amortization
deduction allowable. Bond premium on a Note held by a U.S. Holder that does
not make an election will decrease the gain or increase the loss otherwise
recognized on disposition of the Note. The election to amortize premium on a
constant yield to maturity basis once made applies to all debt obligations
held or subsequently acquired by the electing U.S. Holder on or after the
first day of the first taxable year to which the election applies (other than
debt instruments the interest on which is excludable from gross income) and
may not be revoked without the consent of the Internal Revenue Service.
U.S. HOLDERS: SALE OR REDEMPTION
Unless a nonrecognition provision applies, the sale, exchange, redemption
(including pursuant to an offer by the Operating Partnership) or other
disposition of a Note will be a taxable event for U.S. Federal income tax
purposes. In such event, a U.S. Holder will recognize gain or loss equal to
the difference between (i) the amount of cash plus the fair market value of
any property received upon such sale, exchange, redemption or other taxable
disposition and (ii) the U.S. Holder's adjusted tax basis therein. A U.S.
Holder's adjusted tax basis for a Note generally will be the U.S. Holder's
purchase price for the Note increased by amounts includible in income by the
U.S. Holder as market discount and reduced by any amortization deduction
allowable. Except with respect to accrued market discount or accrued and
unpaid interest (which will constitute ordinary income), such gain or loss
generally will constitute capital gain or loss and will be long-term capital
gain or loss if the Note has been held by the U.S. Holder for more than 12
months at the time of such sale, exchange, redemption or other disposition
(or, if there is net capital gain and the U.S. Holder is an individual, trust
or estate, will be taxed as long-term capital gain if the Note has been held
for more than 18 months, and as mid-term capital gain if the Note has been
held for more than 12 months). The distinction between capital gain or loss
and ordinary income or loss is also relevant for purposes of, among other
things, limitations on the deductibility of capital losses.
NON-U.S. HOLDER
Generally, a Non-U.S. Holder will be subject to a 30% withholding tax on
interest paid with respect to a Note if such Non-U.S. Holder is a direct or
indirect 10% or greater holder of the capital or profits interest in the
Operating Partnership, a controlled foreign corporation related to the
Operating Partnership, a bank receiving
S-30
<PAGE>
interest described in Section 881(c)(3)(A) of the Code, or any Non-U.S. Holder
who has failed to deliver the statement described in Section 871(h)(5) of the
Code and the Regulations thereunder (certifying that such holder is not a U.S.
person, citizen or resident).
Final regulations dealing with withholding tax on income paid to foreign
persons, backup withholding and related matters (the "New Withholding
Regulations") were issued by the Treasury Department on October 6, 1997. The
New Withholding Regulations generally will be effective for payments made
after December 31, 1999, subject to certain transition rules. Prospective Non-
U.S. Holders are strongly urged to consult their tax advisors with respect to
the New Withholding Regulations.
Generally, a Non-U.S. Holder will not be subject to Federal income taxes on
any amount that constitutes capital gain upon retirement or disposition of a
Note. Certain exceptions may be applicable, however, and a Non-U.S. Holder
should consult its tax advisor in this regard.
S-31
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
dated July , 1998 (the "Underwriting Agreement") by and among the Operating
Partnership, the Company and the underwriters named below (the
"Underwriters"), the Operating Partnership has agreed to sell to each of the
Underwriters named below, and each of the Underwriters has agreed severally to
purchase from the Operating Partnership, the respective principal amount of
Senior Notes set forth opposite its name below.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITER OF NOTES
- ----------- ----------------
<S> <C>
PaineWebber Incorporated.......................................
A.G. Edwards & Sons, Inc.......................................
Salomon Brothers Inc ..........................................
-----------
Total........................................................ $75,000,000
===========
</TABLE>
The Underwriters have advised the Operating Partnership that they propose to
offer the Senior Notes in part to the public at the public offering price set
forth on the cover page of this Prospectus Supplement, and in part to certain
securities dealers (who may include the Underwriters) at such price less a
concession not in excess of % of the principal amount of the Senior Notes.
The Underwriters may allow, and such dealers may reallow, a concession not in
excess of % of the principal amount of the Senior Notes to certain other
dealers, including the Underwriters. Following completion of the initial
offering of the Senior Notes, the public offering price, concession and
reallowance may change.
The Senior Notes are a new issue of securities with no established trading
market. The Operating Partnership has been advised by the Underwriters that
the Underwriters intend to make a market in the Senior Notes but are not
obligated to do so and may discontinue market making at any time without
notice. No assurance can be given as to the liquidity of the trading market
for the Senior Notes.
Pursuant to the Underwriting Agreement, the Company and the Operating
Partnership have agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended, or to contribute to payments the Underwriters may be required to make
in respect thereof.
Until the distribution of the Senior Notes is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters
to bid for and purchase the Senior Notes. As an exception to these rules, the
Underwriters are permitted to engage in certain transactions that stabilize
the price of the Senior Notes. Such transactions consist of bids and purchases
for the purpose of pegging, fixing or maintaining the price of the Senior
Notes.
If the Underwriters create a short position in the Senior Notes in
connection with this Offering, i.e., if they sell a greater aggregate
principal amount of Senior Notes than is set forth on the cover page of this
Prospectus Supplement, the Underwriters may reduce that short position by
purchasing Senior Notes in the open market. In general, purchases of a
security for the purpose of stabilization or to reduce a short position could
cause the price of the security to be higher than it might be in the absence
of such purchases.
Neither the Operating Partnership nor the Underwriters make any
representation or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of the Senior
Notes. In addition, neither the Operating Partnership nor the Underwriters
make any representation that the Underwriters will engage in such transactions
or that such transactions, once commenced, will not be discontinued without
notice.
In the ordinary course of business, certain of the Underwriters and their
affiliates have engaged, and may in the future engage, in commercial banking
and investment banking transactions with the Company, the Operating
Partnership and their affiliates.
S-32
<PAGE>
LEGAL MATTERS
Certain legal matters, including the legality of the Senior Notes being
offered hereby, are being passed upon for the Operating Partnership by
Phillips, Lytle, Hitchcock, Blaine & Huber LLP, Buffalo, New York. Certain
legal matters related to this Offering are being passed upon for the
Underwriters by Goodwin, Procter & Hoar LLP, Boston, Massachusetts.
S-33
<PAGE>
PROSPECTUS
$100,000,000
SOVRAN SELF STORAGE, INC. PREFERRED STOCK COMMON STOCK
$150,000,000
SOVRAN ACQUISITION LIMITED PARTNERSHIP DEBT SECURITIES
---------------
Sovran Self Storage, Inc. ("Sovran" or the "Company") may offer from time to
time in one or more series (i) shares of its preferred stock, $.01 par value
per share ("Preferred Stock"), and (ii) shares of its common stock, $.01 par
value per share ("Common Stock"), with an aggregate public offering price of
up to $100,000,000 (or its equivalent in another currency based on the
exchange rate at the time of sale) in amounts, at prices and on terms to be
determined at the time of offering. Sovran Acquisition Limited Partnership
(the "Operating Partnership") may offer from time to time in one or more
series unsecured, non-convertible investment grade debt securities ("Debt
Securities") with an aggregate offering price of up to $150,000,000 (or its
equivalent in another currency based upon the exchange rate at the time of
sale) in amounts, at prices and on terms to be determined at the time of
offering. The Preferred Stock, Common Stock and Debt Securities (collectively,
the "Securities") may be offered separately or together, in separate classes
or series, in amounts, at prices and on terms to be set forth in one or more
supplements to this Prospectus (each a "Prospectus Supplement").
The specific terms of the Securities for which this Prospectus is being
delivered will be set forth in the applicable Prospectus Supplement and will
include, where applicable: (i) in the case of Preferred Stock, the specific
designation and stated value per share, any dividend, liquidation, redemption,
conversion, voting and other rights, and any initial public offering price;
(ii) in the case of Common Stock, any initial public offering price; (iii) in
the case of Debt Securities, the specific title, aggregate principal amount,
ranking, currency, form (which may be registered or bearer, or 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 Operating Partnership or repayment at the option of the holder, terms
for sinking fund payments, covenants and any initial public offering price. In
addition, such specific terms may include limitations on direct or beneficial
ownership and restrictions on transfer of the Securities, in each case as may
be consistent with the Company's Amended and Restated Articles of
Incorporation or otherwise appropriate to preserve the status of the Company
as a real estate investment trust ("REIT") for federal income tax purposes.
See "Restrictions on Transfers of Capital Stock."
The applicable Prospectus Supplement will also contain information, where
appropriate, about certain United States federal income tax considerations
relating to, and any listing on a securities exchange of, the Securities
covered by such Prospectus Supplement.
The Preferred Stock and Common Stock may be offered by the Company and the
Debt Securities may be offered by the Operating Partnership directly to one or
more purchasers, through agents designated from time to time by the Company or
the Operating Partnership or to or through underwriters or dealers. If any
agents or underwriters are involved in the sale of any of the securities,
their names, and any applicable purchase price, fee, commission or discount
arrangement between or among them will be set forth, or will be calculable
from the information set forth, in an accompanying Prospectus Supplement. See
"Plan of Distribution." No Securities may be sold without delivery of a
Prospectus Supplement describing the method and terms of the offering of such
Securities.
SEE "RISK FACTORS" ON PAGE 4 FOR CERTAIN FACTORS THAT SHOULD BE CONSIDERED
BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
---------------
The date of this Prospectus is July 9, 1998.
<PAGE>
AVAILABLE INFORMATION
The Company and the Operating Partnership have filed with the Securities and
Exchange Commission (the "SEC" or "Commission") a Registration Statement on
Form S-3 under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Securities. This Prospectus, which constitutes part of the
Registration Statement, omits certain of the information contained in the
Registration Statement and the exhibits thereto on file with the Commission
pursuant to the Securities Act and the rules and regulations of the Commission
thereunder. The Registration Statement, including exhibits thereto, may be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and
at the Commission's Regional Offices at 7 World Trade Center, 13th Floor, New
York, New York 10048, and Northwestern Atrium Center, 500 W. Madison Street,
Suite 1400, Chicago, Illinois 60661-2511, and copies may be obtained at the
prescribed rates from the Public Reference Section of the Commission at its
principal office in Washington, D.C. The Commission maintains an Internet Web
site (http://www.sec.gov.) that contains such documents filed electronically
by the Company and the Operating Partnership with the Commission through its
Electronic Data Gathering, Analysis and Retrieval System (EDGAR) filing
system. Statements contained in this Prospectus as to the contents of any
contract or other document referred to are not necessarily complete, and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference.
The Company and, since April 1998, the Operating Partnership, 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
Operating Partnership file reports and proxy statements and other information
with the Commission. Such reports, proxy statements and other information can
be inspected and copied at the locations described above. Copies of such
materials can be obtained by mail from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at
prescribed rates. In addition, the Common Stock is listed on the New York
Stock Exchange (the "NYSE"), and such materials can be inspected and copied at
the NYSE, 20 Broad Street, New York, New York 10005.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission pursuant to the
Exchange Act are incorporated by reference in this Prospectus: (i) the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997, as amended by the Company's Amended Annual Report on Form 10-K/A filed
on June 12, 1998, (ii) the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998, (iii) the Company's Current Report on Form 8-K
filed on October 24, 1997, (iv) the Company's Current Report on Form 8-K filed
on February 20, 1998, as amended by the Company's Amended Current Report on
Form 8-K/A filed on April 17, 1998, (v) the Company's Current Report on Form
8-K filed on June 10, 1998, (vi) the Company's Current Report on Form 8-K
filed on July 6, 1998, (vii) the Operating Partnership's Current Report on
Form 8-K filed on July 6, 1998, (viii) the description of the Company's Common
Stock contained in the Company's Registration Statement on Form 8-A dated June
16, 1995, including all amendments and reports updating such description, and
(ix) the Operating Partnership's Registration Statement on Form 10, dated
April 22, 1998, including all amendments and reports updating such
Registration Statement.
All documents filed by the Company or the Operating Partnership pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date
of this Prospectus and prior to the termination of the offering of all
Securities shall be deemed to be incorporated by reference in this Prospectus
and to be a part hereof from the date of filing of such documents. The Company
and the Operating Partnership will provide, without charge, to each person,
including any beneficial owner, to whom a copy of this Prospectus is
delivered, at the request of such person, a copy of any or all of the
documents incorporated herein by reference (other than exhibits thereto,
unless such exhibits are specifically incorporated by reference into such
documents). Written requests for such copies should be directed to David L.
Rogers, Chief Financial Officer, Sovran Self Storage, Inc., 5166 Main Street,
Williamsville, New York, 14221, telephone (716) 633-1850.
2
<PAGE>
Any statement contained herein or in a document incorporated or deemed to be
incorporated herein by reference shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained
herein (or in an applicable Prospectus Supplement) or in any subsequently
filed document that is incorporated by reference herein modifies or supersedes
such statement. Any such statement so modified or superseded shall not be
deemed to constitute a part of this Prospectus or any Prospectus Supplement,
except as so modified or superseded.
3
<PAGE>
RISK FACTORS
"Safe Harbor" statement under the Private Securities Litigation Reform Act
of 1995: This Prospectus, including the information incorporated by reference
herein, and the applicable Prospectus Supplement contain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Actual results could differ materially from those projected in the forward-
looking statements as a result of the risk factors set forth below, and
prospective investors should carefully consider such risk factors in
conjunction with the other information contained or incorporated by reference
in this Prospectus and the applicable Prospectus Supplement before making a
decision to purchase any Securities. Section 27A of the Securities Act of
1933, as amended and Section 21E of the Security Exchange Act of 1934, as
amended by their express terms do not apply to forward-looking statements made
in connection with an initial public offering. Unless the context otherwise
requires, the "Company" shall also hereinafter refer to the Operating
Partnership and its subsidiaries.
Prospective investors should carefully consider the following information in
conjunction with the other information contained in this Prospectus and the
applicable Prospectus Supplement before purchasing Securities.
ACQUISITIONS MAY NOT PERFORM AS ANTICIPATED
The Company has completed many acquisitions of self storage facilities since
the Company's initial public offering of Common Stock in June 1995 (the
"Initial Offering"). (The Company's self storage facilities are sometimes
referred to individually as a "Property" and collectively as the
"Properties".) The Company's strategy is to continue to grow by acquiring
additional self-storage facilities. Acquisitions entail risks that investments
will fail to perform in accordance with expectations and that judgments with
respect to the prices paid for acquired properties and the costs of any
improvements required to bring an acquired property up to standards
established for the market position intended for that property will prove
inaccurate, as well as general investment risks associated with any new real
estate investment.
REAL ESTATE FINANCING MAY BECOME UNAVAILABLE OR INFEASIBLE
Unsecured Credit Facility. The Company has a line of credit (the "Unsecured
Credit Facility") with a syndicate of financial institutions (the "Lenders").
The Unsecured Credit Facility is recourse to the Company and the Operating
Partnership and the required payments are not reduced if the economic
performance of any of the Properties declines. The Unsecured Credit Facility,
except under certain circumstances, limits the Company's ability to make
distributions to its shareholders. If there should occur certain other events
of default, the Lenders may seek to exercise their rights under the Unsecured
Credit Facility, which could have a material adverse effect on the Company and
its ability to make expected distributions to shareholders and distributions
required by the real estate investment trust provisions of the Internal
Revenue Code of 1986, as amended (the "Code").
Rising Interest Rates. Indebtedness that the Company incurs under the
Unsecured Credit Facility bears interest at a variable rate. Accordingly,
increases in interest rates could increase the Company's interest expense,
which would adversely affect the Company's cash available for distribution and
its ability to pay expected distributions to shareholders. The Company manages
and expects to continue to manage its exposure to rising interest rates using
interest rate swaps and other available mechanisms. If the amount of the
Company's indebtedness bearing interest at a variable rate exceeds certain
levels, the Company may be required to make such arrangements pursuant to the
terms of the Unsecured Credit Facility.
Refinancing May Not be Available. It may be necessary for the Company to
refinance the Unsecured Credit Facility through additional debt financing or
equity offerings. If the Company were unable to refinance this indebtedness on
acceptable terms, the Company might be forced to dispose of certain Properties
upon disadvantageous terms, which might result in losses to the Company and
might adversely affect the cash available for distribution. If prevailing
interest rates or other factors at the time of refinancing result in higher
4
<PAGE>
interest rates on refinancings, the Company's interest expense would increase,
which would adversely affect the Company's cash available for distribution and
its ability to pay expected distributions to shareholders.
No Limitations on Debt. The Board of Directors of the Company currently has
a policy of limiting the amount of Company debt at the time of incurrence to
less than 50% of the sum of the market value of the issued and outstanding
Common Shares and the Company's debt at the time such debt is incurred;
however, the organizational documents of the Company do not contain any
limitation on the amount of indebtedness the Company might incur. Accordingly,
the Board of Directors could alter or eliminate the current policy limitation
on borrowing without a vote of the shareholders. The Company could become
highly leveraged if this policy were changed.
THE SELF-STORAGE INDUSTRY ENTAILS FLUCTUATING DEMAND AND SIGNIFICANT
COMPETITION
The Properties are subject to all operating risks common to the self-storage
industry. These risks include decreases in demand for rental spaces in a
particular locale, changes in supply of or demand for similar or competing
facilities in an area and changes in market rental rates. There is also risk
of inability to collect rents from customers. The Company's current strategy
is to acquire interests only in self-storage facilities. Consequently, the
Company is subject to risks inherent in investments in a single industry. The
Properties compete with other self-storage facilities in their geographic
markets. As a result of competition, the Properties could experience a
decrease in occupancy levels and rental rates, thereby decreasing the cash
available for distribution. The Company competes in operations and for
acquisition opportunities with entities that have substantial financial
resources. Competition may reduce the number of suitable acquisition
opportunities offered to the Company and increase the bargaining power of
property owners seeking to sell. The self-storage industry has at times
experienced overbuilding in response to perceived increases in demand. A
recurrence of such overbuilding might cause the Company to experience a
decrease in occupancy levels, limit the Company's ability to increase rents
and compel the Company to offer discounted rents.
REAL ESTATE INVESTMENTS ARE ILLIQUID AND ARE SUBJECT TO UNINSURABLE RISKS AND
GOVERNMENT REGULATION
General Risks. The Company's investments are subject to varying degrees of
risk generally incident to the ownership of real property. The underlying
value of the Company's real estate investments and the Company's income and
ability to make distributions to its shareholders are dependent upon the
Company's ability to operate the Properties in a manner sufficient to maintain
or increase cash available for distribution. Income from the Properties may be
adversely affected by changes in national economic conditions; changes in
local market conditions due to changes in general or local economic conditions
and neighborhood characteristics; competition from other self-storage
facilities; changes in interest rates and in the availability, cost and terms
of mortgage funds; the impact of present or future environmental legislation
and compliance with environmental laws; the ongoing need for capital
improvements, particularly in older facilities; changes in real estate tax
rates and other operating expenses; adverse changes in governmental rules and
fiscal policies; uninsured losses resulting from casualties associated with
civil unrest, acts of God, including natural disasters, and acts of war;
adverse changes in zoning laws; and other factors which are beyond the control
of the Company.
Illiquidity of Real Estate May Limit its Value. Real estate investments are
relatively illiquid. The ability of the Company to vary its portfolio in
response to changes in economic and other conditions is limited. In addition,
provisions of the Code may limit the Company's ability to profit on the sale
of Properties held for fewer than four years. There can be no assurance that
the Company will be able to dispose of a Property when it finds disposition
advantageous or necessary or that the sale price of any disposition will
recoup or exceed the amount of the Company's investment.
Uninsured and Underinsured Losses Could Result in Loss of Value of
Properties. There are certain types of losses, generally of a catastrophic
nature, that may be uninsurable or not economically insurable, as to which the
Properties are at risk in their particular locales. The Company's management
uses its discretion in determining amounts, coverage limits and deductibility
provisions of insurance, with a view to acquiring
5
<PAGE>
appropriate insurance on the Company's investments at a reasonable cost and on
suitable terms. This may result in insurance coverage that in the event of a
substantial loss would not be sufficient to pay the full current market value
or current replacement cost of the Company's lost investment. Inflation,
changes in building codes and ordinances, environmental considerations, and
other factors also might make it infeasible to use insurance proceeds to
replace a Property after it has been damaged or destroyed. Under such
circumstances, the insurance proceeds received by the Company might not be
adequate to restore its economic position with respect to such Property.
Possible Liability Relating to Environmental Matters. Under various federal,
state and local environmental laws, ordinances and regulations, a current or
previous owner or operator of real property may be liable for the costs of
removal or remediation of hazardous or toxic substances on, under or in such
property. Such laws often impose liability whether or not the owner or
operator caused or knew of the presence of such hazardous or toxic substances
and whether or not the storage of such substances was in violation of a
tenant's lease. In addition, the presence of hazardous or toxic substances, or
the failure to remediate such property, may adversely affect the owner's
ability to borrow using such real property as collateral. In connection with
the ownership of the Properties, the Company may be potentially liable for any
such costs.
Americans with Disabilities Act. The Americans with Disabilities Act of 1990
("ADA") generally requires that buildings be made accessible to persons with
disabilities. A determination that the Company is not in compliance with the
ADA could result in imposition of fines or an award of damages to private
litigants. If the Company were required to make modifications to comply with
the ADA, the Company's results of operations and ability to make expected
distributions to its shareholders could be adversely affected.
LIMITATIONS ON ABILITY TO CHANGE CONTROL
Limitation on Ownership of Shares. In order to maintain its qualification as
a REIT, not more than 50% in value of the Company's outstanding shares of
stock may be owned, directly or indirectly, by five or fewer individuals (as
defined in the Code) (the "Five or Fewer Test"). The Company's Amended and
Restated Articles of Incorporation ("Articles of Incorporation") limit
ownership of the issued and outstanding Common Stock by any single shareholder
(directly or by virtue of the attribution provisions of the Code) to 9.8% of
the aggregate value of the Company's outstanding stock, except that the
ownership by certain entities is limited to 15% (the "Ownership Limit"). The
Ownership Limit may (i) have the effect of precluding acquisition of control
of the Company by a third party without consent of the Board of Directors even
if a change in control were in the interest of shareholders, and (ii) limit
the opportunity for shareholders to receive a premium for their Common Stock
that might otherwise exist if an investor were attempting to assemble a block
of Common Stock in excess of 9.8% or 15%, as the case may be, of the
outstanding shares of beneficial interest of the Company or to otherwise
effect a change in control of the Company. The Board of Directors, in its sole
discretion, may waive the Ownership Limit if it is satisfied that ownership by
such shareholders in excess of such limits will not jeopardize the Company's
status as a REIT under the Code or in the event it determines that it is no
longer in the best interests of the Company to be a REIT. A transfer of Common
Stock to a person who, as a result of the transfer, violates the Ownership
Limit may not be effective under some circumstances.
Shareholder Rights Agreement. The Company has a shareholders' rights plan
(the "Shareholder Rights Agreement") which grants the holders of the Common
Stock rights which generally become exercisable if (i) a person becomes an
"acquiring person" by acquiring 10% or more of the Common Stock, or (ii) a
person commences a tender offer that would result in that person owning 10% or
more of the Common Stock. In the event a person becomes an "acquiring person,"
each holder of a right (other than the acquiring person) would be entitled to
acquire such number of preferred shares of the Company which are equivalent to
the Common Stock having a value of twice the then-current exercise price of
the right. If the Company is acquired in a merger or other business
combination transaction after any such event, each holder of a right would
then be entitled to purchase, at the then-current exercise price, shares of
the acquiring company's common stock having a value of twice the exercise
price of the right. The Shareholder Rights Agreement may have the effect of
delaying or preventing a change in control of the Company.
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Other Limitations. Certain other limitations could have the effect of
discouraging a takeover or other transaction in which holders of some, or a
majority, of the outstanding Common Stock might receive a premium for their
Common Stock over the then prevailing market price or which such holders might
believe to be otherwise in their best interest. The issuance of preferred
stock could have the effect of delaying or preventing a change in control of
the Company even if a change in control were in the shareholders' interest. In
addition, the Maryland General Corporation Law (the "MGCL") imposes certain
restrictions and requires certain procedures with respect to the acquisition
of certain levels of share ownership and business combinations, including
combinations with interested shareholders. These provisions of the MGCL would
have the effect of delaying or preventing a change in control of the Company
even if a change in control were in the shareholders' interest. In addition,
under the Operating Partnership's agreement of limited partnership, in general
the Company may not merge, consolidate or engage in any combination with
another person or sell all or substantially all of its assets unless such
transaction includes the merger of the Operating Partnership, which requires
the approval of the holders of 75% of the limited partnership interests
thereof. If the Company were to own less than 75% of the limited partnership
interests in the Operating Partnership, this provision of the limited
partnership agreement could have the effect of delaying or preventing the
Company from engaging in certain change of control transactions.
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
The Company intends to operate so as to qualify as a REIT under the Code.
Qualification as a REIT involves the application of highly technical and
complex Code provisions for which there are only limited judicial and
administrative interpretations. Continued qualification as a REIT depends upon
the Company's continuing ability to meet various requirements concerning,
among other things, the ownership of the outstanding stock, the nature of its
assets, the sources of its income and the amount of its distributions to its
shareholders. If the Company were to fail to qualify as a REIT in any taxable
year, the Company would not be allowed a deduction for distributions to
shareholders in computing its taxable income and would be subject to federal
income tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates. Unless entitled to relief under certain
Code provisions, the Company also would be ineligible for qualification as a
REIT for the four taxable years following the year during which qualification
was lost. As a result, distributions to the shareholders would be reduced for
each of the years involved. Although the Company currently intends to operate
in a manner designed to qualify as a REIT, it is possible that future
economic, market, legal, tax or other considerations may cause the Board of
Directors to revoke the REIT election.
EFFECT OF MARKET INTEREST RATES ON PRICE OF SHARES
One of the factors that may influence the price of the Common Stock in
public trading markets is the annual yield on Common Stock as compared to
yields on other financial instruments. Thus, an increase in market interest
rates will result in higher yields on other financial instruments, which could
adversely affect the market price of the Common Stock.
LEGAL PROCEEDING
Robert J. Amsdell, a former business associate of certain officers and
directors of the Company, including Robert J. Attea, Charles E. Lannon,
Kenneth F. Myszka and David L. Rogers, filed a lawsuit against the Company on
June 13, 1995 in the United States District Court for the Northern District of
Ohio in connection with the formation of the Company as a REIT and related
transactions, as well as the Initial Offering. On April 29, 1996, Mr. Amsdell
filed a first amended complaint and on September 24, 1997, a second amended
complaint was filed. The complaint alleges, among other things, breach of
fiduciary duty, breach of contract, breach of general partnership/joint
venture arrangement, fraud and deceit, breach of duty of good faith and other
causes of action including a declaratory judgment as to Mr. Amsdell's
continuing interest in the Company. Mr. Amsdell is seeking money damages in
excess of $15 million, as well as punitive damages and declaratory and
injunctive relief (including the imposition of a constructive trust on assets
of the Company in which Mr. Amsdell claims to have a continuing interest) and
an accounting. The first amended complaint also added Messrs. Attea, Lannon,
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Myszka and Rogers as additional defendants. The parties are currently involved
in discovery. The Company intends to vigorously defend the lawsuit. Messrs.
Attea, Lannon, Myszka and Rogers have agreed to indemnify the Company for any
loss arising from the lawsuit. The Company believes that the actual amount of
Mr. Amsdell's recovery in this matter, if any, would be within the ability of
these individuals to provide indemnification. The Company does not believe
that the lawsuit will have a material adverse effect upon the Company.
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THE COMPANY AND THE OPERATING PARTNERSHIP
GENERAL
Sovran Self Storage, Inc. is a self-administered and self-managed real
estate investment trust ("REIT") which acquires, owns and manages self storage
properties. The Company was formed to continue the business of its predecessor
companies which had engaged in the self storage business since 1985. The
Company owns an indirect interest in each of the Properties through the
Operating Partnership of which the Company holds a 93.37% economic interest
consisting of a 91.71% direct limited partnership interest and a 1.66% general
partnership interest owned by Sovran Holdings, Inc., a wholly-owned subsidiary
of the Company. Unaffiliated third parties own collectively a 6.63% limited
partnership interest in the Operating Partnership. The Operating Partnership
owns a 100% fee simple interest in each of the Properties. The Company
believes that this structure, commonly known as an umbrella partnership real
estate investment trust ("UPREIT"), facilitates the Company's ability to
acquire properties by using units of the Operating Partnership as currency in
property acquisitions.
As of July 7, 1998, the Company owned and operated 196 self-storage
properties consisting of approximately 10.9 million net rentable square feet,
situated in 19 states, primarily the Eastern United States and Texas. As of
March 31, 1998, the Properties had a weighted average occupancy of 84.1% and a
weighted average annual rent per occupied square foot of $7.62. The Company
believes that it is one of the largest operators of self-storage properties in
the United States.
The Company seeks to increase cash flow and enhance shareholder value
through aggressive management of the Properties and selective acquisition of
new self-storage properties. Aggressive property management entails increasing
rents, increasing occupancy levels, strictly controlling costs, maximizing
collections, strategically expanding and improving the Properties and, should
economic conditions warrant, developing new properties. The Company believes
that there continue to be significant opportunities for growth through
acquisitions, and constantly seeks to acquire self-storage properties located
primarily in the Eastern United States that are susceptible to realization of
increased economies of scale and enhanced performance through the application
of the Company's management expertise.
The Company was incorporated on April 19, 1995 under Maryland law. The
Operating Partnership was formed on June 1, 1995 under Delaware law. The
Company's Common Stock has traded on the New York Stock Exchange since the
completion of the Company's initial public offering on June 26, 1995. The
Company's and the Operating Partnership's principal executive offices are
located at 5166 Main Street, Williamsville, New York 14221, and its telephone
number is (716) 633-1850. The Company and the Operating Partnership also
maintain a regional office in Atlanta, Georgia.
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USE OF PROCEEDS
The Company is required by the terms of the partnership agreement of the
Operating Partnership to invest the net proceeds of any sale of Common Stock
or Preferred Stock in the Operating Partnership in exchange for additional
units of limited partnership of the Operating Partnership ("Units"). As will
be more fully described in the applicable Prospectus Supplement, the Company
and the Operating Partnership intend to use the net proceeds from the sale of
Securities for one or more of the following: repayment of indebtedness,
acquisition of in new self storage facilities, maintenance and improvement of
currently owned Properties and general corporate purposes.
RATIOS OF EARNINGS TO FIXED CHARGES
The following table sets forth the Company and the Operating Partnership's
and their predecessor's consolidated ratios of earnings to fixed charges for
the periods shown:
<TABLE>
<CAPTION>
COMPANY AND OPERATING PARTNERSHIP PREDECESSORS
----------------------------------------------------------------------
YEAR ENDED
THREE MONTHS YEAR ENDED JANUARY 1, 1995 DECEMBER
ENDED DECEMBER 31, TO 31,
MARCH 31, --------------------------- JUNE 25, -----------
1998 1997 1996 1995 1995 1994 1993
-------------- -------- -------- --------- --------------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
5.27 9.43 7.56 21.88 1.09 1.31 0.84
</TABLE>
The ratios of earnings to fixed charges were computed by dividing earnings
by fixed charges. For this purpose, earnings consist of pre-tax income from
continuing operations plus fixed charges. Fixed charges consist of interest
expense and the amortization of debt issuance costs. To date, the Company has
not issued any Preferred Stock; therefore, the ratios of earnings to combined
fixed charges and preferred stock dividend requirements are the same as the
ratios of earnings to fixed charges presented above.
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DESCRIPTION OF DEBT SECURITIES
GENERAL
The Company conducts its business principally through the Operating
Partnership. Consequently, the Operating Partnership, and not the Company,
will issue the Debt Securities. The Debt Securities will be direct unsecured
obligations of the Operating Partnership and may be either senior Debt
Securities ("Senior Debt Securities") or subordinated Debt Securities
("Subordinated Debt Securities"). The Debt Securities will be issued under one
or more indentures, each dated as of a date prior to the issuance of the Debt
Securities to which it relates. Senior Debt Securities and Subordinated Debt
Securities may be issued pursuant to separate indentures (respectively, a
"Senior Indenture" and a "Subordinated Indenture"), in each case between the
Operating Partnership and a trustee (a "Trustee"), which may be the same
Trustee, and in the form that has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part, subject to such amendments or
supplements as may be adopted from time to time. The Senior Indenture and the
Subordinated Indenture, as amended or supplemented from time to time, are
sometimes hereinafter referred to collectively as the "Indentures." The
Indentures will be subject to and governed by the Trust Indenture Act of 1939,
as amended (the "TIA"). The statements made under this heading relating to the
Debt Securities and the Indentures are summaries of the anticipated provisions
thereof, do not purport to be complete and are qualified in their entirety by
reference to the Indentures and such Debt Securities.
Capitalized terms used herein and not defined shall have the meanings
assigned to them in the applicable Indenture.
TERMS
The indebtedness represented by the Senior Debt Securities will rank equally
with all other unsecured and unsubordinated indebtedness of the Operating
Partnership. The indebtedness represented by Subordinated Debt Securities will
be subordinated in right of payment to the prior payment in full of Senior
Indebtedness of the Company as described under "--Subordination." The
particular terms of the Debt Securities offered by a Prospectus Supplement
will be described in the applicable Prospectus Supplement, along with any
applicable modifications of or additions to the general terms of the Debt
Securities as described herein and in the applicable Indenture and any
applicable federal income tax considerations. Accordingly, for a description
of the terms of any series of Debt Securities, reference must be made to both
the Prospectus Supplement relating thereto and the description of the Debt
Securities set forth in this Prospectus.
Except as set forth in any Prospectus Supplement, 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 by the Operating Partnership or
as set forth in the applicable Indenture or in one or more indentures
supplemental to such 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 issuance of additional Debt Securities of such series.
Each Indenture will provide that the Operating Partnership may, but need
not, designate more than one Trustee thereunder, each with respect to one or
more series of Debt Securities. Any Trustee under an 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. 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, and, except as otherwise indicated herein, any action
described herein to be taken by each 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.
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The following summaries set forth certain general terms and provisions of
the Indentures and the Debt Securities. The Prospectus Supplement relating to
the series of Debt Securities being offered will contain further terms of such
Debt Securities, including the following specific terms:
(1) The title of such Debt Securities and whether such Debt Securities
are Senior Debt Securities or Subordinated Debt Securities;
(2) The aggregate principal amount of such Debt Securities and any limit
on such aggregate principal amount;
(3) The price (expressed as a percentage of the principal amount thereof)
at which such Debt Securities will be issued and, if other than the
principal amount thereof, the portion of the principal amount thereof
payable upon declaration of acceleration of the maturity thereof;
(4) The date or dates, or the method for determining such date or dates,
on which the principal of such Debt Securities will be payable;
(5) The rate or rates (which may be fixed or variable), or the method by
which such rate or rates shall be determined, at which such Debt Securities
will bear interest, if any;
(6) The date or dates, or the method for determining such date or dates,
from which any such interest will accrue, the dates on which any such
interest will be payable, the record dates for such interest payment dates,
or the method by which such dates shall be determined, the persons to whom
such interest shall be payable, and the basis upon which interest shall be
calculated if other than that of a 360-day year of twelve 30-day months;
(7) The place or places where the principal of (and premium or Make-Whole
Amount (as defined in the Indenture), if any) and interest, if any, on such
Debt Securities will be payable, where such Debt Securities may be
surrendered for registration of transfer or exchange and where notices or
demands to or upon the Operating Partnership in respect of such Debt
Securities and the applicable Indenture may be served;
(8) The period or periods, if any, within which, the price or prices at
which and the other terms and conditions upon which such Debt Securities
may, pursuant to any optional or mandatory redemption provisions, be
redeemed, as a whole or in part, at the option of the Operating
Partnership;
(9) The obligation, if any, of the Operating Partnership to redeem, repay
or purchase such Debt Securities pursuant to any sinking fund or analogous
provision or at the option of a holder thereof, and the period or periods
within which, the price or prices at which and the other terms and
conditions upon which such Debt Securities will be redeemed, repaid or
purchased, as a whole or in part, pursuant to such obligation;
(10) If other than U.S. dollars, the currency or currencies in which such
Debt Securities are denominated and payable, which may be a foreign
currency or units of two or more foreign currencies or a composite currency
or currencies, and the terms and conditions relating thereto;
(11) Whether the amount of payments of principal of (and premium or Make-
Whole Amount, if any, including any amount due upon redemption, if any) or
interest, if any, on such Debt Securities may be determined with reference
to an index, formula or other method (which index, formula or method may,
but need not be, based on the yield on or trading price of other
securities, including United States Treasury securities, or on a currency,
currencies, currency unit or units, or composite currency or currencies)
and the manner in which such amounts shall be determined;
(12) Whether the principal of (and premium or Make-Whole Amount, if any)
or interest on the Debt Securities of the series are to be payable, at the
election of the Operating Partnership or a holder thereof, in a currency or
currencies, currency unit or units or composite currency or currencies
other than that in which such Debt Securities are denominated or stated to
be payable, the period or periods within which, and the terms and
conditions upon which, such election may be made, and the time and manner
of, and identity of the exchange rate agent with responsibility for,
determining the exchange rate between the currency or currencies, currency
unit or units or composite currency or currencies in which such Debt
Securities are
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denominated or stated to be payable and the currency or currencies,
currency unit or units or composite currency or currencies in which such
Debt Securities are to be so payable;
(13) Provisions, if any, granting special rights to the holders of Debt
Securities of the series upon the occurrence of such events as may be
specified;
(14) Any deletions from, modifications of or additions to the Events of
Default (as defined in the Indenture) or covenants of the Operating
Partnership with respect to Debt Securities of the series, whether or not
such Events of Default or covenants are consistent with the Events of
Default or covenants described herein;
(15) Whether and under what circumstances the Operating Partnership will
pay any additional amounts on such Debt Securities in respect of any tax,
assessment or governmental charge and, if so, whether the Operating
Partnership will have the option to redeem such Debt Securities in lieu of
making such payment;
(16) Whether Debt Securities of the series are to be issuable as
Registered Securities, Bearer Securities (with or without coupons) or both,
any restrictions applicable to the offer, sale or delivery of Bearer
Securities and the terms upon which Bearer Securities of the series may be
exchanged for Registered Securities of the series and vice versa (if
permitted by applicable laws and regulations), whether any Debt Securities
of the series are to be issuable initially in temporary global form and
whether any Debt Securities of the series are to be issuable in permanent
global form with or without coupons and, if so, whether beneficial owners
of interests in any such permanent global Security may exchange such
interests for Debt Securities of such series and of like tenor of any
authorized form and denomination and the circumstances under which any such
exchanges may occur, if other than in the manner provided in the Indenture,
and, if Registered Securities of the series are to be issuable as a Global
Security (as defined), the identity of the depository for such series;
(17) The date as of which any Bearer Securities of the series and any
temporary Global Security representing outstanding Debt Securities of the
series shall be dated if other than the date of original issuance of the
first Security of the series to be issued;
(18) The Person to whom any interest on any Registered Security of the
series shall be payable, if other than the Person in whose name that
Security (or one or more Predecessor Securities) is registered at the close
of business on the Regular Record Date for such interest, the manner in
which, or the Person to whom, any interest on any Bearer Security of the
series shall be payable, if otherwise than upon presentation and surrender
of the coupons appertaining thereto as they severally mature, and the
extent to which, or the manner in which, any interest payable on a
temporary Global Security on an Interest Payment Date will be paid if other
than in the manner provided in the Indenture;
(19) The applicability, if any, of the defeasance and covenant defeasance
provisions of the Indenture to the Debt Securities of the series;
(20) If the Debt Securities of such series are to be issuable in
definitive form (whether upon original issue or upon exchange of a
temporary Security of such series) only upon receipt of certain
certificates or other documents or satisfaction of other conditions, then
the form and/or terms of such certificates, documents or conditions;
(21) Any other terms of the series (which terms shall not be inconsistent
with the provisions of the Indenture under which the Debt Securities are
issued).
If so provided in the applicable Prospectus Supplement, the Debt Securities
may be issued at a discount below their principal amount and provide for less
than the entire principal amount thereof to be payable upon declaration of
acceleration of the maturity thereof ("Original Issue Discount Securities").
In such cases, all material U.S. federal income tax, accounting and other
considerations applicable to Original Issue Discount Securities will be
described in the applicable Prospectus Supplement.
Except as described under "--Merger, Consolidation or Sale of Assets" or as
may be set forth in any Prospectus Supplement, the Debt Securities will not
contain any provisions that would limit the ability of the
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Operating Partnership to incur indebtedness or that would afford holders of
Debt Securities protection in the event of (i) a highly leveraged or similar
transaction involving the Operating Partnership, the management of the
Operating Partnership or the Company, or any affiliate of any such party, (ii)
a change of control, or (iii) a reorganization, restructuring, merger or
similar transaction involving the Operating Partnership that may adversely
affect the holders of the Debt Securities. In addition, subject to the
limitations set forth under "--Merger, Consolidation or Sale of Assets," the
Operating 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 Operating Partnership, that would increase the amount of
the Operating Partnership's indebtedness or substantially reduce or eliminate
the Operating Partnership's indebtedness or substantially reduce or eliminate
the Operating Partnership's assets, which may have an adverse effect on the
Operating Partnership's ability to service its indebtedness, including the
Debt Securities. Neither Maryland General Corporation Law nor the governing
instruments of the Company and the Operating Partnership define the term
"substantially all" in connection with the sale of assets. Additionally,
Maryland cases interpreting the words "substantially all" all rely heavily
upon the facts and circumstances of the particular case. Consequently, to
determine whether a sale of "substantially all" of the Operating Partnership's
assets has occurred, a holder of Debt Securities must review the financial and
other information disclosed by the Operating Partnership to the public.
Restrictions on ownership and transfers of the Common Shares and Preferred
Shares are designed to preserve the Company's status as a REIT and, therefore,
may act to prevent or hinder a change of control. See "Limits on Ownership of
Shares of Beneficial Interest." 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.
DENOMINATION, INTEREST, REGISTRATION AND TRANSFER
Unless otherwise described in the applicable Prospectus Supplement, the Debt
Securities of any series will be issuable in denominations of $1,000 and
integral multiples thereof. Where Debt Securities of any series are issued in
bearer form, the special restrictions and considerations, including special
offering restrictions and special federal income tax considerations,
applicable to any such Debt Securities and to payment on and transfer and
exchange of such Debt Securities will be described in the applicable
Prospectus Supplement. Bearer Debt Securities will be transferable by
delivery.
Unless otherwise specified in the applicable Prospectus Supplement, the
principal of (and applicable premium or Make-Whole Amount, if any) and
interest on any series of Debt Securities will be payable at the corporate
trust office of the applicable Trustee, the address of which will be stated in
the applicable Prospectus Supplement; provided that, at the option of the
Operating Partnership, payment of interest may be made by check mailed to the
address of the person entitled thereto as it appears in the applicable
register for such Debt Securities or by wire transfer of funds to such person
at an account maintained within the United States.
Any interest not punctually paid or duly provided for on any Interest
Payment Date with respect to a Debt Security in registered form ("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, in which case notice thereof 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 Indenture.
Subject to certain limitations imposed upon Debt Securities issued in book-
entry form, the Debt Securities of any series will be exchangeable for any
authorized denomination of other Debt Securities of the same series and of a
like aggregate principal amount and tenor upon surrender of such Debt
Securities at the corporate trust office of the applicable Trustee or at the
office of any transfer agent designated by the Operating Partnership for such
purpose. In addition, subject to certain limitations imposed upon Debt
Securities issued in book-entry form, the Debt Securities of any series may be
surrendered for registration of transfer or exchange thereof at the corporate
trust office of the applicable Trustee or at the office of any transfer agent
designated by the Operating
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Partnership for such purpose. Every Debt Security in registered form
surrendered for registration of transfer or exchange must be duly endorsed or
accompanied by a written instrument of transfer, and the person requesting
such action must provide evidence of title and identity satisfactory to the
applicable Trustee or transfer agent. No service charge will be made for any
registration of transfer or exchange of any Debt Securities, but the Operating
Partnership may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith. If the applicable
Prospectus Supplement refers to any transfer agent (in addition to the
applicable Trustee) initially designated by the Operating Partnership with
respect to any series of Debt Securities, the Operating Partnership may at any
time rescind the designation of any such transfer agent or approve a change in
the location through which any such transfer agent acts, except that the
Operating Partnership will be required to maintain a transfer agent in each
place of payment for such series. The Operating Partnership may at any time
designate additional transfer agents with respect to any series of Debt
Securities.
Neither the Operating Partnership nor any Trustee shall be required to (a)
issue, register the transfer of or exchange Debt Securities of any series
during a period beginning at the opening of business 15 days before the
selection of any Debt Securities for redemption and ending at the close of
business on the day of mailing of the notice of redemption; (b) register the
transfer of or exchange any Debt Security, or portion thereof, so selected for
redemption, in whole or in part, except the unredeemed portion of any Debt
Security being redeemed in part; or (c) issue, register the transfer of or
exchange any Debt Security that has been surrendered for repayment at the
option of the holder, except the portion, if any, of such Debt Security not to
be so repaid.
Payment in respect of Debt Securities in bearer form will be made in the
currency and in the manner designated in the applicable Prospectus Supplement,
subject to any applicable laws and regulations, at such paying agencies
outside the United States as the Operating Partnership may appoint from time
to time. The paying agents outside the United States, if any, initially
appointed by the Operating Partnership for a series of Debt Securities will be
named in the Prospectus Supplement. Unless otherwise provided in the
applicable Prospectus Supplement, the Operating Partnership may at any time
designate additional paying agents or rescind the designation of any paying
agents, except that, if Debt Securities of a series are issuable in registered
form, the Operating Partnership will be required to maintain at least one
paying agent in each place of payment for such series and if Debt Securities
of a series are issuable in bearer form, the Operating Partnership will be
required to maintain at least one paying agent in a place of payment outside
the United States where Debt Securities of such series and any coupons
appertaining thereto may be presented and surrendered for payment.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Indentures provide that the Operating Partnership may, without the
consent of the holders of any outstanding Debt Securities, consolidate with,
or sell, lease or convey all or substantially all of its assets to, or merge
with or into, any other entity provided that (i) either the Operating
Partnership shall be the continuing entity, or the successor entity (if other
than the Operating Partnership) formed by or resulting from any such
consolidation or merger or which shall have received the transfer of such
assets, and which is organized under the laws of any domestic jurisdiction and
assumes (A) the Operating Partnership's obligations to pay principal of (and
premium, if any) and interest on all of the Debt Securities and (B) the due
and punctual performance and observance of all of the covenants and conditions
contained in each Indenture; (ii) immediately after giving effect to such
transaction and treating any indebtedness that becomes an obligation of the
Operating Partnership or any subsidiary or any subsidiary as a result thereof
as having been incurred by the Operating Partnership or such subsidiary at the
time of such transaction, no event of default under the Indentures, and no
event which, after notice or the lapse of time, or both, would become such an
event of default, shall have occurred and be continuing; and (iii) an
officers' certificate and legal opinion covering such conditions shall be
delivered to each Trustee.
CERTAIN COVENANTS
The applicable Prospectus Supplement will describe any material covenants in
respect of a series of Debt Securities that are not described in this
Prospectus. Unless otherwise indicated in the applicable Prospectus
Supplement, Senior Debt Securities will include the following covenants of the
Operating Partnership:
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Existence. Except as permitted under "--Merger, Consolidation or Sale of
Assets," the Indentures will require the Operating Partnership 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 Operating
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.
Maintenance of Properties. The Indentures will require the Operating
Partnership to cause all of its material 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 will cause to be made all necessary repairs, renewals,
replacements, betterments and improvements thereof, all as in the judgment of
the Operating 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 Operating Partnership and its subsidiaries
shall not be prevented from selling or otherwise disposing of their properties
for value in the ordinary course of business.
Insurance. The Indentures will require the Operating Partnership to cause
each of its and its subsidiaries' insurable properties to be insured against
loss or damage at least equal to their then full insurable value with insurers
of recognized responsibility and, if described in the applicable Prospectus
Supplement, having a specified rating from a recognized insurance rating
service.
Payment of Taxes and Other Claims. The Indentures will require the Operating
Partnership 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 it or any subsidiary or upon the income,
profits or property of the Operating 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 Operating Partnership or any
subsidiary; provided, however, that the Operating 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.
EVENTS OF DEFAULT, NOTICE AND WAIVER
Unless otherwise provided in the applicable Prospectus Supplement, each
Indenture will provide that the following events are "Events of Default" with
respect to any series of Debt Securities issued thereunder: (a) default in the
payment of any interest on any Debt Security of such series when such interest
becomes due and payable that continues for a period of 30 days; (b) default in
the payment of the principal of (or premium or Make-Whole Amount, if any, on)
any Debt Security of such series when due and payable; (c) default in making
any sinking fund payment as required for any Debt Security of such series; (d)
default in the performance, or breach, of any other covenant or warranty of
the Operating Partnership in the applicable Indenture with respect to the Debt
Securities of such series and continuance of such default or breach for a
period of 60 days after written notice as provided in the Indenture; (e)
default under any bond, debenture, note, mortgage, indenture or instrument
under which there may be issued or by which there may be secured or evidenced
any indebtedness for money borrowed by the Operating Partnership (or by any
Subsidiary, the repayment of which the Operating Partnership has guaranteed or
for which the Company is directly responsible or liable as obligor or
guarantor), having an aggregate principal amount outstanding of at least
$25,000,000, whether such indebtedness now exists or shall hereafter be
created, which default shall have resulted in such indebtedness becoming or
being declared due and payable prior to the date on which it would otherwise
have become due and payable, without such indebtedness having been discharged,
or such acceleration having been rescinded or annulled, within a period of 30
days after written notice to the Operating Partnership as provided in the
Indenture; (f) certain events of bankruptcy, insolvency or reorganization, or
court appointment of a receiver, liquidator or trustee of the Operating
Partnership or any Significant Subsidiary; and (g) any other event of default
provided with respect to a particular series of Debt Securities. The term
"Significant Subsidiary" has the meaning ascribed to such term in Regulation
S-X promulgated under the Securities Act.
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If an Event of Default under any Indenture with respect to Debt Securities
of any series at the time outstanding occurs and is continuing, then in every
such case the applicable Trustee or the holders of not less than 25% in
principal amount of the Debt Securities of that series will have the right to
declare the principal amount (or, if the Debt Securities of that series are
Original Issue Discount Securities or indexed securities, such portion of the
principal amount as may be specified in the terms thereof) of, and premium or
Make-Whole Amount, if any, on, all the Debt Securities of that series to be
due and payable immediately by written notice thereof to the Operating
Partnership (and to the applicable Trustee if given by the holders). However,
at any time after such a declaration of acceleration with respect to Debt
Securities of such series has been made, but before a judgment or decree for
payment of the money due has been obtained by the applicable Trustee, the
holders of not less than a majority in principal amount of outstanding Debt
Securities of such series may rescind and annul such declaration and its
consequences if (a) the Operating Partnership shall have deposited with the
applicable Trustee all required payments of the principal of (and premium or
Make-Whole Amount, if any) and interest on the Debt Securities of such series,
plus certain fees, expenses, disbursements and advances of the applicable
Trustee and (b) all Events of Default, other than the non-payment of
accelerated principal (or specified portion thereof and the premium or Make-
Whole Amount, if any), with respect to Debt Securities of such series have
been cured or waived as provided in such Indenture. The Indentures will also
provide that the holders of not less than a majority in principal amount of
the outstanding Debt Securities of any series may waive any past default with
respect to such series and its consequences, except a default (i) in the
payment of the principal of (or premium or Make-Whole Amount, if any) or
interest on any Debt Security of such series or (ii) in respect of a covenant
or provision contained in the applicable Indenture that cannot be modified or
amended without the consent of the holder of each outstanding Debt Security
affected thereby.
The Indentures will require each Trustee to give notice to the holders of
Debt Securities within 90 days of a default under the applicable Indenture
unless such default shall have been cured or waived; provided, however, that
such Trustee may withhold notice to the holders of any series of Debt
Securities of any default with respect to such series (except a default in the
payment of the principal of (or premium or Make-Whole Amount, if any) or
interest on any Debt Security of such series or in the payment of any sinking
fund installment in respect of any Debt Security of such series) if specified
responsible officers of such Trustee consider such withholding to be in the
interest of such holders.
The Indentures will provide that no holders of Debt Securities of any series
may institute any proceedings, judicial or otherwise, with respect to such
Indenture or for any remedy thereunder, except in the case of failure of the
applicable Trustee, for 60 days, to act after it has received a written
request to institute proceedings in respect of an Event of Default from the
holders of not less than 25% in principal amount of the outstanding Debt
Securities of such series, as well as an offer of indemnity reasonably
satisfactory to it. This provision will not prevent, however, any holder of
Debt Securities from instituting suit for the enforcement of payment of the
principal of (and premium or Make-Whole Amount, if any) and interest on such
Debt Securities at the respective due dates or redemption dates thereof.
The Indentures will provide that, subject to provisions in each Indenture
relating to its duties in case of default, a Trustee will be under no
obligation to exercise any of its rights or powers under an Indenture at the
request or direction of any holders of any series of Debt Securities then
outstanding under such Indenture, unless such holders shall have offered to
the Trustee thereunder reasonable security or indemnity. The holders of not
less than a majority in principal amount of the outstanding Debt Securities of
any series (or of all Debt Securities then outstanding under an Indenture, as
the case may be) shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the applicable Trustee,
or of exercising any trust or power conferred upon such Trustee. However, a
Trustee may refuse to follow any direction which is in conflict with any law
or the applicable Indenture, which may involve such Trustee in personal
liability or which may be unduly prejudicial to the holders of Debt Securities
of such series not joining therein.
Within 120 days after the close of each fiscal year, the Operating
Partnership will be required to deliver to each Trustee a certificate, signed
by one of several specified officers of the Operating Partnership, stating
whether
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or not such officer has knowledge of any default under the applicable
Indenture and, if so, specifying each such default and the nature and status
thereof.
MODIFICATION OF THE INDENTURES
Modifications and amendments of an Indenture will be permitted to be made
only with the consent of the holders of not less than a majority in principal
amount of all outstanding Debt Securities issued under such Indenture affected
by such modification or amendment; provided, however, that no such
modification or amendment may, without the consent of the holder of each such
Debt Security affected thereby, (a) change the stated maturity of the
principal of, or any installment of interest (or premium or Make-Whole Amount,
if any) on, any such Debt Security; (b) reduce the principal amount of, or the
rate or amount of interest on, or any premium or Make-Whole Amount payable on
redemption of, any such Debt Security, or reduce the amount of principal of an
Original Issue Discount Security that would be due and payable upon
declaration of acceleration of the maturity thereof or would be provable in
bankruptcy, or adversely affect any right of repayment of the holder of any
such Debt Security; (c) change the place of payment, or the coin or currency,
for payment of principal of, premium or Make-Whole Amount, if any, or interest
on any such Debt Security; (d) impair the right to institute suit for the
enforcement of any payment on or with respect to any such Debt Security; (e)
reduce the above-stated percentage of outstanding Debt Securities of any
series necessary to modify or amend the applicable Indenture, to waive
compliance with certain provisions thereof or certain defaults and
consequences thereunder or to reduce the quorum or voting requirements set
forth in the applicable Indenture; (f) change the currency or currency unit in
which any Debt Security or any premium or interest thereon is payable; (g) in
the case of the Subordinated Indenture, modify the subordination provisions
thereof in a manner adverse to the holders of Subordinated Debt Securities of
any series then outstanding; or (h) modify any of the foregoing provisions or
any of the provisions relating to the waiver of certain past defaults or
certain covenants, except to increase the required percentage to effect such
action or to provide that certain other provisions may not be modified or
waived without the consent of the holder of such Debt Security.
The holders of a majority in aggregate principal amount of the outstanding
Debt Securities of each series may, on behalf of all holders of Debt
Securities of that series, waive, insofar as that series is concerned,
compliance by the Operating Partnership with certain restrictive covenants of
the applicable Indenture.
Modifications and amendments of an Indenture will be permitted to be made by
the Operating Partnership and the respective Trustee thereunder without the
consent of any holder of Debt Securities for any of the following purposes:
(a) to evidence the succession of another person to the Operating Partnership
as obligor under such Indenture; (b) to add to the covenants of the Operating
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 Operating
Partnership in such Indenture; (c) to add events of default for the benefit of
the holders of all or any series of Debt Securities; (d) to add or change any
provisions of an Indenture to facilitate the issuance of, or to liberalize
certain terms of, Debt Securities in bearer form, or to permit or facilitate
the issuance of Debt Securities in uncertificated form, provided that such
action shall not adversely affect the interests of the holders of the Debt
Securities of any series in any material respect; (e) to change or eliminate
any provisions of an Indenture, provided that any such change or elimination
shall become effective only when there are no Debt Securities outstanding of
any series created prior thereto which are entitled to the benefit of such
provision; (f) to secure the Debt Securities; (g) to establish the form or
terms of Debt Securities of any series; (h) to provide for the acceptance of
appointment by a successor Trustee or facilitate the administration of the
trusts under an Indenture by more than one Trustee; (i) to cure any ambiguity,
defect or inconsistency in an Indenture, provided that such action shall not
adversely affect the interests of holders of Debt Securities of any series
issued under such Indenture; or (j) to supplement any of the provisions of an
Indenture to the extent necessary to permit or facilitate defeasance and
discharge of any series of such Debt Securities, provided that such action
shall not adversely affect the interests of the holders of the outstanding
Debt Securities of any series.
The Indentures will provide that in determining whether the holders of the
requisite principal amount of outstanding Debt Securities of a series have
given any request, demand, authorization, direction, notice, consent
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or waiver thereunder or whether a quorum is present at a meeting of holders of
Debt Securities, (a) the principal amount of an Original Issue Discount
Security that shall be deemed to be outstanding shall be the amount of the
principal thereof that would be due and payable as of the date of such
determination upon declaration of acceleration of the maturity thereof, (b)
the principal amount of any Debt Security denominated in a foreign currency
that shall be deemed Outstanding shall be the U.S. dollar equivalent,
determined on the issue date for such Debt Security, of the principal amount
(or, in the case of an Original Issue Discount Security, the U.S. dollar
equivalent on the issue date of such Debt Security of the amount determined as
provided in (a) above), (c) the principal amount of an indexed security that
shall be deemed outstanding shall be the principal face amount of such indexed
security at original issuance, unless otherwise provided with respect to such
indexed security pursuant such Indenture, and (d) Debt Securities owned by the
Operating Partnership or any other obligor upon the Debt Securities or any
affiliate of the Operating Partnership or of such other obligor shall be
disregarded.
The Indentures will contain provisions for convening meetings of the holders
of Debt Securities of a series. A meeting will be permitted to be called at
any time by the applicable Trustee, and also, upon request, by the Operating
Partnership or the holders of at least 25% in principal amount of the
outstanding Debt Securities of such series, in any such case upon notice given
as provided in such Indenture. Except for any consent that must be given by
the holder of each Debt Security affected by certain modifications and
amendments of an Indenture, any resolution presented at a meeting or adjourned
meeting duly reconvened at which a quorum is present may be adopted by the
affirmative vote of the holders of a majority in principal amount of the
outstanding Debt Securities of that series; provided, however, that, except as
referred to above, any resolution with respect to any request, demand,
authorization, direction, notice, consent, waiver or other action that may be
made, given or taken by the holders of a specified percentage, which is less
than a majority, in principal amount of the outstanding Debt Securities of a
series may be adopted at a meeting or adjourned meeting or adjourned meeting
duly reconvened at which a quorum is present by the affirmative vote of the
holders of such specified percentage in principal amount of the outstanding
Debt Securities of that series. Any resolution passed or decision taken at any
meeting of holders of Debt Securities of any series duly held in accordance
with an Indenture will be binding on all holders of Debt Securities of that
series. The quorum at any meeting called to adopt a resolution, and at any
reconvened meeting, will be persons holding or representing a majority in
principal amount of the outstanding Debt Securities of a series; provided,
however, that if any action is to be taken at such meeting with respect to a
consent or waiver which may be given by the holders of not less than a
specified percentage in principal amount of the outstanding Debt Securities of
a series, the persons holding or representing such specified percentage in
principal amount of the outstanding Debt Securities of such series will
constitute a quorum.
Notwithstanding the foregoing provisions, the Indentures will provide that
if any action is to be taken at a meeting of holders of Debt Securities of any
series with respect to any request, demand, authorization, direction, notice,
consent, waiver and other action that such Indenture expressly provides may be
made, given or taken by the holders of a specified percentage in principal
amount of all outstanding Debt Securities affected thereby, or of the holders
of such series and one or more additional series: (a) there shall be no
minimum quorum requirement for such meeting, and (b) the principal amount of
the outstanding Debt Securities of such series that vote in favor of such
request, demand, authorization, direction, notice, consent, waiver or other
action shall be taken into account in determining whether such request,
demand, authorization, direction, notice, consent, waiver or other action has
been made, given or taken under such Indenture.
CERTAIN DEFINITIONS
"Indebtedness" means, with respect to any person, (a) any obligation of such
person to pay the principal of, premium, if any, interest on (including
interest accruing on or after the filing of any petition in bankruptcy or for
reorganization relating to such person, whether or not a claim for such post-
petition interest is allowed in such proceeding), penalties, reimbursement or
indemnification amounts, fees, expenses or other amounts relating to any
indebtedness of such person (i) for borrowed money (whether or not the
recourse of the lender is to the whole of the assets of such person or only to
a portion thereof), (ii) evidenced by notes, debentures or similar instruments
(including purchase money obligations) given in connection with the
acquisition of any property or
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assets (other than trade accounts payable for inventory or similar property
acquired in the ordinary course of business), including securities, for the
payment of which such person is liable, directly or indirectly, or the payment
of which is secured by a lien, charge or encumbrance on property or assets of
such person, (iii) for goods, materials or services purchased in the ordinary
course of business (other than trade accounts payable arising in the ordinary
course of business), (iv) with respect to letters of credit or bankers
acceptances issued for the account of such person or performance bonds, (v)
for the payment of money relating to a Capitalized Lease Obligation (as
defined in the Indenture), or (vi) under interest rate swaps, caps or similar
agreements and foreign exchange contracts, currency swaps or similar
agreements; (b) any liability of others of the kind described in the preceding
clause (a) which such person has guaranteed or which is otherwise its legal
liability; and (c) any and all deferrals, renewals, extensions and refunding
of, or amendments, modifications or supplements to, any liability of the kind
described in any of the preceding clauses (a) or (b).
"Senior Indebtedness" means Indebtedness of the Operating Partnership,
whether outstanding on the date of issue of any Subordinated Debt Securities
or thereafter created, incurred, assumed or guaranteed by the Operating
Partnership, other than the following: (a) any Indebtedness as to which, in
the instrument evidencing such Indebtedness or pursuant to which such
Indebtedness was issued, it is expressly provided that such Indebtedness is
subordinate in right of payment to all indebtedness of the Operating
Partnership not expressly subordinated to such Indebtedness; (b) any
Indebtedness which by its terms refers explicitly to the Subordinated Debt
Securities and states that such Indebtedness shall not be senior, shall be
pari passu or shall be subordinated in right of payment to the Subordinated
Debt Securities; and (c) with respect to any series of Subordinated Debt
Securities, any Indebtedness of the Operating Partnership evidenced by
Subordinated Debt Securities of the same or of another series. Notwithstanding
anything to the contrary in the foregoing, Senior Indebtedness shall not
include: (x) Indebtedness of or amounts owed by the Operating Partnership for
compensation to employees, or for goods, materials and services purchased in
the ordinary course of business, or (y) Indebtedness of the Operating
Partnership to a subsidiary of the Operating Partnership.
SUBORDINATION
Unless otherwise provided in the applicable Prospectus Supplement,
Subordinated Debt Securities will be subject to the following subordination
provisions.
The payment of the principal of, interest on, or any other amounts due on,
the Subordinated Debt Securities will be subordinated in right of payment to
the prior payment in cash in full of all Senior Indebtedness of the Operating
Partnership. No payment on account of the principal of, redemption of,
interest on or any other amounts due on the Subordinated Debt Securities and
no redemption, purchase or other acquisition of the Subordinated Debt
Securities may be made, unless (a) full payment in cash of amounts then due
for principal, sinking funds, interest (including interest accruing on or
after the filing of any petition in bankruptcy or for reorganization relating
to the Operating Partnership, whether or not a claim for such post-petition
interest is allowed in such proceeding), penalties, reimbursement or
indemnification amounts, fees and expenses, and of all other amounts then due
on all Senior Indebtedness shall have been made or duly provided for pursuant
to the terms of the instrument governing such Senior Indebtedness, and (b) at
the time of, or immediately after giving effect to, any such payment,
redemption, purchase or other acquisition, there shall not exist under any
Senior Indebtedness or any agreement pursuant to which any Senior Indebtedness
has been issued, any default which shall not have been cured or waived and
which shall have resulted in the full amount of such Senior Indebtedness being
declared due and payable and not rescinded. In addition, the Subordinated
Indenture provides that, if holders of any Senior Indebtedness notify the
Operating Partnership and the Subordinated Trustee that a default has occurred
giving the holders of such Senior Indebtedness the right to accelerate the
maturity thereof, no payment on account of principal, sinking fund or other
redemption, interest or any other amounts due on the Subordinated Debt
Securities and no purchase, redemption or other acquisition of the
Subordinated Debt Securities will be made for the period (the "Payment
Blockage Period") commencing on the date such notice is received and ending on
the earlier of (i) the date on which such event of default shall have been
cured or waived or (ii) 180 days from the date such notice is received.
Notwithstanding the foregoing, only one payment blockage
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notice with respect to the same event of default or any other events of
default existing and known to the person giving such notice at the time of
such notice on the same issue of Senior Indebtedness may be given during any
period of 360 consecutive days. No new Payment Blockage Period may be
commenced by the holders of Senior Indebtedness during any period of 360
consecutive days unless all events of default which triggered the preceding
Payment Blockage Period have been cured or waived. Upon any distribution of
its assets in connection with any dissolution, winding-up, liquidation or
reorganization of the Operating Partnership, all Senior Indebtedness must be
paid in full in cash before the holders of the Subordinated Debt Securities
are entitled to any payments whatsoever.
The Subordinated Indenture does not restrict the amount of Senior
Indebtedness or other indebtedness of the Operating Partnership or any
Subsidiary. As a result of these subordination provisions, in the event of the
Operating Partnership's insolvency, holders of the Subordinated Debt
Securities may recover ratably less than general creditors of the Company.
If this Prospectus is being delivered in connection with a series of
Subordinated Debt Securities, the accompanying Prospectus Supplement or the
information incorporated herein by reference will set forth the approximate
amount of Senior Indebtedness outstanding as of the end of the Operating
Partnership's most recent fiscal quarter.
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
Unless otherwise indicated in the applicable Prospectus Supplement, the
Operating Partnership will be permitted, at its option, to discharge certain
obligations to holders of any series of Debt Securities issued under any
Indenture that have not already been delivered to the applicable Trustee for
cancellation and that either have become due and payable or will become due
and payable within one year (or scheduled for redemption within one year) by
irrevocably depositing with the applicable Trustee, in trust, funds in such
currency or currencies, currency unit or units or composite currency or
currencies in which such Debt Securities are payable in an amount sufficient
to pay the entire indebtedness on such Debt Securities in respect of principal
(and premium or Make-Whole Amount, if any) and interest to the date of such
deposit (if such Debt Securities have become due and payable) or to the stated
maturity or redemption date, as the case may be.
The Indentures will provide that, unless otherwise indicated in the
applicable Prospectus Supplement, the Operating Partnership may elect either
(a) to defease and be discharged from any and all obligations with respect to
such Debt Securities (except for the obligations to register the transfer or
exchange of such Debt Securities, to replace temporary or mutilated,
destroyed, lost or stolen Debt Securities, to maintain an office or agency in
respect of such Debt Securities, and to hold moneys for payment in trust)
("defeasance") or (b) to be released from certain obligations with respect to
such Debt Securities under the applicable Indenture (including the
restrictions described under "--Certain Covenants") or, if provided in the
applicable Prospectus Supplement, its obligations with respect to any other
covenant, and any omission to comply with such obligations shall not
constitute an Event of Default with respect to such Debt Securities ("covenant
defeasance"), in either case upon the irrevocable deposit by the Operating
Partnership with the applicable Trustee, in trust, of an amount, in such
currency or currencies, currency unit or units or composite currency or
currencies in which such Debt Securities are payable at stated maturity, or
Government Obligations (as defined below), or both, applicable to such Debt
Securities, which through the scheduled payment of principal and interest in
accordance with their terms will provide money in an amount sufficient to pay
the principal of (and premium or Make-Whole Amount, if any) and interest on
such Debt Securities, and any mandatory sinking fund or analogous payments
thereon, on the scheduled due dates therefor.
Such a trust will only be permitted to be established if, among other
things, the Operating Partnership has delivered to the applicable Trustee an
opinion of counsel (as specified in the applicable Indenture) to the effect
that the holders of such Debt Securities will not recognize income, gain or
loss for U.S. federal income tax purposes as a result of such defeasance or
covenant defeasance and will be subject to U.S. federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such defeasance or
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covenant defeasance had not occurred, and such opinion of counsel, in the case
of defeasance, will be required to refer to and be based upon a ruling
received from or published by the Internal Revenue Service or a change in
applicable United States federal income tax law occurring after the date of
the Indenture. In the event of such defeasance, the holders of such Debt
Securities would thereafter be able to look only to such trust fund for
payment of principal (and premium or Make-Whole Amount, if any) and interest.
"Government Obligations" means securities that are (a) direct obligations of
the United States of America or the government which issued the foreign
currency in which the Debt Securities of a particular series are payable, for
the payment of which its full faith and credit is pledged or (b) obligations
of a person controlled or supervised by and acting as an agency or
instrumentality of the United States of America or such government which
issued the foreign currency in which the Debt Securities of such series are
payable, the payment of which is unconditionally guaranteed as a full faith
and credit obligation by the United States of America or such other
government, which, in 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
Government Obligation or a specific payment of interest on or principal of any
such Government Obligation held by such custodian for 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 Government Obligation or the specific payment of
interest on or principal of the Government Obligation evidenced by such
depository receipt.
Unless otherwise provided in the applicable Prospectus Supplement, if after
the Operating Partnership has deposited funds and/or Government Obligations to
effect defeasance or covenant defeasance with respect to Debt Securities of
any series, (a) the holder of a Debt Security of such series is entitled to,
and does, elect pursuant to the applicable Indenture or the terms of such Debt
Security to receive payment in a currency, currency unit or composite currency
other than that in which such deposit has been made in respect of such Debt
Security, or (b) a Conversion Event (as defined below) occurs in respect of
the currency, currency unit or composite currency in which such deposit has
been made, the indebtedness represented by such Debt Security will be deemed
to have been, and will be, fully discharged and satisfied through the payment
of the principal of (and premium or Make-Whole Amount, if any) and interest on
such Debt Security as they become due out of the proceeds yielded by
converting the amount so deposited in respect of such Debt Security into the
currency, currency unit or composite currency in which such Debt Security
becomes payable as a result of such election or such cessation of usage based
on the applicable market exchange rate. "Conversion Event" means the cessation
of use of (i) a currency, currency unit or composite currency both by the
government of the country which issued such currency and for the settlement of
transactions by a central bank or other public institutions of or within the
international banking community, (ii) the ECU both within the European
Monetary System and for the settlement of transactions by public institutions
of or within the European Communities or (iii) any currency unit or composite
currency other than the ECU for the purposes for which it was established.
Unless otherwise provided in the applicable Prospectus Supplement, all
payments of principal of (and premium or Make-Whole Amount, if any) and
interest on any Debt Security that is payable in a foreign currency that
ceases to be used by its government of issuance shall be made in U.S. dollars.
In the event the Operating Partnership effects covenant defeasance with
respect to any Debt Securities and such Debt Securities are declared due and
payable because of the occurrence of any Event Default other than the Event of
Default described in clause (d) under "--Events of Default, Notice and Waiver"
with respect to specified sections of an Indenture (which sections would no
longer be applicable to such Debt Securities) or described in clause (g) under
"--Events of Default, Notice and Waiver" with respect to any other covenant as
to which there has been covenant defeasance, the amount in such currency,
currency unit or composite currency in which such Debt Securities are payable,
and Government Obligations on deposit with the applicable Trustee, will be
sufficient to pay amounts due on such Debt Securities at the time of their
stated maturity but may not be sufficient to pay amounts due on such Debt
Securities at the time of the acceleration resulting from such of Event of
Default. However, the Operating Partnership would remain liable to make
payment of such amounts due at the time of acceleration.
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The applicable Prospectus Supplement may further describe the provisions, if
any, permitting such defeasance or covenant defeasance, including any
modifications to the provisions described above, with respect to the Debt
Securities of or within a particular series.
BOOK-ENTRY SYSTEM
The Debt Securities of a series may be issued in whole or in part in the
form of one or more global securities ("Global Securities") that will be
deposited with, or on behalf of, a depository (the "Depository") identified in
the Prospectus Supplement relating to such series. Global Securities, if any,
issued in the United States are expected to be deposited with The Depository
Trust Company ("DTC"), as Depository. Global Securities may be issued in fully
registered form and may be issued in either temporary or permanent form.
Unless and until it is exchanged in whole or in part for the individual Debt
Securities represented thereby, a Global Security may not be transferred
except as a whole by the Depository for such Global Security to a nominee of
such Depository or by a nominee of such Depository to such Depository or
another nominee of such Depository or by such Depository or any nominee of
such Depositor to a successor Depository or any nominee of such successor.
The specific terms of the depository arrangement with respect to a series of
Debt Securities will be described in the Prospectus Supplement relating to
such series. The Operating Partnership expects that unless otherwise indicated
in the applicable Prospectus Supplement, the following provisions will apply
to depository arrangements.
Upon the issuance of a Global Security, the Depository for such Global
Security or its nominee will credit on its book-entry registration and
transfer system the respective principal amounts of the individual Debt
Securities represented by such Global Security to the accounts of persons that
have accounts with such Depository ("Participants"). Such accounts shall be
designated by the underwriters, dealers or agents with respect to such Debt
Securities or by Operating Partnership if such Debt Securities are offered
directly by the Operating Partnership. Ownership of beneficial interests in
such Global Security will be limited to Participants or persons that may hold
interests through Participants.
The Operating Partnership expects that, pursuant to procedures established
by DTC, ownership of beneficial interests in any Global Security with respect
to which DTC is the Depository will be shown on, and the transfer of that
ownership will be effected only through, records maintained by DTC or its
nominee (with respect to beneficial interests of Participants) and records of
Participants (with respect to beneficial interests of persons who hold through
Participants). Neither the Operating Partnership nor the Trustee will have any
responsibility or liability for any aspect of the records of DTC or for
maintaining, supervising or reviewing any records of DTC or any of its
Participants relating to beneficial ownership interests in the Debt
Securities. The laws of some states require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
limits and laws may impair the ability to own, pledge or transfer beneficial
interest in a Global Security.
So long as the Depository for a Global Security or its nominee is the
registered owner of such Global Security, such Depository or such nominee, as
the case may be, will be considered the sole owner or holder of the Debt
Securities represented by such Global Security for all purposes under the
applicable Indenture. Except as described below or in the applicable
Prospectus Supplement, owners of beneficial interest in a Global Security will
not be entitled to have any of the individual Debt Securities represented by
such Global Security registered in their names, will not receive or be
entitled to receive physical delivery of any such Debt Securities in
definitive form and will not be considered the owners or holders thereof under
the applicable Indenture. Beneficial owners of Debt Securities evidenced by a
Global Security will not be considered the owners or holders thereof under the
applicable Indenture for any purpose, including with respect to the giving of
any direction, instructions or approvals to the Trustee thereunder.
Accordingly, each person owning a beneficial interest in a Global Security
with respect to which DTC is the Depository must rely on the procedures of DTC
and, if such person is not a Participant, on the procedures of the Participant
through which such person owns its interests, to exercise any rights of a
holder under the applicable Indenture. The Operating Partnership understands
that, under existing industry practice, if it requests any action of holders
or if an owner of a beneficial interest in a Global Security
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desires to give or take any action which a holder is entitled to give or take
under the applicable Indenture, DTC would authorize the Participants holding
the relevant beneficial interest to give or take such action, and such
Participants would authorize beneficial owners through such Participants to
give or take such actions or would otherwise act upon the instructions of
beneficial owners holding through them.
Payments of principal of, any premium or Make-Whole Amount and any interest
on individual Debt Securities represented by a Global Security registered in
the name of a Depository or its nominee will be made to or at the direction of
the Depository or its nominee, as the case may be, as the registered owner of
the Global Security under the applicable Indenture. Under the terms of the
applicable Indenture, the Operating Partnership and the Trustee may treat the
persons in whose name Debt Securities, including a Global Security, are
registered as the owners thereof for the purpose of receiving such payments.
Consequently, neither the Operating Partnership nor the Trustee has or will
have any responsibility or liability for the payment of such amounts to
beneficial owners of Debt Securities (including principal, premium or Make-
Whole Amount, if any, and interest). The Operating Partnership believes,
however, that it is currently the policy of DTC to immediately credit the
accounts of relevant Participants with such payments, in amounts proportionate
to their respective holdings of beneficial interests in the relevant Global
Security as shown on the records of DTC or its nominee. The Operating
Partnership also expects that payments by Participants to owners of beneficial
interests in such Global Security held through such Participants will be
governed by standing instructions and customary practices, as is the case with
securities held for the account of customers in bearer form or registered in
street name, and will be the responsibility of such Participants. Redemption
notices with respect to any Debt Securities represented by a Global Security
will be sent to the Depository or its nominee. If less than all of the Debt
Securities of any series are to be redeemed, the Operating Partnership expects
the Depository to determine the amount of the interest of each Participant in
such Debt Securities to be redeemed to be determined by lot. None of the
Operating Partnership, the Trustee, any Paying Agent or the Security Registrar
for such Debt Securities will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in the Global Security for such Debt Securities or for
maintaining any records with respect thereto.
Neither the Operating Partnership nor the Trustee will be liable for any
delay by the holders of a Global Security or the Depository in identifying the
beneficial owners of Debt Securities and the Operating Partnership and the
Trustee may conclusively rely on, and will be protected in relying on,
instructions from the holder of a Global Security or the Depository for all
purposes. The rules applicable to DTC and its Participants are on file with
the Securities and Exchange Commission.
If a Depository for any Debt Securities is at any time unwilling, unable or
ineligible to continue as depository and a successor depository is not
appointed by the Operating Partnership within 90 days, the Operating
Partnership will issue individual Debt Securities in exchange for the Global
Security representing such Debt Securities. In addition, the Operating
Partnership may at any time and in its sole discretion, subject to any
limitations described in the Prospectus Supplement relating to such Debt
Securities, determine not to have any of such Debt Securities represented by
one or more Global Securities and in such event will issue individual Debt
Securities in exchange for the Global Security or Securities representing such
Debt Securities. Individual Debt Securities so issued will be issued in
denominations of $1,000 and integral multiples thereof.
The Debt Securities of a series may also be issued in whole or in part in
the form of one or more bearer global securities (a "Bearer Global Security")
that will be deposited with a depository, or with a nominee for such
depository, identified in the applicable Prospectus Supplement. Any such
Bearer Global Securities may be issued in temporary or permanent form. The
specific terms and procedures, including the specific terms of the depository
arrangement, with respect to any portion of a series of Debt Securities to be
represented by one or more Bearer Global Securities will be described in the
applicable Prospectus Supplement.
PAYMENT AND PAYING AGENTS
Unless otherwise specified in the applicable Prospectus Supplement, the
principal of (and applicable premium or Make-Whole Amount, if any) and
interest on any series of Debt Securities will be payable at the
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corporate trust office of the Trustee, the address of which will be stated in
the applicable Prospectus Supplement; provided that, at the option of the
Operating Partnership, payment of interest may be made by check mailed to the
address of the person entitled thereto as it appears in the applicable
register for such Debt Securities or by wire transfer of funds to such person
at an account maintained within the United States.
All moneys paid by the Operating Partnership to a paying agent or a Trustee
for the payment of the principal of or any premium, Make-Whole Amount or
interest on any Debt Security which remain unclaimed at the end of two years
after such principal, premium, Make-Whole Amount or interest has become due
and payable will be repaid to the Operating Partnership, and the holder of
such Debt Security thereafter may look only to the Operating Partnership for
payment thereof.
GLOBAL SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more global securities (the "Global Securities") that will be
deposited with, or on behalf of, a depositary identified in the applicable
Prospectus Supplement relating to such series. Global Securities may be issued
in either registered or bearer form and in either temporary or permanent form.
The specific terms of the depositary arrangement with respect to a series of
Debt Securities will be described in the applicable Prospectus Supplement
relating to such series.
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DESCRIPTION OF PREFERRED STOCK
The description of the Company's preferred stock, par value $.01 per share
("Preferred Stock"), set forth below does not purport to be complete and is
qualified in its entirety by reference to the Company's Amended and Restated
Articles of Incorporation (the "Articles of Incorporation") and Amended and
Restated Bylaws (the "Bylaws").
GENERAL
Under the Articles of Incorporation, the Company has authority to issue 10
million shares of Preferred Stock, none of which was outstanding as of June
15, 1998. Shares of Preferred Stock may be issued from time to time, in one or
more series, as authorized by the Board of Directors of the Company. Prior to
issuance of shares of each series, the Board of Directors is required by the
Maryland General Corporation Law ("MGCL") and the Company's Articles of
Incorporation to fix for each series, the terms, preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends or
other distributions, qualifications and terms or conditions of redemption, as
are permitted by Maryland law. The Preferred Stock will, when issued, be fully
paid and nonassessable and will have no preemptive rights. The Board of
Directors could authorize the issuance of shares of Preferred Stock with terms
and conditions that could have the effect of discouraging a takeover or other
transaction that holders of Common Stock might believe to be in their best
interests or in which holders of some, or a majority, of the shares of Common
Stock might receive a premium for their shares over the then market price of
such shares of Common Stock.
TERMS
The following description of the Preferred Stock sets forth certain general
terms and provisions of the Preferred Stock to which any Prospectus Supplement
may relate. The statements below describing the Preferred Stock are in all
respects subject to and qualified in their entirety by reference to the
applicable provisions of the Company's Articles of Incorporation and Bylaws
and any applicable amendment to the Articles of Incorporation designating
terms of a series of Preferred Stock (a "Designating Amendment").
Reference is made to the Prospectus Supplement relating to the Preferred
Stock offered thereby for specific terms, including:
(1) The title and stated value of such Preferred Stock;
(2) The number of shares of such Preferred Stock offered, the liquidation
preference per share and the offering price of such Preferred Stock;
(3) The dividend rate(s), period(s) and/or payment date(s) or method(s)
of calculation thereof applicable to such Preferred Stock;
(4) The date from which dividends on such Preferred Stock shall
accumulate, if applicable;
(5) The procedures for any auction and remarketing, if any, for such
Preferred Stock;
(6) The provision for a sinking fund, if any, for such Preferred Stock;
(7) The provision for redemption, if applicable, of such Preferred Stock;
(8) Any listing of such Preferred Stock on any securities exchange;
(9) The terms and conditions, if applicable, upon which such Preferred
Stock will be convertible into Common Stock, including the conversion price
(or manner of calculation thereof);
(10) Any other specific terms, preferences, rights, limitations or
restrictions of such Preferred Stock;
(11) A discussion of federal income tax considerations applicable to such
Preferred Stock;
(12) The relative ranking and preference of such Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up of
the affairs of the Company;
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(13) Any limitations on issuance of any series of Preferred Stock ranking
senior to or on a parity with such series of Preferred Stock as to dividend
rights and rights upon liquidation, dissolution or winding up of the
affairs of the Company; and
(14) Any limitations on direct or beneficial ownership and restrictions
on transfer, in each case as may be appropriate to preserve the status of
the Company as a REIT.
RANK
Unless otherwise specified in the Prospectus Supplement, the Preferred Stock
will, with respect to dividend rights and rights upon liquidation, dissolution
or winding up of the Company, rank (i) senior to all classes or series of
Common Stock of the Company, and to all equity securities ranking junior to
such Preferred Stock with respect to dividend rights or rights upon
liquidation, dissolution or winding up of the Company; (ii) on a parity with
all equity securities issued by the Company the terms of which specifically
provide that such equity securities rank on a parity with the Preferred Stock
with respect to dividend rights or rights upon liquidation, dissolution or
winding up of the Company; and (iii) junior to all equity securities issued by
the Company the terms of which specifically provide that such equity
securities rank senior to the Preferred Stock with respect to dividend rights
or rights upon liquidation, dissolution or winding up of the Company. The term
"equity securities" does not include convertible debt securities.
DIVIDENDS
Holders of the Preferred Stock of each series will be entitled to receive,
when, as and if declared by the Board of Directors of the Company, out of
assets of the Company legally available for payment, cash dividends at such
rates and on such dates as will be set forth in the applicable Prospectus
Supplement. Each such dividend shall be payable to holders of record as they
appear on the share transfer books of the Company on such record dates as
shall be fixed by the Board of Directors of the Company.
Dividends on any series of the Preferred Stock may be cumulative or non-
cumulative, as provided in the applicable Prospectus Supplement. Dividends, if
cumulative, will be cumulative from and after the date set forth in the
applicable Prospectus Supplement. If the Board of Directors of the Company
fails to declare a dividend payable on a dividend payment date on any series
of the Preferred Stock for which dividends are non-cumulative, then the
holders of such series of the Preferred Stock will have no right to receive a
dividend in respect of the dividend period ending on such dividend payment
date, and the Company will have no obligation to pay the dividend accrued for
such period, whether or not dividends on such series are declared payable on
any future dividend payment date.
If Preferred Stock of any series is outstanding, no dividends will be
declared or paid or set apart for payment on any capital stock of the Company
of any other series ranking, as to dividends, on a parity with or junior to
the Preferred Stock of such series for any period unless (i) if such series of
Preferred Stock has a cumulative dividend, full cumulative dividends have been
or contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof is set apart for such payment on the Preferred Stock
of such series for all past dividend periods and the then current dividend
period or (ii) if such series of Preferred Stock does not have a cumulative
dividend, full dividends for the then current dividend period have been or
contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof is set apart for such payment on the Preferred Stock of
such series. When dividends are not paid in full (or a sum sufficient for such
full payment is not so set apart) upon Preferred Stock of any series and the
shares of any other series of Preferred Stock ranking on a parity as to
dividends with the Preferred Stock of such series, all dividends declared upon
Preferred Stock of such series and any other series of Preferred Stock ranking
on a parity as to dividends with such Preferred Stock shall be declared pro
rata so that the amount of dividends declared per share of Preferred Stock of
such series and such other series of Preferred Stock shall in all cases bear
to each other the same ratio that accrued dividends per share on the Preferred
Stock of such series (which shall not include any accumulation in respect of
unpaid dividends for prior dividend periods if such Preferred Stock does not
have a cumulative dividend) and
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such other series of Preferred Stock bear to each other. No interest, or sum
of money in lieu of interest, shall be payable in respect of any dividend
payment or payments on Preferred Stock of such series which may be in arrears.
Except as provided in the immediately preceding paragraph, unless (i) if
such series of Preferred Stock has a cumulative dividend, full cumulative
dividends on the Preferred Stock of such series have been or contemporaneously
are declared and paid or declared and a sum sufficient for the payment thereof
is set apart for payment for all past dividend periods and the then current
dividend period, and (ii) if such series of Preferred Stock does not have a
cumulative dividend, full dividends on the Preferred Stock of such series have
been or contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof is set apart for payment for the then
current dividend period, no dividends (other than in shares of Common Stock or
other shares of capital stock ranking junior to the Preferred Stock of such
series as to dividends and upon liquidation) shall be declared or paid or set
aside for payment nor shall any other distribution be declared or made upon
the Common Stock, or any other capital stock of the Company ranking junior to
or on a parity with the Preferred Stock of such series as to dividends or upon
liquidation, nor shall any shares of Common Stock, or any other shares of
capital stock of the Company ranking junior to or on a parity with the
Preferred Stock of such series as to dividends or upon liquidation be
redeemed, purchased or otherwise acquired for any consideration (or any moneys
be paid to or made available for a sinking fund for the redemption of any such
shares) by the Company (except by conversion into or exchange for other
capital stock of the Company ranking junior to the Preferred Stock of such
series as to dividends and upon liquidation).
Any dividend payment made on shares of a series of Preferred Stock shall
first be credited against the earliest accrued but unpaid dividend due with
respect to shares of such series which remains payable.
REDEMPTION
If so provided in the applicable Prospectus Supplement, the Preferred Stock
will be subject to mandatory redemption or redemption at the option of the
Company, as a whole or in part, in each case upon the terms, at the times and
at the redemption prices set forth in such Prospectus Supplement.
The Prospectus Supplement relating to a series of Preferred Stock that is
subject to mandatory redemption will specify the number of shares of such
Preferred Stock that shall be redeemed by the Company in each year commencing
after a date to be specified, at a redemption price per share to be specified,
together with an amount equal to all accrued and unpaid dividends thereon
(which shall not, if such Preferred Stock does not have a cumulative dividend,
include any accumulation in respect of unpaid dividends for prior dividend
periods) to the date of redemption. The redemption price may be payable in
cash or other property, as specified in the applicable Prospectus Supplement.
If the redemption price for Preferred Stock of any series is payable only from
the net proceeds of the issuance of shares of capital stock of the Company,
the terms of such Preferred Stock may provide that, if no such shares of
capital stock shall have been issued or to the extent the net proceeds from
any issuance are insufficient to pay in full the aggregate redemption price
then due, such Preferred Stock shall automatically and mandatorily be
converted into the applicable shares of capital stock of the Company pursuant
to conversion provisions specified in the applicable Prospectus Supplement.
Notwithstanding the foregoing, unless (i) if a series of Preferred Stock has
a cumulative dividend, full cumulative dividends on all shares of such series
of Preferred Stock shall have been or contemporaneously are declared and paid
or declared and a sum sufficient for the payment thereof set apart for payment
for all past dividend periods and the then current dividend period, and (ii)
if a series of Preferred Stock does not have a cumulative dividend, full
dividends on all shares of the Preferred Stock of such series have been or
contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof set apart for payment for the then current dividend
period, no shares of such series of Preferred Stock shall be redeemed unless
all outstanding shares of Preferred Stock of such series are simultaneously
redeemed; provided, however, that the foregoing shall not prevent the purchase
or acquisition of Preferred Stock of such series to preserve the REIT status
of the Company or pursuant to a purchase or exchange offer made on the same
terms to holders of
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all outstanding shares of Preferred Stock of such series. In addition, unless
(i) if such series of Preferred Stock has a cumulative dividend, full
cumulative dividends on all outstanding shares of such series of Preferred
Stock have been or contemporaneously are declared and paid or declared and a
sum sufficient for the payment thereof set apart for payment for all past
dividend periods and the then current dividend period, and (ii) if such series
of Preferred Stock does not have a cumulative dividend, full dividends on the
Preferred stock of such series have been or contemporaneously are declared and
paid or declared and a sum sufficient for the payment thereof set apart for
payment for the then current dividend period, the Company shall not purchase
or otherwise acquire directly or indirectly any shares of Preferred Stock of
such series (except by conversion into or exchange for capital shares of the
Company ranking junior to the Preferred Stock of such series as to dividends
and upon liquidation); provided, however, that the foregoing shall not prevent
the purchase or acquisition of shares of Preferred Stock of such series to
preserve the REIT status of the Company or pursuant to a purchase or exchange
offer made on the same terms to holders of all outstanding shares of Preferred
Stock of such series.
If fewer than all of the outstanding shares of Preferred Stock of any series
are to be redeemed, the number of shares to be redeemed will be determined by
the Company and such shares may be redeemed pro rata from the holders of
record of such shares in proportion to the number of such shares held or for
which redemption is requested by such holder (with adjustments to avoid
redemption of fractional shares) or by any other equitable manner determined
by the Company.
Notice of redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each holder of record of Preferred Stock of
any series to be redeemed at the address shown on the stock transfer books of
the Company. Each notice shall state: (i) the redemption date; (ii) the number
of shares and series of the Preferred Stock to be redeemed; (iii) the
redemption price; (iv) the place or places where certificates for such
Preferred Stock are to be surrendered for payment of the redemption price; (v)
that dividends on the shares to be redeemed will cease to accrue on such
redemption date; and (vi) the date upon which the holder's conversion rights,
if any, as to such shares shall terminate. If fewer than all the shares of
Preferred Stock of any series are to be redeemed, the notice mailed to each
such holder thereof shall also specify the number of shares of Preferred Stock
to be redeemed from each such holder. If notice of redemption of any Preferred
Stock has been given and if the funds necessary for such redemption have been
set aside by the Company in trust for the benefit of the holders of any
Preferred Stock so called for redemption, then from and after the redemption
date dividends will cease to accrue on such Preferred Stock, and all rights of
the holders of such shares will terminate, except the right to receive the
redemption price.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Company, then, before any distribution or payment shall be
made to the holders of any Common Stock or any other class or series of
capital stock of the Company ranking junior to the Preferred Stock in the
distribution of assets upon any liquidation, dissolution or winding up of the
Company, the holders of each series of Preferred Stock shall be entitled to
receive out of assets of the Company legally available for distribution to
stockholders liquidating distributions in the amount of the liquidation
preference per share, if any, set forth in the applicable Prospectus
Supplement, plus an amount equal to all dividends accrued and unpaid thereon
(which shall not include any accumulation in respect of unpaid noncumulative
dividends for prior dividend periods). After payment of the full amount of the
liquidating distributions to which they are entitled, the holders of Preferred
Stock will have no right or claim to any of the remaining assets of the
Company. In the event that, upon any such voluntary or involuntary
liquidation, dissolution or winding up, the available assets of the Company
are insufficient to pay the amount of the liquidating distributions on all
outstanding shares of Preferred Stock and the corresponding amounts payable on
all shares of other classes or series of capital stock of the Company ranking
on a parity with the Preferred Stock in the distribution of assets, then the
holders of the Preferred Stock and all other such classes or series of capital
stock shall share ratably in any such distribution of assets in proportion to
the full liquidating distributions to which they would otherwise be
respectively entitled.
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If liquidating distributions shall have been made in full to all holders of
Preferred Stock, the remaining assets of the Company shall be distributed
among the holders of any other classes or series of capital stock ranking
junior to the Preferred Stock upon liquidation, dissolution or winding up,
according to their respective rights and preferences and in each case
according to their respective number of shares. For such purposes, the
consolidation or merger of the Company with or into any other corporation,
trust or entity, or the sale, lease or conveyance of all or substantially all
of the property or business of the Company, shall not be deemed to constitute
a liquidation, dissolution or winding up of the Company.
VOTING RIGHTS
Holders of the Preferred Stock will not have any voting rights, except as
set forth below or as otherwise from time to time required by law or as
indicated in the applicable Prospectus Supplement.
Unless provided otherwise for any series of Preferred Stock, so long as any
shares of Preferred Stock of a series remain outstanding, the Company will
not, without the affirmative vote or consent of the holders of at least two-
thirds of the shares of such series of Preferred Stock outstanding at the
time, given in person or by proxy, either in writing or at a meeting (such
series voting separately as a class), (i) authorize or create, or increase the
authorized or issued amount of, any class or series of capital stock ranking
prior to such series of Preferred Stock with respect to payment of dividends
or the distribution of assets upon liquidation, dissolution or winding up or
reclassify any authorized capital stock of the Company into such shares, or
create, authorize or issue any obligation or security convertible into or
evidencing the right to purchase any such shares; or (ii) amend, alter or
repeal the provisions of the Company's Articles of Incorporation or the
Designating Amendment for such series of Preferred Stock, whether by merger,
consolidation or otherwise (an "Event"), so as to materially and adversely
affect any right, preference, privilege or voting power of such series of
Preferred Stock or the holders thereof; provided, however, with respect to the
occurrence of any of the Events set forth in (ii) above, so long as the
Preferred Stock remains outstanding with the terms thereof materially
unchanged, taking into account that upon the occurrence of an Event the
Company may not be the surviving entity, the occurrence of any such Event
shall not be deemed to materially and adversely affect such rights,
preferences, privileges or voting power of holders of Preferred Stock, and
provided further that (x) any increase in the amount of the authorized
Preferred Stock or the creation or issuance of any other series of Preferred
Stock, or (y) any increase in the amount of authorized shares of such series
or any other series of Preferred Stock, in each case ranking on a parity with
or junior to the Preferred Stock of such series with respect to payment of
dividends or the distribution of assets upon liquidation, dissolution or
winding up, shall not be deemed to materially and adversely affect such
rights, preferences, privileges or voting powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of such series of Preferred Stock shall
have been redeemed or called for redemption and sufficient funds shall have
been deposited in trust to effect such redemption.
CONVERSION RIGHTS
The terms and conditions, if any, upon which any series of Preferred Stock
is convertible into Common Stock will be set forth in the applicable
Prospectus Supplement relating thereto. Such terms will include the number of
shares of Common Stock into which the shares of Preferred Stock are
convertible, the conversion price (or manner of calculation thereof), the
conversion period, provisions as to whether conversion will be at the option
of the holders of the Preferred Stock or the Company, the events requiring an
adjustment of the conversion price and provisions affecting conversion in the
event of the redemption of such series of Preferred Stock.
RESTRICTIONS ON OWNERSHIP
For the Company to qualify as a REIT under the Internal Revenue Code of
1986, as amended (the "Code"), not more than 50% in value of its outstanding
capital stock may be owned, directly or indirectly, by five or fewer
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individuals (as defined in the Code to include certain entities) during the
last half of a taxable year. To assist the Company in meeting this
requirement, the Company may take certain actions to limit the beneficial
ownership, directly or indirectly, by a single person of the Company's
outstanding equity securities, including any Preferred Stock of the Company.
Therefore, the Designating Amendment for each series of Preferred Stock may
contain provisions restricting the ownership and transfer of the Preferred
Stock. The applicable Prospectus Supplement will specify any additional
ownership limitation relating to a series of Preferred Stock. See
"Restrictions on Transfers of Capital Stock."
TRANSFER AGENT
The transfer agent and registrar for the Preferred Stock will be set forth
in the applicable Prospectus Supplement.
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DESCRIPTION OF COMMON STOCK
The description of the Company's Common Stock set forth below does not
purport to be complete and is qualified in its entirety by reference to the
Company's Articles of Incorporation and Bylaws.
GENERAL
Under the Articles of Incorporation, the Company has authority to issue 100
million shares of Common Stock, par value $.01 per share. Under Maryland law,
stockholders generally are not responsible for the corporation's debts or
obligations. At July 7, 1998, the Company had outstanding 12,333,213 shares of
Common Stock.
TERMS
Subject to the preferential rights of any other shares or series of stock,
holders of shares of Common Stock will be entitled to receive dividends on
shares of Common Stock if, as and when authorized and declared by the Board of
Directors of the Company out of assets legally available therefor and to share
ratably in the assets of the Company legally available for distribution to its
stockholders in the event of its liquidation, dissolution or winding-up after
payment of, or adequate provision for, all known debts and liabilities of the
Company.
Each outstanding share of Common Stock entitles the holder to one vote on
all matters submitted to a vote of stockholders, including the election of
Directors and, except as otherwise required by law or except as provided with
respect to any other class or series of stock, the holders of Common Stock
will possess the exclusive voting power. There is no cumulative voting in the
election of Directors, which means that the holders of a majority of the
outstanding shares of Common Stock can elect all of the Directors then
standing for election, and the holders of the remaining shares of Common Stock
will not be able to elect any Directors.
Holders of Common Stock have no conversion, sinking fund or redemption
rights, or preemptive rights to subscribe for any securities of the Company.
The Company intends to furnish its stockholders with annual reports
containing audited consolidated financial statements and an opinion thereon
expressed by an independent public accounting firm and quarterly reports for
the first three quarters of each fiscal year containing unaudited financial
information.
All shares of Common Stock will have equal dividend, distribution,
liquidation and other rights, and will have no preference, appraisal or
exchange rights.
Pursuant to the MGCL, a corporation generally cannot dissolve, amend its
Articles of Incorporation, merge, sell all or substantially all of its assets,
engage in a share exchange or engage in similar transactions outside the
ordinary course of business unless approved by the affirmative vote of
stockholders holding at least two-thirds of the shares entitled to vote on the
matter unless a lesser percentage (but not less than a majority of all of the
votes to be cast on the matter) is set forth in the corporation's Articles of
Incorporation. The Company's Articles of Incorporation do not provide for a
lesser percentage in such situations.
RESTRICTIONS ON OWNERSHIP
For the Company to qualify as a REIT under the Code, not more than 50% in
value of its outstanding capital stock may be owned, directly or indirectly,
by five or fewer individuals (as defined in the Code to include certain
entities) during the last half of a taxable year. To assist the Company in
meeting this requirement, the Company may take certain actions to limit the
beneficial ownership, directly or indirectly, by a single person of the
Company's outstanding equity securities. See "Restrictions on Transfers of
Capital Stock."
SHAREHOLDER RIGHTS AGREEMENT
The Company has a shareholders' rights plan (the "Shareholder Rights
Agreement") which grants the holders of the Common Stock rights which
generally become exercisable if (i) a person becomes an "acquiring
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person" by acquiring 10% or more of the Common Stock, or (ii) a person
commences a tender offer that would result in that person owning 10% or more
of the Common Stock. In the event a person becomes an "acquiring person," each
holder of a right (other than the acquiring person) would be entitled to
acquire such number of preferred shares of the Company which are equivalent to
the Common Stock having a value of twice the then-current exercise price of
the right. If the Company is acquired in a merger or other business
combination transaction after any such event, each holder of a right would
then be entitled to purchase, at the then-current exercise price, shares of
the acquiring company's common stock having a value of twice the exercise
price of the right. The Shareholder Rights Agreement may have the effect of
delaying or preventing a change in control of the Company.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is American Stock
Transfer and Trust Company.
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RESTRICTIONS ON TRANSFERS OF CAPITAL STOCK
For the Company to qualify as a REIT under the Code, among other things, not
more than 50% in value of its outstanding capital stock may be owned, directly
or indirectly, by five or fewer individuals (defined in the Code to include
certain entities) during the last half of a taxable year (other than the first
year) (the "Five or Fewer Test"), and such shares of capital stock must be
beneficially owned by 100 or more persons during at least 335 days of a
taxable year of 12 months (other than the first year) or during a
proportionate part of a shorter taxable year. The Articles of Incorporation,
subject to certain exceptions, provide that no holder may own, or be deemed to
own by virtue of the attribution provisions of the Code, shares of the
Company's capital stock in excess of the Ownership Limit. Pursuant to the
Code, generally, certain types of entities, such as pension trusts qualifying
under Section 401(a) of the Code, United States investment companies
registered under the Investment Company Act of 1940, corporations, trusts and
partnerships will be looked-through for purposes of the Five or Fewer Test
(i.e., the beneficial owners of such entities will be counted as holders). The
Company's Articles of Incorporation limit such entities under the Look-Through
Ownership Limit to holdings of no more than 15% of the aggregate value of the
Company's shares of capital stock. Any transfer of shares of capital stock or
any security convertible into shares of capital stock that would create a
direct or indirect ownership of shares of capital stock in excess of the
Ownership Limit or the Look-Through Ownership Limit or that would result in
the disqualification of the Company as a REIT, including any transfer that
results in the shares of capital stock being owned by fewer than 100 persons
or results in the Company being "closely held" within the meaning of Section
856(h) of the Code shall be null and void, and the intended transferee will
acquire no rights to the shares of capital stock. The foregoing restrictions
on transferability and ownership will not apply if the Board of Directors
determines that it is no longer in the best interests of the Company to
attempt to qualify, or to continue to qualify, as a REIT. The Board of
Directors may, in its sole discretion, waive the Ownership Limit or the Look-
Through Ownership Limit if evidence satisfactory to the Board of Directors and
the Company's tax counsel is presented that the changes in ownership will not
then or in the future jeopardize the Company's REIT status.
Capital stock owned, or deemed to be owned, or transferred to a shareholder
in excess of the Ownership Limit or the Look-Through Ownership Limit or that
causes the Company to be treated as "closely-held" under Section 856(h) of the
Code or is otherwise not permitted as provided above, will be designated
shares in trust ("Shares in Trust") that will be transferred, by operation of
law, to a person unaffiliated with the Company designated by the Board of
Directors as trustee (the "Trustee") of a trust (the "Share Trust") for the
benefit of one or more charitable organizations. Shares in Trust will remain
issued and outstanding Common or Preferred Shares of the Company and will be
entitled to the same rights and privileges as all other shares of the same
class or series. The Trustee will receive all dividends and distributions on
the Shares in Trust for the Share Trust and will hold such dividends or
distributions in trust for the benefit of one or more designated charitable
beneficiaries. The Trustee will vote all Shares in Trust. Any vote cast by the
proposed transferee in respect of the Shares in Trust prior to the discovery
by the Company that such shares have been transferred to the Share Trust shall
be rescinded and shall be void ab initio. Any dividend or distribution paid to
a proposed transferee or owner of Shares in Trust prior to the discovery by
the Company that such shares have been transferred to the Share Trust will be
required to be repaid upon demand to the Trustee for the benefit of one or
more charitable beneficiaries. The Trustee may, at any time the Shares in
Trust are held in the Share Trust, transfer the interest in the Share Trust
representing the Shares in Trust to any person whose ownership of the shares
of capital stock designated as Shares in Trust would not violate the Ownership
Limit or the Look-Through Ownership Limit, or otherwise result in the
disqualification of the REIT, as described above, and provided such permitted
transferee purchases such shares for valuable considerations. Upon such sale,
the proposed original transferee will receive the lesser of (i) the price paid
by the original transferee shareholder for the shares of capital stock that
were transferred to the Share Trust, or if the original transferee shareholder
did not give value for such shares (e.g., the capital stock was received
through a gift, devise or other transaction), the average closing price for
the class of shares from which such shares of Shares in Trust were designated
for the ten days immediately preceding such sale or gift and (ii) the price
received by the Trustee from such sale. Any amounts received by the Trustee in
excess of the amounts paid to the proposed transferee will be distributed to
one or more charitable beneficiaries of the Share Trust. If the foregoing
transfer restrictions are determined to be void or invalid by virtue of any
legal decision,
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statute, rule or regulation, then the intended transferee of shares held in
the Share Trust may be deemed, at the option of the Company, to have acted as
an agent on behalf of the Company in acquiring the Shares in Trust and to hold
the Shares in Trust on behalf of the Company.
In addition, the Company has the right, for a period of 90 days during the
time any shares of Shares in Trust are held by the Trustee, to purchase all or
any portion of the Shares in Trust from the Trust at the lesser of (i) the
price initially paid for such shares by the original transferee-shareholder,
or if the original transferee-shareholder did not give value for such shares
(e.g., the shares were received through a gift, device or other transaction),
the average closing price for the class of stock from which such Shares in
Trust were designated for the ten days immediately preceding such sale or
gift, and (ii) the average closing price for the class of shares form which
such Shares in Trust were designated for the ten trading days immediately
preceding the date the Company elects to purchase such shares. The 90-day
period begins on date of the violative transfer if the original transferee-
shareholder gives notice to the Company of the transfer or, if no such notice
is given, the date the Board of Directors determines that a violative transfer
has been made.
All certificates representing shares of stock of the Company bear a legend
referring to the restrictions described above.
Each shareholder shall upon demand be required to disclose to the Company in
writing any information with respect to the direct, indirect and constructive
ownership of capital stock as the Board of Directors deems necessary to comply
with the provisions of the Code applicable to REITs, to comply with the
requirements of any taxing authority or governmental agency or to determine
any such compliance.
The Ownership Limit and the Look-Through Ownership Limit may have the effect
of precluding acquisition of control of the Company.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain material U.S. Federal income tax
considerations regarding the offering of Securities. The following discussion
is not exhaustive of all possible tax considerations and is not tax advice.
The Code provisions governing the Federal income tax treatment of REITs are
highly technical and complex, and this summary is qualified in its entirety by
the applicable Code provisions, rules and regulations promulgated thereunder,
and the administrative and judicial interpretations thereof. The following
discussion is based on current law. The tax treatment of a holder of any of
the Securities will vary depending upon the terms of the specific Securities
acquired by such holder as well as his particular situation, and this
discussion does not attempt to address any aspects of Federal income taxation
relating to the holders of Securities. Certain Federal income tax
considerations relevant to holders of Securities will be provided in the
applicable Prospectus Supplement relating thereto.
EACH PROSPECTIVE PURCHASER IS URGED TO CONSULT WITH HIS OR HER OWN TAX
ADVISOR WITH RESPECT TO SUCH PURCHASER'S SPECIFIC FEDERAL, STATE, LOCAL,
FOREIGN AND OTHER TAX CONSEQUENCES OF THE PURCHASE, HOLDING AND SALE OF
SECURITIES.
TAXATION OF THE COMPANY
The Company intends to operate so as to meet the requirements under the Code
for qualification as a REIT, commencing with its taxable year ending December
31, 1995. No assurance can be given, however, that such requirements will be
met. Based on various assumptions and factual representations made by the
Company, in the opinion of Phillips, Lytle, Hitchcock, Blaine & Huber LLP,
counsel to the Company, the Company has been organized in conformity with the
requirements for qualification as a REIT beginning with its taxable year
ending December 31, 1995, and its proposed method of operation as described in
this Prospectus and as represented by the Company will enable it to satisfy
the requirements for such qualification. Such qualification depends upon the
Company's ability to meet the various requirements imposed under the Code
through actual operating results, as discussed below. Phillips, Lytle,
Hitchcock, Blaine & Huber LLP will not review these operating results, and no
assurance can be given that actual operating results will meet these
requirements. The opinion of Phillips, Lytle, Hitchcock, Blaine & Huber LLP is
not binding on the Internal Revenue Service (the "Service"). In addition, the
opinion of Phillips, Lytle, Hitchcock, Blaine & Huber LLP is also based upon
existing law, Treasury regulations, currently published administrative
positions of the Service and judicial decisions, which are subject to change
either prospectively or retroactively.
In any year in which the Company qualifies as a REIT, it generally will not
be subject to Federal corporate income taxes on that portion of its ordinary
income or capital gain that is currently distributed to shareholders. The REIT
provisions of the Code generally allow a REIT to deduct distributions paid to
its shareholders. This deduction for distributions paid to shareholders
substantially eliminates the Federal "double taxation" on earnings (once at
the corporate level and once again at the shareholder level) that usually
results from investments in a corporation.
Even if the Company qualifies as a REIT, however, the Company will be
subject to Federal income tax, as set forth below. First, the Company will be
taxed at regular corporate rates on its undistributed REIT taxable income,
including undistributed net capital gains. Second, under certain
circumstances, the Company may be subject to the "alternative minimum tax" as
a consequence of its items of tax preference. Third, if the Company has 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
other non-qualifying 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 disposition 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 either the 75% or 95% gross income test (discussed below) but 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 amount by which the
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Company fails the 75% or 95% test, multiplied by a fraction intended to
reflect the Company's profitability. Sixth, if the Company fails to distribute
during each 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 will be
subject to a 4% excise tax on the excess of such required distribution over
the amounts actually distributed. Seventh, if the Company should dispose of
any of the asset owned at the time of the Initial Offering that had a fair
market value at such time in excess of its adjusted tax basis ("Built-In-
Gain") or any asset acquired by the Company from a C corporation (i.e., a
corporation generally subject to the full corporate level tax) in a carryover
basis transaction during the ten-year period (the "Recognition Period")
beginning on the date of the Initial Offering with respect to assets owned by
the Company at the time of the Initial Offering, or the date on which the
asset was acquired by the Company from a C corporation, then, to the extent of
the Built-In Gain, such gain will be subject to a tax at the highest regular
corporate rate, pursuant to guidelines issued by the Service (the "Built-In
Gain Rules").
REQUIREMENTS FOR QUALIFICATION
To qualify as a REIT, the Company must elect to be so treated and must meet
the requirements, discussed below, relating to the Company's organization,
sources of income, nature of assets and distributions of income to
shareholders ("REIT Requirements").
ORGANIZATIONAL REQUIREMENTS
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 the REIT Requirements, (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, and (vi) at all
times during the last half of each taxable year not more than 50% in value of
the outstanding shares of which is owned, directly or indirectly, through the
application of certain attribution rules, by five or fewer individuals (as
defined in the Code to include certain entities). In addition, certain other
tests, described below, regarding the nature of its income and assets also
must be satisfied. The Code provides that conditions (i) through (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 twelve months, or
during a proportionate part of a taxable year of less than 12 months.
Conditions (v) and (vi) (the "100 shareholder" and "five or fewer"
requirements) will not apply until after the first taxable year for which an
election is made to be taxed as a REIT. For purposes of conditions (v) and
(vi), pension funds and certain other tax-exempt entities are treated as
individuals, subject to a "look-through" exception in the case of condition
(vi).
Prior to consummation of the Initial Offering, the Company did not satisfy
conditions (v) and (vi) above. The Initial Offering and related transactions
allowed the Company to satisfy the 100 shareholder and five or fewer
requirements. In addition, the Company's Articles of Incorporation currently
include certain restrictions regarding transfer of its stock, which
restrictions are intended (among other things) to assist the Company in
continuing to satisfy conditions (v) and (vi) above.
In addition, a corporation may not elect to become a REIT unless its taxable
year is the calendar year. Effective January 1, 1995, the Company changed its
taxable year to the calendar year.
In order to provide the Company with flexibility, the Company owns the
Properties through the Operating Partnership. The Company holds a 91.71%
limited partnership interest in the Partnership. The Subsidiary, a wholly-
owned subsidiary of the Company, holds a 1.66% general partner interest in the
Operating Partnership. The Operating Partnership and the Subsidiary are
qualified REIT subsidiaries. A qualified REIT subsidiary is any corporation
that is 100% owned by a REIT at all times during the period the subsidiary is
in existence. Under Section 856(i) of the Code, a qualified REIT subsidiary is
not treated as a separate corporation from the REIT, and all assets,
liabilities, income, deductions, and credits of the qualified REIT subsidiary
are treated as assets,
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liabilities and such items (as the case may be) of the REIT. The Operating
Partnership is currently disregarded for Federal income tax purposes since the
existence of the Subsidiary is ignored for Federal income tax purposes and, as
a result, the Operating Partnership has only one partner for Federal income
tax purposes.
The Operating Partnership is treated as a partnership for Federal income tax
purposes and the Company is treated as a partner in the Operating Partnership.
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 income of the
partnership attributable to such share. In addition, the character of the
assets and gross income of the partnership retain the same character in the
hands of the REIT for purposes of Section 856 of the Code, including
satisfying the gross income tests and asset tests. Thus, the Company's
proportionate share of the assets, liabilities and items of income of the
Operating Partnership are treated as assets, liabilities and items of income
of the Company for purposes of applying the requirements described herein.
INCOME TESTS
To maintain qualification as a REIT, three gross income requirements must be
satisfied annually.
. First, at least 75% of the Company's gross income, excluding gross
income from certain dispositions of property held primarily for sale to
customers in the ordinary course of a trade or business ("prohibited
transactions"), for each taxable year must be derived directly or
indirectly from investments relating to real property or mortgages on
real property (including "rents form real property" and in certain
circumstances, interest) or from certain types of temporary investments.
. 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 investments and from dividends, interest
and gain from the sale or disposition of stock or securities or from any
combination of the foregoing.
. Third, less than 30% of the Company's gross income (including gross
income from prohibited transactions) for each taxable year is derived
from gain from the sale or other disposition of stock or securities held
for less than one year, gain from prohibited transactions and gain from
the sale or other disposition of real property held for less than four
years (apart from involuntary conversion and sales of foreclosure
property). For purposes of applying the 30% gross income test, the
holding period of the Properties acquired by the Company at the time of
the Initial Offering will be deemed to have commenced on the date of
acquisition.
Rents received or deemed to be 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 generally must not be based in whole or in
part on the income or profits of any person.
. Second, the Code provides that rents from a tenant will not qualify as
"rents from real property" in satisfying the gross income tests if the
REIT, or an owner of 10% or more of the REIT, 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 the
personal property will not qualify as "rents from real property."
. Finally, for rents to qualify as "rents from real property" the REIT
must not operate or manage the property or furnish or render services to
tenants, other than through an "independent contractor" who is
adequately compensated and from whom the REIT does not derive any
income; provided, however, that a REIT may provide services with respect
to its properties and the income will qualify as "rents from real
property" if the services are "usually or customarily rendered" in
connection with the rental of a room or other space for occupancy only
and are not otherwise considered "rendered to the occupant."
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The Company does not anticipate charging rent that is based in whole or in
part on the income or profits of any person. The Company will not derive rent
attributable to personal property leased in connection with real property that
exceeds 15% of the total rents. The Company does not anticipate receiving rent
from Related Party Tenants.
The Company provides certain services with respect to the Properties. The
Company believes that the services provided by it directly are usually or
customarily rendered in connection with the rental of space for occupancy only
and are not otherwise rendered to particular tenants and therefore that the
provision of such services will not cause rents received with respect to the
Properties to fail to qualify as rents from real property. Services with
respect to the Properties that may not be provided by the Company directly
will be performed by independent contractors.
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 that
year if it is eligible for relief under certain provisions of the Code. These
relief provisions will generally be available if (i) the Company's failure to
meet these tests was due to reasonable cause and not due to willful neglect,
(ii) the Company attaches a schedule of the sources of its income to its
Federal income tax return and (iii) any incorrect information on the schedule
is 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 these relief provisions. For example, if the Company fails to
satisfy the gross income tests because non-qualifying income that the Company
intentionally incurs exceeds the limits on such income, the Service could
conclude that the Company's failure to satisfy the tests was not due to
reasonable cause. As discussed above, even if these relief provisions apply, a
100% tax would be imposed on the greater of the amount by which the Company
fails either the 75% or 95% gross income test, multiplied by a fraction
intended to reflect the Company's profitability. No similar mitigation
provision provides relief if the Company fails the 30% income test, and in
such case, the Company will cease to qualify as a REIT.
ASSET TESTS
At the close of each quarter of its taxable year, the Company also must
satisfy three tests relating to the nature and diversification of its assets.
. First, at least 75% of the value of the Company's total assets must be
represented by real estate assets, cash, cash items and government
securities.
. Second, no more than 25% of the value of the Company's total assets may
be represented by securities other than those in the 75% asset class.
. Third, of the investments included in the 25% asset class, the value of
any one issuer's securities owned by the Company may not exceed 5% of
the value of the Company's total assets, and the Company may not own
more than 10% of any one issuer's outstanding voting securities.
After initially meeting the asset tests at the close of any quarter, the
Company will not lose its status as a REIT for failure to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset
values. If the failure to satisfy the asset tests results from an acquisition
of securities or other property during a quarter, the failure can be cured by
disposition of sufficient non-qualifying assets within 30 days after the close
of that quarter. The Company intends to maintain adequate records of the value
of its assets to ensure compliance with the asset tests and to take such other
actions within 30 days after the close of any quarter as may be required to
cure any noncompliance.
ANNUAL DISTRIBUTION REQUIREMENTS
To qualify as a REIT, the Company is required to make distributions (other
than capital gain distributions) to its shareholders in an amount at least
equal to (a) the sum of (i) 95% of the Company's "REIT taxable income"
(computed without regard to the dividends-paid deduction and the Company's
capital gain) and (ii) 95% of the net income, if any, from foreclosure
property in excess of the special tax on income from
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foreclosure property, minus (b) the sum of certain items of non-cash 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
Federal income tax return for such year and if paid on or before the first
regular distribution after such declaration. To the extent that the Company
does not distribute all of its net capital gain or distributes less than 100%
(but at least 95%) of its "REIT taxable income" as adjusted, it will be
subject to tax thereon at regular ordinary or capital gains corporate tax
rates, as the case may be. Further, if the Company should fail to distribute
during each calendar year at least the sum of (a) 85% of its REIT ordinary
income for that year, (b) 95% of its REIT capital gain net income for that
year and (c) 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. In addition, during its
Recognition Period, if the Company disposes of any asset subject to the Built-
In Gain Rules, the Company will be required, pursuant to guidance issued by
the Service, to distribute at least 95% of the Built-In Gain (after tax), if
any, recognized on the disposition of the asset.
The Company intends to make timely distributions sufficient to satisfy the
annual distribution requirements.
It is expected that the Company's REIT taxable income will be less than its
cash flow due to the allowance of depreciation and other non-cash charges in
computing REIT taxable income. Accordingly, the Company anticipates that it
will generally have sufficient cash or liquid assets to enable it to satisfy
the 95% distribution requirement. It is possible, however, that the Company,
from time to time, may not have sufficient cash or other liquid assets to meet
the 95% distribution requirement or to distribute such greater amount as may
be necessary to avoid income and excise taxation, due to timing differences
between (i) the actual receipt of income and actual payment of deductible
expenses and (ii) the inclusion of such income and deduction of such expenses
in arriving at taxable income of the Company, or if the amount of
nondeductible expenses such as principal amortization or capital expenditures
exceed the amount of non-cash deductions. In the event that such timing
differences occur, the Company may find it necessary to arrange for
borrowings, if possible, in order to meet the distribution requirement.
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 shareholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Thus, the Company may be
able to avoid being taxed on amounts distributed as deficiency dividends. The
Company will, however, be required to pay interest based upon the amount of
any deduction taken for deficiency dividends.
EARNINGS AND PROFITS
In order to qualify as a REIT, the Company must either satisfy the REIT
requirements described in this Prospectus for all taxable years after 1986 or
have, at the close of any taxable year, no earnings and profits attributable
to a non-REIT year. Pursuant to Treasury Regulations, in order to qualify
under either of these two provisions, the Company must not have acquired the
assets of a corporation in a nonrecognition transaction after 1986 with
accumulated earnings and profits attributable to a non-REIT period unless, by
the close of its first taxable year, such earnings are distributed to the
shareholders. Accordingly, any earnings and profits that are carried over to
the Company through the transactions resulting in the formation of the Company
(the "Formation Transactions") were required, pursuant to Section 381 of the
Code, to have been distributed to the shareholders prior to the close of the
Company's first taxable year. The Company has represented that it had no non-
REIT earnings and profits for Federal income tax purposes as of the end of its
first taxable year ended December 31, 1995. In rendering its opinion regarding
the eligibility of the Company to qualify as a REIT, Phillips, Lytle,
Hitchcock, Blaine & Huber LLP is relying on such representation. The Company
believes that even if there were a subsequent determination that it received
non-REIT earnings and profits in the Formation Transactions, distributions to
shareholders in 1995 in excess of current earnings and profits likely were
sufficient to distribute any such non-REIT earnings and profits. Moreover,
although not free from doubt, pursuant to Treasury Regulations, the Company
may be able to use certain "deficiency dividend" procedures to distribute any
non-REIT earnings and profits determined to exist that were not distributed by
the close of the 1995 taxable year. There can be no assurance, however, that
1995 distributions were sufficient to distribute any non-REIT earnings
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and profits determined to exist or that such deficiency dividend procedures
would be available. In the event that 1995 distributions were insufficient to
distribute any such non-REIT earnings and profits, and the Company were unable
to utilize the deficiency dividend procedures in the Treasury Regulations, the
Company would fail to qualify as a REIT.
FAILURE TO QUALIFY
If the Company fails to qualify 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 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 dividends, taxable as
ordinary income, and subject to certain limitations of the Code, corporate
distributees may be eligible for the dividends-received deduction. Unless the
Company is entitled to relief under specific statutory provisions, the Company
also will be ineligible for qualification as a REIT for the four taxable years
following the year during which qualification was lost. It is not possible to
state whether in all circumstances the Company would be entitled to such
statutory relief. For example, if the Company fails to satisfy the gross
income tests because non-qualifying income that the Company intentionally
incurs exceeds the limit on such income, the Service could conclude that the
Company's failure to satisfy the tests was not due to reasonable cause.
BUILT-IN GAIN
To the extent the Company held any asset that has Built-In Gain as of the
first day of the first taxable year for which the Company qualifies as a REIT,
the Company may recognize a corporate level tax at the time it disposes of
such asset. Pursuant to Section 337(d)(1) of the Code, Congress has authorized
the Service to issue regulations to ensure that the repeal of the General
Utilities doctrine is not circumvented through the use of investment vehicles
like a REIT. In Notice 88-19, 1988-1 C.B. 486, the Service announced that it
intends to promulgate regulations requiring a C corporation to recognize any
net Built-In Gain that would have been realized if the corporation had
liquidated at the end of the last taxable year before the taxable year in
which it qualifies to be taxed as a REIT. However, in lieu of this immediate
recognition rule, the regulations will permit a REIT to elect to be subject to
rule similar to rules applicable to S corporations with built-in gains under
Section 1374 of the Code. Section 1374 of the Code generally provides that a
corporation with appreciated assets that elects S corporation status will
recognize a corporate level tax on the built-in gain if the S corporation
disposes of the appreciated assets within a ten-year period commencing on the
date on which the S corporation election was made. The Company has represented
that it will elect to have rules similar to the rules of Section 1374 of the
Code apply to it. Accordingly, if the Company disposes of appreciated assets
in a taxable transaction within a ten-year period commencing on the date the
Company first qualifies as a REIT, the Company will be taxed at the corporate
level on the Built-in Gain attributable to the disposed assets. For these
purposes, the assets owned by the Company prior to the Formation Transactions
will be appreciated assets. If these assets are disposed of within the ten-
year recognition period, the Company will recognize a corporate level tax on
the Built-In Gain attributable to the disposed assets. Accordingly, the
disposition of assets acquired in the Formation Transactions will adversely
affect a shareholder's investment in the Company. However, the Company may
dispose of Property that is subject to the tax on Built-in Gain in a tax-free
exchange of like-kind property pursuant to Section 1031 of the Code which will
not trigger Built-In Gain. Moreover, the Company does not anticipate disposing
of a substantial portion of its Built-In Gain assets, other than in a tax-free
exchange, within the ten-year recognition period. The Company estimates that
the amount of Built-In Gain with respect to the Properties is approximately
$5,000,000 and the amount of the corporate level tax if such Built-In Gain was
recognized would be approximately $1,750,000 at current tax rates. The amount
of such Built-In Gain is based upon the Company's determination of fair value
as of the first day of the first taxable year for which the Company qualified
as a REIT which valuation could be challenged by the Service.
41
<PAGE>
PLAN OF DISTRIBUTION
The Company may sell Preferred Stock and Common Stock and the Operating
Partnership may sell Debt Securities to or through one or more underwriters or
dealers for public offering and sale by or through them, directly to one or
more individual, institutional or other purchasers, through agents or through
a combination of any such methods of sale. Direct sales to investors may also
be accomplished through subscription rights distributed to the Company's
shareholders on a pro rata basis, which may or may not be transferred. In
connection with any distribution of subscription rights to shareholders, if
all of the underlying Securities are not subscribed for, the Company may sell
the unsubscribed Securities directly to third parties or may engage the
services of one or more underwriters, dealers or agents, including standby
underwriters, to sell the unsubscribed Securities to third parties.
The distribution of the Securities may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, at
market prices prevailing at the time of sale, at prices related to such
prevailing market price, or at negotiated prices (any of which may represent a
discount from the prevailing market prices).
In connection with the sale of Securities, underwriters or agents may
receive compensation from the Company or the Operating Partnership or from
purchasers of Securities, for whom they may act as agents, in the form of
discounts, concessions or commissions. Underwriters may sell Securities to and
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 Securities may be deemed to
be underwriters under the Securities Act, and any discounts or commissions
they receive from the Company or the Operating Partnership and any profit on
the resale of Securities they realize 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 Operating Partnership will be described, in the applicable Prospectus
Supplement.
Unless otherwise specified in the related Prospectus Supplement, each series
of Securities will be a new issue with no established trading market, other
than the Common Shares which are listed on the NYSE. Any Common Shares sold
pursuant to a Prospectus Supplement will be listed on the NYSE, subject to
official notice of issuance. The Operating Partnership or the Company may
elect to list any series of Debt Securities or Preferred Stock, respectively,
on an exchange, but are not obligated to do so. It is possible that one or
more underwriters may make a market in a series of Securities, but will not be
obligated to do so and may discontinue any market making at any time without
notice. Therefore, no assurance can be given as to the liquidity of, or the
trading market for, any series of Debt Securities, or Preferred Stock.
Until the distribution of the Securities is completed, rules of the
Commission may limit the ability of any underwriters and selling group members
to bid for and purchase the Securities. As an exception to these rules,
underwriters are permitted to engage in certain transactions that stabilize
the price of the Securities. Such transactions consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the Securities.
If the underwriters create a short position in the Securities in connection
with an offering, i.e., if they sell more Securities than are set forth on the
cover page of the applicable Prospectus Supplement, the underwriters may
reduce that short position by purchasing Securities in the open market.
The lead underwriters may also impose a penalty bid on certain other
underwriters and selling group members participating in an offering. This
means that if the lead underwriters purchase Securities in the open market to
reduce the underwriters' short position or to stabilize the price of the
Securities, they may reclaim the amount of any selling concession from the
underwriters and selling group members who sold those Securities as part of
the offering.
42
<PAGE>
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security before the distribution is
completed.
Neither the Company nor the Operating Partnership makes any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above might have on the price of the Securities. In
addition, neither the Company nor the Operating Partnership makes any
representation that underwriters will engage in such transaction or that such
transactions, once commenced, will not be discontinued without notice.
Under agreements into which the Company or the Operating Partnership may
enter, underwriters, dealers and agents who participate in the distribution of
Securities may be entitled to indemnification by the Company or the Operating
Partnership against certain liabilities, including liabilities under the
Securities Act.
Underwriters, dealers and agents may engage in transactions with, or perform
services for, or be tenants of, the Company or the Operating Partnership in
the ordinary course of business.
If so indicated in the applicable Prospectus Supplement, the Company will
authorize underwriters or other persons acting as the Company's agents to
solicit offers by certain institutions to purchase Securities from the Company
at the public offering price set forth in such Prospectus Supplement pursuant
to delayed delivery contracts ("Company Contracts") providing the payment and
delivery on the date or dates stated in such Prospectus Supplement.
Institutions with which such contracts, when authorized, may be made include
commercial and savings banks, insurance companies, pension funds, investment
companies, educational and charitable institutions and others, but in all
cases such institutions must be approved by the Company. The obligations of
any purchaser under any such contracts will be subject to the condition that
the purchase of the Securities shall not at the time of delivery be prohibited
under the laws of the jurisdiction to which such purchaser is subject. The
underwriters and such other agents will not have any responsibility in respect
of the validity or performance of such contracts.
If so indicated in the applicable Prospectus Supplement, the Operating
Partnership will authorize underwriters or other persons acting as the
Operating Partnership's agents to solicit offers by certain institutions to
purchase Debt Securities from the Operating Partnership at the public offering
price set forth in such Prospectus Supplement pursuant to delayed delivery
contracts ("Operating Partnership Contracts") providing for payment and
delivery on the date or dates stated in such Prospectus Supplement. Each
Operating Partnership Contract will be for an amount no less than, and the
aggregate principal amounts of Debt Securities sold pursuant to Operating
Partnership Contracts shall be not less nor more than, the respective amounts
stated in the applicable Prospectus Supplement. Institutions with which such
contracts, when authorized, may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational and
charitable institutions and others, but will in all cases be subject to the
approval of the Operating Partnership. The obligations of any purchaser under
any such contract will be subject to the conditions that (i) the purchase of
the Debt Securities shall not at the time of delivery be prohibited under the
laws of any jurisdiction in the United States to which such purchaser is
subject, and (ii) if the Debt Securities are being sold to underwriters, the
Operating Partnership shall have sold to such underwriters the total principal
amount of the Debt Securities less the principal amount thereof covered by the
Operating Partnership Contracts. The underwriters and such other agents will
not have any responsibility in respect of the validity or performance of such
contracts.
In order to comply with the securities laws of certain states, if
applicable, the Securities offered hereby will be sold in such jurisdictions
only through registered or licensed brokers or dealers. In addition, in
certain states Securities may not be sold unless they have been registered or
qualified for sale in the applicable state or an exemption from the
registration or qualification requirement is available and is complied with.
43
<PAGE>
LEGAL MATTERS
Phillips, Lytle, Hitchcock, Blaine & Huber LLP Buffalo, New York, will pass
upon certain legal matters for the Company. Phillips, Lytle, Hitchcock, Blaine
& Huber has in the past represented and is presently representing the Company
in certain other matters. Robert J. Attea, Chairman of the Board and Chief
Executive Officer of the Company, is the brother of a partner of Phillips,
Lytle, Hitchcock, Blaine & Huber LLP. Several partners of Phillips, Lytle,
Hitchcock, Blaine & Huber LLP own shares of Common Stock.
EXPERTS
The financial statements and schedules thereto incorporated by reference in
this Prospectus or elsewhere in the Registration Statement, to the extent and
for the periods indicated in their reports, have been audited by Ernst & Young
LLP, auditors, and are incorporated herein in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.
No person has been authorized in connection with the offering made hereby to
give any information or to make any representation not contained in this
Prospectus and, if given or made, such information or representation must not
be relied upon as having been authorized by the Company, the Operating
Partnership or any other person. This Prospectus does not constitute an offer
to sell or a solicitation of an offer to buy any of the Securities offered
hereby to any person or by anyone in any jurisdiction in which it is unlawful
to make such offer or solicitation. Neither the delivery of this Prospectus
nor any sale made hereunder shall, under any circumstances, create any
implication that the information contained herein is correct as of any date
subsequent to the date hereof.
44
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS AND, IF GIVEN OR
MADE, SUCH OTHER INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES.
THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PROSPECTUS SUPPLEMENT
<S> <C>
Prospectus Supplement Summary............................................ S-3
Industry Overview........................................................ S-7
The Company.............................................................. S-8
Properties............................................................... S-11
Selected Financial Data.................................................. S-12
Selected Pro Forma Financial Data........................................ S-14
Ratios of Earnings to Fixed Changes...................................... S-15
Use of Proceeds.......................................................... S-15
Capitalization........................................................... S-16
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... S-17
Description of Senior Notes.............................................. S-20
Certain Federal Income Tax Consequences.................................. S-29
Underwriting............................................................. S-32
Legal Matters............................................................ S-33
PROSPECTUS
Available Information.................................................... 2
Incorporation of Certain Documents by Reference.......................... 2
Risk Factors............................................................. 4
The Company and the Operating Partnership................................ 9
Use of Proceeds.......................................................... 10
Ratios of Earnings to Fixed Charges...................................... 10
Description of Debt Securities........................................... 11
Description of Preferred Stock........................................... 26
Description of Common Stock.............................................. 32
Restrictions on Transfers of Capital Stock............................... 34
Certain Federal Income Tax Considerations................................ 36
Plan of Distribution..................................................... 42
Legal Matters............................................................ 44
Experts.................................................................. 44
</TABLE>
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$75,000,000
SOVRAN ACQUISITION LIMITED
PARTNERSHIP
% SENIOR NOTES DUE 2005
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PROSPECTUS SUPPLEMENT
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PAINEWEBBER INCORPORATED
A.G. EDWARDS & SONS, INC.
SALOMON SMITH BARNEY
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, 1998
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