-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, ARbcrVebqpfSm+zalHoxLPS4ZgM95v0kcgB1A1upAP27G18sY42LD6Qf0iILBxQj k5bX7jRWMm+dVoo7QGjlIg== 0000898430-95-000733.txt : 19950511 0000898430-95-000733.hdr.sgml : 19950511 ACCESSION NUMBER: 0000898430-95-000733 CONFORMED SUBMISSION TYPE: 424B5 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19950509 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: STORAGE EQUITIES INC CENTRAL INDEX KEY: 0000318380 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 953551121 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B5 SEC ACT: 1933 Act SEC FILE NUMBER: 033-54755 FILM NUMBER: 95535704 BUSINESS ADDRESS: STREET 1: 600 N BRAND BLVD STREET 2: SUITE 300 CITY: GLENDALE STATE: CA ZIP: 91203 BUSINESS PHONE: 8182448080 424B5 1 PRELIMINARY PROSPECTUS SUPPLEMENT & PROSPECTUS (U.S.) FILED PURSUANT TO RULE 424(b)(5) REGISTRATION NO.33-54755 ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. THIS + +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, MAY 9, 1995 Prospectus Supplement (To Prospectus dated August 12, 1994) 3,500,000 SHARES [LOGO OF PUBLIC STORAGE] STORAGE EQUITIES, INC. COMMON STOCK ----------- Of the 3,500,000 shares of Common Stock being offered, 2,800,000 shares are being offered hereby in the United States (the "U.S. Shares") and 700,000 shares are being offered in a concurrent international offering outside the United States and Canada. The price to the public and aggregate underwriting discounts and commissions per share will be identical for both offerings. See "Underwriting." The Common Stock of Storage Equities, Inc. (the "Company") is traded on the New York Stock Exchange (the "NYSE") under the symbol "SEQ". On May 5, 1995, the closing price of the Common Stock on the NYSE was $16 1/4. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER "CERTAIN CONSIDERATIONS" IN THE ACCOMPANYING PROSPECTUS. ----------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ----------- THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. - ------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------
Underwriting Price to Discounts and Proceeds to Public Commissions Company(1) - ------------------------------------------------------------------------------------------ Per Share....................... $ $ $ - ------------------------------------------------------------------------------------------ Total........................... $ $ $ - ------------------------------------------------------------------------------------------ Total Assuming Full Exercise of Over-Allotment Option(2)....... $ $ $ - ------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------
(1) Before deducting expenses estimated at $ , which are payable by the Company. (2) Assuming exercise in full of the 45-day option granted by the Company to the U.S. Underwriters to purchase up to 525,000 additional shares of Common Stock, on the same terms, solely to cover over-allotments. See "Underwriting." ----------- The U.S. Shares of Common Stock are offered by the U.S. Underwriters, subject to prior sale, when, as and if delivered to and accepted by the U.S. Underwriters, and subject to its right to reject orders in whole or in part. It is expected that delivery of the shares of Common Stock will be made in New York City on or about , 1995. ----------- PAINEWEBBER INCORPORATED SMITH BARNEY INC. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION RAYMOND JAMES & ASSOCIATES, INC. THE ROBINSON-HUMPHREY COMPANY, INC. ----------- THE DATE OF THIS PROSPECTUS SUPPLEMENT IS , 1995. Storage Equities' Facilities [MAP OF UNITED STATES APPEARS HERE WHICH INDICATES BY REGION THE PERCENTAGE OF MINI-WAREHOUSES IN WHICH THE COMPANY HAS AN INTEREST.] North Western.................... 17% North Eastern.................... 13% Mid Western...................... 12% South Western.................... 22% South Central.................... 19% South Eastern.................... 17% ---- 100% At March 31, 1995, Storage Equities had ownership interests in 438 facilities located in or near major metropolitan areas in 37 states. [PHOTOGRAPH APPEARS HERE OF The familiar orange Public AERIAL VIEW OF MINI-WAREHOUSE Storage logo is prominently FACILITY ALONG MAJOR displayed at the Company's THOROUGHFARES.] mini-warehouse facilities. The Company seeks facilities that [PHOTOGRAPH APPEARS HERE OF are located along major thoroughfares. MINI-WAREHOUSE FACILITY, ENTRANCE AND SIGN WITH PUBLIC STORAGE LOGO.] IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. PROSPECTUS SUPPLEMENT SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere or incorporated by reference in this Prospectus Supplement and the accompanying Prospectus. Unless otherwise indicated, all information in this Prospectus Supplement assumes that the Underwriters' over-allotment option will not be exercised. Investors should carefully consider the information set forth under the heading "Certain Considerations" in the accompanying Prospectus. As used herein, the term "Public Storage" includes Public Storage, Inc. and its subsidiaries, including the Company's adviser and property operators, unless the context indicates otherwise. THE COMPANY Storage Equities, Inc. (the "Company"), an equity real estate investment trust ("REIT"), owns more mini-warehouse space in the United States than any competitor and is the largest owner of mini-warehouses operated under the "Public Storage" name. At March 31, 1995, the Company had equity investments in 422 mini-warehouses with approximately 23.9 million square feet of space. The Company's mini-warehouses, which are located primarily in or near major metropolitan markets in 37 states, offer relatively low-cost, easily accessible, secure and enclosed storage space for both personal and business use. See "Business." The Company's primary objective is to maximize shareholder value by increasing funds from operations per share of Common Stock through internal growth and acquisitions of additional mini-warehouses. The Company believes that its access to capital, geographic diversification and operating efficiencies resulting from its size enhance its ability to achieve this objective. The net proceeds of this offering of Common Stock (the "Offering") will be used primarily to make additional investments in mini-warehouses. The Company believes that its mini-warehouse investments made since December 31, 1994 and its proposed acquisitions to be made with the net proceeds of the Offering generated an unleveraged cash yield of approximately 10% for the latest 12-month period for which information is available. See "Use of Proceeds." The Company believes that its mini-warehouses have attractive operating characteristics. For 1994, the Company's mini-warehouses had an average occupancy level of 90% compared with an average break-even occupancy level (before depreciation expense and debt service) of only 28%, resulting in a profit margin (net operating income before depreciation expense ("net cash flow") divided by rental income) of 64%. The Company's tenant base, which is comprised of more than 190,000 individuals and businesses, has an average occupancy term of 12 months, and no one mini-warehouse accounts for more than 1% of revenues. In addition, the Company's mini-warehouses are characterized by a low level of capital expenditures to maintain their condition and appearance. The Company further believes that its operating results have benefitted from favorable industry trends and conditions. Notably, the level of new mini- warehouse construction has decreased since 1988 while consumer demand has increased. In addition, in recent years consolidation has occurred in the fragmented mini-warehouse industry. The Company believes that it is well- positioned to capitalize on this consolidation trend due to its demonstrated access to capital and national presence. The Company's operator, Public Storage, is the largest mini-warehouse operator in the United States and Canada, operating approximately the same square footage of mini-warehouse space as the next ten largest operators combined and approximately four times as much space as the next largest operator. S-3 The Company's five senior officers are responsible for the acquisition of more than 350 mini-warehouses, the development of more than 650 mini-warehouses and the operation of more than 1,000 mini-warehouses during their average 16 years of experience with Public Storage. In addition, the Company's senior management has a significant ownership position in the Company with officers, directors and their affiliates beneficially owning approximately 9,358,000 shares or 28% of the Company's Common Stock as of March 31, 1995, with a current market value of approximately $150 million. Approximately 2,165,000 of these shares were purchased for cash at market prices during 1994. The Company is currently advised by, and its facilities are operated by, Public Storage, and the Company's executive officers and certain directors are affiliated with Public Storage. All are subject to various conflicts of interest arising out of their relationships with entities that own and operate mini-warehouses. The Company is currently considering a transaction by which it would become self-advised and self-managed and be combined with substantially all of Public Storage's United States real estate investments. See "--Proposed Restructuring." All operations are under the general supervision of the Company's Board of Directors (the "Board of Directors"), including investments in new facilities and transactions with affiliates. Of the Company's investments, 211 were made jointly with seven of a group of eight public limited partnerships organized by Public Storage (these eight partnerships are referred to herein collectively as the "PSP Partnerships"). The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"). See "Business" and "Certain Considerations--Conflicts of Interest and Transactions with Affiliates" and "Certain Federal Income Tax Considerations" in the accompanying Prospectus. PROPOSED RESTRUCTURING The Company has formed a special committee of independent directors to consider a transaction in which the Company would be combined with its adviser and property operators and substantially all of Public Storage's United States real estate investments. As a result of this transaction, the Company would become self-advised and self-managed. The special committee selected Robertson, Stephens & Company, L.P. as financial adviser in March 1995 to render advice in connection with the restructuring. Although no terms have been established, it is expected that the Company would issue shares of its common stock in the transaction and the name of the Company would be changed to "Public Storage, Inc." There is no agreement relating to this transaction and no assurances can be made that an agreement can be reached, that a transaction can be completed or as to the effect of such a transaction on the market price of the Company's Common Stock. Any such transaction would be subject to, among other things, prior approval of holders of Common Stock and delivery of a fairness opinion from Robertson, Stephens & Company, L.P. Public Storage, organized in 1972, has been engaged in the acquisition, development, construction and operation of mini-warehouses and, to a lesser extent, other commercial properties in the United States and Canada. As of March 31, 1995, Public Storage operated 1,072 mini-warehouses and 51 business parks in the United States, including the Company's 422 mini-warehouses and 16 business parks, and Public Storage had direct or indirect ownership interests in 1,012 mini-warehouses and 41 business parks in the United States, including the Company's facilities. GROWTH STRATEGIES The Company's growth strategies focus on improving the operating performance of its existing properties and on increasing its ownership of mini-warehouses through additional investments. Major elements of these strategies are as follows: . Increase net cash flow from existing properties. The Company seeks to increase the net cash flow generated by its existing properties by (i) increasing average occupancy rates and (ii) achieving higher levels S-4 of realized monthly rents per occupied square foot. Average occupancy at the 246 mini-warehouses in which the Company had an ownership interest since January 1992 ("Same Store mini-warehouses") has increased from 86.8% in 1992 to 90.3% for 1994. Similarly, realized monthly rents per occupied square foot have increased approximately 7% during this same period. These factors have resulted in net cash flow growth at Same Store mini-warehouses of approximately 6%, 10% and 7% in 1992, 1993 and 1994, respectively, over the prior year. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations." .Acquire properties operated by Public Storage. The Company believes its relationship with Public Storage enhances its ability to identify attractive acquisition opportunities. Exclusive of the Company's facilities, approximately 600 mini-warehouses are operated under the "Public Storage" name on behalf of approximately 80 ownership entities. From time to time, some of these owners desire to sell their mini-warehouses, providing the Company with a source of acquisition opportunities. These properties exhibit net cash flow growth comparable to the Company's mini-warehouses and the Company believes they include some of the better located, better constructed mini-warehouses in the industry. Because of common property operation, the Company is provided with reliable operating information prior to acquisition and these properties are easily integrated into the Company's portfolio. From January 1, 1992 through December 31, 1993, the Company acquired a total of 36 mini-warehouses which were operated under the "Public Storage" name (2.1 million square feet of space at an aggregate purchase price of $83.2 million). For 1994, the net cash flow generated by these properties provided an unleveraged cash yield of approximately 11.6%. From January 1, 1994 through May 5, 1995, the Company acquired an additional 73 such properties. .Acquire properties operated by other operators. The Company believes its relationship with Public Storage also enhances its ability to capitalize on the overall fragmentation in the mini-warehouse industry. Of the more than 22,000 mini-warehouses in the United States, the Company believes that the ten largest operators operate less than 11% of the total space. Public Storage's presence in and knowledge of substantially all of the major markets in the United States provides the Company with local market information on rental rates, occupancy and competition. From January 1, 1992 through December 31, 1993, the Company acquired a total of 16 mini-warehouses (967,000 square feet of space at an aggregate purchase price of $34.5 million) operated by other operators. For 1994, the net cash flow generated by these properties provided an unleveraged cash yield of approximately 12.2%. From January 1, 1994 through May 5, 1995, the Company acquired an additional 37 such properties. .Access to acquisition capital. The Company believes that its strong financial position enables it to access capital for growth. The Company's debt, as a percentage of shareholders' equity, has decreased from 60% at December 31, 1990 to 13% at March 31, 1995, thereby significantly reducing refinancing risks. The Company currently has a $115 million credit facility (LIBOR plus 1.25%) with a bank group led by Wells Fargo Bank, which the Company uses as a temporary source of acquisition financing. The Company seeks to ultimately finance all acquisitions with permanent sources of capital. From January 1, 1992 through March 31, 1995, the Company has issued approximately $500 million of perpetual preferred and common equity to finance such acquisitions. See "Business-- Borrowings" and "--Limitations on Debt." .Conservative distribution policy. The Company seeks to retain significant funds (after funding its distributions and capital improvements) for additional property acquisitions and debt reduction. From January 1, 1992 through March 31, 1995, the Company retained approximately $30 million for such purposes. For the three months ended March 31, 1995, the Company distributed only 51% of its funds from operations ("FFO") allocable to Common Stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources." S-5 As a result of the implementation of its growth strategies, the Company has successfully increased FFO allocable to Common Stock. From 1992 through 1994, FFO allocable to Common Stock increased 93%, while the weighted average number of shares of Common Stock increased only 51%. See "--Summary Financial Information." OPERATING STRATEGIES The Company's mini-warehouses are operated under the "Public Storage" name, the most recognized name in the mini-warehouse industry. The major elements of the Company's operating strategies are as follows: . Capitalize on Public Storage name recognition. Public Storage, with more than 20 years of operating experience in the mini-warehouse business, is the largest operator of mini-warehouses in the country. Including the Company's mini- warehouses, as of March 31, 1995, Public Storage operated 1,106 mini-warehouses aggregating approximately 65.2 million square feet of space located in 38 states and four provinces in Canada. In the past eight years, in excess of $56 million has been expended promoting the "Public Storage" name. The Company believes that its participation in the Public Storage marketing and advertising programs improves its competitive position in the market. Public Storage is the only mini-warehouse operator regularly using television advertising in several major markets around the country, and Public Storage's in-house Yellow Pages staff designs and places advertisements in approximately 700 directories in 80 markets. In addition, Public Storage offers a toll-free referral system, 800- 44-STORE, which services approximately 100,000 calls per year from potential customers inquiring as to the nearest Public Storage mini-warehouse. .Benefit from Public Storage's economies of scale. Through its affiliation with Public Storage, the Company is able to realize economies of scale. By combining the advertising and marketing programs and purchasing activities of more than 1,100 mini-warehouses, Public Storage achieves significant per facility savings which are passed on to the Company. . Maintain high occupancy levels and increase realized rents. Subject to market conditions, Public Storage generally seeks to achieve average occupancy levels in excess of 90% and to eliminate promotions prior to increasing rental rates. Average occupancy for the Company's Same Store mini-warehouses has increased from 86.8% in 1992 to 90.3% in 1994. During the first quarter of 1995, the average occupancy was 88.6% compared to 87.7% for the first quarter of 1994. Realized monthly rents per square foot increased from $.55 in 1992 to $.60 during the first quarter of 1995. The Company has increased rental rates in many markets where it has achieved high occupancy levels and eliminated or minimized promotions. .Concentrate properties in major markets. The Company is focused on owning and acquiring mini-warehouses located principally in the 54 largest metropolitan areas (those with populations in excess of 1,000,000) throughout the country. The Company believes that the events resulting in the rental of mini-warehouse space occur with greater frequency in the larger metropolitan areas than in less populous areas. By concentrating its facilities within these markets, the Company can also achieve economies of scale with respect to property operations and advertising. .Focus on high quality properties in prime locations. The Company seeks to own high quality properties located on prime land with high traffic counts, high visibility and a dense population within a three to five mile radius. The Company believes that facilities located on prime land are less susceptible to the threat of competition via new development and, as a result, have more stable cash flows. The Company is also committed to investing the capital necessary to maintain the high quality of its facilities and to upgrade them when warranted by market conditions. S-6 .Systems and controls. Public Storage has an organizational structure and a property management system, "CHAMP" (Computerized Help and Management Program), which links its corporate office with each mini-warehouse. This enables Public Storage to obtain daily information from each mini-warehouse and to achieve efficiencies in operations and maintain control over space inventory, rental rates and promotional discounts. Expense management is achieved through centralized payroll and accounts payable systems and a comprehensive property tax appeals department, and Public Storage has an extensive internal audit program designed to ensure proper handling of cash collections. . Professional property operation. In addition to approximately 120 support personnel at the Public Storage corporate offices, Public Storage employs approximately 2,700 on-site personnel who manage the day-to-day operations of the mini-warehouses in the Public Storage system. These on-site personnel are supervised by 107 district managers, 14 regional managers and three divisional managers (with an average of 12 years experience in the mini-warehouse industry) who report to the president of the mini-warehouse property operator (who has 11 years of experience with the Public Storage organization). Public Storage carefully selects and extensively trains the operational and support personnel and offers them a progressive career path. See "Management." THE OFFERING Common Stock Offered by the Company: United States Offering..................... 2,800,000 shares International Offering..................... 700,000 shares Total................................... 3,500,000 shares Common Stock to be Outstanding After the Offering........................................ 36,338,310 shares (1) Use of Proceeds................................. The Company intends to use the net proceeds of the offering to make investments in real estate assets, primarily mini-warehouses. See "Use of Proceeds." Listing......................................... NYSE Stock Exchange Symbol........................... SEQ
- -------- (1) Excludes 487,834 shares subject to options under the Company's Stock Option Plans, 3,872,054 shares which are issuable upon conversion or redemption of the Company's 8.25% Convertible Preferred Stock (the "Convertible Preferred Stock") and shares proposed to be issued in a merger with Public Storage Properties VII, Inc. ("Properties 7"). See "Recent Developments." S-7 SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE AND MINI-WAREHOUSE DATA)
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, --------------------- --------------------------- 1995 1994 1994 1993 1992 -------- ----------- -------- -------- ------- OPERATING DATA: Total revenues............. $ 43,198 $ 32,949 $147,196 $114,680 $97,448 Depreciation and amortiza- tion...................... 8,147 6,811 28,274 24,998 22,405 Interest expense........... 1,520 1,558 6,893 6,079 9,834 Minority interest in in- come...................... 1,823 2,049 9,481 7,291 6,895 Net income................. 13,200 8,746 42,118 28,036 15,123 OTHER DATA: Funds from operations(1)... $ 18,534 $ 11,255 $ 56,143 $ 35,830 $21,133 Funds from operations allo- cable to Common Stock(2).. 12,558 7,606 39,297 24,942 20,321 PER SHARE OF COMMON STOCK: Net income(3).............. $ 0.24 $ 0.24 $ 1.05 $ 0.98 $ 0.90 Distributions paid on Com- mon Stock................. 0.22 0.21 0.85 $ 0.84 $ 0.84 Weighted average shares of Common Stock.............. 30,567 21,166 24,077 17,558 15,981 MINI-WAREHOUSE DATA:(4) Mini-warehouse net square footage at end of period (000's)................... 23,911 19,304 22,450 18,587 16,311 Number of mini-warehouses at end of period.......... 422 329 386 316 278 Weighted average occupancy of the Same Store mini- warehouses for the period. 88.6% 87.7% 90.3% 89.5% 86.8% Weighted average mini- warehouse realized monthly rent per occupied square foot for Same Store mini- warehouses for the period. $ 0.60 $ 0.58 $ 0.59 $ 0.56 $ 0.55 MARCH 31, 1995 --------------------- AS ACTUAL ADJUSTED(5) -------- ----------- BALANCE SHEET DATA: Total assets............... $932,337 $1,006,373 Total debt................. 87,119 52,119 Shareholders' equity....... 696,432 805,468
- -------- (1) FFO is defined generally by the National Association of Real Estate Investment Trusts, Inc. ("NAREIT") as income before loss on early extinguishment of debt and gain on disposition of real estate, adjusted as follows: (i) plus depreciation and amortization, and (ii) less distributions to minority interests in excess of minority interest in income. FFO is a supplemental performance measure for equity REITs used by industry analysts. FFO does not take into consideration principal payments on debt, capital improvements, distributions and other obligations of the Company. Accordingly, FFO is not a substitute for the Company's net cash provided by operating activities or net income as a measure of the Company's liquidity or operating performance. (2) FFO allocable to Common Stock is equal to FFO less preferred stock dividends. (3) Determined after preferred stock dividends. (4) Reflects information regarding properties in which the Company has an interest, not the Company's proportionate interest in such properties. See "Business--General" and "--Investment in Facilities." (5) Adjusted to give effect to (i) the issuance of 2,300,000 shares of preferred stock in May 1995 and the application of a portion of the net proceeds to repay indebtedness under the Company's credit facility and (ii) the sale of the Common Stock offered hereby. Does not reflect shares of Common Stock proposed to be issued in a merger with Properties 7. See "Recent Developments," "Capitalization" and "Use of Proceeds." S-8 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock offered hereby (assuming no exercise of the Underwriters' over-allotment option) are estimated at approximately $53,547,000. The net proceeds from the Offering, together with the proceeds remaining from a May 1995 offering of preferred stock (approximately $20 million at May 5, 1995), will be used to make investments in real estate, primarily mini-warehouses, including mortgage loans and interests in real estate partnerships. In addition to the contemplated transactions described under "Recent Developments," the Company has agreements in principle to acquire nine mini-warehouses for an aggregate purchase price (including closing and conversion costs) of approximately $38.8 million, consisting of $32.5 million of cash and $6.3 million of cancellation of mortgage debt, and is in the process of developing two properties at an aggregate cost of approximately $8.2 million. Seven of the properties being acquired are owned by affiliates of Public Storage and the purchase price is based on independent appraisals. These proposed acquisitions are contingent and, accordingly, there is no assurance that all or any of the properties will be acquired. Pending investment in real estate assets, the net proceeds of the Offering will be deposited in interest bearing accounts or invested in certificates of deposit, United States government obligations or other short-term, high-quality debt instruments selected at the discretion of the officers of the Company. RECENT DEVELOPMENTS Proposed Restructuring. See "Prospectus Summary--Proposed Restructuring" for the status of a proposed restructuring of the Company. Acquisition of Properties. During 1995 (through May 5), the Company acquired 39 mini-warehouses, including facilities acquired in the merger with Properties 6, for an aggregate purchase price of approximately $108,026,000. Affiliates of PSI owned 29 of these facilities. Development of properties in selected markets. The Company is evaluating the feasibility of developing mini-warehouses in selected markets in which there are few, if any, facilities to acquire at attractive prices and where the absence of other undeveloped parcels of land or other impediments to development make it difficult to construct additional competing facilities. The Company is currently constructing two properties in Atlanta, Georgia, which are expected to open during 1995. See "Use of Proceeds." Issuances of Capital Stock. During 1995 (through May 5), the Company issued 4,011,603 shares of Common Stock for an aggregate gross price of approximately $56,000,000 and 4,495,000 shares of preferred stock for an aggregate gross price of $112,375,000. As of March 31, 1995, the Company's officers, directors and their affiliates beneficially owned approximately 9,358,000 shares or 28% of the Common Stock. The shares of Common Stock issued in 1995 were issued primarily in the February 1995 merger with Properties 6 described below and to PSI in connection with the acquisition of participation interests in 19 mini- warehouses. The transactions with PSI were approved by the Company's independent directors, and the purchase price was supported by fairness opinions. Tender Offers. During 1995 (through May 5), the Company acquired, in cash tender offers, limited partnership interests in two PSP Partnerships (PS Partners I and VIII), representing approximately 24% and 13% of these limited partnership interests, respectively, for an aggregate purchase price of approximately $8,079,000. During 1994, the Company acquired limited partnership interests in five other PSP Partnerships. As a result, the Company owns approximately 33% to 66% of the outstanding limited partnership interests of each of these seven PSP Partnerships. The Company currently owns approximately 35% of the limited partnership interests in PS Partners VI and intends to make a cash tender offer for up to 45% of the limited partnership interests in that partnership. S-9 Mergers with Related Companies. In February 1995, Public Storage Properties VI, Inc. ("Properties 6") merged with and into the Company, and the outstanding Properties 6 common stock (2,716,223 shares) was converted into an aggregate of (i) approximately 3,148,000 shares of Common Stock and (ii) approximately $21,427,000 in cash. Properties 6 owned 22 mini-warehouses and one combination mini-warehouse/business park facility in seven states. PSI and its affiliates received approximately 1,293,000 shares of Common Stock in the merger. One facility acquired by the Company in the merger may be the subject of an ongoing area-wide groundwater investigation pursuant to the federal Comprehensive Environmental Response, Cleanup, and Liability Act. The Company believes that the terms of the merger reflect a purchase price adjustment sufficient to cover any resulting potential liability. See "Certain Considerations--Operating Risks--Risk of Environmental Liabilities" in the accompanying Prospectus. On February 2, 1995, the Company and Public Storage Properties VII, Inc. ("Properties 7") agreed, subject to certain conditions, to merge. In the merger, Properties 7 would be merged with and into the Company, and each share of Properties 7's common stock would be converted, at the election of the shareholders of Properties 7, into either shares of the Company's Common Stock or, with respect to up to 20% of Properties 7's common stock, $18.95 in cash. This dollar amount has been based on Properties 7's net asset value (the appraised value of Properties 7's real estate assets as of December 31, 1994 (which took into account certain potential structural and environmental remediation costs relating to one of the properties) and the estimated book value of Properties 7's other net assets as of May 31, 1995). The number of shares of the Company's Common Stock issued in the merger will be determined by dividing this same dollar amount by the average of the per share closing prices of the Company's Common Stock on the NYSE for a specified period prior to Properties 7's shareholders' meeting. In the event of the merger, pre-merger cash distributions would be made to shareholders of Properties 7 to cause Properties 7's net asset value as of the effective date of the merger to be substantially equivalent to its estimated net asset value as of May 31, 1995. The number of shares of the Company's Common Stock issued in the merger and the amount receivable upon a cash election would be reduced on a pro rata basis in an aggregate amount equal to additional distributions required in order to satisfy Properties 7's real estate investment trust distribution requirements. The merger was approved by the independent directors of the Company and Properties 7 and is conditioned on, among other requirements, approval by the shareholders of both the Company and Properties 7. The Company and Properties 7 are in the process of seeking the approval of their respective shareholders for the merger at shareholders' meetings scheduled for June 14, 1995. Properties 7 owns 34 mini-warehouses, three business parks and one combination mini-warehouse/business park facility in 11 states. There are 3,806,491 outstanding shares of Properties 7 common stock. PSI has informed the Company that PSI would expect to elect to receive the Company's Common Stock in the merger and no cash. In 1990 and 1991, PSI organized 18 finite-life REITs that are listed on the American Stock Exchange, including Properties 6 and 7 discussed above and Public Storage Properties VIII, Inc. ("Properties 8") that was merged into the Company in September 1994. Public Storage owned or owns approximately 28% of the common stock of Properties 6, 7 and 8 and their properties were or are operated by Public Storage. The Company had no ownership interest in Properties 6, 7 and 8 or any of their properties prior to the merger or proposed merger. S-10 DISTRIBUTIONS AND PRICE RANGE OF COMMON STOCK The Common Stock has been listed on the NYSE since October 19, 1984. The following table sets forth distributions paid per share on the Common Stock in the periods indicated below and the reported high and low sales prices on the NYSE composite tape for the applicable periods.
DISTRIBUTIONS CALENDAR PERIODS HIGH LOW PAID ---------------- ---- ---- ------------- 1993: First quarter........... $12 $8 7/8 $.21 Second quarter.......... 12 1/4 11 .21 Third quarter........... 14 1/2 11 5/8 .21 Fourth quarter.......... 15 13 3/4 .21 1994: First quarter........... 16 13 1/2 .21 Second quarter.......... 16 3/4 13 3/8 .21 Third quarter........... 15 3/4 13 3/8 .21 Fourth quarter.......... 15 13 .22 1995: First Quarter........... 17 1/8 13 1/2 .22 Second Quarter (through May 5, 1995)........... 17 1/8 15 3/4 --
As of March 31, 1995, there were 11,821 record holders of Common Stock. On May 5, 1995, the last reported sale price of the Common Stock on the NYSE was $16 1/4 per share. Holders of Common Stock are entitled to receive distributions when, as and if declared by the Board of Directors out of any funds legally available for that purpose. The Company, as a REIT, is required to distribute annually to Shareholders (which include not only holders of Common Stock, but also holders of preferred stock), at least 95% of its "real estate investment trust taxable income," which, as defined by the relevant tax statutes and regulations, is generally equivalent to net taxable ordinary income. Under certain circumstances, the Company can rectify a failure to meet this distribution requirement by paying dividends after the close of a particular taxable year. See "Certain Federal Income Tax Matters--Tax Treatment of the Company" in the accompanying Prospectus. The Company's revolving credit facility with a commercial bank restricts the Company's ability to pay distributions in excess of "Funds from Operations" for the prior four fiscal quarters less scheduled principal payments and less capital expenditures. Funds from Operations is defined in the loan agreement generally as net income before gain on sale of real estate, extraordinary loss on early retirement of debt and deductions for depreciation, amortization and non-cash charges. Also, unless full dividends on the Company's preferred stock have been paid for all past dividend periods, no dividends may be paid on the Common Stock, except in certain instances. S-11 CAPITALIZATION The table below sets forth as of March 31, 1995 the historical consolidated capitalization of the Company, and the consolidated capitalization of the Company as adjusted to give effect to (i) the issuance of 2,300,000 shares of preferred stock in May 1995 and the application of a portion of the net proceeds therefrom to repay outstanding bank borrowings, and (ii) the sale of the Common Stock offered hereby. See "Use of Proceeds," "Recent Developments" and "Selected Financial Information."
MARCH 31, 1995 AS ADJUSTED(2) --------- -------------- (DOLLARS IN THOUSANDS) Total debt: Line of credit with banks.......................... $ 35,000 $ -- Mortgage notes payable............................. 52,119 52,119 --------- --------- Total debt....................................... 87,119 52,119 Minority interest.................................... 133,893 133,893 Shareholders' equity: Preferred Stock, $.01 par value, 50,000,000 shares authorized:(1) Senior Preferred Stock, 8,806,000 shares issued and outstanding (11,106,000 shares issued and outstanding, as adjusted)....................... 220,150 277,650 Convertible Preferred Stock, 2,300,000 shares is- sued and outstanding................................. 57,500 57,500 Common Stock, $.10 par value, 60,000,000 shares authorized, 32,838,310 shares issued and outstanding (36,338,310 issued and outstanding, as adjusted)......................................... 3,284 3,634 Paid-in capital.................................... 424,965 476,151 Cumulative net income.............................. 185,685 185,685 Cumulative distributions paid...................... (195,152) (195,152) --------- --------- Total shareholders' equity....................... 696,432 805,468 --------- --------- Total capitalization........................... $ 917,444 $ 991,480 ========= =========
- -------- (1) None of the outstanding series of preferred stock has a mandatory redemption or sinking fund provision. (2) Does not reflect shares of Common Stock proposed to be issued in the merger with Properties 7. See "Recent Developments." S-12 SELECTED FINANCIAL INFORMATION The following selected historical financial information relating to each of the three years in the period ended December 31, 1994 has been derived from the audited financial statements of the Company for those periods as restated. The selected financial information for the three months ended March 31, 1995 and the same period in 1994 has been derived from unaudited financial statements of the Company for those periods. Certain of the real estate partnerships that are now consolidated with the Company were previously accounted for under the equity method. The financial information presented for all periods prior to 1993 has been restated to reflect such consolidation to enhance comparability. These restatements have no effect on previously reported net income, earnings per share, funds from operations or shareholders' equity. The data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus Supplement and the financial statements included in the documents incorporated by reference in the accompanying Prospectus, including the pro forma information in the Form 10-Q for the quarter ended March 31, 1995 (the "1995 10-Q").
THREE MONTHS ENDED MARCH 31 YEAR ENDED DECEMBER 31, -------------------- ------------------------------ 1995 1994 1994 1993 1992 --------- --------- --------- --------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Rental income......... $ 41,974 $ 31,299 $ 141,845 $ 109,203 $ 95,886 Interest and other in- come................. 1,224 1,650 5,351 5,477 1,562 --------- --------- --------- --------- -------- 43,198 32,949 147,196 114,680 97,448 --------- --------- --------- --------- -------- Expenses: Cost of operations.... 15,807 11,926 52,816 42,116 38,348 Depreciation and amor- tization............. 8,147 6,811 28,274 24,998 22,405 General and adminis- trative.............. 1,091 740 2,631 2,541 2,629 Advisory fee.......... 1,610 1,119 4,983 3,619 2,612 Interest expense...... 1,520 1,558 6,893 6,079 9,834 --------- --------- --------- --------- -------- 28,175 22,154 95,597 79,353 75,828 --------- --------- --------- --------- -------- Income before minority interest and gain on disposition of real estate................. 15,023 10,795 51,599 35,327 21,620 Minority interest in in- come................... (1,823) (2,049) (9,481) (7,291) (6,895) --------- --------- --------- --------- -------- Income before gain on disposition of real es- tate................... 13,200 8,746 42,118 28,036 14,725 Gain on disposition of real estate............ -- -- -- -- 398 --------- --------- --------- --------- -------- Net income.............. $ 13,200 $ 8,746 $ 42,118 $ 28,036 $ 15,123 Net income allocable to Common Stock(1)........ 7,224 5,097 25,272 17,148 14,311 Net income per share of Common Stock........... 0.24 0.24 1.05 0.98 0.90 Distributions paid per share of Common Stock.. 0.22 0.21 0.85 0.84 0.84 Weighted average shares of Common Stock out- standing............... 30,567 21,166 24,077 17,558 15,981 OTHER DATA: Net cash provided by op- erating activities..... $ 23,130 $ 17,357 $ 79,180 $ 59,477 $ 44,025 Net cash used in invest- ing activities......... (66,499) (31,864) (169,590) (137,429) (21,010) Net cash provided by (used in) financing ac- tivities............... 43,750 24,131 100,029 80,100 (21,070) Funds from opera- tions(2)............... 18,534 11,255 56,143 35,830 21,133 Preferred stock divi- dends.................. 5,976 3,649 16,846 10,888 812 Funds from operations allocable to Common Stock(3)............... 12,558 7,606 39,297 24,942 20,321 BALANCE SHEET DATA: Total assets............ $ 932,337 $ 703,434 $ 820,309 $ 666,133 $537,724 Total debt.............. 87,119 46,519 77,235 84,076 69,478 Shareholders' equity.... 696,432 454,738 587,786 376,066 253,669
(Footnotes on following page) S-13 - -------- (1) Net income allocable to Common Stock is equal to net income less preferred stock dividends. (2) Funds from operations is defined generally by NAREIT as income before loss on early extinguishment of debt and gain on disposition of real estate, adjusted as follows: (i) plus depreciation and amortization, and (ii) less distributions to minority interests in excess of minority interest in income. FFO is a supplemental performance measure for equity REITs used by industry analysts. FFO does not take into consideration principal payments on debt, capital improvements, distributions and other obligations of the Company. Accordingly, FFO is not a substitute for the Company's net cash provided by operating activities or net income as a measure of the Company's liquidity or operating performance. (3) FFO allocable to Common Stock is equal to FFO less preferred stock dividends. S-14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the consolidated financial statements appearing in the Annual Report on Form 10-K for the year ended December 31,1994, as amended (the "1994 10-K") and the 1995 10-Q. Results of Operations Three months ended March 31, 1995 compared to the three months ended March 31, 1994: Net income for the three months ended March 31, 1995 was $13,200,000 compared to $8,746,000 for the same period in 1994, representing an increase of $4,454,000. Net income allocable to common shareholders increased to $7,224,000 for the three months ended March 31, 1995 from $5,097,000 for the three months endedMarch 31, 1994. The increase in net income and net income allocable to common shareholders were primarily the result of improved property operations for the Same Store mini-warehouses (those mini-warehouses owned since January 1992) and the acquisition of additional real estate facilities and partnership interests during 1995 and 1994. Net income per common share was $.24 per share (based on weighted average shares outstanding of 30,566,839) for the three months ended March 31, 1995 compared to $.24 per share (based on weighted average shares outstanding of 21,166,478) for the same period in 1994. The Company's revenues are generated principally through the operation of its real estate facilities. The Company's core business is the operation of mini- warehouse facilities which, during the three months ended March 31, 1995, represented approximately 90% of the Company's property operations (based on the 1995 rental income). During the three months ended March 31, 1995, property net operating income (rental income less cost of operations and depreciation expense) improved compared to the same period in 1994. Rental income increased $10,675,000 or 34% from $31,299,000 for the three months ended March 31, 1994 to $41,974,000 for the same period in 1995, cost of operations increased $3,881,000 or 33% from $11,926,000 for the three months ended March 31, 1994 to $15,807,000 for the same period in 1995 and depreciation expense increased by $1,336,000 from $6,811,000 for the three months ended March 31, 1994 to $8,147,000 for the same period in 1995, resulting in a net increase in property net operating income of $5,458,000 or 43%. Property net operating income prior to the reduction for depreciation expense ("net cash flow") increased by $6,794,000 or 35% from $19,373,000 for the three months ended March 31, 1994 to $26,167,000 for the same period in 1995. These increases were the result of (i) improved property operations at the Same Store mini-warehouses, (ii) the acquisition of additional real estate facilities (161 facilities from January 1, 1992 through March 31, 1995) and (iii) improved property operations at the Company's business park facilities. Property net operating income for the Same Store mini-warehouses increased by $504,000 or 5% from $9,343,000 for the three months ended March 31, 1994 to $9,847,000 for the three months ended March 31, 1995. Net operating income before depreciation expense ("net cash flow") for the Same Store mini- warehouses increased by $721,000 or 5% from $13,790,000 for the three months ended March 31, 1994 to $14,511,000 for the three months ended March 31, 1995. These increases are principally due to increased weighted average occupancy levels combined with an increase in average rental rates. Weighted average occupancy levels were 88.6% for the Same Store mini-warehouses for the three months ended March 31, 1995 compared to 87.7% for the same period in 1994. Realized monthly rent per square foot for these facilities was $.60 and $.58 for the three months ended March 31, 1995 and 1994, respectively. Mini-warehouse facilities acquired subsequent to December 31, 1991 contributed approximately $7,334,000 and $2,946,000 of property net operating income for the three months ended March 31, 1995 and 1994, respectively ($9,503,000 and $3,845,000 of net cash flow for the three months ended March 31, 1995 and 1994, respectively). S-15 Property net operating income with respect to the Company's business park operations increased by $566,000 from $273,000 for the three months ended March 31, 1994 to $839,000 for the same period in 1995. Net cash flow with respect to the Company's business park operations increased by $415,000 from $1,738,000 for the three months ended March 31, 1994 to $2,153,000 for the same period in 1995. The increase is due principally to the acquisition of a business park facility during the second quarter of 1994 which contributed approximately $165,000 to the increase in the property net operating income. Weighted average occupancy levels were 95.9% for the business park facilities for the three months ended March 31, 1995 compared to 94.4% for the same period in 1994. Interest and other income decreased from $1,650,000 for the three months ended March 31, 1994 to $1,224,000 for the same period in 1995 for a net decrease of $426,000. The decrease is primarily attributable to the cancellation of approximately $2,273,000 and $24,441,000 of mortgage notes receivable during 1995 and 1994, respectively, in connection with the acquisition of real estate facilities securing such notes. As a result, the average outstanding mortgage notes receivable balance was significantly lower ($22,388,000) during the three months ended March 31, 1995 compared to the same period in 1994 ($47,087,000). As of March 31, 1995, the mortgage notes bear interest at stated rates ranging from 8.5% to 11.97% and effective interest rates ranging from 10.0% to 14.8%. Depreciation and amortization expense was $8,147,000 and $6,811,000 for the three months ended March 31, 1995 and 1994, respectively, representing an increase of $1,336,000, which is due to the acquisition of additional properties in 1994 and 1995. General and administrative expense was $1,091,000 and $740,000 for the three months ended March 31, 1995 and 1994, respectively, representing an increase of $351,000. This increase is due to the growth in the Company's capital base combined with certain costs incurred in connection with the acquisition of additional real estate facilities. "Minority interest in income" represents the income allocable to equity (partnership) interests in the PSP Partnerships (whose accounts are consolidated with the Company) which are not owned by the Company. Since 1990, the Company has acquired portions of these equity interests through its acquisition of limited and general partnership interests in the PSP Partnerships. These acquisitions have resulted in reductions to the "Minority interest in income" from what it would otherwise have been in the absence of such acquisitions, and accordingly, have increased the Company's share of the consolidated PSP Partnerships' income. In determining income allocable to the minority interest for the three months ended March 31, 1995 and 1994, consolidated depreciation and amortization expense of approximately $2,773,000 and $4,053,000, respectively, was allocated to the minority interest. The decrease in depreciation allocated to the minority interest was principally the result of the acquisition of limited partnership units by the Company. The acquisition of these partnership interests has provided the Company with increased liquidity through cash distributions from the PSP Partnerships. The Company expects to continue to acquire additional partnership interests in the PSP Partnerships during 1995. See "Recent Developments" and --"Liquidity and Capital Resources." Advisory fees increased by $491,000 from $1,119,000 for the three months ended March 31, 1994 to $1,610,000 for the same period in 1995. The advisory fee, which is based on a contractual computation, increased as a result of increased adjusted net income (as defined) per common share combined with the issuance of additional preferred and common stock during 1994 and 1995. Year ended December 31, 1994 compared to year ended December 31, 1993: Net income in 1994 was $42,118,000 compared to $28,036,000 in 1993, representing an increase of $14,082,000. Net income per common share was $1.05 per share in 1994 compared to $.98 per share in 1993, representing an increase of $.07 per share. In determining net income per common share, preferred stock dividends ($16,846,000 and $10,888,000 in 1994 and 1993, respectively) reduced income allocable to the common stockholders. The increase was primarily the result of improved property operations at the Company's Same Store mini-warehouses, the acquisition of additional real estate facilities during 1994, 1993 and 1992, and the acquisition of additional partnership interests. S-16 During 1994, property net operating income improved compared to 1993. Rental income increased $32,642,000 or 30% from $109,203,000 in 1993 to $141,845,000 in 1994, cost of operations increased $10,700,000 or 25% from $42,116,000 in 1993 to $52,816,000 in 1994, and property depreciation expense increased $3,175,000 from $24,924,000 in 1993 to $28,099,000 in 1994 or 13%, resulting in a net increase in property operating income of $18,767,000 or 45%. Net cash flow increased by $21,942,000 or 33%. These increases were the result of improved property operations for the Same Store mini-warehouses, the acquisition of a total of 123 additional mini-warehouse facilities and one business park facility during 1994, 1993 and 1992, and improved property operations at the Company's business park facilities. Property net operating income for the Same Store mini-warehouses increased by $2,583,000 or 6.7% from $38,383,000 in 1993 to $40,966,000 in 1994. Net cash flow for the Same Store mini-warehouses increased by $3,634,000 or 6.6% from $55,266,000 in 1993 to $58,900,000 in 1994. These increases continue the upward trend of improved operations at these facilities over the past three years as net cash flow increased by approximately 9.7% in 1993 and 6.1% in 1992 compared to the respective prior year. These increases are principally due to increased occupancy levels combined with an increase in average rental rates. From January 1, 1992 through December 31, 1994, the Company acquired a total of 123 mini-warehouse facilities, 23 of which were acquired pursuant to a merger transaction on September 30, 1994. During 1994 and 1993 these newly acquired mini-warehouses contributed approximately $22,831,000 and $5,812,000 of net cash flow, respectively. Property net operating income with respect to the Company's business park operations improved by $2,668,000 from a net operating loss of $429,000 in 1993 to net operating income of $2,239,000 in 1994. Net cash flow with respect to the Company's business park operations improved by $1,289,000 from $6,009,000 in 1993 to $7,298,000 in 1994. These improvements are principally due to the improved performance of the Company's business park facility located in Culver City, California, where property net operating income increased by approximately $511,000 combined with the 1994 acquisition of a facility located in Monterey Park, California which provided property net operating income of $710,000 in 1994. Weighted average occupancy levels were 95.3% for the business park facilities for the year ended December 31, 1994 compared to 93.1% for the same period in 1993. Interest and other income decreased from $5,477,000 in 1993 to $5,351,000 in 1994. The decrease is primarily attributable to the cancellation of mortgage notes receivable totaling $24,441,000 (face amount) during 1994 in connection with the acquisition of the underlying real estate facilities securing the mortgage notes. Interest expense increased from $6,079,000 in 1993 to $6,893,000 in 1994, representing an increase of $814,000. This increase is primarily attributable to the overall increase in average debt outstanding in 1994 compared to 1993 as a result of increased borrowings on its bank credit facilities in 1994 compared to 1993. The Company principally uses its credit facilities to finance the acquisition of real estate investments which are subsequently repaid with the net proceeds from the sale of the Company's securities. The weighted average annual interest rate on the credit facility and the mortgage notes outstanding at December 31, 1994 were approximately 7.3% and 9.3%, respectively. During the third and fourth quarters of 1994, the Company expensed $700,000 of debt issuance costs and $300,000 of fees to establish the new bank credit facility. Advisory fees increased by $1,364,000 from $3,619,000 in 1993 to $4,983,000 in 1994. The advisory fee, which is based on a contractual computation, increased as a result of increased adjusted net income (as defined) per common share combined with the issuance of additional common and preferred stock during 1994 and 1993. S-17 Year ended December 31, 1993 compared to year ended December 31, 1992: Net income in 1993 was $28,036,000 compared to $15,123,000 in 1992, representing an increase of $12,913,000. Net income per common share was $.98 per share in 1993 compared to $.90 per share in 1992, representing an increase of $.08 per share. Net income in 1992 included a gain on the partial condemnation by a governmental authority of a mini-warehouse facility of $398,000 or $.02 per common share. In addition, in determining net income per common share, preferred stock dividends ($10,888,000 and $812,100 in 1993 and 1992, respectively) reduced income allocable to the common stockholders. Income before gain on disposition of real estate was $28,036,000 in 1993 compared to $14,725,000 in 1992, representing an increase of $13,311,000 or 90%. The increase was primarily the result of improved property operations for properties owned throughout 1993 and 1992, the acquisition of additional real estate facilities during 1993 and 1992, the acquisition of additional partnership interests, increased interest income and reduced interest expense. During 1993, property net operating income improved compared to 1992. Rental income increased $13,317,000 or 13.9% from $95,886,000 in 1992 to $109,203,000 in 1993, cost of operations increased $3,768,000 or 9.8% from $38,348,000 in 1992 to $42,116,000 in 1993, and depreciation expense increased $2,888,000 from $22,036,000 in 1992 to $24,924,000 in 1993, resulting in a net increase in property operating income of $6,661,000 or 18.8%. Net cash flow increased by $9,549,000 or 16.6%. These increases were the result of (i) improved property operations at the Same Store mini-warehouses and (ii) the acquisition of 11 additional mini-warehouse facilities during 1992 (four of which were acquired on December 30, 1992) and 41 additional mini-warehouse facilities during 1993 (13 of which were acquired on December 30, 1993) partially offset by reduced property operations at the Company's business park facilities. Property net operating income for the Same Store mini-warehouses increased by $4,535,000 or 13.4% from $33,848,000 in 1992 to $38,383,000 in 1993. Property net operating income prior to the reduction of depreciation expense for the Same Store mini-warehouses increased by $4,893,000 or 9.7% from $50,373,000 in 1992 to $55,266,000 in 1993. These increases are principally due to increased occupancy levels combined with a slight increase in average rental rates. The real estate facilities which were acquired during 1993 and 1992 contributed approximately $5,812,000 and $959,000 of net cash flow in 1993 and 1992, respectively. Property net operating income with respect to the Company's business park operations decreased by $1,448,000 from $1,019,000 in 1992 to a net operating loss of $429,000 in 1993. Net cash flow with respect to the Company's business park operations decreased by $197,000 or 3.2% from $6,206,000 in 1992 to $6,009,000 in 1993. These decreases are principally due to the performance of the Company's business park facility located in Culver City, California, where property net operating income decreased by approximately $590,000 due to a decline in occupancy and increased expenses. The facility has been actively marketed and property operations have improved in 1994. Weighted average occupancy levels were 93.1% for the business park facilities for the year ended December 31, 1993 compared to 90.0% for the same period in 1992. Interest and other income increased from $1,562,000 in 1992 to $5,477,000 in 1993 for a net increase of $3,915,000. The increase is primarily attributable to the acquisition of mortgage notes receivable totaling $61,088,000 (face amount). The mortgage notes bear interest at stated rates ranging from 6.125% to 11.97% and effective interest rates ranging from 10.00% to 14.74%. The overall average outstanding mortgage notes receivable balance for the year ended December 31, 1993 was approximately $54,453,000 generating an overall average effective yield of 11.04%. S-18 Interest expense decreased from $9,834,000 in 1992 to $6,079,000 in 1993 for a net decrease of $3,755,000. The decrease in interest expense is primarily attributable to overall decreases in average debt outstanding as mortgage notes payable were reduced by $19,141,000 during 1993 combined with reduced average borrowings on the Company's credit facilities during 1993 as compared to 1992. The weighted average annual interest rate on the mortgage notes outstanding at December 31, 1993 was approximately 10.0%. Advisory fees increased by $1,007,000 from $2,612,000 in 1992 to $3,619,000 in 1993. The advisory fee, which is based on a contractual computation, increased as a result of increased adjusted net income (as defined) per common share combined with the issuance of additional preferred stock during 1993. Property Operating Trends The following table illustrates property operating trends for the Company's properties:
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ------------------ -------------------------- 1995(1) 1994 1994 1993 1992 --------- ------- ------- ------- ------- Change in property net operating income ("NOI") over prior year for the Same Store mini-warehouses: After reductions for depre- ciation.................... 5.4% 11.0% 6.7% 13.4% 8.2% Prior to reductions for de- preciation................. 5.2% 9.3% 6.6% 9.7% 6.1% Change in NOI over prior year for all properties: After reductions for depre- ciation.................... 43.5% 39.0% 44.5% 18.8% 7.3% Prior to reductions for de- preciation................. 35.1% 30.0% 32.7% 16.6% 5.3% Weighted average occupancy levels for Same Store mini- warehouses................... 88.6% 87.7% 90.3% 89.5% 86.8% Realized monthly rent per square foot for Same Store mini-warehouses(2)........... $.60 $.58 $ .59 $ .56 $ .55 Gross profit margin (loss)(3) Mini-warehouse facilities... 45.5% 44.1% 46.5% 49.0% 42.2% Business park facilities(4). 19.8% 8.1% 15.1% (3.3)% 7.8% Overall for all facilities.. 42.9% 40.1% 43.0% 38.6% 37.0% Pre-depreciation operating margin(5) Mini-warehouse facilities... 63.7% 63.2% 64.1% 63.5% 61.9% Business Park facilities(4). 50.7% 51.1% 49.1% 45.9% 47.8% Overall for all facilities.. 62.3% 61.9% 62.8% 61.4% 60.0%
- -------- (1) Results for the three months ended March 31, 1995 are not necessarily indicative of the results that may be expected for the year ended December 31, 1995. The Company experiences minor seasonal fluctuations in the occupancy levels of mini-warehouses with occupancies and property performance generally higher in the summer months than in the winter months. (2) Realized rent per square foot represents the actual revenue earned per occupied square foot. Management believes this is a more relevant measure than the posted rental rates, since posted rates can be discounted through the use of promotions. (3) Gross profit margin is computed by dividing NOI (rental income less cost of operations and depreciation) by gross revenues. (4) Decrease in gross profit margin and pre-depreciation operating margin, in 1993, is principally due to the reductions in property operations at the Culver City and Lakewood facilities. (5) Pre-depreciation operating margin is computed by dividing NOI prior to the reduction of depreciation expense by gross revenues. S-19 Trends in property operations are due to: . Increasing occupancy levels due to reduced construction from mid-1980's levels and promotion of the Company's facilities. . Increasing realized rents per square foot of mini-warehouse space due to increased demand and reduced need for promotional discounting of mini- warehouse space to improve occupancy. . Increasing revenues due to increasing realized rents and occupancy levels offset in part by modest increase in expenses (approximately 2% for the first three months of 1995, 5% in 1994, 2% in 1993, and 2% in 1992 on Same Store mini-warehouses) due to expense controls including modest increases in payroll offset by reductions in promotional expenditures. Liquidity and Capital Resources Capital structure. The Company's financial profile is characterized by a low level of debt, increasing net income, increasing cash flow from operations, increasing FFO and a conservative dividend payout ratio with respect to the Common Stock. These characteristics reflect management's desire to "match" asset and liability maturities, to minimize refinancing risks and to retain capital to take advantage of acquisition and development opportunities and to provide financial flexibility. Over the last three years the Company has taken a variety of steps to enhance its capital structure, including: . The public issuance of approximately $335 million of preferred stock. The preferred stock does not require redemption or sinking funds by the Company. . The public issuance of approximately $115 million of Common Stock. . The issuance of approximately $82 million of Common Stock in mergers with Properties 6 and Properties 8. . The retention of approximately $30 million of funds available for debt payments or reinvestment. The Company does not believe it has any significant refinancing risks with respect to its mortgage debt and nominal interest rate risks associated with its variable rate mortgage debt which had a principal balance of $18.3 million at March 31, 1995. The Company uses its $115 million bank credit facility primarily to fund acquisitions and provide financial flexibility and liquidity. The credit facility bears interest at LIBOR plus 1.25%. At March 31, 1995, the Company had borrowings of $35 million under this facility, which was repaid with the proceeds of the offering of Series F Preferred Stock in May 1995. As a result of these transactions, the Company's capitalization has increased. Shareholders' equity increased from $188 million on December 31, 1991 to $696.4 million on March 31, 1995. The increased equity combined with reductions in total debt has resulted in an improvement in the Company's debt to equity ratio from 55% at December 31, 1991 to 13% at March 31, 1995. The Company's ratio of debt to total assets also decreased from 19% at December 31, 1991 to 9% at March 31, 1995. See "Prospectus Summary", "Use of Proceeds" and "Recent Developments" for certain recent and pending transactions, including descriptions of the merger with Properties 8 and Properties 6 in September 1994 and February 1995, respectively, as well as the status of a proposed restructuring of the Company. Net Cash Provided by Operating Activities and Funds From Operations. The Company believes that important measures of its performance as well as its liquidity are net cash provided by operating activities and FFO. Net cash provided by operating activities (net income plus depreciation, amortization and minority interest) reflects the cash generated from the Company's business before distributions to various equity holders, including the preferred shareholders, capital expenditures or mandatory principal payments on debt. Net cash provided by operating activities has increased over the past three years from $44.0 million in 1992 S-20 to $79.2 million in 1994. Net cash provided by operating activities has increased to $23.1 million for the three months ended March 31, 1995 from $17.4 million for the same period in 1994. The following table summarizes the Company's ability to pay the minority interests' distributions, its dividends to the preferred shareholders and capital improvements to maintain the facilities through the use of net cash provided by operating activities. The remaining cash flow is available to the Company to make both scheduled and optional principal payments on debt, pay distributions to common shareholders and for reinvestment.
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ------------------------ ---------------------------------------- 1995 1994 1994 1993 1992 ----------- ----------- ------------ ------------ ------------ Net Income.............. $13,200,000 $ 8,746,000 $ 42,118,000 $ 28,036,000 $ 15,123,000 Depreciation and amorti- zation................. 8,147,000 6,811,000 28,274,000 24,998,000 22,405,000 Minority interest in in- come................... 1,823,000 2,049,000 9,481,000 7,291,000 6,895,000 Gain on disposition of real estate............ -- -- -- -- (398,000) Amortization of dis- counts on mortgage notes receivable....... (40,000) (249,000) (693,000) (848,000) -- ----------- ----------- ------------ ------------ ------------ Net cash provided by op- erating activities............. 23,130,000 17,357,000 79,180,000 59,477,000 44,025,000 Distributions from oper- ations to minority interests..... (4,596,000) (6,102,000) (23,037,000) (23,647,000) (22,892,000) ----------- ----------- ------------ ------------ ------------ Cash from operations allocable to the Company's shareholders. 18,534,000 11,255,000 56,143,000 35,830,000 21,133,000 Less: preferred stock dividends.............. (5,976,000) (3,649,000) (16,846,000) (10,888,000) (812,000) ----------- ----------- ------------ ------------ ------------ Cash from operations available to common shareholders.... 12,558,000 7,606,000 39,297,000 24,942,000 20,321,000 Capital improvements to maintain facilities Mini-warehouses....... (790,000) (397,000) (6,360,000) (3,520,000) (3,541,000) Business parks........ (268,000) (207,000) (1,952,000) (2,915,000) (1,612,000) Add back: minority interest share of capital improvements to maintain facilities.... 332,000 228,000 2,948,000 2,935,000 2,975,000 ----------- ----------- ------------ ------------ ------------ Funds available for principal payments on debt, common dividends and reinvestment....... 11,832,000 7,230,000 33,933,000 21,442,000 18,143,000 Cash distributions to common shareholders.... (6,458,000) (4,951,000) (21,249,000) (14,728,000) (13,424,000) ----------- ----------- ------------ ------------ ------------ Funds available for principal payments on debt and reinvestment.. $ 5,374,000 $ 2,279,000 $ 12,684,000 $ 6,714,000 $ 4,719,000 =========== =========== ============ ============ ============
The increases in net cash provided by operating activities and funds available for principal payments on debt, common dividends and reinvestment over the past three years is primarily due to (i) increasing property net operating income at the Same Store mini-warehouses, (ii) the acquisition of limited and general partnership interests in the PSP Partnerships and (iii) the leverage created through the issuance of preferred stock and the utilization of the net proceeds in real estate investments which have provided net cash flows in excess of the preferred stock dividend requirements. These factors have improved the cash flow position of the common shareholders as FFO applicable to the common shareholders has increased over the same period at a rate greater than the increase in number of common shares. The significant increase in capital improvements in 1994 compared to 1993 for the mini-warehouse facilities is due to the acquisition of new S-21 facilities in 1994 and 1993 combined with approximately $800,000 of non- recurring expense to upgrade certain facilities in Texas to provide for climate controlled storage units. See the consolidated statements of cash flows for the each of the three years in the period ended December 31, 1994 in the 1994 10-K for additional information regarding the Company's investing and financing activities. FFO increased to $56,143,000 for the year ended December 31, 1994 compared to $35,830,000 in 1993 and $21,133,000 in 1992. FFO has increased to $18,534,000 for the three months ended March 31, 1995 from $11,255,000 for the same period in 1994. FFO applicable to the common shareholders (after deducting preferred stock dividends) increased to $39,297,000 for the year ended December 31, 1994 compared to $24,942,000 in 1993 and $20,321,000 in 1992. FFO applicable to the common shareholders has increased to $12,558,000 for the three months ended March 31, 1995 from $7,606,000 for the same period in 1994. FFO is defined by the National Association of Real Estate Investment Trusts, Inc. ("NAREIT") as net income (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. NAREIT has recently adopted revisions to the definition of FFO which will become effective in 1996. The most material impact of the new guidelines will be (i) amortization of deferred financing costs will be treated as an expense--i.e. it will no longer be treated as an add-back to net income and (ii) certain gains on sales of land will be included in FFO if deemed to be recurring. These changes will have no impact on the way the Company currently computes its funds from operations. FFO is a supplemental performance measure for equity real estate investment trusts used by industry analysts. FFO does not take into consideration scheduled principal payments on debt, capital improvements, distributions and other obligations of the Company. Accordingly, FFO is not a substitute for the Company's cash flow or net income (as discussed above) as a measure of the Company's liquidity or operating performance. The Company believes that its rental revenues, distributions from real estate partnership interests and interest income will be sufficient over at least the next 12 months to meet the Company's operating expenses, capital improvements, debt service requirements and distributions to shareholders. During 1995, the Company has budgeted approximately $8 million for capital improvements ($2 million of which is directly attributable to the minority interest in respect of its ownership interest) to maintain its facilities. During 1994, the Company incurred capital improvements of approximately $8.3 million. The Company believes that it is not subject to any significant refinancing risks. During 1993 and 1994, the Company either repaid or extended the maturities of its mortgage notes such that in no year, until 1999, will there be more than $5.0 million of principal payments on mortgage notes becoming due and payable. See Note 7 to the Company's consolidated financial statements in the 1994 10-K for principal maturities on mortgage notes payable. In March 1995, the Company acquired two parcels of land located in Atlanta, Georgia on which the Company is currently developing mini-warehouse facilities. The facilities are scheduled to open in late 1995 and have an estimated aggregate cost of approximately $8.2 million. The Company believes its geographically diverse portfolio has resulted in a relatively stable and predictable investment portfolio with increasing overall property performance over the past four years. S-22 Distributions The Company has a conservative distribution policy that is, among other things, supported by its cash flow from operations (after capital expenditures and debt service), availability of cash to make such distributions and Company's ability to maintain its REIT status. The Company's policy is also conservative with respect to FFO. The Company's conservative distribution policy permits it, after funding its distributions and capital improvements, to retain significant funds to make additional investments and debt reductions. During 1992, 1993, 1994 and the first quarter of 1995, the Company distributed to common shareholders 66%, 59%, 54% and 51% of its FFO available to common shareholders, respectively, allowing it to retain approximately $30 million after capital improvements and preferred stock dividend requirements. Distributions to shareholders since 1993 were as follows:
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, --------------------------- ------------------------------------------------------- 1995 1994 1993 --------------------------- --------------------------- --------------------------- DISTRIBUTIONS TOTAL DISTRIBUTIONS TOTAL DISTRIBUTIONS TOTAL PER SHARE DISTRIBUTIONS PER SHARE DISTRIBUTIONS PER SHARE DISTRIBUTIONS ------------- ------------- ------------- ------------- ------------- ------------- Series A Preferred Stock.................. $.625 $ 1,141,000 $2.500 $ 4,563,000 $2.500 $ 4,563,000 Series B Preferred Stock.................. $.575 1,372,000 $2.300 5,340,000 $1.803 4,147,000 Series C Preferred Stock.................. $.542 650,000 $1.042 1,250,000 -- -- Series D Preferred Stock.................. $.594 713,000 $0.792 950,000 -- -- Series E Preferred Stock.................. $.417 914,000 $ -- -- -- -- Convertible Preferred Stock.................. $.516 1,186,000 $2.063 4,743,000 $0.947 2,178,000 ----------- ----------- ----------- 5,976,000 16,846,000 10,888,000 Common Stock............ $.220 6,458,000 $0.850 21,249,000 $0.840 14,728,000 ----------- ----------- ----------- $12,434,000 $38,095,000 $25,616,000 =========== =========== ===========
The Series C Preferred Stock and the Series D Preferred Stock were issued on June 30, 1994 and September 1, 1994, respectively. Dividends with respect to the Series C and Series D Preferred Stock are pro rated from the date of issuance through December 31, 1994. The annual distribution requirement with respect to the Series D Preferred stock is $2.38 per share. The dividend rate on the Series C Preferred Stock is adjustable. For the period from the date of issue (June 30, 1994) through September 30, 1994, the rate was equal to 8.15% per annum, 8.426% per annum for the fourth quarter of 1994 and 8.668% per annum for the first quarter of 1995. Thereafter, the dividend rate per annum will be adjusted quarterly and will be equal to the highest of one of three U.S. Treasury indices (Treasury Bill Rate, Ten Year Constant Maturity Rate, and Thirty Year Constant Maturity Rate) multiplied by 110%. However, the dividend rate for any dividend period will not be less than 6.75% per annum nor greater than 10.75% per annum. The dividend rate with respect to the second quarter of 1995 is 8.393% per annum. The annual distribution level with respect to the Company's outstanding preferred stock (including the Series E Preferred Stock issued in February 1995 and the Series F Preferred Stock issued in May 1995) is approximately $31,227,000. The amount assumes an annual dividend rate on the Series C Preferred Stock of 8.393% (the rate in effect for the second quarter of 1995). At the maximum rate on the Series C Preferred Stock (10.75%), the amount would increase by approximately $707,000. The distributions for the first quarter of 1995 with respect to the Common Stock is $.22 per share. REIT Distribution Requirement As a REIT, the Company is not taxed on that portion of its taxable income which is distributed to its shareholders provided that at least 95% of its taxable income in any year is so distributed prior to filing of the Company's tax return with respect to such year. The Company has satisfied the REIT distribution requirement since 1980. The Company has satisfied the REIT distribution requirement for 1992, 1993 and 1994 by attributing distributions in 1993, 1994 and 1995 to the prior year's taxable income. The Company S-23 may be required, over each of the next several years, to attribute distributions made after the close of the taxable year to the prior year, but shareholders will be treated for federal income tax purposes as having received such distributions in the taxable years in which they are actually made. The extent to which the Company will be required to attribute distributions to the prior year will depend on the Company's operating results and the level of distributions as determined by the Board of Directors. Future Transactions The Company intends to continue to expand its asset and capital base through the acquisition of real estate assets and interests in real estate assets from unaffiliated parties and affiliates of Public Storage through direct purchases, mergers, tender offers or other transactions, including transactions of the type described under "Use of Proceeds" and "Recent Developments." The Company expects to fund these transactions with borrowings under its credit facility, undistributed operating cash flow and the issuance of securities. S-24 BUSINESS GENERAL The Company, an equity real estate investment trust ("REIT"), owns more mini- warehouse space in the United States than any competitor and is the largest owner of mini-warehouses operated under the "Public Storage" name. At March 31, 1995, the Company had equity investments in 422 mini-warehouses with approximately 23.9 million square feet of space. The Company's mini-warehouses, which are located primarily in or near major metropolitan markets in 37 states, offer relatively low-cost, easily accessible, secure and enclosed storage space for both personal and business use. The Company's primary objective is to maximize shareholder value by increasing funds from operations per share of Common Stock through internal growth and acquisitions of additional mini-warehouses. The Company believes that its access to capital, geographic diversification and operating efficiencies resulting from its size enhance its ability to achieve this objective. The Company believes that its mini-warehouse investments made since December 31, 1994 and its proposed acquisitions to be made with the net proceeds of the Offering generated an unleveraged cash yield of approximately 10% for the latest 12-month period for which information is available. The Company believes that its mini-warehouses have attractive operating characteristics. For 1994, the Company's mini-warehouses had an average occupancy of 90% compared with an average break-even occupancy level (before depreciation expense and debt service) of only 28%, resulting in a profit margin (net cash flow divided by rental income) of 64%. The Company's tenant base, which is comprised of more than 170,000 individuals and businesses, has an average occupancy term of 12 months, and no one mini-warehouse accounts for more than 1% of revenues. In addition, the Company's mini-warehouses are characterized by a low level of capital expenditure to maintain their condition and appearance. The Company further believes that its operating results have benefitted from favorable industry trends and conditions. Notably, the level of new mini- warehouse construction has decreased since 1988 while consumer demand has increased. In addition, in recent years consolidation has occurred in the fragmented mini-warehouse industry. The Company believes that it is well- positioned to capitalize on this consolidation trend due to its demonstrated access to capital and national presence. Public Storage is the largest mini- warehouse operator in the United States and Canada, operating approximately the same square footage of mini-warehouse space as the next ten largest operators combined and approximately four times as much space as the next largest operator. The Company is evaluating the feasibility of developing mini-warehouses in selected markets in which there are few, if any, facilities to acquire at attractive prices and where the absence of other undeveloped parcels of land or other impediments to development make it difficult to construct additional competing facilities. The Company is currently constructing two properties in Atlanta, Georgia, which are expected to open during 1995. The Company's five senior officers are responsible for the acquisition of more than 350 mini-warehouses, the development of more than 650 mini-warehouses and the operation of more than 1,000 mini-warehouses during their average 16 years of experience with the Public Storage organization. In addition, the Company's senior management has a significant ownership position in the Company with officers, directors and their affiliates beneficially owning approximately 9,358,000 shares or 28% of the Common Stock as of March 31, 1995, with a current market value of approximately $150 million. Approximately 2,165,000 of these shares were purchased for cash at market prices during 1994. The Company is currently advised by Public Storage Advisers, Inc. (the "Adviser") and its facilities are operated by Public Storage Management, Inc. ("PSMI") and Public Storage Commercial Properties Group, Inc. ("PSCP"). The Adviser, PSMI and PSCP are subsidiaries of Public Storage, Inc. ("PSI"), and the Company's executive officers and certain directors are affiliated with PSI. All are subject to various conflicts S-25 of interest arising out of their relationships with entities that own and operate mini-warehouses. All operations are under the general supervision of the Board of Directors, including investments in new facilities and transactions with affiliates. Of the Company's investments, 211 were made jointly with the PSP Partnerships. The Company has elected to be taxed as a REIT under the Code. To the extent that the Company continues to qualify as a REIT, it will not be taxed, with certain limited exceptions, on the taxable income that is distributed to its shareholders. See "Certain Considerations-- Conflicts of Interest and Transactions with Affiliates" and "Certain Federal Income Tax Considerations" in the accompanying Prospectus. See "Prospectus Summary--Proposed Restructuring" for the status of a proposed restructuring of the Company. INVESTMENTS IN FACILITIES At March 31, 1995, the Company had equity interests (through direct ownership, as well as general and limited partnership interests) in 438 facilities (180 of which were wholly owned) located in 37 states: Alabama (14), Arizona (5), California (107), Colorado (14), Connecticut (3), Delaware (3), Florida (34), Georgia (12), Hawaii (1), Illinois (9), Indiana (8), Kansas (13), Kentucky (2), Louisiana (3), Maryland (10), Massachusetts (1), Michigan (2), Minnesota (1), Missouri (9), Nebraska (1), Nevada (9), New Hampshire (2), New Jersey (13), New York (6), North Carolina (6), Ohio (20), Oklahoma (5), Oregon (13), Pennsylvania (7), Rhode Island (2), South Carolina (1), Tennessee (8), Texas (61), Utah (5), Virginia (12), Washington (14), and Wisconsin (2). These facilities consist of 403 mini-warehouses, 16 business parks and 19 combination mini-warehouse/business park facilities. Some of the general partnership and limited partnership interests represent a de minimus interest in the facilities. At March 31, 1995, the Company also held mortgage loans secured by 11 other mini-warehouses owned by seven private limited partnerships whose general partners are affiliates of the Adviser. None of the Company's current investments involves 5% or more of the Company's total assets, gross revenues or net income. In the opinion of management of the Company, the facilities in which the Company has invested are adequately insured. Mini-Warehouses. Mini-warehouses, which comprise the vast majority of the Company's investments (approximately 94% of the Company's FFO for the three months ended March 31, 1995), are designed to offer accessible storage space for personal and business use at a relatively low cost. A user rents a fully enclosed space which is for the user's exclusive use and to which only the user has access on an unrestricted basis during business hours. On-site operation is the responsibility of resident managers who are supervised by area managers. Some mini-warehouses also include rentable uncovered parking areas for vehicle storage. Leases for mini-warehouse space may be on a long-term or short-term basis, although typically spaces are rented on a month-to-month basis. Rental rates vary according to the location of the property and the size of the storage space. Users of space in mini-warehouses include both individuals and large and small businesses. Individuals usually employ this space for storage of, among other things, furniture, household appliances, personal belongings, motor vehicles, boats, campers, motorcycles and other household goods. Businesses normally employ this space for storage of excess inventory, business records, seasonal goods, equipment and fixtures. Mini-warehouses in which the Company has invested generally consist of three to seven buildings containing an aggregate of between 350 to 750 storage spaces, most of which have between 25 and 400 square feet and an interior height of approximately eight to 12 feet. The Company experiences minor seasonal fluctuations in the occupancy levels of mini-warehouses with occupancies generally higher in the summer months than in the winter months. The Company believes that these fluctuations result in part from increased moving activity during the summer. S-26 The Company's mini-warehouses are geographically diversified and are generally located in heavily populated areas and close to concentrations of apartment complexes, single family residences and commercial developments. However, there may be circumstances in which it may be appropriate to own a property in a less populated area, for example, in an area that is highly visible from a major thoroughfare and close to, although not in, a heavily populated area. Moreover, in certain population centers, land costs and zoning restrictions may create a demand for space in nearby less populated areas. As with most other types of real estate, the conversion of mini-warehouses to alternative uses in connection with a sale or otherwise would generally require substantial capital expenditures. However, the Company does not intend to convert its mini-warehouses to other uses. Commercial Properties. Subject to the prohibitions on investments and activities described below, the Company may invest in all types of real estate. Most of the Company's non-mini-warehouse investments are interests in business parks and low-rise office buildings. A business park may include both industrial and office space. Industrial space may be used for, among other things, light manufacturing and assembly, storage and warehousing, distribution and research and development activities. The Company believes that most of the office space is occupied by tenants who are also renting industrial space. The remaining office space is used for general office purposes. A business park may also include facilities for commercial uses such as banks, travel agencies, restaurants, office supply shops, professionals or other tenants providing services to the public. The amount of retail space in a business park is not expected to be significant. The Company's business parks typically consist of one to ten buildings located on three to twelve acres and contain from approximately 55,000 to 175,000 square feet of rentable space. A business park property is typically divided into units ranging in size from 600 to 5,000 square feet. However, the Company may acquire business parks that do not have these characteristics. The larger facilities have on-site management. Parking is open or covered, and the ratio of spaces to rentable square feet ranges from one to four per thousand square feet, depending upon the use of the property and its location. Office space generally requires a greater parking ratio than most industrial uses. GROWTH STRATEGIES The Company's growth strategies focus on improving the operating performance of its existing properties and on increasing its ownership of mini-warehouses through additional investments. Major elements of these strategies are as follows: . Increase net cash flow from existing properties. The Company seeks to increase the net cash flow generated by its existing properties by (i) increasing average occupancy rates and (ii) achieving higher levels of realized monthly rents per occupied square foot. Average occupancy at the Same Store mini-warehouses has increased from 86.1% in 1992 to 90.3% for 1994. Similarly, realized monthly rents per occupied square foot have increased approximately 7% during this same period. These factors have resulted in net cash flow growth at Same Store mini-warehouses of approximately 6%, 10% and 7% in 1992, 1993 and 1994, respectively, over the prior year. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Results of Operations." .Acquire properties operated by Public Storage. The Company believes its relationship with Public Storage enhances its ability to identify attractive acquisition opportunities. Exclusive of the Company's facilities, approximately 600 mini-warehouses are operated under the "Public Storage" name on behalf of approximately 80 ownership entities. From time to time, some of these owners desire to sell their mini-warehouses providing the Company with a source of acquisition opportunities. These properties exhibit net cash flow growth comparable to the Company's mini-warehouses and the Company believes they include some of the better located, better constructed mini-warehouses in the industry. Because of common property operation, the Company is provided with reliable operating information prior to acquisition and these properties are easily integrated into the Company's portfolio. From January 1, 1992 through December 31, S-27 1993, the Company acquired a total of 36 mini-warehouses which were operated under the "Public Storage" name (2.1 million square feet of space at an aggregate purchase price of $83.2 million). For 1994, the net cash flow generated by these properties provided an unleveraged cash yield of approximately 11.6%. From January 1, 1994 through May 5, 1995 , the Company acquired an additional 73 such properties. The Company believes that adequate procedures are in place to protect the Company's interest in affiliated transactions. All affiliated transactions must be approved by the Company's independent directors and supported by independent appraisals or fairness opinions. .Acquire properties operated by other operators. The Company believes its relationship with Public Storage also enhances its ability to capitalize on the overall fragmentation in the mini-warehouse industry. Of the more than 22,000 mini-warehouses in the United States, the Company believes that the ten largest operators manage less than 11% of the total space. Public Storage's presence in and knowledge of substantially all of the major markets in the United States provides the Company with local market information on rates, occupancy and competition. From January 1, 1992 through December 31, 1993, the Company acquired a total of 16 mini-warehouses (967,000 square feet of space at an aggregate purchase price of $34.5 million) operated by other operators. For 1994, the net cash flow generated by these assets provided an unleveraged cash yield of approximately 12.2%. From January 1, 1994 through May 5, 1995, the Company acquired an additional 37 such properties. .Access to acquisition capital. The Company believes that its strong financial position enables it to access capital for growth. The Company's debt, as a percentage of shareholders' equity, has decreased from 60% at December 31, 1990 to 13% at March 31, 1995, thereby significantly reducing refinancing risks. The Company currently has a $115 million credit facility (LIBOR plus 1.25%) with a bank group led by Wells Fargo Bank, which the Company uses as a temporary source of acquisition financing. The Company seeks to ultimately finance all acquisitions with permanent sources of capital. From January 1, 1992 through March 31, 1995, the Company has issued approximately $500 million of perpetual preferred and common equity to finance such acquisitions. See "--Borrowings" and "--Limitations on Debt." .Conservative distribution policy. The Company seeks to retain significant funds (after funding its distributions and capital improvements) for additional property acquisitions and debt reduction. From January 1, 1992 through March 31, 1995, the Company retained approximately $30 million for such purposes. For the three months ended March 31, 1995, the Company distributed only 51% of its FFO allocable to Common Stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." As a result of the implementation of its growth strategies, the Company has successfully increased FFO allocable to Common Stock. From 1992 through 1994, FFO allocable to Common Stock increased 93%, while the weighted average number of shares of Common Stock increased only 51%. See "Prospectus Supplement Summary--Summary Financial Information." OPERATING STRATEGIES The Company's mini-warehouses are operated under the "Public Storage" name, the most recognized name in the mini-warehouse industry. The major elements of the Company's and Public Storage's operating strategies are as follows: . Capitalize on Public Storage name recognition. Public Storage, with more than 20 years of operating experience in the mini-warehouse business, is the largest operator of mini-warehouses in the country. Including the Company's mini- warehouses, as of March 31, 1995, Public Storage operated 1,106 mini-warehouses aggregating approximately 65.2 million square feet of space located in 38 states and four provinces in Canada. In the past eight years, in excess of $56 million has been expended promoting the "Public Storage" name. The Company believes that its participation in the Public Storage marketing and S-28 advertising programs improves its competitive position in the market. Public Storage is the only mini-warehouse operator regularly using television advertising in several major markets around the country, and Public Storage's in-house Yellow Pages staff designs and places advertisements in approximately 700 directories in 80 markets. In addition, Public Storage offers a toll-free referral system, 800-44-STORE, which services approximately 100,000 calls per year from potential customers inquiring as to the nearest Public Storage mini- warehouse. .Benefit from Public Storage's economies of scale. Through its affiliation with Public Storage, the Company is able to realize economies of scale. By combining the advertising and marketing programs and purchasing activities of more than 1,100 mini-warehouses, Public Storage achieves significant per facility savings which are passed on to the Company. .Maintain high occupancy levels and increase realized rents. Subject to market conditions, Public Storage generally seeks to achieve average occupancy levels in excess of 90% and to eliminate promotions prior to increasing rental rates. Average occupancy for the Company's Same-Store mini-warehouses has increased from 86.8% in 1992 to 90.3% in 1994. During the first quarter of 1995, the average occupancy was 88.6% compared to 87.7% for the first quarter of 1994. Realized monthly rents per square foot increased from $.55 in 1992 to $.60 during the first quarter of 1995. The Company has increased rental rates in many markets where it has achieved high occupancy levels and eliminated or minimized promotions. .Concentrate properties in major markets. The Company is focused on owning and acquiring mini-warehouses located principally in the 54 largest metropolitan areas (those with populations in excess of 1,000,000) throughout the country. The Company believes that the events resulting in the rental of mini-warehouse space occur with greater frequency in the larger metropolitan areas than in less populous areas. By concentrating its facilities within these markets, the Company can also achieve economies of scale with respect to property operations and advertising. .Focus on high quality properties in prime locations. The Company seeks to own high quality properties located on prime land with high traffic counts, high visibility and a dense population within a three to five mile radius. The Company believes that facilities located on prime land are less susceptible to the threat of competition via new development and, as a result, have more stable cash flows. The Company is also committed to investing the capital necessary to maintain the high quality of its facilities and to upgrade them when warranted by market conditions. .Systems and controls. Public Storage has an organizational structure and a property management system, "CHAMP" (Computerized Help and Management Program), which links its corporate office with each mini-warehouse. This enables Public Storage to obtain daily information from each mini-warehouse and to achieve efficiencies in operations and maintain control over space inventory, rental rates and promotional discounts. Expense management is achieved through centralized payroll and accounts payable systems and a comprehensive property tax appeals department, and Public Storage has an extensive internal audit program designed to ensure proper handling of cash collections. .Professional property operation. In addition to approximately 120 support personnel at the Public Storage corporate offices, Public Storage employs approximately 2,700 on-site personnel who manage the day-to-day operations of the mini-warehouses in the Public Storage system. These on-site personnel are supervised by 107 district managers, 14 regional managers and three divisional managers (with an average of 12 years experience in the mini-warehouse industry) who report to the president of the mini-warehouse property operator (who has 11 years of experience with the Public Storage organization). Public Storage carefully selects and extensively trains the operational and support personnel and offers them a progressive career path. See "Management." S-29 COMPETITION Competition in the market areas in which many of the Company's facilities are located is significant and affects the occupancy levels, rental rates and operating expenses of certain of the Company's facilities. In addition to competition from mini-warehouses operated by Public Storage, there are three other national firms and numerous regional and local operators. The Company believes that the significant operating and financial experience of its executive officers and directors, combined with the Company's capital structure, national investment scope, geographic diversity, economies of scale and the "Public Storage" name, should enable the Company to continue to compete effectively with other entities. In seeking investments, the Company competes with a wide variety of institutions and other investors, some of whom may have greater financial resources than the Company. An increase in the amount of funds available for real estate investments may increase competition for ownership of interests in facilities and may reduce yields. The following table sets forth information on the largest mini-warehouse operators in the United States and Canada as of March 31, 1995. Of the 1,106 mini-warehouses operated under the "Public Storage" name at March 31, 1995, the Company had equity interests (through direct ownership, as well as general and limited partnership interests) in 422 mini-warehouses. Largest Mini-Warehouse Facility Operators-March 1995 [BAR CHART APPEARS HERE ILLUSTRATING THE LARGEST MINI-WAREHOUSE FACILITY OPERATORS--MARCH 1995: PUBLIC STORAGE, SHURGARD, U-HAUL AND STORAGE USA.] Public Storage 1,106 facilities 65,200,000 total rentable square feet Shurgard 248 facilities 15,600,000 total rentable square feet U-Haul 650 facilities 13,000,000 total rentable square feet Storage USA 128 facilities 8,400,000 total rentable square feet Sources: Public Storage; Shurgard Storage Centers, Inc. Registration Statement filed April 18, 1995 and Prospectus dated February 15, 1995; Amerco Prospectus dated March 16, 1995; Storage USA, Inc. Registration Statement filed April 18, 1995. Includes United States and Canada. In Canada, Public Storage's mini-warehouses are operated by an affiliate of PSMI. S-30 PROHIBITED INVESTMENTS AND ACTIVITIES The Company's Bylaws prohibit the Company from purchasing properties in which the Company's officers or directors have an interest, or from selling properties to such persons, unless the transactions are approved by a majority of the independent directors and are fair to the Company based on an independent appraisal. This Bylaw provision may be changed only upon a vote of the holders of a majority of the shares of (i) Common Stock and Convertible Preferred Stock, voting together and (ii) each of the series of senior preferred stock. See "--Limitations on Debt" for other restrictions in the Bylaws. INVESTMENT ADVISER Since the Company's organization, the Adviser has administered the day-to-day investment operations of the Company and has advised and consulted with the Board of Directors in connection with the acquisition and disposition of investments. The Board of Directors has the duty of overall supervision of the Company's operations. The Adviser is wholly owned by PSI which in turn is wholly owned by PSI Holdings, Inc. ("PSIH"). PSIH is beneficially owned 14% by Kenneth Q. Volk, Jr. and 86% by B. Wayne Hughes and his daughter, Tamara L. Hughes, who has an option to acquire, exercisable under certain circumstances, and an irrevocable proxy to vote, Mr. Volk's remaining interest in PSIH. Certain of the directors and officers of the Company are also directors and officers of the Adviser. The Advisory Contract between the Company and the Adviser was approved by the unanimous vote of the directors who are not affiliated with the Adviser. Effective September 30, 1991, the Company entered into an Amended and Restated Advisory Contract (the "Advisory Contract") with the Adviser. This contract, which amends the original advisory contract, provides for the monthly payment of advisory fees equal to the sum of (i) 12.75% of the Company's adjusted income (as defined, and after a reduction for the Company's share of capital improvements) per share of Common Stock based on Common Stock outstanding at September 30, 1991 (14,989,454 shares) and (ii) 6% of adjusted income per share on shares in excess of 14,989,454 shares of Common Stock. Under the original advisory contract, advisory fees were equal to 15% of the Company's adjusted income (as defined, and without a reduction for the Company's share of capital improvements). Effective May 14, 1992, the Advisory Contract was amended to provide that, in computing the advisory fee, adjusted income will be reduced by dividends paid on all preferred stock and that the Adviser will also receive an amount equal to 6% of any such dividends. In addition to the advisory fee, the Adviser is paid a disposition fee of 20% of the total realized gain (as defined) from the sale of the Company's assets, subject to certain limitations. The Advisory Contract may be terminated (i) at any time by either party upon 60 days' written notice, with or without cause, or (ii) by the Company upon written notice upon the occurrence of certain events. The Advisory Contract is subject to annual renewals with the approval of the independent directors and, in certain circumstances, can be assigned by either the Company or the Adviser. Upon (i) termination of the Advisory Contract, other than under certain circumstances, or (ii) expiration of the Advisory Contract due to the Company's refusal to agree to an extension of the Advisory Contract on the same terms, the Adviser will be entitled to receive payments as follows: (a) an amount equal to the accrued and unpaid portion of the disposition fee, less 20% of any total unrealized loss (as defined) as of the date of termination; (b) an amount equal to 20% of the total unrealized gain (as defined); and (c) an amount equal to 15% of adjusted income from October 1, 1991 to the date of termination minus the advisory fee paid from October 1, 1991 to the date of termination. See "Prospectus Summary--Proposed Restructuring" for the status of a proposed restructuring of the Company. S-31 PROPERTY OPERATORS Since the Company's organization, PSMI, which was organized in 1973, has provided property operation services to the Company under a Management Agreement between the Company and PSMI (as amended, the "Management Agreement," which term shall include the assignment relating to such agreement referenced in the following sentence). In 1987, PSMI assigned its rights to operate commercial properties to PSCP, which was organized in 1987. PSMI continues to operate mini-warehouse facilities under the Management Agreement. Under the Management Agreement, PSMI and PSCP operate substantially all of the assets in which the Company has invested. PSMI has informed the Company that it believes it operates more rentable square feet of mini-warehouse storage space than any other property operator. At March 31, 1995, PSMI, PSCP and affiliates operated a total of approximately 1,157 facilities in the United States and Canada, containing an aggregate of approximately 70.3 million net rentable square feet of space, 1,106 of which were mini-warehouse facilities containing approximately 65.2 million net rentable square feet of mini- warehouse space. Under the supervision of the Company, PSMI and PSCP coordinate rental policies, rent collection, marketing activity, purchase of equipment and supplies, maintenance activity, and the selection and engagement of vendors, suppliers and independent contractors. PSMI and PSCP assist and advise the Company in establishing policies for the hire, discharge and supervision of employees for the operation of the Company's facilities, including resident managers, assistant managers, relief managers, and billing and maintenance personnel. Some or all of these employees may be employed on a part-time basis and may also be employed by PSI, partnerships organized by PSI or other persons or entities owning facilities operated by PSMI or PSCP. In the purchasing of services by the Company such as advertising (including broadcast media advertising) and insurance, PSMI and PSCP attempt to achieve economies by combining the resources of the various facilities that they operate. Facilities operated by PSMI and PSCP carry comprehensive insurance, including fire, earthquake, liability and extended coverage. PSMI has developed systems for space inventory, accounting and handling delinquent accounts, including a computerized network linking PSMI operated facilities. Each project manager is furnished with detailed operating procedures and typically receives facilities training from PSMI. Form letters covering a variety of circumstances are also supplied to resident managers. A record of actions taken by the resident managers when delinquencies occur is maintained. The Company's facilities are typically advertised via signage, yellow pages, flyers and broadcast media advertising (television and radio) in geographic areas in which many of the Company's facilities are located. The Company believes that PSMI is the only mini-warehouse operator that uses television advertising to any significant extent. Broadcast media and other advertising costs are charged to the Company's facilities located in geographic areas affected by the advertising. From time to time, PSMI or PSCP adopt promotional programs, such as temporary rent reductions, in selected areas or for individual facilities. For as long as the Management Agreement is in effect, PSMI has granted the Company a non-exclusive license to use two PSI service marks and related designs, including the "Public Storage" name, in conjunction with rental and operation of facilities managed pursuant to the Management Agreement. Upon termination of the Management Agreement, the Company would no longer have the right to use the service marks and related designs except as described below. Management believes that the loss of the right to use the service marks and related designs could have a material adverse effect on the Company's business. The Management Agreement as amended in February 1995 (approved by the Board of Directors in August 1994) provides that (i) as to facilities directly owned by the Company, the Management Agreement will expire in February 2002, provided that in February of each year it shall be automatically extended for one year unless either party notifies the other that the Management Agreement is not being extended, in which S-32 case it expires, as to such facilities, on the first anniversary of its then scheduled expiration date; and (ii) as to facilities in which the Company has an interest, but not directly owned by the Company, the Management Agreement may be terminated as to such facilities, upon 60 days' written notice by the Company and upon seven years' notice by PSMI or PSCP, as the case may be. The Management Agreement may also be terminated at any time by either party for cause, but if terminated for cause by the Company, the Company retains the right to use the service marks and related designs until the then scheduled expiration date, if applicable, or otherwise a date seven years after such termination. PSMI and PSCP are wholly owned subsidiares of PSI, which in turn is a wholly owned subsidiary of PSIH. Certain of the directors and officers of the Company are also directors and officers of PSMI and PSCP. For a description of the compensation payable to PSMI and PSCP under the Property Management Agreement, see item 13 of the 1994 10-K. See "Prospectus Summary--Proposed Restructuring" for the status of a proposed restructuring of the Company. AGREEMENT ON INVESTMENT OPPORTUNITIES At any time and from time to time the Company can invoke its rights under the Agreement on Investment Opportunities, which (when invoked) provides that PSI and its affiliates may not invest, or offer to others the opportunity to invest, in any existing mini-warehouse owned by an unaffiliated party unless the opportunity has been presented to and rejected by the Company. These parties may invest in other types of improved property, and in unimproved property acquired for mini-warehouse construction, without obligation to make such investments available to the Company. Upon completion of this offering, the Company intends to invoke its rights under the Agreement on Investment Opportunities until the net proceeds from the sale of the shares of Common Stock offered hereby have been committed. BORROWINGS As of March 31, 1995, the Company had an aggregate of approximately $52 million of mortgage financing due at various dates between 1995 and 2028 (average maturity of approximately 8 years) and bearing interest at rates ranging from 7.1% to 10.55% (weighted average of 9.33%) per year. The Company has a $115 million credit facility with a group of commercial banks. The facility bears interest at LIBOR plus 1.25% and is secured by the Company's general partner interests in joint ventures with seven of the PSP Partnerships. The revolving portion of the facility ($45 million) expires in September 1997 and is extendable until 1999. The declining revolver portion of the facility provides for maximum borrowings of $70 million through September 1997, $20 million through September 1998 and $10 million through September 1999. As of May 5, 1995, there were no amounts outstanding under the credit facility. The Company has received a commitment from its group of commercial banks that, among other things, would expand the credit facility to $125 million, reduce the interest rate and release the security for the credit facility. The terms of the modified credit facility have not been finalized, and there is no assurance that the modification will be implemented. Subject to the limitations described under "--Limitations on Debt", the Company has broad powers to borrow in furtherance of its investment objectives. The Company has incurred in the past, and may incur in the future, both short- term and long-term indebtedness to increase its funds available for investment in additional facilities, capital expenditures and distributions. S-33 LIMITATIONS ON DEBT The Bylaws provide that the Board of Directors shall not authorize or permit the incurrence of any obligation by the Company which would cause the Company's "Asset Coverage" of its unsecured indebtedness to become less than 300%. Asset Coverage is defined in the Bylaws as the ratio (expressed as a percentage) by which the value of the total assets (as defined in the Bylaws) of the Company less the Company's liabilities (except liabilities for unsecured borrowings) bears to the aggregate amount of all unsecured borrowings of the Company. This Bylaw provision may be changed only upon a vote of the holders of a majority of the shares of (i) Common Stock and Convertible Preferred Stock voting together and (ii) each of the series of senior preferred stock. The Company's Bylaws prohibit the Company from issuing debt securities in a public offering unless the Company's "cash flow" (which for this purpose means net income, exclusive of extraordinary items, plus depreciation) for the most recent 12 months for which financial statements are available, adjusted to give effect to the anticipated use of the proceeds from the proposed sale of debt securities, would be sufficient to pay the interest on such securities. This Bylaw provision may be changed only upon a vote of the holders of a majority of the shares of (i) Common Stock and Convertible Preferred Stock voting together and (ii) each of the series of senior preferred stock. Without the consent of the holders of a majority of each of the series of senior preferred stock, the Company will not take any action that would result in a ratio of "Debt" to "Assets" (the "Debt Ratio") in excess of 50%. As of March 31, 1995, the Debt Ratio was approximately 9%. "Debt" means the liabilities (other than "accrued and other liabilities" and "minority interest") that should, in accordance with generally accepted accounting principles, be reflected on the Company's consolidated balance sheet at the time of determination. "Assets" means the Company's total assets that should, in accordance with generally accepted accounting principles, be reflected on the Company's consolidated balance sheet at the time of determination. AGREEMENTS WITH PUBLIC PARTNERSHIPS Between 1982 and 1987, affiliates of PSI sponsored the eight PSP Partnerships. Through public offerings, these limited partnerships raised an aggregate of $454,791,000 for investment in existing facilities. The Company and seven of the PSP Partnerships jointly own 211 facilities. As of March 31, 1995, the Company had invested approximately $175,000,000 in these joint ventures with seven of the PSP Partnerships. The total of the original purchase prices of the facilities jointly acquired by the Company and these PSP Partnerships is approximately $470,000,000, consisting of cash paid by the Company and the PSP Partnerships, Common Stock and convertible securities issued by the Company, notes issued by the Company, existing property debt assumed by the Company alone and existing property debt assumed jointly by the Company and the PSP Partnerships. The interest of the Company in these joint ventures ranges from approximately 10% to 70%, but is generally 50% or less. In addition, the Company is a co-general partner, and owns limited partnership interests (ranging from 33% to 66% at March 31, 1995), in all of the PSP Partnerships. See "Recent Developments." Pursuant to participation agreements entered into between the Company and seven of the eight PSP Partnerships, the facilities in which the Company invested with such PSP Partnerships were held in a number of separate joint ventures comprised of a PSP Partnership and the Company. The participation agreements were approved by the unanimous vote of the directors of the Company who are not affiliated with the PSP Partnerships. The Company believes that the terms of the participation agreements are as favorable to the Company as the terms that could have been obtained from unaffiliated sources providing comparable benefits to the Company. For tax administrative efficiency the original joint ventures with the seven PSP Partnerships were consolidated into a single joint venture for each of the seven respective PSP Partnerships effective December 31, 1990. The consolidated agreements, like the prior individual agreements, include the following provisions: (i) although the PSP Partnership is the managing general partner of the respective joint venture, the Company, at any time after seven years from the date a property was acquired, may compel a sale of a property at not less than the property's independently determined fair market value, (ii) both the Company and the PSP S-34 Partnership have a right of first refusal to acquire the other's interest in the event of a proposed sale, and (iii) allocations will be made to take into account, for tax purposes, any tax items (such as gain, loss, depreciation, etc.) arising from the difference (if any) (a) between the tax basis of property contributed to the general partnership and the fair market value of the property and (b) between the discounted value for purposes of determining profits and losses and the fair market value. In addition, depreciation deductions are allocated to, and borne by, the PSP Partnership to the extent such depreciation deductions are not in excess of the PSP Partnership's original capital account. See "Certain Federal Income Tax Considerations--Tax Consequences to Company of Joint Investments with PSP Partnerships" in the accompanying Prospectus for a discussion of certain tax issues that may be raised by joint investments by the Company and the PSP Partnerships. EMPLOYEES The Company has approximately 1,200 full and part-time employees, primarily personnel engaged in rendering property operation services. The Company is required to bear the compensation of personnel involved in the business of the Company (other than executives and their secretarial support personnel), in addition to payment of advisory fees and property operation fees. S-35 MANAGEMENT The following table sets forth the directors and officers of the Company.
NAME POSITIONS ---- --------- B. Wayne Hughes Chairman of the Board and Chief Executive Officer Harvey Lenkin President and Director Hugh W. Horne Vice President Ronald L. Havner, Jr. Vice President and Chief Financial Officer Obren B. Gerich Vice President John Reyes Controller Sarah Hass Secretary Robert J. Abernethy Director Dann V. Angeloff Director William C. Baker Director Uri P. Harkham Director Berry Holmes Director Michael M. Sachs Director
B. Wayne Hughes, age 61, has been a director of the Company since its organization in 1980 and was President and Co-Chief Executive Officer from 1980 until November 1991 when he became Chairman of the Board and sole Chief Executive Officer. Mr. Hughes is the President and Chief Executive Officer of PSI and various affiliates and the Chairman of the Board of 17 other REITs organized by PSI beginning in 1989 (the "Public Storage REITs"). Mr. Hughes has been active in the real estate investment field for 25 years. Harvey Lenkin, age 59, became President and a director of the Company in November 1991. He was President of PSMI from 1978 until 1988, when he became Chairman of the Board of PSMI and an officer of PSI with overall responsibility for investment banking and investor relations. He has been President of the Public Storage REITs since their inception. Hugh W. Horne, age 50, has been a Vice President of the Company since 1980 and was Secretary of the Company from 1980 until February 1992. He has been an officer of PSI and PSMI since 1973. He is responsible for managing all aspects of property acquisition. Ronald L. Havner, Jr., age 37, a certified public accountant, became an officer of the Company in 1990 and Chief Financial Officer in November 1991. He has been an officer of PSI since 1986 and became Chief Financial Officer of PSI and its affiliates in 1991. Mr. Havner has been an officer of the Public Storage REITs since their inception. Obren B. Gerich, age 56, a certified public accountant and certified financial planner, has been a Vice President of the Company since 1980 and was Chief Financial Officer of the Company until November 1991. Mr. Gerich has been an officer of PSI since 1975. Mr. Gerich has been an officer of the Public Storage REITs since their inception. John Reyes, age 34, a certified public accountant, joined PSI in 1990 and has been the Controller of the Company since 1992. From 1983 to 1990, Mr. Reyes was employed by Ernst & Young. Sarah Hass, age 39, became Secretary of the Company in February 1992. She joined PSI's legal department in June 1991, rendering services on behalf of the Company, PSI and its affiliates. From 1987 until May 1991, her professional corporation was a partner in the law firm of Sachs & Phelps, then counsel to the Company, the Adviser and PSI, and from April 1986 until June 1987, she was associated with that firm, practicing in the area of securities law. From September 1979 until September 1985, Ms. Hass was associated with the law firm of Rifkind & Sterling, Incorporated. S-36 Robert J. Abernethy, age 54, Chairman of the Audit Committee, is President of American Standard Development Company and of Self-Storage Management Company, which develop and operate mini-warehouses. Mr. Abernethy has been a director of the Company since its organization. Mr. Abernethy is a member of the board of directors of Johns Hopkins University and of the Metropolitan Transportation Authority and a former member of the board of directors of the Metropolitan Water District of Southern California. Dann V. Angeloff, age 59, is president of The Angeloff Company, a corporate financial advisory firm. The Angeloff Company has rendered, and is expected to continue to render, financial advisory and securities brokerage services for PSI. Mr. Angeloff is the general partner of a limited partnership that owns a mini-warehouse developed by PSI and managed by PSMI. Mr. Angeloff has been a director of the Company since its organization. Mr. Angeloff is a director of Compensation Resource Group, Datametrics Corporation, Nicholas/Applegate Growth Equity Fund, Nicholas/Applegate Investment Trust, Royce Medical Company, Seda Specialty Packaging Corp. and one of the Public Storage REITs. William C. Baker, age 61, became a director of the Company in November 1991. Since April 1993, Mr. Baker has been President of Red Robin International Inc., an operator and franchisor of casual dining restaurants in the United States and Canada. From 1976 to 1988, he was a principal shareholder and Chairman and Chief Executive Officer of Del Taco, Inc., an operator and franchisor of fast food restaurants in California. Mr. Baker is a director of Bank of Newport, Santa Anita Realty Enterprises, Inc., Santa Anita Operating Company and Callaway Golf Company. Uri P. Harkham, age 46, became a director of the Company in March 1993. Mr. Harkham has been the President and Chief Executive Officer of the Jonathan Martin Fashion Group, which specializes in designing, manufacturing and marketing women's clothing, since its organization in 1976. Since 1978, Mr. Harkham has been the Chairman of the Board of Harkham Properties, a real estate firm specializing in buying and managing fashion warehouses in Los Angeles and Australia. Berry Holmes, age 64, a member of the Audit Committee, is a private investor. Mr. Holmes has been a director of the Company since its organization. Mr. Holmes was president and a director of Financial Corporation of Santa Barbara and Santa Barbara Savings and Loan Association through June 1984 and was a consultant with Santa Barbara Savings and Loan Association during the second half of 1984. Mr. Holmes is a director of one of the Public Storage REITs. Michael M. Sachs, age 54, has been President since June 1990 of Westrec Financial, Inc., a holding company formed to acquire, develop and manage, through a subsidiary, recreational properties. Mr. Sachs was vice president of the predecessor to Westrec Financial, Inc. for the prior two years. Mr. Sachs has been a director of the Company since its organization. He was President of a professional corporation that from 1982 to July 1985 was general counsel to PSI and its affiliates and until June 1991 was of counsel to the law firm of Sachs & Phelps, then counsel to the Company, the Adviser and PSI. From 1985 until June 1990, Mr. Sachs was an officer of PSI and its affiliates. Mr. Sachs is a director of MMI Medical, Inc. and one of the Public Storage REITs. The Company's mini-warehouses are operated by PSMI. The four senior executives of PSMI are the following. Marvin M. Lotz, age 52, has been president of PSMI since 1988. Mr. Lotz was an officer of PSI with responsibility for property acquisitions from 1983 until 1988. Anthony Grillo, age 39, joined PSMI in 1981 and has been a divisional manager since 1988 in charge of overall mini-warehouse management activities in the southwestern United States (approximately 380 properties). S-37 Ron Harden, age 46, joined PSMI in 1987 and became a divisional manager in 1988. He is responsible for overall mini-warehouse management activities in the northeastern United States and in eastern Canada (approximately 329 properties). Gary Hattenburg, age 44, joined PSMI as a divisional manager in 1989 to oversee the overall mini-warehouse management activities in the northwestern and southeastern United States and in western Canada (approximately 385 properties). He has been in the mini-warehouse industry since 1976 including serving for four years as the Director of Operations for Shurgard Inc., a national operator of mini-warehouses. SPECIAL TAX CONSIDERATIONS FOR FOREIGN STOCKHOLDERS The rules governing United States Federal income taxation of non-U.S. stockholders (as defined below) are complex, and the following discussion is intended only as a summary of such rules. Prospective non-U.S. stockholders should consult with their own tax advisors to determine the impact of Federal, state, and local income tax laws on an investment in the REIT, including any reporting requirements, as well as the tax treatment of such an investment under their home country laws. Prospective non-U.S. stockholders should also review "Certain Federal Income Tax Considerations" in the accompanying Prospectus. For purposes of this discussion, a non-U.S. stockholder is a holder of the Common Stock that, for U.S. Federal income tax purposes, is not a "United States person." A "United States person," in turn, means a citizen or resident of the United States; a corporation, partnership, or other entity created or organized in the United States or under the laws of the United States or of any political subdivision thereof; or an estate or trust whose income is includible in gross income for U.S. Federal income tax purposes regardless of its source. The following discussion assumes that the shares of Common Stock are held as "capital assets" under the Internal Revenue Code. Distributions to a non-U.S. stockholder will generally be subject to tax as ordinary income to the extent of the Company's current and accumulated earnings and profits as determined for Federal income tax purposes. Such distributions will generally be subject to withholding of such income tax at a 30% rate, unless reduced by an applicable tax treaty or unless such dividends are treated as effectively connected with a U.S. trade or business. If the amount distributed exceeds a non-U.S. stockholder's allocable share of such earnings and profits, the excess will be treated as a tax-free return of capital to the extent of such stockholder's adjusted basis in the Common Stock. To the extent that such distributions exceed the adjusted basis of a non-U.S. stockholder's Common Stock, such distributions will generally be subject to tax if such stockholder would otherwise be subject to tax on any gain from the sale or disposition of its Common Stock, as described below. If it cannot be determined at the time a distribution is made whether or not such distribution will be in excess of current and accumulated earnings and profits, the distribution will be subject to withholding at the same rate as dividends. Amounts so withheld, however, are refundable or creditable against U.S. Federal tax liability if it subsequently is determined that such distribution was, in fact, in excess of current and accumulated earnings and profits of the Company, unless the non- U.S. stockholder is otherwise subject to U.S. Federal income tax. For any year in which the Company qualifies as a REIT, distributions to a non-U.S. stockholder that are attributable to gain from the sales or exchanges by the Company of "United States real property interests" will be treated as if such gain were effectively connected with a United States business and will thus be subject to tax at the normal capital gain rates applicable to U.S. stockholders (subject to applicable alternative minimum tax) under the provisions of the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Also, distributions subject to FIRPTA may be subject to a 30% branch profits tax in the hands of a foreign corporate stockholder not entitled to a treaty exemption. The Company is required to withhold 35% of any distribution that could be designated by the Company as a capital gains dividend. This amount may be credited against the non-U.S. stockholder's FIRPTA tax liability. Gain recognized by a non-U.S. stockholder upon a sale of its Common Stock will generally not be subject to tax under FIRPTA if the Company is a "domestically controlled REIT," which is defined generally as a REIT in which at all times during a specified testing period less than 50% in value of its shares were held S-38 directly or indirectly by non-U.S. persons. Because only a minority of the Company's stockholders are non-U.S. stockholders, the Company expects to qualify as a "domestically controlled REIT." Accordingly, a non-U.S. stockholder should not be subject to U.S. tax from gains recognized upon disposition of the Common Stock, provided the stockholder is not present in the United States for 183 days or more and certain other requirements are met. Under temporary United States Treasury regulations, United States information reporting requirements and backup withholding tax will generally not apply to dividends paid on the Common Stock to a non-U.S. stockholder at an address outside the United States. Payments by a United States office of a broker of the proceeds of a sale of the Common Stock is subject to both backup withholding at a rate of 31% and information reporting unless the holder certifies its non-U.S. stockholder status under penalties of perjury or otherwise establishes an exemption. Information reporting requirements (but not backup withholding) will also apply to payments of the proceeds of sales of the Common Stock by foreign offices of United States brokers, or foreign brokers with certain types of relationships to the United States, unless the broker has documentary evidence in its records that the holder is a non-U.S. stockholder and certain other conditions are met, or the holder otherwise establishes an exemption. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules will be refunded or credited against the non-U.S. stockholder's United States Federal income tax liability, provided that the required information is furnished to the Internal Revenue Service. These information reporting and backup withholding rules are under review by the United States Treasury and their application to the Common Stock could be changed by future regulations. S-39 UNDERWRITING The U.S. Underwriters named below, for whom PaineWebber Incorporated, Smith Barney Inc., Donaldson, Lufkin & Jenrette Securities Corporation, Raymond James & Associates, Inc. and The Robinson-Humphrey Company, Inc. are acting as Representatives, have severally agreed, subject to the terms and conditions of the U.S. Underwriting Agreement (the "U.S. Underwriting Agreement"), to purchase from the Company, and the Company has agreed to sell to the U.S. Underwriters, the number of shares of Common Stock set forth opposite their names.
NUMBER UNDERWRITER OF SHARES ----------- --------- PaineWebber Incorporated............................................ Smith Barney Inc. .................................................. Donaldson, Lufkin & Jenrette Securities Corporation................. Raymond James and Associates, Inc................................... The Robinson-Humphrey Company, Inc. ................................ --------- Total............................................................. 2,800,000 =========
The Company has also entered into an International Underwriting Agreement (the "International Underwriting Agreement") with certain International Underwriters (the "International Underwriters" and, together with the U.S. Underwriters, the "Underwriters"), for whom PaineWebber International (U.K.) Ltd., Smith Barney Inc., Donaldson, Lufkin & Jenrette Securities Corporation, Raymond James & Associates, Inc. and The Robinson-Humphrey Company, Inc. are acting as representatives (the "International Representatives"). Subject to the terms and conditions of the International Underwriting Agreement, and concurrently with the sale of 2,800,000 shares of Common Stock to the U.S. Underwriters, the Company has agreed to sell to the International Underwriters, and the International Underwriters have severally agreed to purchase, an aggregate of 700,000 shares of Common Stock. The initial public offering price per share and the total underwriting discounts and commissions per share will be identical in the U.S. Underwriting Agreement and the International Underwriting Agreement with respect to all shares of Common Stock being purchased by the Underwriters from the Company. In the U.S. Underwriting Agreement and the International Underwriting Agreement, the several U.S. Underwriters and the several International Underwriters, respectively, have agreed, subject to certain conditions, to purchase all of the shares of Common Stock being sold pursuant to each such Underwriting Agreement (other than those covered by the over-allotment option described below), if any are purchased. The U.S. Underwriting Agreement provides that, in the event of a default by a U.S. Underwriter, in certain circumstances, the purchase commitments of non-defaulting U.S. Underwriters may be increased or the U.S. Underwriting Agreement may be terminated, and the International Underwriting Agreement provides that, in the event of a default by an International Underwriter, in certain circumstances, the purchase commitments of non-defaulting International Underwriters may be increased or the International Underwriting Agreement may be terminated. The sale of Common Stock to be purchased by the U.S. Underwriters and the International Underwriters are conditioned upon one another. The Company has been advised by the Representatives and the International Representatives that the Underwriters propose initially to offer the shares of Common Stock to the public at the public offering price set forth on the cover page of this Prospectus, and to certain securities dealers at such price less a concession S-40 not in excess of $. per share. The U.S. Underwriters may allow, and such dealers may reallow, the concessions of not more than $. per share on sales to certain other dealers. After the public offering, the public offering price and concessions may be changed by the Representatives and the International Representatives. The Company has granted to the U.S. Underwriters an option, exercisable within the 45-day period after the date of the Prospectus, to purchase up to an additional 525,000 shares of Common Stock at the public offering price set forth on the cover page of this Prospectus, less the underwriting discounts and commissions. The U.S. Underwriters may exercise such option only to cover over- allotments, if any, in the sale of the shares of Common Stock offered hereby. To the extent that such option is exercised, each U.S. Underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares of Common Stock as the percentage it was obligated to purchase pursuant to the U.S. Underwriting Agreement. Each U.S. Underwriter has represented and agreed that, as part of the distribution of the shares of Common Stock, (a) it is not purchasing any shares of Common Stock for the account of anyone other than a United States or Canadian Person (as hereinafter defined) and (b) it has not offered or sold, and will not offer or sell, directly or indirectly, any shares of Common Stock or distribute this prospectus to any person outside the United States or Canada or to anyone other than a United States or Canadian Person. Each International Underwriter has represented and agreed that, as part of the distribution of the shares of Common Stock, (a) it is not purchasing any shares of Common Stock for the account of any United States or Canadian Person and (b) it has not offered or sold, and will not offer or sell, directly or indirectly, any shares of Common Stock or distribute any prospectus relating to the shares of Common Stock to any person within the United States or Canada or to any United States or Canadian Person. The foregoing limitations do not apply to stabilization transactions or to sales between the U.S. Underwriters and the International Underwriters pursuant to the Agreement Between U.S. and International Underwriters. As used herein, "United States or Canadian Person" means any individual who is a resident of the United States or Canada, or any corporation, pension, profit-sharing or other trust or other entity organized under or governed by the laws of the United States or Canada, or any political subdivision of either thereof (other than a branch located outside the United States and Canada of any United States or Canadian Person) and includes any United States or Canadian Branch of a person who is otherwise not a United States or Canadian Person. Sales may be made between the U.S. Underwriters and the International Underwriters of such number of shares of Common Stock as may be mutually agreed. The per share price of any shares so sold shall be the price to the public set forth on the cover page of this Prospectus, less an amount not greater than the per share amount of the concession to dealers set forth above. To the extent there are sales between the U.S. Underwriters and the International Underwriters, the number of shares of Common Stock initially available for sale by the U.S. Underwriters may be more or less than the amount specified on the cover page of this Prospectus. The Company and its executive officers and directors have agreed not to sell, offer to sell or otherwise dispose of shares of Common Stock or securities convertible into Common Stock or sell, offer to sell or grant rights, options or warrants with respect to Common Stock or securities convertible into Common Stock prior to the expiration of 90 days from the date of this Prospectus Supplement, without the prior written consent of PaineWebber Incorporated, subject to certain exceptions, including offers and sales to the shareholders of Properties 7 in connection with a potential merger of Properties 7 into the Company, offers and sales in connection with the restructuring of the Company and offers and sales in connection with the acquisition of property and partnership interests. See "Prospectus Summary--Proposed Restructuring" and "Recent Developments." The Company has agreed to indemnify the Underwriters and their controlling persons against certain liabilities, including liabilities under the Securities Act or to contribute to payments the U.S. Underwriters and the International Underwriters may be required to make in respect thereof. S-41 LEGAL OPINIONS Certain legal matters relating to the Common Stock will be passed upon for the Company by David Goldberg, Glendale, California, counsel to the Company and counsel to PSI and its affiliates, and for the Underwriters by Skadden, Arps, Slate, Meagher & Flom, Los Angeles, California. Hogan & Hartson L.L.P., Washington, D.C., has delivered an opinion dated July 26, 1994 as to the status of the Company as a REIT. Mr. Goldberg owns 20,877 shares of Common Stock, 1,000 Shares of Convertible Preferred Stock and 500 shares of Series C Preferred Stock, and has options to acquire an additional 47,500 shares of Common Stock and has invested in entities affiliated with PSI. See "Certain Federal Income Tax Considerations" in the accompanying Prospectus. EXPERTS The consolidated financial statements and related schedules of the Company appearing in the Company's Annual Report on Form 10-K, as amended by a Form 10-K/A (Amendment No. 2) dated April 21, 1995, have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports included in the Company's Annual Report on Form 10-K, and incorporated herein by reference. Such consolidated financial statements are incorporated herein by reference in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. S-42 PROSPECTUS STORAGE EQUITIES, INC. PREFERRED STOCK COMMON STOCK WARRANTS Storage Equities, Inc. (the "Company") may from time to time offer in one or more series (i) shares of preferred stock, par value $.01 per share (the "Preferred Stock"), (ii) shares of Common Stock, par value $.10 per share (the "Common Stock") or (iii) warrants to purchase Preferred Stock or Common Stock (the "Warrants"), with an aggregate public offering price of up to $300,000,000 on terms to be determined at the time of offering. The Preferred Stock, Common Stock and Warrants (collectively, the "Securities") may be offered, separately or together, in amounts, at prices and on terms to be set forth in a supplement to this Prospectus (a "Prospectus Supplement"). The specific terms of the Securities in respect of which this Prospectus is being delivered will be set forth in the applicable Prospectus Supplement and will include, where applicable: (i) in the case of Preferred Stock, the specific title and stated value, any dividend, liquidation, redemption, conversion, voting and other rights, and any initial public offering price; (ii) in the case of Common Stock, any initial public offering price; and (iii) in the case of Warrants, the duration, offering price, exercise price and detachability. The applicable Prospectus Supplement will also contain information, where applicable, about any listing on a securities exchange of the Securities covered by such Prospectus Supplement. The Securities may be offered directly, through agents designated from time to time by the Company, or to or through underwriters or dealers. If any agents or underwriters are involved in the sale of any of the Securities, their names, and any applicable purchase price, fee, commission or discount arrangement between or among them, will be set forth, or will be calculable from the information set forth, in the applicable Prospectus Supplement. See "Plan of Distribution." No Securities may be sold without delivery of the applicable Prospectus Supplement describing the method and terms of the offering of such series of Securities. This Prospectus may also be used in a registered resale by persons who hold (i) Securities issued pursuant to this Prospectus or (ii) securities issued in private or other transactions in connection with acquisitions by the Company of direct or indirect interests in real properties or otherwise, in each case in transactions in which such persons may be deemed to be underwriters within the meaning of the Securities Act of 1933. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER "CERTAIN CONSIDERATIONS" IN THE PROSPECTUS. ------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------ THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. ------------ August 12, 1994 AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, files reports and other information with the Securities and Exchange Commission (the "Commission"). Reports, proxy statements and other information filed by the Company with the Commission can be inspected and copied at the public reference facilities maintained by the Commission in Washington, D.C. and at the Regional Offices of the Commission at 75 Park Place, 14th Floor, New York, New York 10007; and Northwestern Atrium Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661. Copies of such material can be obtained at prescribed rates from the Public Reference Room of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Such material can also be inspected at the New York Stock Exchange ("NYSE"), 20 Broad Street, New York, New York 10005. The Company has filed with the Commission a registration statement on Form S- 3 (herein, together with all amendments and exhibits, referred to as the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"). This Prospectus does not contain all the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information, reference is hereby made to the Registration Statement. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents, filed by the Company with the Commission pursuant to Section 13 of the Exchange Act (File No. 1-8389), are incorporated herein by reference: (i) the Annual Report on Form 10-K for the year ended December 31, 1993, as amended by Form 10-K/A's dated April 26, 1994 and May 26, 1994, (ii) the Quarterly Reports on Form 10-Q for the quarters ended March 31, 1994 and June 30, 1994 and (iii) the Current Reports on Form 8-K dated January 12, 1994 (as amended by Form 8-K/A dated May 26, 1994), February 2, 1994, June 7, 1994 and June 23, 1994. All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to the termination of the offering of the Securities shall be deemed to be incorporated by reference in this Prospectus. Any statement contained herein or in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein (or in the applicable Prospectus Supplement) or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. Copies of all documents which are incorporated herein by reference (not including the exhibits to such documents, unless such exhibits are specifically incorporated by reference in such information), will be provided without charge to any person, including any beneficial owner, to whom this Prospectus is delivered, upon written request. Requests for such copies should be directed to Investor Services Department, Storage Equities, Inc., 600 North Brand Boulevard, Suite 300, Glendale, California 91203-1241. 2 THE COMPANY The Company is a real estate investment trust ("REIT"), organized as a corporation under the laws of California, that has invested primarily in existing self-service facilities offering storage space for personal and business use ("mini-warehouses"). The Company believes that it is one of the largest owners of mini-warehouses in the United States. The Company has also invested to a much smaller extent in existing business parks containing commercial and industrial rental space. At June 30, 1994, the Company had equity interests (through direct ownership, as well as general and limited partnership interests) in 356 properties located in 36 states, including 325 mini-warehouse facilities, 16 business parks and 15 combination mini- warehouse/business park facilities. These facilities are operated under the "Public Storage" name. The Common Stock, and the Company's 10% Cumulative Preferred Stock, Series A (the "Series A Preferred Stock"), 9.20% Cumulative Preferred Stock, Series B (the "Series B Preferred Stock"), 8.25% Convertible Preferred Stock (the "Convertible Preferred Stock") and Adjustable Rate Cumulative Preferred Stock, Series C (the "Adjustable Rate Preferred Stock") are traded on the NYSE under the symbols SEQ, SEQ PrA, SEQ PrB, SEQ PrX and SEQ PrC, respectively. The Company's operations are managed by Public Storage Advisers, Inc. (the "Adviser"), the Company's investment adviser, by Public Storage Management, Inc. ("PSMI"), its mini-warehouse property manager, and by Public Storage Commercial Properties Group, Inc. ("PSCP"), its commercial property manager. All operations are under the general supervision of the Company's Board of Directors (the "Board of Directors"), including investments in new facilities, which are reviewed and approved by the Board of Directors and are subject to restrictions in the Company's Bylaws. Of the Company's investments, 212 were made jointly with seven of a group of eight public limited partnerships affiliated with the Adviser (these eight partnerships are referred to herein collectively as the "PSP Partnerships"). The Adviser, PSMI, PSCP and the Company's executive officers and certain directors are affiliated with Public Storage, Inc. ("PSI"). PSI believes that, together with its affiliates, it is the largest operator of mini-warehouse facilities in the United States and Canada. At June 30, 1994, PSMI, PSCP and their affiliates managed a total of approximately 1,176 facilities in the United States and Canada containing an aggregate of approximately 69,190,400 net rentable square feet of space, 1,091 of which were mini-warehouse facilities containing approximately 63,979,100 net rentable square feet of space. Since 1976, PSI and its affiliated entities and unaffiliated investor groups have raised approximately $2.7 billion in equity capital for the development and acquisition of facilities, primarily mini- warehouses managed by PSMI. The executive officers and certain directors of the Company, the Adviser, PSI, PSMI and PSCP are subject to various conflicts of interest arising out of their relationships with entities that own and operate mini-warehouses and business parks. For example, the Company pays substantial fees to the Adviser, PSMI and PSCP for investment advisory and property management services. The issuance of securities pursuant to this Prospectus is expected to increase the compensation payable to the Adviser, and, to the extent the proceeds of such issuance are used to acquire properties, increase compensation to PSMI and PSCP. The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"). To the extent that the Company continues to qualify as a REIT, it will not be taxed, with certain limited exceptions, on the net income that is currently distributed to its shareholders (the "Shareholders"). See "Certain Federal Income Tax Considerations." The Company was incorporated in California in 1980; its principal executive offices are located at 600 North Brand Boulevard, Suite 300, Glendale, California 91203- 1241. Its telephone number is (818) 244-8080. 3 CERTAIN CONSIDERATIONS In evaluating the Securities, investors should consider the following factors, in addition to other matters set forth or incorporated in this Prospectus (and in the applicable Prospectus Supplement) and the Registration Statement. OPERATING RISKS General Risks of Real Estate Ownership. The Company is subject to the risks generally incident to the ownership of real estate-related assets, including lack of demand for rental spaces in a locale, changes in general economic or local conditions, changes in supply of or demand for similar or competing facilities in an area, the impact of environmental protection laws, changes in interest rates and availability of permanent mortgage funds which may render the sale or financing of a property difficult or unattractive and changes in tax, real estate and zoning laws. Competition Among Mini-Warehouses. Most of the Company's properties are mini- warehouses. Competition in the market areas in which many of the Company's investments are located is significant and has affected the occupancy levels, rental rates and operating expenses of certain of the Company's investments. Risk of Environmental Liabilities. Under various federal, state and local laws, regulations and ordinances (collectively, "Environmental Laws"), an owner or operator of real estate interests may be liable for the costs of cleaning up, as well as certain damages resulting from, past or present spills, disposals or other releases of hazardous or toxic substances or wastes on, in or from a property. Certain Environmental Laws impose such liability without regard to whether the owner knew of, or was responsible for, the presence of hazardous or toxic substances or wastes at or from a property. An owner or operator of real estate or real estate interests also may be liable under certain Environmental Laws that govern activities or operations at a property having adverse environmental effects, such as discharges to air and water as well as handling and disposal practices for solid and hazardous or toxic wastes. In some cases, liability may not be limited to the value of the property. The presence of such substances or wastes, or the failure to properly remediate any resulting contamination, also may adversely affect the owner's or operator's ability to sell, lease or operate its property or to borrow using its property as collateral. Most of the Company's facilities were acquired prior to the time that it was customary to conduct extensive environmental investigations in connection with property acquisitions. The Company's current practice is to conduct preliminary environmental assessments in connection with property acquisitions (other than acquisitions of additional interests in properties in which the Company has an existing interest) to evaluate the environmental condition of, and potential environmental liabilities associated with, such properties. Such assessments generally consist of an investigation of environmental conditions at the subject property (not including soil or groundwater sampling or analysis), as well as a review of available information regarding the site and publicly available data regarding conditions at other sites in the vicinity. In connection with its operations and during the course of environmental investigations in connection with property acquisitions, the Company has become aware that prior operations or activities at certain facilities or from nearby locations have or may have resulted in contamination to the soil and/or groundwater at such facilities. In this regard, certain such facilities are or may be the subject of federal or state environmental investigations or remedial actions. In each such case, the Company has obtained or intends, with respect to pending or future acquisitions, to obtain appropriate purchase price adjustments or indemnifications that it believes are sufficient to cover any such potential liabilities. Although there can be no assurance, the Company believes it has funds available to cover any liability from such environmental contamination or potential contamination and the Company is not aware of any environmental contamination of its facilities material to its overall business or financial condition. FINANCING RISKS Dilution and Subordination. The interest of Shareholders, including persons who acquire Securities in this offering, can be diluted through the issuance of additional securities. 4 Since October 1992 the Company has issued shares of preferred stock in public offerings and intends to issue additional such shares. These issuances could involve certain risks to holders of shares of Common Stock. In the event of a liquidation of the Company, the holders of the preferred stock will be entitled to receive, before any distribution of assets to holders of Common Stock, liquidating distributions (an aggregate of $190,625,000 in respect of the preferred stock issued to date), plus any accrued and unpaid dividends. Holders of preferred stock are entitled to receive, when declared by the Board of Directors, cash dividends (an aggregate of $17,041,300 per year in respect of the preferred stock issued to date (up to $17,821,300 at the maximum dividend rate on shares of adjustable rate preferred stock)), in preference to holders of Common Stock. As a REIT, the Company must distribute to its Shareholders (which include not only holders of Common Stock but also holders of preferred stock) at least 95% of its taxable income. Failure to pay full dividends on the preferred stock could jeopardize the Company's qualification as a REIT. See "Description of Preferred Stock" and "Certain Federal Income Tax Considerations--Tax Treatment of the Company." Risk of Leverage. In making real estate investments, the Company has incurred and may continue to incur indebtedness to the extent believed appropriate. The incurrence of indebtedness increases the risk of loss of the investment. CONFLICTS OF INTEREST AND TRANSACTIONS WITH AFFILIATES Conflicts of Interest. The Adviser, PSMI, PSCP and certain of the Company's executive officers and directors have possible conflicts of interest arising out of their relationship with entities that own and operate mini-warehouses and other facilities. These conflicts of interests may include the method by which the executive officers and directors allocate their time between the Company and other activities, including activities involving mini-warehouses and other facilities owned by affiliates of PSMI or PSCP. In addition, the directors and executive officers of the Company and their affiliates may, subject to certain limitations, invest in other businesses, including business activities of the type conducted by or in competition with the Company. Also, conflicts of interest will exist to the extent the Company's mini-warehouses compete with other PSMI-managed mini-warehouses. Transactions with Affiliates. The Company has purchased, and intends to continue to purchase, real estate assets from affiliates of the Adviser, and, to a much lesser extent, the Company has sold real estate assets to such affiliates. These transactions present the risk that their terms may not be as favorable to the Company as could be obtained in transactions with unaffiliated parties, although it is the Company's policy that these affiliated transactions receive approval by a majority of the Company's disinterested directors after review of independent valuations. A subsidiary of PSI has reinsured, and intends to continue to reinsure, policies insuring against losses to goods stored by tenants in the Company's mini-warehouses. PSI believes that the availability of insurance reduces the potential liability of the Company to tenants for losses to their goods from theft or destruction. The PSI subsidiary receives the premiums and bears the risks associated with the insurance. PSI sells locks and boxes to tenants to be used in securing their spaces and moving their goods. PSI believes that the availability of locks and boxes for sale promotes the rental of spaces. PSI receives the benefit and bears the expense of these sales. EFFECTS OF LOSS OF QUALIFICATION AS A REIT The Company has elected to be taxed as a REIT under the Code. In order for the Company to continue to qualify as a REIT under the Code, certain detailed technical requirements must be met (including certain income tests, certain limitations on types of assets the Company can own, certain operational limitations, and certain stock ownership tests). Although the Company intends to operate so that it will continue to qualify as a REIT, the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of future changes in the circumstances of the Company preclude any assurance that the Company will so qualify in any year. If the Company fails to qualify as a REIT in any tax 5 year, it will be taxed as a regular domestic corporation, and distributions to Shareholders would not be deductible for tax purposes. This would result in a significant corporate tax liability for the Company and a material reduction in the after-tax cash that would be available for distribution to Shareholders. Furthermore, unless certain relief provisions apply, the Company would not be eligible to elect REIT status again until the fifth taxable year that begins after the first year for which the Company fails to qualify. As a REIT, the Company is not taxed on that portion of its taxable income which is distributed to Shareholders provided that at least 95% of its taxable income is so distributed. Under certain circumstances the Company can rectify a failure to meet the 95% distribution test by making distributions after the close of a particular taxable year and attributing those distributions to the prior year's taxable income. The Company has satisfied the REIT distribution requirement for 1990, 1991, 1992 and 1993 by attributing distributions in 1991, 1992, 1993 and 1994 to the prior year's taxable income. The Company may be required, over each of the next several years, to make distributions after the close of a taxable year and to attribute those distributions to the prior year. The extent to which the Company will be required to attribute distributions to the prior year will depend on the Company's operating results and the level of distributions as determined by the Board of Directors. Reliance on subsequent year distributions could cause the Company to be subject to certain penalty taxes. In that regard, if the Company were to distribute during any year less than 85% of the Company's REIT Taxable Income (not taking into account distributions made in subsequent years but attributed to such year), which is generally equivalent to net taxable ordinary income, a 4% non-deductible excise tax would apply to the excess of the required 85% distribution (plus any distribution shortfall from the preceding year) over the amount actually distributed during the year. The Company intends to monitor its compliance with this 85% distribution requirement in an effort to minimize any excise tax. See "Certain Federal Income Tax Considerations--Tax Treatment of the Company." USE OF PROCEEDS Unless otherwise described in the applicable Prospectus Supplement, the Company intends to use the net proceeds from the sale of the Securities for general corporate purposes, primarily investments in mini-warehouses, including mortgage loans and interests in real estate partnerships, and the repayment of outstanding bank borrowings under the Company's credit facility. RATIO OF EARNINGS TO FIXED CHARGES The ratio of earnings to combined fixed charges and preferred stock dividends is computed by dividing earnings by the sum of fixed charges and preferred stock dividends. Earnings consists of net income before minority interest in income, loss on early extinguishment of debt and gain on disposition of real estate plus fixed charges (other than preferred stock dividends) less the portion of minority interest in income which does not contribute to fixed charges. Fixed charges consist of interest expense. Preferred stock dividends consist of dividends on the Series A Preferred Stock (issued in October 1992), the Series B Preferred Stock (issued in March 1993) and the Convertible Preferred Stock (issued in July 1993), to the extent paid in the applicable periods. The ratios do not reflect dividends on the Adjustable Rate Preferred Stock, which was issued on June 30, 1994.
FOR THE SIX MONTHS ENDED JUNE 30, FOR THE YEAR ENDED DECEMBER 31, ----------- ---------------------------------- 1994 1993 1993 1992 1991 1990 1989 ----- ----- ------ ------ ------ ------ ------ Ratio of earnings to combined fixed charges and preferred stock dividends.............. 2.34 2.57 2.40 2.89 2.71 2.79 2.18
6 DESCRIPTION OF COMMON STOCK The Company is authorized to issue 60,000,000 shares of Common Stock, $.10 par value per share. At June 30, 1994, the Company had outstanding 23,714,460 shares of Common Stock and had 415,667 and 3,872,054 shares of Common Stock reserved for issuance under the Company's 1990 Stock Option Plan and in connection with the conversion or redemption of the Convertible Preferred Stock, respectively. In addition, at June 30, 1994, the Company had 1,150,000 shares of Common Stock reserved for issuance under the Company's 1994 Stock Option Plan (the "1994 Plan"), subject to shareholder approval of the 1994 Plan. The following description of the Common Stock sets forth certain general terms and provisions of the Common Stock to which any Prospectus Supplement may relate, including a Prospectus Supplement providing that Common Stock will be issuable upon conversion of the Preferred Stock or upon the exercise of the Warrants. The statements below describing the Common Stock are in all respects subject to and qualified in their entirety by reference to the applicable provisions of the Company's Restated Articles of Incorporation and Bylaws. Holders of Common Stock will be entitled to receive dividends when, as and if declared by the Board of Directors, out of funds legally available therefor. Payment and declaration of dividends on the Common Stock and purchases of shares thereof by the Company will be subject to certain restrictions if the Company fails to pay dividends on outstanding preferred stock. See "Description of Preferred Stock." Upon any liquidation, dissolution or winding up of the Company, holders of Common Stock will be entitled to share equally and ratably in any assets available for distribution to them, after payment or provision for payment of the debts and other liabilities of the Company and the preferential amounts owing with respect to any outstanding preferred stock. Holders of Common Stock have no preemptive rights, which means they have no right to acquire any additional shares of Common Stock that may be issued by the Company at a subsequent date. Each outstanding share of Common Stock entitles the holder to one vote on all matters presented to such holders for a vote, with the exception that they have cumulative voting rights with respect to the election of the Board of Directors, in accordance with California law. Cumulative voting means that each holder of Common Stock is entitled to cast as many votes as there are directors to be elected multiplied by the number of shares registered in his or her name. A holder of Common Stock may cumulate the votes for directors by casting all of the votes for one candidate or by distributing the votes among as many candidates as he or she chooses. The outstanding shares of Common Stock are, and additional shares of Common Stock will be, when issued, fully paid and nonassessable. See "Certain Federal Income Tax Considerations--Tax Treatment of the Company" for a discussion of certain powers given to the Board of Directors to prohibit the transfer, or effect redemptions, of the Common Stock and any other capital stock of the Company designed to aid the Company to maintain qualification as a REIT. 7 DESCRIPTION OF PREFERRED STOCK The Company is authorized to issue 50,000,000 shares of preferred stock, $.01 par value per share. At June 30, 1994, the Company had outstanding 7,625,000 shares of preferred stock. The Company's Restated Articles of Incorporation provide that the preferred stock may be issued from time to time in one or more series and give the Board of Directors broad authority to fix the dividend and distribution rights, conversion and voting rights, if any, redemption provisions and liquidation preferences of each series of preferred stock. Holders of preferred stock have no preemptive rights. The outstanding shares of preferred stock are, and additional shares of preferred stock will be, when issued, fully paid and nonassessable. See "Certain Federal Income Tax Considerations--Tax Treatment of the Company" for a discussion of certain powers given to the Board of Directors to prohibit the transfer, or effect redemptions, of the preferred stock or any other capital stock of the Company designed to aid the Company to maintain its qualification as a REIT. The issuance of preferred stock with special voting rights (or Common Stock) could be used to deter attempts by a single Shareholder or group of Shareholders to obtain control of the Company in transactions not approved by the Board of Directors. The Company has no intention to issue the preferred stock (or Common Stock) for such purposes. OUTSTANDING PREFERRED STOCK At June 30, 1994, the Company had four series of preferred stock outstanding: 1,825,000 shares of Series A Preferred Stock, 2,300,000 shares of Series B Preferred Stock, 2,300,000 shares of Convertible Preferred Stock and 1,200,000 shares of Adjustable Rate Preferred Stock. In all respects, the Series A Preferred Stock, the Series B Preferred Stock and the Adjustable Rate Preferred Stock rank on a parity with each other and are senior to the Convertible Preferred Stock. Each of the Series A Preferred Stock, the Series B Preferred Stock and the Adjustable Rate Preferred Stock (i) has a stated value of $25.00 per share, (ii) in preference to the holders of shares of the Common Stock and any other capital stock ranking junior to the Series A Preferred Stock, the Series B Preferred Stock and the Adjustable Rate Preferred Stock as to payment of dividends (including the Convertible Preferred Stock), provides for cumulative quarterly dividends calculated as a percentage of the stated value (10% in the case of the Series A Preferred Stock, 9.20% in the case of the Series B Preferred Stock and a rate adjustable quarterly ranging from 6.75% to 10.75% (8.15% through September 30, 1994) in the case of the Adjustable Rate Preferred Stock) and (iii) is subject to redemption, in whole or in part, at the option of the Company at a cash redemption price of $25.00 per share, plus accrued and unpaid dividends (on and after September 30, 2002 in the case of the Series A Preferred Stock, on and after June 30, 2003 in the case of the Series B Preferred Stock, and on and after June 30, 1999 in the case of the Adjustable Rate Preferred Stock). In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of the Series A Preferred Stock, the Series B Preferred Stock and the Adjustable Rate Preferred Stock will be entitled to receive out of the Company's assets available for distribution to stockholders, before any distribution of assets is made to holders of Common Stock or any other shares of capital stock ranking as to such distributions junior to the Series A Preferred Stock, the Series B Preferred Stock and the Adjustable Rate Preferred Stock (including the Convertible Preferred Stock), liquidating distributions in the amount of $25.00 per share, plus all accrued and unpaid dividends. Except as expressly required by law and in certain other limited circumstances, the holders of the Series A Preferred Stock, the Series B Preferred Stock and the Adjustable Rate Preferred Stock are not entitled to vote. The consent of holders of at least 66 2/3% of the outstanding shares of the Series A, the Series B Preferred Stock and the Adjustable Rate Preferred Stock (and any other series of preferred stock ranking on a parity therewith), voting as a single class, is required to authorize another class of shares senior to such preferred stock. 8 The Convertible Preferred Stock (i) has a stated value of $25.00 per share, (ii) in preference to the holders of shares of the Common Stock and any other capital stock ranking junior to the Convertible Preferred Stock as to payment of dividends, provides for cumulative quarterly dividends at an annual rate of 8.25% of the stated value thereof, (iii) is convertible at the option of the holder at any time into Common Stock at a conversion price of 1.6835 shares of Common Stock for each share of Convertible Preferred Stock (subject to adjustment in certain circumstances) and (iv) after July 1, 1998, under certain circumstances, is redeemable for Common Stock at the option of the Company, in whole or in part, at a redemption price of 1.6835 shares of Common Stock for each share of Convertible Preferred Stock (subject to adjustment in certain circumstances). In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of the Convertible Preferred Stock will be entitled to receive out of the Company's assets available for distribution to stockholders, before any distribution of assets is made to holders of Common Stock or any other shares of capital stock ranking as to such distributions junior to the Convertible Preferred Stock, liquidating distributions in the amount of $25.00 per share, plus all accrued and unpaid dividends. Except as expressly required by law and in certain other limited circumstances, the holders of the Convertible Preferred Stock are not entitled to vote. The consent of holders of at least 66 2/3% of the outstanding shares of the Convertible Preferred Stock is required to authorize another class of shares senior to the Convertible Preferred Stock and junior to the Series A Preferred Stock, the Series B Preferred Stock and the Adjustable Rate Preferred Stock (and any other series of preferred stock ranking on a parity therewith). FUTURE SERIES OF PREFERRED STOCK The following description of preferred stock sets forth certain general terms and provisions of the Preferred Stock to which any Prospectus Supplement may relate. The statements below describing the Preferred Stock are in all respects subject to and qualified in their entirety by reference to the applicable provisions of the Company's Restated Articles of Incorporation (including the applicable form of Certificate of Determination) and Bylaws. Reference is made to the Prospectus Supplement relating to the Preferred Stock offered thereby for specific terms, including, where applicable, the following: (1) the title and stated value of such Preferred Stock; (2) the number of shares of such Preferred Stock offered, the liquidation preference per share and the offering price of such Preferred Stock; (3) the dividend rate(s), period(s) and/or payment date(s) or method(s) of calculation thereof applicable to such Preferred Stock; (4) the date from which dividends on such Preferred Stock shall accumulate, if applicable; (5) the provision for a sinking fund, if any, for such Preferred Stock; (6) the provision for redemption, if applicable, of such Preferred Stock; (7) any listing of such Preferred Stock on any securities exchange; (8) the terms and conditions, if applicable, upon which such Preferred Stock will be convertible into Common Stock, including the conversion price (or manner of calculation thereof); (9) the voting rights, if any, of such Preferred Stock; (10) any other specific terms, preferences, rights, limitations or restrictions of such Preferred Stock; (11) the relative ranking and preferences of such Preferred Stock as to dividend rights and rights upon liquidation, dissolution or winding up of the affairs of the Company; and (12) any limitations on issuance of any series of preferred stock ranking senior to or on a parity with such series of Preferred Stock as to dividend rights and rights upon liquidation, dissolution or winding up of the affairs of the Company. Ranking. The ranking of the Preferred Stock is set forth in the applicable Prospectus Supplement. Unless otherwise specified in the Prospectus Supplement, the Preferred Stock will, with respect to dividend rights and rights upon liquidation, dissolution or winding up of the affairs of the Company, rank (i) senior to the Common Stock, any additional class of common stock and any series of preferred stock expressly made junior to such Preferred Stock with respect to dividend rights or rights upon liquidation, dissolution or winding up of the affairs of the Company; (ii) on a parity with all preferred stock issued by the Company the 9 terms of which specifically provide that such preferred stock rank on a parity with the Preferred Stock with respect to dividend rights or rights upon liquidation, dissolution or winding up of the Company; and(iii) junior to all preferred stock issued by the Company the terms of which specifically provide that such preferred stock rank senior to the Preferred Stock with respect to dividend rights or rights upon liquidation, dissolution or winding up of the Company. Dividends. Holders of shares of the Preferred Stock of each series shall be entitled to receive, when, as and if declared by the Board of Directors, out of assets of the Company legally available for payment, cash dividends at such rates and on such dates as will be set forth in the applicable Prospectus Supplement. Each such dividend shall be payable to holders of record as they appear on the stock transfer books of the Company on such record dates as shall be fixed by the Board of Directors. Dividends on any series of the Preferred Stock may be cumulative or non- cumulative, as provided in the applicable Prospectus Supplement. Dividends, if cumulative, will be cumulative from and after the date set forth in the applicable Prospectus Supplement. If the Board of Directors fails to declare a dividend payable on a dividend payment date on any series of the Preferred Stock for which dividends are noncumulative, then the holders of such series of the Preferred Stock will have no right to receive a dividend in respect of the dividend period ending on such dividend payment date, and the Company will have no obligation to pay the dividend accrued for such period, whether or not dividends on such series are declared payable on any future dividend payment date. No dividends (other than in Common Stock or other capital stock ranking junior to the Preferred Stock of any series as to dividends and upon liquidation) shall be declared or paid or set aside for payment, nor shall any other distribution be declared or made upon the Common Stock, or any other capital stock of the Company ranking junior to or on a parity with the Preferred Stock of such series as to dividends or upon liquidation, nor shall any Common Stock or any other capital stock of the Company ranking junior to or on a parity with the Preferred Stock of such series as to dividends or upon liquidation be redeemed, purchased or otherwise acquired for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any shares of any such stock) by the Company (except by conversion into or exchange for other capital stock of the Company ranking junior to the Preferred Stock of such series as to dividends and upon liquidation) unless (i) if such series of Preferred Stock has a cumulative dividend, full cumulative dividends on the Preferred Stock of such series have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for all past dividend periods and the then current dividend period and (ii) if such series of Preferred Stock does not have a cumulative dividend, full dividends on the Preferred Stock of such series have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for the then current dividend period. Any dividend payment made on shares of a series of Cumulative Preferred Stock shall first be credited against the earliest accrued but unpaid dividend due with respect to shares of such series which remains payable. Redemption. If so provided in the applicable Prospectus Supplement, the shares of Preferred Stock will be subject to mandatory redemption or redemption at the option of the Company, in whole or in part, in each case upon the terms, at the times and at the redemption prices set forth in such Prospectus Supplement. The Prospectus Supplement relating to a series of Preferred Stock that is subject to mandatory redemption will specify the number of shares of such Preferred Stock that shall be redeemed by the Company in each year commencing after a date to be specified, at a redemption price per share to be specified, together with an amount equal to all accrued and unpaid dividends thereon (which shall not, if such Preferred Stock does not have a cumulative dividend, include any accumulation in respect of unpaid dividends for prior dividend periods) to the date of redemption. The redemption price may be payable in cash, securities or other property, as specified in the applicable Prospectus Supplement. 10 Notwithstanding the foregoing, no shares of any series of Preferred Stock shall be redeemed and the Company shall not purchase or otherwise acquire directly or indirectly any shares of Preferred Stock of such series (except by conversion into or exchange for capital stock of the Company ranking junior to the Preferred Stock of such series as to dividends and upon liquidation) unless all outstanding shares of Preferred Stock of such series are simultaneously redeemed unless, in each case, (i) if such series of Preferred Stock has a cumulative dividend, full cumulative dividends on the Preferred Stock of such series shall have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for all past dividend periods and the then current dividend period and (ii) if such series of Preferred Stock does not have a cumulative dividend, full dividends on the Preferred Stock of such series have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for the then current dividend period; provided, however, that the foregoing shall not prevent the purchase or acquisition of shares of Preferred Stock of such series pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding shares of Preferred Stock of such series. If fewer than all of the outstanding shares of Preferred Stock of any series are to be redeemed, the number of shares to be redeemed will be determined by the Company and such shares may be redeemed pro rata from the holders of record of such shares in proportion to the number of such shares held by such holders (with adjustments to avoid redemption of fractional shares) or any other equitable method determined by the Company. Notice of redemption will be mailed at least 30 days but not more than 60 days before the redemption date to each holder of record of Preferred Stock of any series to be redeemed at the address shown on the stock transfer books of the Company. Each notice shall state: (i) the redemption date; (ii) the number of shares and series of the Preferred Stock to be redeemed; (iii) the redemption price; (iv) the place or places where certificates for such Preferred Stock are to be surrendered for payment of the redemption price;(v) that dividends on the shares to be redeemed will cease to accrue on such redemption date; and (vi) the date upon which the holder's conversion rights, if any, as to such shares shall terminate. If fewer than all the shares of Preferred Stock of any series are to be redeemed, the notice mailed to each such holder thereof shall also specify the number of shares of Preferred Stock to be redeemed from each such holder and, upon redemption, a new certificate shall be issued representing the unredeemed shares without cost to the holder thereof. In order to facilitate the redemption of shares of Preferred Stock, the Board of Directors may fix a record date for the determination of shares of Preferred Stock to be redeemed, such record date to be not less than 30 or more than 60 days prior to the date fixed for such redemption. Notice having been given as provided above, from and after the date specified therein as the date of redemption, unless the Company defaults in providing funds for the payment of the redemption price on such date, all dividends on the Preferred Stock called for redemption will cease. From and after the redemption date, unless the Company so defaults, all rights of the holders of the Preferred Stock as shareholders of the Company, except the right to receive the redemption price (but without interest), will cease. Subject to applicable law and the limitation on purchases when dividends on Preferred Stock are in arrears, the Company may, at any time and from time to time, purchase any shares of Preferred Stock in the open market, by tender or by private agreement. Liquidation Preference. Upon any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, then, before any distribution or payment shall be made to the holders of any Common Stock or any other class or series of capital stock of the Company ranking junior to any series of the Preferred Stock in the distribution of assets upon any liquidation, dissolution or winding up of the Company, the holders of such series of Preferred Stock shall be entitled to receive out of assets of the Company legally available for distribution to stockholders liquidating distributions in the amount of the liquidation preference per share (set forth in the applicable Prospectus Supplement), plus an amount equal to all dividends accrued and unpaid thereon (which shall not include any accumulation in respect of unpaid dividends for prior dividend periods if such Preferred Stock does not have a cumulative dividend). After payment of the full 11 amount of the liquidating distributions to which they are entitled, the holders of Preferred Stock will have no right or claim to any of the remaining assets of the Company. In the event that, upon any such voluntary or involuntary liquidation, dissolution or winding up, the legally available assets of the Company are insufficient to pay the amount of the liquidating distributions on all outstanding shares of any series of Preferred Stock and the corresponding amounts payable on all shares of other classes or series of capital stock of the Company ranking on a parity with the Preferred Stock in the distribution of assets upon liquidation, dissolution or winding up, then the holders of such series of Preferred Stock and all other such classes or series of capital stock shall share ratably in any such distribution of assets in proportion to the full liquidating distributions to which they would otherwise be respectively entitled. If liquidating distributions shall have been made in full to all holders of Preferred Stock, the remaining assets of the Company shall be distributed among the holders of any other classes or series of capital stock ranking junior to such series of Preferred Stock upon liquidation, dissolution or winding up, according to their respective rights and preferences and in each case according to their respective number of shares. For such purposes, the consolidation or merger of the Company with or into any other corporation, or the sale, lease, transfer or conveyance of all or substantially all of the property or business of the Company, shall not be deemed to constitute a liquidation, dissolution or winding up of the Company. Voting Rights. Holders of the Preferred Stock will not have any voting rights, except as set forth below or as otherwise expressly required by law or as indicated in the applicable Prospectus Supplement. If the equivalent of six quarterly dividends payable on any series of Preferred Stock are in default (whether or not declared or consecutive), the holders of all such series of preferred stock, voting as a single class with all other series of preferred stock upon which similar voting rights have been conferred and are exercisable, will be entitled to elect two additional directors until all dividends in default have been paid or declared and set apart for payment. Such right to vote separately to elect directors shall, when vested, be subject, always, to the same provisions for vesting of such right to elect directors separately in the case of future dividend defaults. At any time when such right to elect directors separately shall have so vested, the Company may, and upon the written request of the holders of record of not less than 20% of the total number of preferred shares of the Company then outstanding shall, call a special meeting of Shareholders for the election of directors. In the case of such a written request, such special meeting shall be held within 90 days after the delivery of such request and, in either case, at the place and upon the notice provided by law and in the Bylaws of the Company, provided that the Company shall not be required to call such a special meeting if such request is received less than 120 days before the date fixed for the next ensuing annual meeting of Shareholders, and the holders of all classes of outstanding preferred stock are offered the opportunity to elect such directors (or fill any vacancy) at such annual meeting of shareholders. Directors so elected shall serve until the next annual meeting of shareholders of the Company or until their respective successors are elected and qualify. If, prior to the end of the term of any director so elected, a vacancy in the office of such director shall occur, during the continuance of a default by reason of death, resignation, or disability, such vacancy shall be filled for the unexpired term of such former director by the appointment of a new director by the remaining director or directors so elected. The affirmative vote or consent of the holders of at least a majority of the outstanding shares of each series of Preferred Stock will be required to amend or repeal any provision of or add any provision to, the Restated Articles of Incorporation, including the Certificate of Determination, if such action would materially and adversely alter or change the rights, preferences or privileges of such series of Preferred Stock. No consent or approval of the holders of any series of Preferred Stock will be required for the issuance from the Company's authorized but unissued preferred stock of other shares of any series of preferred stock ranking on a parity with or junior to such series of Preferred Stock, or senior to a series of Preferred Stock expressly made junior to other series of preferred stock as to payment of dividends and distribution of assets, including other shares of such series of Preferred Stock. 12 The foregoing voting provisions will not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of such series of Preferred Stock shall have been redeemed or called for redemption upon proper notice and sufficient funds shall have been deposited in trust to effect such redemption. Conversion Rights. The terms and conditions, if any, upon which shares of any series of Preferred Stock are convertible into Common Stock will be set forth in the applicable Prospectus Supplement relating thereto. Such terms will include the number of shares of Common Stock into which the Preferred Stock is convertible, the conversion price (or manner of calculation thereof), the conversion period, provisions as to whether conversion will be at the option of the holders of the Preferred Stock or automatically upon the occurrence of certain events, the events requiring an adjustment of the conversion price and provisions affecting conversion in the event of the redemption of such Preferred Stock. DESCRIPTION OF WARRANTS The Company has no Warrants outstanding (other than options issued under the Company's employee stock option plan). The Company may issue Warrants for the purchase of Preferred Stock or Common Stock. Warrants may be issued independently or together with any other Securities offered by any Prospectus Supplement and may be attached to or separate from such Securities. Each series of Warrants will be issued under a separate warrant agreement (each, a "Warrant Agreement") to be entered into between the Company and a warrant agent specified in the applicable Prospectus Supplement (the "Warrant Agent"). The Warrant Agent will act solely as an agent of the Company in connection with the Warrants of such series and will not assume any obligation or relationship of agency or trust for or with any holders or beneficial owners of Warrants. The following sets forth certain general terms and provisions of the Warrants offered hereby. Further terms of the Warrants and the applicable Warrant Agreement will be set forth in the applicable Prospectus Supplement. The applicable Prospectus Supplement will describe the terms of the Warrants in respect of which this Prospectus is being delivered, including, where applicable, the following: (1) the title of such Warrants; (2) the aggregate number of such Warrants; (3) the price or prices at which such Warrants will be issued; (4) the designation, number and terms of the shares of Preferred Stock or Common Stock purchasable upon exercise of such Warrants; (5) the designation and terms of the other Securities, if any, with which such Warrants are issued and the number of such Warrants issued with each such Security; (6) the date, if any, on and after which such Warrants and the related Preferred Stock or Common Stock, if any, will be separately transferable; (7) the price at which each share of Preferred Stock or Common Stock purchasable upon exercise of such Warrants may be purchased; (8) the date on which the right to exercise such Warrants shall commence and the date on which such right shall expire; (9) the minimum or maximum amount of such Warrants which may be exercised at any one time; and (10) any other terms of such Warrants, including terms, procedures and limitations relating to the exchange and exercise of such Warrants. 13 CERTAIN FEDERAL INCOME TAX CONSIDERATIONS The following summary of certain federal income tax considerations to the Company is based on current law, is for general information only, and is not tax advice. The tax treatment of a holder of any of the Securities will vary depending upon the terms of the specific securities acquired by such holder, as well as his or her particular situation, and this discussion does not attempt to address any aspects of federal income taxation relating to holders of Securities, except as discussed under "Taxation of Shareholders." Certain federal income tax considerations relevant to holders of the Securities may be provided in the applicable Prospectus Supplement relating thereto. EACH INVESTOR IS ADVISED TO CONSULT THE APPLICABLE PROSPECTUS SUPPLEMENT, AS WELL AS HIS OR HER OWN TAX ADVISOR, REGARDING THE TAX CONSEQUENCES TO HIM OR HER OF THE ACQUISITION, OWNERSHIP AND SALE OF THE SECURITIES, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH ACQUISITION, OWNERSHIP AND SALE AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS. TAX TREATMENT OF THE COMPANY If certain detailed conditions imposed by the Code and the related regulations are met, an entity, such as the Company, that invests principally in real estate and that otherwise would be taxed as a corporation may elect to be treated as a REIT. The most important consequence to the Company of being treated as a REIT for federal income tax purposes is that this enables the Company to deduct dividend distributions to Shareholders, thus effectively eliminating the "double taxation" (at the corporate and shareholder levels) that typically results when a corporation earns income and distributes that income to shareholders in the form of dividends. The Company elected to be taxed as a REIT beginning with its fiscal year ending December 31, 1981. That election will continue in effect until it is revoked or terminated. Based upon the description in this Prospectus of the Company's current and contemplated method of operation and upon certain representations made by officers of the Company concerning the Company's satisfaction of the factual elements of the REIT tests, Hogan & Hartson L.L.P., special counsel to the Company, is of the opinion that the Company has qualified as a REIT during each of the five years in the period ended December 31, 1993, and as of July 26, 1994, the date of the opinion. This opinion is based on various assumptions relating to the organization and operation of the Company and is conditioned upon certain representations made by the Company as to certain relevant factual matters. Moreover, qualification and taxation as a REIT will depend upon the Company's ability to meet on a continuing basis, distribution levels and diversity of stock ownership, and the various qualification tests imposed by the Code as discussed below. While the Company intends to operate so that it will continue to qualify as a REIT, given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of future changes in the circumstances of the Company, no assurance can be given by special counsel or the Company that the Company will so qualify for any particular year. Hogan & Hartson L.L.P. will not review compliance with these tests on a continuing basis, and has not undertaken to update its opinion subsequent to the date thereof. The following is a very brief overview of certain of the technical requirements that the Company must meet on an ongoing basis in order to continue to qualify as a REIT: 1. The capital stock must be widely-held and not more than 50% of the value of the capital stock may be held by five or fewer individuals (determined after giving effect to various ownership attribution rules). To aid in meeting these requirements, the Bylaws give the Board of Directors the power to prohibit the transfer, or effect the redemption, of shares of capital stock if the transfer would result in the Company not meeting these requirements or if the ownership of capital stock would otherwise prevent the Company from so complying. 14 2. The Company's gross income must meet three income tests: (a) at least 75% of the gross income must be derived from specified real estate sources; (b) at least 95% of the gross income must be from the real estate sources includable in the 75% income test, and/or from dividends, interest, or gains from the sale or disposition of stock or securities not held for sale in the ordinary course of business; and (c) less than 30% of the gross income may be derived from the sale of real estate assets held for less than four years, from the sale of certain "dealer" property, or from the sale of stock or securities held for less than one year. 3. Generally, 75% by value of the Company's investments must be in real estate, mortgages secured by real estate, cash, or government securities. 4. The Company must distribute to Shareholders in each taxable year an amount at least equal to 95% of the Company's "REIT Taxable Income" (which is generally equivalent to net taxable ordinary income). Under certain circumstances, the Company can rectify a failure to meet the 95% distribution test by paying dividends after the close of a particular taxable year. The Company in years prior to 1990 made distributions in excess of its REIT Taxable Income. During 1990, the Company reduced its distributions to Shareholders to permit the Company to make an optional reduction in short-term borrowings (which previously had been used to fund distributions to Shareholders). As a result, distributions paid by the Company in 1990 were less than 95% of the Company's REIT Taxable Income for 1990. The Company has satisfied the REIT distribution requirements for 1990, 1991, 1992 and 1993 by attributing distributions in 1991, 1992, 1993 and 1994 to the prior year's taxable income. The Company may be required, over each of the next several years, to make distributions after the close of a taxable year and to attribute those distributions to the prior year. The extent to which the Company will be required to attribute distributions to the prior year will depend on the Company's operating results and the level of distributions as determined by the Board of Directors. Reliance on subsequent year distributions could cause the Company to be subject to certain penalty taxes. In that regard, if the Company were to distribute during any year less than 85% of the Company's REIT Taxable Income (not taking into account distributions made in subsequent years but attributed to such year), then a 4% non-deductible excise tax would apply to the excess of the required 85% distribution (plus any distribution shortfall from the preceding year) over the amount actually distributed during the year. The Company intends to monitor its compliance with this 85% distribution requirement in an effort to minimize any excise tax. For purposes of applying the income and asset tests mentioned above, a REIT is considered to own a proportionate share of the assets of any partnership in which it holds a partnership interest. For years in which the Company qualifies as a REIT, the Company generally will be taxable only on its undistributed income. Certain penalty taxes can apply if the Company delays distributions until after the close of a taxable year. Moreover, a confiscatory tax of 100% can apply to income derived by the Company from sales of "dealer" property. If the Company fails to meet either the 75% or 95% source of income tests described above, but still qualifies for REIT status under the reasonable cause exception to those tests, a 100% tax is imposed equal to the amount obtained by multiplying (i) the greater of the amount, if any, by which it failed either the 75% or the 95% income tests, times (ii) the fraction that its REIT Taxable Income represents of the Company's gross income (excluding capital gain and certain other items). It should be noted that the Company is not required to distribute its net capital gain. However, to the extent that the Company does not declare a capital gain dividend, that gain will be taxable to the Company at normal corporate rates, and the Company will be subject to a 4% non-deductible excise tax to the extent that it does not distribute 95% of its capital gain. The Company also will be subject to the minimum tax on tax preference items (excluding items specifically allocable to its shareholders). For any taxable year that the Company fails to qualify as a REIT, it would be taxed at the usual corporate rates on all of its taxable income, whether or not it makes any distributions to Shareholders. Those taxes would reduce the amount of cash available to the Company for distribution to Shareholders. As a result, 15 failure of the Company to qualify during any taxable year as a REIT could have a material adverse effect upon the Company and the Shareholders, unless certain relief provisions are available. The Company's election to be treated as a REIT will terminate automatically if the Company fails to meet the qualification requirements described above. If a termination (or a voluntary revocation) occurs, unless certain relief provisions apply, the Company will not be eligible to elect REIT status again until the fifth taxable year that begins after the first year for which the Company's election was terminated (or revoked). If the Company loses its REIT status, but later qualifies and elects to be taxed as a REIT again, the Company may face significant adverse tax consequences. Immediately prior to the effectiveness of the election to return to REIT status, the Company would be treated as if it disposed of all of its assets in a taxable transaction, triggering taxable gain with respect to the Company's appreciated assets. (The Company would, however, be permitted to elect an alternative treatment under which the gains would be taken into account only as and when they actually are recognized upon sales of the appreciated property occurring within the 10-year period after return to REIT status.) The Company would not receive the benefit of a dividends paid deduction to reduce any such taxable gains. Thus, any such gains on appreciated assets would be subject to double taxation, at the corporate as well as the shareholder level. TAXATION OF SHAREHOLDERS Distributions generally will be taxable to Shareholders as ordinary income to the extent of the Company's earnings and profits. For this purpose, earnings and profits of the Company first will be allocated to distributions paid on preferred stock until an amount equal to such distributions has been allocated thereto. As a result, it is likely that any distributions paid on preferred stock will be taxable in full as dividends to the holders of preferred stock. Dividends declared during the last quarter of a calendar year and actually paid during January of the immediately following calendar year generally are treated as if received by the shareholders on December 31 of the calendar year during which they were declared. Distributions paid to Shareholders will not constitute passive activity income and as a result, generally cannot be offset by losses from passive activities of Shareholders subject to the passive activity rules. Distributions designated by the Company as capital gain dividends generally will be taxed as long-term capital gain to Shareholders, to the extent that the distributions do not exceed the Company's actual net capital gain for the taxable year. Corporate Shareholders may be required to treat up to 20% of any such capital gain dividends as ordinary income. Distributions by the Company, whether characterized as ordinary income or as capital gain, are not eligible for the 70% dividends received deduction for corporations. If the Company should realize a loss, Shareholders will not be permitted to deduct any share of that loss. Future regulations may require that Shareholders take into account, for purposes of computing their individual alternative minimum tax liability, certain tax preference items of the Company. The Company may distribute cash in excess of its net taxable income. Upon distribution of such cash by the Company to Shareholders (other than as a capital gain dividend), if all of the Company's current and accumulated earnings and profits have been distributed, the excess cash will be deemed to be a non-taxable return of capital to each Shareholder to the extent of the adjusted tax basis of the Shareholder's capital stock. Distributions in excess of the adjusted tax basis will be treated as gain from the sale or exchange of the capital stock. A Shareholder who has received a distribution in excess of current and accumulated earnings and profits of the Company may, upon the sale of the capital stock, realize a higher taxable gain or a smaller loss because the basis of the Common Stock as reduced will be used for purposes of computing the amount of the gain or loss. Generally, gain or loss realized by a Shareholder upon the sale of capital stock will be reportable as capital gain or loss. If a Shareholder receives a long-term capital gain dividend from the Company and has held the capital stock for six months or less, any loss incurred on the sale or exchange of the capital stock is treated as a long-term capital loss, to the extent of the corresponding long-term capital gain dividend received. If a Shareholder is subject to "backup withholding," the Company will be required to deduct and withhold from any dividends payable to such Shareholder a tax of 31%. These rules may apply when a 16 Shareholder fails to supply a correct taxpayer identification number, or when the IRS notifies the Company that a Shareholder is subject to the rules or has furnished an incorrect taxpayer identification number. The Company is required to demand annual written statements from the record holders of designated percentages of its capital stock disclosing the actual owners of the capital stock and to maintain permanent records showing the information it has received as to the actual ownership of such capital stock and a list of those persons failing or refusing to comply with such demand. In any year in which the Company does not qualify as a REIT, distributions by the Company to Shareholders will be taxable in the same manner discussed above, except that no distributions can be designated as capital gain dividends, distributions will be eligible for the corporate dividends received deduction, and Shareholders will not receive any share of the Company's tax preference items. Tax Exempt Investors. In general, a tax exempt entity that is a Shareholder is not subject to tax on distributions from the Company or gain realized on the sale of capital stock, provided that the tax exempt entity has not financed the acquisition of its capital stock with "acquisition indebtedness" within the meaning of the Code. Special rules apply to organizations exempt under Code Sections 501(c)(7), (c)(9), (c)(17) and (c)(20), and such prospective investors should consult their own tax advisors concerning the applicable "set aside" and reserve requirements. In addition, for taxable years beginning after December 31, 1993, certain distributions by a REIT to a tax-exempt employee's pension trust that owns more than 10% of the REIT will, in certain circumstances, be treated as "unrelated business taxable income." Foreign Investors. The rules governing United States income, gift and estate taxation of foreign entities and individuals who are neither citizens nor residents of the United States are complex. They depend not only upon United States federal and state income, gift and estate tax principles, but also upon the treaties, if any, between the United States and the country of the nonresident investor. Therefore, any prospective foreign investor is urged to consult its own tax advisor with respect to both the United States and foreign tax consequences of owning stock of the Company. The following discussion sets forth several points that may be relevant to particular foreign investors. It assumes that any such investor holds the stock of the Company as an investment and not in connection with the conduct of a U.S. trade or business. Ordinary dividends generally will be subject to withholding at the source, at a 30% rate (which may be reduced under applicable treaties if the shareholder satisfies all pertinent requirements). Capital gain dividends may be subject to such withholding at a 35% rate if they relate to dispositions of U.S. real property interests (including the sale or disposition prior to maturity of loans where interest is based upon a "participation" in the income or appreciation from real property). Such dispositions would generally include the sale (but not the retirement) of profit-sharing loans relating to U.S. real property. In addition, such capital gain dividends (net of the amount of regular income tax) may be subject to a 30% branch tax in the hands of any foreign corporate recipients. Such tax may be reduced or eliminated in the case of a corporation that is a resident of a country with which the U.S. has a tax treaty, provided that a majority of such corporation's ultimate shareholders are residents of the country in question and that various filing requirements are satisfied. Investors may be able to obtain a partial refund of taxes withheld in respect of capital gain distributions by filing a nonresident U.S. tax return. Because only a minority of the Company's shareholders are expected to be foreign taxpayers, the Company should qualify as a "domestically-controlled REIT." Accordingly, a foreign taxpayer will not be subject to U.S. tax from gains recognized upon disposition of capital stock (unless the shareholder was present in the U.S. for more than 183 days in the year of sale and certain other requirements are met). Upon the death of a foreign individual shareholder, the investor's stock in the Company will be treated as part of the investor's U.S. estate for purposes of the U.S. estate tax, except as may be otherwise provided in an applicable estate tax treaty. 17 TAX CONSEQUENCES TO COMPANY OF JOINT INVESTMENTS WITH PSP PARTNERSHIPS The Company entered into arrangements with seven of the PSP Partnerships under which the Company participated in the acquisition of existing mini- warehouses and business park properties. See "The Company." Under the arrangements with the seven PSP Partnerships, the Company would acquire an undivided interest in property that was to be owned jointly with a PSP Partnership and then would transfer its interest in the property to a joint venture that was formed with the PSP Partnership in exchange for a partnership interest in that joint venture. These transactions have been treated as nontaxable events under Section 721 of the Code, and the Company generally has received a carryover basis in that joint venture interest equal to the Company's basis in the property conveyed to the joint venture. The Company obtained opinions of counsel that the actual tax consequences arising from the formation of the Company's joint investments with PSP Partnerships were consistent with the foregoing. It is possible, however, that the IRS might attempt to restructure the transactions by taking the position that the Company and the PSP Partnership should be treated for tax purposes as having transferred their respective consideration to the joint venture, with the joint venture (rather than the Company and the PSP Partnership) acquiring the real property from the seller. In the event that a court would agree with the IRS, the joint venture would recognize a short-term capital gain in an amount equal to the fair market value of the consideration supplied by the Company that consisted of the Company's securities or notes. Under the joint venture agreements, any such gain would be allocated to the Company. All of the joint ventures with the PSP Partnerships provide for a special allocation of initial cost recovery deductions to the PSP Partnerships. After that initial allocation, subsequent cost recovery deductions are then allocated to the Company, to the extent required to balance out the initial allocation to the PSP Partnerships. Assuming that these allocations are respected for tax purposes, these provisions initially have the effect of delaying the cost recovery deductions otherwise allocable to the Company, reducing the amount of the Company's distributions during that period that would be considered a return of capital, if distributions to Shareholders otherwise exceeded the Company's current or accumulated earnings and profits. These effects reverse at such time as the depreciation of the joint ventures begins to be allocated to the Company. STATE AND LOCAL TAXES The tax treatment of the Company and the Shareholders in states having taxing jurisdiction over them may differ from the federal income tax treatment. Accordingly, no discussion of state taxation of the Company and the Shareholders is provided nor is any representation made as to the tax status of the Company in such states. All investors should consult their own tax advisors as to the treatment of the Company under the respective state tax laws applicable to them. 18 PLAN OF DISTRIBUTION The Company may sell the Securities to one or more underwriters for public offering and sale by them or may sell the Securities to investors directly or through agents. Any such underwriter or agent involved in the offer and sale of the Securities will be named in the applicable Prospectus Supplement. Underwriters may offer and sell the Securities at a fixed price or prices, which may be changed, at prices related to the prevailing market prices at the time of sale or at negotiated prices. The Company also may, from time to time, authorize underwriters acting as the Company's agents to offer and sell the Securities upon the terms and conditions as are set forth in the applicable Prospectus Supplement. In connection with the sale of Securities, underwriters may be deemed to have received compensation from the Company in the form of underwriting discounts or commissions and may also receive commissions from purchasers of Securities for whom they may act as agent. Underwriters may sell Securities to or through dealers, and such dealers may receive compensation in the form of discounts, concessions or commissions from the underwriters and/or commissions from the purchasers for whom they may act as agent. Any underwriting compensation paid by the Company to underwriters or agents in connection with the offering of Securities, and any discounts, concessions or commissions allowed by underwriters to participating dealers, will be set forth in the applicable Prospectus Supplement. Underwriters, dealers and agents participating in the distribution of the Securities may be deemed to be underwriters, and any discounts and commissions received by them and any profit realized by them on resale of the Securities may be deemed to be underwriting discounts and commissions, under the Securities Act. Underwriters, dealers and agents may be entitled, under agreements entered into with the Company, to indemnification against and contribution toward certain civil liabilities, including liabilities under the Securities Act. If so indicated in the applicable Prospectus Supplement, the Company will authorize dealers acting as the Company's agents to solicit offers by certain institutions to purchase Securities from the Company at the public offering price set forth in such Prospectus Supplement pursuant to Delayed Delivery Contracts ("Contracts") providing for payment and delivery on the date or dates stated in such Prospectus Supplement. Each Contract will be for an amount not less than, and the aggregate principal amount of Securities sold pursuant to Contracts shall be not less nor more than, the respective amounts stated in the applicable Prospectus Supplement. Institutions with whom Contracts, when authorized, may be made include commercial and savings banks, insurance companies, pension funds, investment companies, educational and charitable institutions, and other institutions but will in all cases be subject to the approval of the Company. Contracts will not be subject to any conditions except (i) the purchase by an institution of the Securities covered by its Contracts shall not at the time of delivery be prohibited under the laws of any jurisdiction in the United States to which such institution is subject, and (ii) if the Securities are being sold to underwriters, the Company shall have sold to such underwriters the total principal amount of the Securities less the principal amount thereof covered by Contracts. Agents and underwriters will have no responsibility in respect of the delivery or performance of Contracts. This Prospectus may also be used in a registered resale by persons who hold (i) Securities issued pursuant to this Prospectus or (ii) securities issued in private or other transactions by the Company in connection with acquisitions of interests in, or notes secured by, mini-warehouses and other real properties or interests in entities that own mini-warehouses and other real properties, or otherwise, in each case in transactions in which they may be deemed underwriters within the meaning of the Securities Act. Any profits realized on sales pursuant to this Prospectus by holders of such shares may be regarded as underwriting compensation. Such sales may be made on the NYSE, in the over-the- counter market or in privately negotiated transactions. Unless any such sale involves less than 1% of the Company's outstanding securities of the same class, this Prospectus will be supplemented to set forth the name of such securityholder, the nature of any position, office or other material relationship of the securityholder with the Company and its affiliates during the preceding three years and the amount of securities of the class owned by such securityholder prior to the sale, the amount of such securities to be sold and the percentage of such class after the sale. Certain of the underwriters, if any, and their affiliates may be customers of, engage in transactions with and perform services for the Company in the ordinary course of business. 19 LEGAL OPINIONS David Goldberg, Glendale, California, counsel to the Company and counsel to PSI and its affiliates, has delivered an opinion dated July 26, 1994 to the effect that the securities offered by this Prospectus will be validly issued, fully paid and nonassessable. Hogan & Hartson L.L.P., Washington, D.C., has delivered an opinion dated July 26, 1994 as to the status of the Company as a REIT. Mr. Goldberg owns 2,900 shares of Common Stock and has options to acquire an additional 40,000 shares of Common Stock and has invested in entities affiliated with PSI. EXPERTS The consolidated financial statements and related schedules of the Company for the year ended December 31, 1993 appearing in the Company's Annual Report on Form 10-K, as amended by a Form 10-K/A (Amendment No. 2) dated May 26, 1994, and the combined summaries of historical information relating to operating revenues and specified expenses--certain properties (the "Combined Summaries") for the properties and periods indicated in Note 1 to such Combined Summaries, appearing in the Company's Current Report on Form 8-K dated June 7, 1994 have been audited by Ernst & Young, independent auditors, as set forth in their reports included in the Company's Annual Report on Form 10-K and the Company's Current Report on Form 8-K dated June 7, 1994 and incorporated herein by reference. Such consolidated financial statements and Combined Summaries are incorporated herein by reference in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. 20 - ----------Same Store Growth (1)----------------------[LOGO OF PUBLIC STORAGE] Monthly Realized Rents per Occupied Square Foot [BAR CHART APPEARS HERE ILLUSTRATING THE MONTHLY REALIZED RENTS PER OCCUPIED SQUARE FOOT FOR SAME STORE MINI- WAREHOUSES FOR THE YEARS 1992, 1993 AND 1994 AND FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1995.] 1992 $.55 1993 $.56 1994 $.59 3 Months Ended March 31, 1994 $.58 3 Months Ended March 31, 1995 $.60 Average Occupancy Levels [BAR CHART APPEARS HERE ILLUSTRATING THE AVERAGE OCCUPANCY LEVELS FOR SAME STORE MINI-WAREHOUSES FOR THE YEARS 1992, 1993 AND 1994 AND FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1995.] 1992 86.8% 1993 89.5% 1994 90.3% 3 Months Ended March 31, 1994 87.7% 3 Months Ended March 31, 1995 88.6% Net Cash Flow (in Millions) (2) [BAR CHART APPEARS HERE ILLUSTRATING THE NET CASH FLOW FOR SAME STORE MINI-WAREHOUSES FOR THE YEARS 1992, 1993 AND 1994 AND FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1995.] 1992 $50.4 1993 $55.3 1994 $58.9 3 Months Ended March 31, 1994 $13.8 3 Months Ended March 31, 1995 $14.5 (1) Same Store refers to mini-warehouses in which the Company has invested since January 1992. (2) Net operating income before depreciation expense. - -------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE- SENTATIONS IN CONNECTION WITH THIS OFFERING, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUB- SEQUENT TO ITS DATE. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPEC- TUS DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN OF- FER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIR- CUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. --------------- TABLE OF CONTENTS PROSPECTUS SUPPLEMENT
PAGE ---- Prospectus Supplement Summary.............................................. S-3 Use of Proceeds ........................................................... S-9 Recent Developments........................................................ S-9 Distributions and Price Range of Common Stock.............................. S-11 Capitalization............................................................. S-12 Selected Financial Information............................................. S-13 Management's Discussion and Analysis of Financial Condition and Results of Operations....................................... S-15 Business................................................................... S-25 Management................................................................. S-36 Special Tax Considerations for Foreign Stockholders........................ S-38 Underwriting............................................................... S-40 Legal Opinions ............................................................ S-42 Experts.................................................................... S-42 PROSPECTUS Available Information...................................................... 2 Incorporation of Certain Documents by Reference............................ 2 The Company................................................................ 3 Certain Considerations..................................................... 4 Use of Proceeds............................................................ 6 Ratio of Earnings to Fixed Charges......................................... 6 Description of Common Stock................................................ 7 Description of Preferred Stock............................................. 8 Description of Warrants.................................................... 13 Certain Federal Income Tax Considerations.................................. 14 Plan of Distribution....................................................... 19 Legal Opinions............................................................. 20 Experts.................................................................... 20
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 3,500,000 SHARES [LOGO OF PUBLIC STORAGE] STORAGE EQUITIES, INC. COMMON STOCK --------------- PROSPECTUS SUPPLEMENT --------------- PAINEWEBBER INCORPORATED SMITH BARNEY INC. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION RAYMOND JAMES & ASSOCIATES, INC. THE ROBINSON-HUMPHREY COMPANY, INC. --------------- , 1995 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- -----END PRIVACY-ENHANCED MESSAGE-----