<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 22, 1994
REGISTRATION NO. 33-__________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
____________
SHURGARD STORAGE CENTERS, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 6798 91-1080141
(State of Incorporation) (Primary Standard Industrial Classification (I.R.S. Employer Identification Number)
Code Number)
HARRELL L. BECK
1201 Third Avenue, Suite 2200 1201 Third Avenue, Suite 2200
Seattle, Washington 98101 Seattle, Washington 98101
(206) 624-8100 (206) 624-8100
(Address and telephone number of registrant's (Name, address and telephone number of agent
principal executive offices) for service)
</TABLE>
____________
Copies to:
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MICHAEL STANSBURY JOHN M. STEEL EDMUND O. BELSHEIM, JR.
LINDA A. SCHOEMAKER BENJAMIN F. STEPHENS SCOTT L. GELBAND
Perkins Coie Riddell Williams Bullitt & Bogle & Gates
1201 Third Avenue, 40th Floor Walkinshaw Two Union Square
Seattle, Washington 98101-3099 1001 Fourth Avenue, #4400 601 Union Street
(206) 583-8888 Seattle, Washington 98154 Seattle, Washington 98101-2346
(206) 624-3600 (206) 682-5151
</TABLE>
____________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after the Registration Statement becomes effective and the
effective time of the merger of Shurgard Incorporated (the "Management
Company") with and into the registrant, as described in the Agreement and Plan
of Merger dated as of December 19, 1994 (the "Merger Agreement") attached as
Appendix I to the Proxy Statement/Prospectus forming a part of the Registration
Statement.
____________
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
____________
CALCULATION OF REGISTRATION FEE
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===================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) UNIT(2) PRICE(2) REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock, $.001
par value(3) . . . . . . . 1,932,572 shares $0.44 $1,979,628 $683
===================================================================================================================
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(1) Based on the number of shares to be issued upon the closing of the merger,
plus certain additional shares that may be issued in the future in
accordance with the Merger Agreement.
(2) The registration fee was computed pursuant to Rule 457(f) under the
Securities Act of 1933, as amended, by multiplying (a) the book value per
share of Management Company Common Stock as of October 31, 1994 and (b)
4,499,154, the number of outstanding shares of Management Company Common
Stock as of December 19, 1994, assuming exercise of all outstanding options
to purchase Management Company Common Stock. The result was then
multiplied by 1/29 of 1%.
(3) Includes associated purchase rights. Prior to the occurrence of certain
events, such rights will not be evidenced or traded separately from the
Common Stock.
____________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
SHURGARD STORAGE CENTERS, INC.
CROSS-REFERENCE SHEET
PURSUANT TO
ITEM 501(b) OF REGULATION S-K
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ITEMS OF FORM S-4 HEADING IN PROXY STATEMENT/PROSPECTUS
------------------------------------------------------------- ---------------------------------------------------
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A. Information About the Transaction
Item 1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus . . . . . . . . . Outside Front Cover Page
Item 2. Inside Front and Outside Back Cover Pages of
Prospectus . . . . . . . . . . . . . . . . . . . Inside Front and Outside Back Cover Pages
Item 3. Risk Factors, Ratio of Earnings to Fixed Charges,
and Other Information . . . . . . . . . . . . . . Summary; Risk Factors
Item 4. Terms of the Transaction . . . . . . . . . . . . Background of and Reasons for the Merger; The
Merger; Description of Shurgard REIT Capital Stock;
Comparison of Rights of Shareholders of the
Shurgard REIT and of the Management Company
Item 5. Pro Forma Financial Information . . . . . . . . . Summary--Unaudited Pro Forma Combined Financial
Statements
Item 6. Material Contacts With the Company Being
Acquired . . . . . . . . . . . . . . . . . . . . Background of and Reasons for the Merger
Item 7. Additional Information Required for Reoffering by
Persons and Parties Deemed to Be Underwriters . . Not Applicable
Item 8. Interests of Named Experts and Counsel . . . . . Not Applicable
Item 9. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities . Not Applicable
B. Information About the Registrant
Item 10. Information With Respect to S-3 Registrants . . . Not Applicable
Item 11. Incorporation of Certain Information by Reference Not Applicable
Item 12. Information With Respect to S-2 or S-3 Registrants Not Applicable
Item 13. Incorporation of Certain Information by Reference Not Applicable
Item 14. Information With Respect to Registrants Other Than
S-3 or S-2 Registrants . . . . . . . . . . . . . Summary; Shurgard Storage Centers, Inc.;
Comparative Per Share Market Information; Financial
Statements
C. Information About the Company Being Acquired
Item 15. Information With Respect to S-3 Companies . . . . Not Applicable
Item 16. Information With Respect to S-2 or S-3 Companies Not Applicable
Item 17. Information With Respect to Companies Other Than
S-2 or S-3 Companies . . . . . . . . . . . . . . Summary; Shurgard Incorporated; Comparative Per
Share Market Information; Financial Statements
</TABLE>
<PAGE> 3
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D. Voting and Management Information
Item 18. Information if Proxies, Consents or Authorizations
Are to Be Solicited . . . . . . . . . . . . . . . Outside Front Cover Page; Summary; Special Meeting
of Shareholders; The Merger; Interests of Certain
Persons in the Merger; Management of the Shurgard
REIT; Executive Compensation; Principal Shurgard
REIT Shareholders
Item 19. Information if Proxies, Consents or Authorizations
Are Not to Be Solicited, or in an Exchange Offer Not Applicable
</TABLE>
<PAGE> 4
[SHURGARD REIT LETTERHEAD]
February ___, 1995
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders
(the "Special Meeting") of Shurgard Storage Centers, Inc. (the "Shurgard REIT")
to be held on Thursday, March 2, 1995, at 10:00 a.m., local time, at the Westin
Hotel, 1900 5th Street, Seattle, Washington.
At the Special Meeting, you will be asked to consider and vote upon a
proposal to approve the merger of Shurgard Incorporated (the "Management
Company") with and into the Shurgard REIT (the "Merger") pursuant to an
Agreement and Plan of Merger dated as of December 19, 1994 (the "Merger
Agreement"). The purpose of the Merger is for the Shurgard REIT to become
self-administered and self-managed. Pursuant to the Merger Agreement, the
outstanding shares of common stock of the Management Company (the "Management
Company Common Stock") will be converted into an aggregate of 1,400,000 shares
of Class A Common Stock of the Shurgard REIT (together with associated purchase
rights, the "Shurgard Class A Common Stock"), subject to certain adjustments
based on the market price of the Shurgard Class A Common Stock and changes to
the Management Company's equity from October 31, 1994 to the closing date of
the Merger, and certain adjustments for persons exercising dissenters' rights.
In addition, pursuant to the Merger Agreement, Management Company shareholders
will be entitled to receive additional shares of Shurgard Class A Common Stock
based on (i) the extent to which, during the five years following the closing
of the Merger, the Shurgard REIT realizes value as a result of certain
transactions relating to interests in or assets of six limited partnerships
acquired by the Shurgard REIT in the Merger and (ii) the value, at the end of
five years or in the event of a change of control, of any remaining interests
in such partnerships as determined by independent appraisal.
A special committee consisting of independent directors of the
Shurgard REIT, who are not members of management or employees of the Management
Company (the "Special Committee"), actively negotiated the terms of the Merger
and the Merger Agreement with the Management Company. In connection with such
consideration, the Special Committee retained Alex. Brown & Sons Incorporated
("Alex. Brown") to act as its financial advisor. Alex. Brown has rendered its
opinion that, as of the date of the Merger Agreement, the consideration to be
paid by the Shurgard REIT in the Merger is fair, from a financial point of
view, to the Shurgard REIT. The written opinion of Alex. Brown, dated December
19, 1994, is included as Appendix II to the accompanying Proxy
Statement/Prospectus and should be read carefully by shareholders. The Special
Committee has unanimously recommended to the Shurgard REIT's Board of Directors
that the Merger Agreement be approved.
THE SPECIAL COMMITTEE ANDTHE SHURGARD REIT'S BOARD OF DIRECTORS HAVE
DETERMINED THE MERGER TO BE FAIR TO AND IN THE BEST INTERESTS OF THE SHURGARD
REIT AND ITS SHAREHOLDERS, HAVE UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND
THE MERGER AND RECOMMEND A VOTE FOR APPROVAL OF THE MERGER.
You should carefully read the accompanying Notice of Special Meeting
of Shareholders and the Proxy Statement/Prospectus for details of the Merger
and additional related information.
Whether or not you plan to attend the Special Meeting, please
complete, sign and date the enclosed proxy card and return it promptly in the
enclosed postage-prepaid envelope. Your stock will be voted in accordance with
the instructions you have given in your proxy. If you attend the Special
Meeting, you may vote in person if you wish, even though you previously have
returned your proxy card. Your prompt cooperation will be greatly appreciated.
Sincerely,
Harrell L. Beck
President
PLEASE COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD.
<PAGE> 5
SHURGARD STORAGE CENTERS, INC.
1201 THIRD AVENUE, SUITE 2200
SEATTLE, WASHINGTON 98101
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD MARCH 2, 1995
TO THE HOLDERS OF CLASS A COMMON STOCK OF SHURGARD STORAGE CENTERS, INC.:
A Special Meeting of holders of Class A Common Stock (the "Special
Meeting") of Shurgard Storage Centers, Inc., a Delaware corporation (the
"Shurgard REIT"), will be held on Thursday, March 2, 1995, at 10:00 a.m., local
time, at the Westin Hotel, 1900 5th Street, Seattle, Washington, for the
following purposes:
1. To consider and vote upon a proposal to approve the merger
of Shurgard Incorporated (the "Management Company") with and into the
Shurgard REIT (the "Merger") pursuant to an Agreement and Plan of
Merger dated as of December 19, 1994 (the "Merger Agreement") between
the Shurgard REIT and the Management Company. Pursuant to the Merger
Agreement, the outstanding shares of common stock of the Management
Company (the "Management Company Common Stock") will be converted into
an aggregate of 1,400,000 shares of Class A Common Stock of the
Shurgard REIT (together with associated purchase rights, the "Shurgard
Class A Common Stock"), subject to certain adjustments based on the
market price of the Shurgard Class A Common Stock and changes to the
Management Company's equity from October 31, 1994 to the closing date
of the Merger, and certain adjustments for persons exercising
dissenters' rights. In addition, pursuant to the Merger Agreement,
Management Company shareholders will be entitled to receive additional
shares of Shurgard Class A Common Stock based on (i) the extent to
which, during the five years following the closing of the Merger, the
Shurgard REIT realizes value as a result of certain transactions
relating to interests in or assets of six limited partnerships
acquired by the Shurgard REIT in the Merger and (ii) the value, at the
end of five years or in the event of a change of control, of any
remaining interests in such partnerships as determined by independent
appraisal. THE MERGER IS MORE COMPLETELY DESCRIBED IN THE
ACCOMPANYING PROXY STATEMENT/PROSPECTUS, AND A COPY OF THE MERGER
AGREEMENT IS ATTACHED AS APPENDIX I THERETO.
2. To transact such other business as may properly come
before the Special Meeting or any adjournments or postponements
thereof.
Only holders of record of shares of Shurgard Class A Common Stock at
the close of business on January [20], 1995, the record date for the Special
Meeting, are entitled to notice of and to vote at the Special Meeting and at
any adjournments or postponements thereof.
The affirmative vote of the holders of shares representing a majority
of the outstanding shares of Shurgard Class A Common Stock entitled to vote at
the Special Meeting is required to approve the Merger. Holders of shares of
Shurgard Class A Common Stock will not be entitled to dissenters' rights as a
result of the Merger.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE
COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE
ENCLOSED POSTAGE-PREPAID ENVELOPE. YOUR STOCK WILL BE VOTED IN ACCORDANCE WITH
THE INSTRUCTIONS YOU HAVE GIVEN IN YOUR PROXY. YOUR PROXY MAY BE REVOKED AT
ANY TIME BEFORE IT IS VOTED BY SIGNING AND RETURNING A LATER-DATED PROXY WITH
RESPECT TO THE SAME SHARES, BY FILING WITH THE SECRETARY OF THE SHURGARD REIT A
WRITTEN REVOCATION BEARING A LATER DATE OR BY ATTENDING AND VOTING IN PERSON AT
THE SPECIAL MEETING.
By Order of the Board of Directors,
Kristin H. Stred
Secretary
Seattle, Washington
February ___, 1995
<PAGE> 6
SHURGARD STORAGE CENTERS, INC.
PROXY STATEMENT/PROSPECTUS
________________
This Proxy Statement/Prospectus is being furnished to holders of
shares of Class A Common Stock, par value $.001 per share (together with
associated purchase rights, the "Shurgard Class A Common Stock"), of Shurgard
Storage Centers, Inc., a Delaware corporation (the "Shurgard REIT"), in
connection with the solicitation of proxies by the Shurgard REIT's Board of
Directors for use at the Special Meeting of Shareholders to be held on
Thursday, March 2, 1995, at the Westin Hotel, 1900 5th Street, Seattle,
Washington, commencing at 10:00 a.m., local time, and at any adjournments or
postponements thereof (the "Special Meeting").
At the Special Meeting, shareholders of record of the Shurgard REIT at
the close of business on January [20], 1995, will consider and vote upon (i) a
proposal to approve the merger of Shurgard Incorporated (the "Management
Company") with and into the Shurgard REIT (the "Merger") pursuant to an
Agreement and Plan of Merger dated as of December 19, 1994 (the "Merger
Agreement") between the Shurgard REIT and the Management Company and (ii) such
other business as may properly come before the Special Meeting or any
adjournments or postponements thereof.
Upon consummation of the Merger, the outstanding shares of common
stock of the Management Company (the "Management Company Common Stock") (except
shares as to which dissenters' rights are exercised and not subsequently
withdrawn) will be converted into an aggregate of 1,400,000 shares of Shurgard
Class A Common Stock, subject to certain adjustments based on the market price
of the Shurgard Class A Common Stock and changes to the Management Company's
equity from October 31, 1994 to the closing date of the Merger, and certain
adjustments for persons exercising dissenters' rights. In addition, pursuant
to the Merger Agreement, Management Company shareholders will have the right to
receive additional shares of Shurgard Class A Common Stock based on (i) the
extent to which, during the five years following the closing of the Merger, the
Shurgard REIT realizes value as a result of certain transactions relating to
interests in or assets of six limited partnerships acquired by the Shurgard
REIT in the Merger and (ii) the value, at the end of five years or in the event
of a change of control, of any remaining interests in such partnerships as
determined by independent appraisal.
This Proxy Statement/Prospectus constitutes the Prospectus of the
Shurgard REIT filed as part of a Registration Statement on Form S-4 (the
"Registration Statement") with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Securities
Act"), relating to the shares of Shurgard Class A Common Stock issuable in
connection with the Merger. All information concerning the Shurgard REIT
contained in this Proxy Statement/Prospectus has been furnished by the Shurgard
REIT, and all information concerning the Management Company contained in this
Proxy Statement/Prospectus has been furnished by the Management Company.
This Proxy Statement/Prospectus is first being mailed to holders of
Shurgard Class A Common Stock on or about February __, 1995.
THE SHARES OF SHURGARD CLASS A COMMON STOCK ISSUABLE IN THE MERGER
HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION, NOR HAS THE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
________________
FOR A DESCRIPTION OF RISK FACTORS RELATING TO THE MERGER AND THE
RELATED TRANSACTIONS DESCRIBED IN THIS PROXY STATEMENT/PROSPECTUS, SEE "RISK
FACTORS."
________________
The date of this Proxy Statement/Prospectus is February ___, 1995.
<PAGE> 7
AVAILABLE INFORMATION
The Shurgard REIT is subject to the information and reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at certain regional offices of the Commission located at
Citicorp Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661,
and 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of such
information can be obtained at prescribed rates from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
This Proxy Statement/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. The Registration Statement
and any amendments thereto, including exhibits filed as a part thereof, are
available for inspection and copying as set forth above.
The Management Company is not subject to the information and reporting
requirements of the Exchange Act.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS WITH RESPECT TO THE MATTERS DESCRIBED IN THIS PROXY
STATEMENT/PROSPECTUS OTHER THAN THOSE CONTAINED HEREIN OR IN THE DOCUMENTS
INCORPORATED BY REFERENCE HEREIN. ANY INFORMATION OR REPRESENTATIONS WITH
RESPECT TO SUCH MATTERS NOT CONTAINED HEREIN OR THEREIN MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE SHURGARD REIT OR THE MANAGEMENT COMPANY. THIS
PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY SECURITIES IN ANY JURISDICTION TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE SHURGARD REIT OR THE MANAGEMENT COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION IN THIS PROXY
STATEMENT/PROSPECTUS OR IN THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THEREOF.
<PAGE> 8
TABLE OF CONTENTS
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AVAILABLE INFORMATION............................. i SHURGARD INCORPORATED............................. 44
Management Services........................... 44
SUMMARY........................................... 1 Relationship With the Shurgard REIT........... 47
Selected Financial Data....................... 50
RISK FACTORS...................................... 16 Management's Discussion and Analysis of
Risks Relating to the Merger.................. 16 Financial Condition and Results of
Tax Risks to the Shurgard REIT and the Operations.................................. 50
Management Company Shareholders Resulting
From the Merger............................. 16 THE MERGER........................................ 53
General Real Estate Investment Risks and Terms of the Merger........................... 53
Self-Storage Industry Risks................. 18 Adjustments to Share Consideration............ 53
Other General Risks........................... 20 Indemnification Shares........................ 54
Contingent Shares............................. 55
SPECIAL MEETING OF SHAREHOLDERS................... 21 Effective Time of the Merger.................. 59
General....................................... 21 Fractional Shares............................. 59
Matters to Be Considered at the Special Exchange of Shares of Management Company
Meeting..................................... 21 Common Stock................................ 59
Record Date; Shares Entitled to Vote; Vote Effect on Management Company Stock Option,
Required.................................... 21 Employee Benefit and Stock Plans............ 60
Proxies; Proxy Solicitation................... 22 Trading of Shares of Shurgard Class A
Common Stock................................ 60
BACKGROUND OF AND REASON FOR THE MERGER........... 23 Representations and Warranties................ 60
Background.................................... 23 Business of the Management Company Pending
Reasons for the Merger; Recommendations of the Merger.................................. 61
the Special Committee and the Shurgard No Solicitation............................... 61
REIT Board.................................. 27 InterMation Spin-off.......................... 61
Opinion of Financial Advisor to the Special Shurgard Realty Advisors...................... 62
Committee................................... 28 Conditions to Consummation of the Merger...... 62
Amendment and Waiver; Termination............. 63
SHURGARD STORAGE CENTERS, INC. ................... 31 Regulatory Matters............................ 63
Business...................................... 31 Indemnification of Management Company
Competition................................... 34 Directors and Officers...................... 64
Selected Financial Data....................... 35 Resale of Shares of Shurgard Class A Common
Management's Discussion and Analysis of Stock Issued in the Merger; Affiliates...... 64
Financial Condition and Results of Agreement of Management Company Significant
Operations.................................. 35 Shareholders to Vote in Favor of
the Merger.................................. 64
POLICIES REGARDING INVESTMENT AND CERTAIN Accounting Treatment.......................... 64
OTHER ACTIVITIES................................ 37 Expenses and Fees............................. 65
Acquisition, Development and Investment Rights of Dissenting Management Company
Policies.................................... 38 Shareholders................................ 65
Financing and Reserve Policies................ 40
Conflict of Interest Policies................. 41 FEDERAL INCOME TAX CONSEQUENCES................... 66
Policy With Respect to Dividends and Certain General....................................... 66
Other Activities............................ 42
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Tax Treatment of the Management Company Compensation to the Shurgard REIT's Directors
and the Shurgard REIT in the Merger......... 66 and Officers................................ 90
Tax Treatment of Management Company
Shareholders in the Merger.................. 67 EXECUTIVE COMPENSATION............................ 91
Built-in Gain Rules........................... 68 Compensation Summary.......................... 91
Failure of the Merger to Qualify.............. 68 Option Grants................................. 92
Tax Treatment of the InterMation Spin-off..... 69 Option Exercises and Year-End Values.......... 92
Failure of the InterMation Spin-off to Certain Relationships and Related
Qualify..................................... 70 Transactions................................ 93
Consequences of Merger on the Shurgard REIT's
Qualification as a REIT..................... 70 PRINCIPAL SHURGARD REIT SHAREHOLDERS.............. 94
Tax Consequences to Management Company
Shareholders Receiving Shurgard Class A PRINCIPAL MANAGEMENT COMPANY SHAREHOLDERS......... 95
Common Stock................................ 74
State and Local Taxes......................... 77 LEGAL OPINION..................................... 96
INTERESTS OF CERTAIN PERSONS IN THE MERGER........ 78 TAX OPINION....................................... 96
Appointment of Officers and a Director of
the Shurgard REIT........................... 78 EXPERTS........................................... 96
Acceleration of the Management Company
Stock Options............................... 78 Appendix I -- Agreement and Plan of Merger dated as of
Indemnification of Directors and Officers December 19, between Shurgard Storage
Pursuant to the Merger Agreement............ 78 Centers, Inc. and Shurgard Incorporated
Contingent Shares............................. 79
Appendix II -- Opinion of Alex. Brown & Sons
COMPARATIVE PER SHARE MARKET INFORMATION.......... 79 Incorporated
The Shurgard REIT............................. 79
The Management Company........................ 79
DESCRIPTION OF SHURGARD REIT CAPITAL STOCK........ 80
General....................................... 80
Common Stock.................................. 80
Preferred Stock............................... 80
Excess Stock.................................. 80
Shareholder Rights Plan....................... 81
DESCRIPTION OF MANAGEMENT COMPANY CAPITAL STOCK... 83
COMPARISON OF RIGHTS OF SHAREHOLDERS OF THE
SHURGARD REIT AND OF THE MANAGEMENT COMPANY..... 84
General....................................... 84
Changes Principally Attributable to
Differences Between the DGCL and the WBCA... 84
MANAGEMENT OF THE SHURGARD REIT................... 88
Committees of the Shurgard REIT Board......... 89
</TABLE>
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<PAGE> 10
SUMMARY
Certain significant matters discussed in this Proxy
Statement/Prospectus are summarized below. This summary is not intended to be
complete and is qualified in all respects by reference to the more detailed
information appearing or incorporated by reference in this Proxy
Statement/Prospectus (including the Appendices hereto).
THE COMPANIES
Shurgard Storage Centers, Inc.... The Shurgard REIT is a real estate
investment trust (a "REIT") that owns
directly and through joint ventures
159 premium self-storage properties and
two office and business parks. The Shurgard
REIT was formed through the consolidation
on March 1, 1994 of 17 publicly held
limited partnerships (the "Consolida-
tion"). The mailing address of the
Shurgard REIT's principal executive
offices is 1201 Third Avenue, Suite 2200,
Seattle, Washington 98101, and its
telephone number is (206) 624- 8100.
See "SHURGARD STORAGE CENTERS, INC."
Shurgard Incorporated............ The Management Company is a real estate
operating company specializing in all
aspects of the self-storage industry. The
mailing address of the Management
Company's principal executive offices is
1201 Third Avenue, Suite 2200, Seattle,
Washington 98101, and its telephone number
is (206) 624-8100. See "SHURGARD
INCORPORATED."
SPECIAL MEETING OF SHAREHOLDERS
Date, Time and Place of the
Special Meeting.................. The Special Meeting is to be held on
Thursday, March 2, 1995, at 10:00 a.m.,
local time, at the Westin Hotel, 1900
5th Street, Seattle, Washington.
Purpose of the Special
Meeting.......................... At the Special Meeting, holders of shares
of Shurgard Class A Common Stock will
consider and vote upon (i) a proposal to
approve the Merger and (ii) such other
business as may properly come before the
Special Meeting or any adjournments or
postponements thereof. The Merger is
being submitted to holders of shares of
Shurgard Class A Common Stock for
approval in accordance with Article 16 of
the Shurgard REIT's Restated Certificate
of Incorporation.
Record Date...................... Only holders of record of shares of
Shurgard Class A Common Stock at the close
of business on January [20], 1995, are
entitled to notice of and to vote at the
Special Meeting or any adjournments or
postponements thereof. On that date,
16,829,283 shares of Shurgard Class A
Common Stock were outstanding and
entitled to vote. As of such record
date, current directors and executive
officers of the Shurgard REIT and their
affiliates may be deemed to be the
beneficial owners of less than 1% of the
outstanding shares of Shurgard Class A
Common Stock.
Vote Required.................... The affirmative vote of the holders of a
majority of the outstanding shares of
Shurgard Class A Common Stock entitled
to vote at the Special Meeting is required
to approve the Merger. Holders of shares
of Class B common stock of the Shurgard
REIT (the "Shurgard Class B Common Stock")
are not entitled to vote at the Special
Meeting (the Shurgard Class A Common
Stock and the Shurgard Class B Common
Stock are referred to collectively herein
as the "Shurgard REIT Common Stock"). See
"SPECIAL MEETING OF SHAREHOLDERS--Record
Date; Shares Entitled to Vote; Vote
Required."
-1-
<PAGE> 11
The Merger
General.......................... Upon the closing of the Merger (the
"Closing"), the Management Company will
merge with and into the Shurgard REIT and
the Shurgard REIT will become a self-
administered and self-managed real estate
investment trust. Pursuant to the Merger
Agreement, the outstanding shares of
Management Company Common Stock will be
converted into an aggregate of 1,400,000
shares of Shurgard Class A Common Stock,
subject to certain adjustments based on
the market price of the Shurgard Class A
Common Stock and changes to the Management
Company's equity from October 31, 1994 to
the Closing date, and certain adjustments
for persons exercising dissenters' rights
(the "Share Consideration"). Based on the
capitalization of the Shurgard REIT as of
December 19, 1994, assuming no adjustment
is made to the aggregate number of shares
of Shurgard Class A Common Stock to be
issued upon the Closing, as a result of
the Merger "affiliates" (as defined under
the Securities Act of 1934, as amended) of
the Management Company will own after the
Merger approximately 7.6% of the outstand-
ing shares of Shurgard REIT Common Stock
(excluding shares of Shurgard REIT Common
Stock beneficially owned by Management
Company affiliates prior to the Merger).
Contingent Shares................ Pursuant to the Merger Agreement,
Management Company shareholders will be
entitled to receive additional shares
of Shurgard Class A Common Stock based on
(i) the extent to which, during the five
years following the Closing, the Shurgard
REIT realizes value as a result of certain
transactions relating to interests in or
assets of six limited partnerships acquired
by the Shurgard REIT in the Merger and
(ii) the value, at the end of five years
or in the event of a change of control,
of any remaining interests in such
partnerships as determined by independent
appraisal (the "Contingent Shares"). See
"THE MERGER-- Contingent Shares."
Treatment of Options............. Pursuant to the Management Company's
stock option plan, holders of outstanding
options to purchase shares of Management
Company Common Stock will have the right
to exercise such options immediately
before the Closing, whether or not the
vesting requirements for such options
have been satisfied. All outstanding
options to purchase shares of Management
Company Common Stock that are not
exercised before the Closing will
terminate.
-2-
<PAGE> 12
Recommendations of the Special
Committee and the Board
of Directors..................... A special committee consisting of
independent directors of the Shurgard
REIT, who are not members of management
or employees of the Management Company
(the "Special Committee"), received the
Management Company's offer with respect
to the Merger and actively negotiated the
terms of the Merger and the Merger
Agreement. In connection with such
consideration, the Special Committee
retained Alex. Brown & Sons Incorporated
("Alex. Brown") to act as its financial
advisor and to deliver a written opinion
as to the fairness of the consideration
to be paid by the Shurgard REIT in the
Merger, from a financial point of view,
to the Shurgard REIT. The Special
Committee has unanimously recommended
to the Shurgard REIT Board that the
Merger Agreement be approved. The
Shurgard REIT Board, after considering
the recommendation of the Special
Committee, has determined the Merger
Agreement to be fair to and in the best
interests of the Shurgard REIT and its
shareholders and has unanimously approved
the Merger Agreement and the Merger. The
Special Committee and the Shurgard REIT
Board recommend that the shareholders of
the Shurgard REIT approve the Merger.
The recommendations of the Special
Committee and the Shurgard REIT Board are
based upon a number of factors discussed
in this Proxy Statement/Prospectus.
See "BACKGROUND OF AND REASONS FOR THE
MERGER."
Opinion of Financial Advisor..... Alex. Brown has delivered its written
opinion, dated December 19, 1994, to the
Special Committee to the effect that, as
of the date of its opinion, the
consideration to be paid by the Shurgard
REIT to the shareholders of the
Management Company pursuant to the Merger
Agreement is fair, from a financial point
of view, to the Shurgard REIT. A copy of
the written opinion of Alex. Brown, which
sets forth the assumptions made, matters
considered and limits of its review, is
attached to this Proxy Statement/Pros-
pectus as Appendix II, and should be
read in its entirety. See "BACKGROUND OF
AND REASONS FOR THE MERGER--Opinion of
Financial Advisor to the Special
Committee."
Effective Time of the Merger..... Promptly following the satisfaction or
waiver (where permissible) of the
conditions to the Merger, the Merger will
be consummated and become effective on
the date and at the time the certificate
of merger to be filed pursuant to the
Delaware General Corporation Law (the
"DGCL") and the articles of merger to be
filed pursuant to the Washington Business
Corporation Act (the "WBCA") are duly
filed with the Secretary of State of the
state of Delaware and of the state of
Washington, respectively, or such later
date and time as may be specified in such
certificate of merger and articles of
merger (the "Effective Time"). See "THE
MERGER--Effective Time of the Merger" and
"--Conditions to Consummation of the
Merger."
Fractional Shares................ No fractional shares of Shurgard Class A
Common Stock will be issued in the Merger.
In lieu thereof, the Shurgard REIT will
pay to any holder otherwise entitled to a
fractional share the cash value thereof.
See "THE MERGER--Fractional Shares."
-3-
<PAGE> 13
Exchange of Certificates in
the Merger....................... As soon as reasonably practicable after
the Effective Time, the Shurgard REIT will
mail a transmittal form and instructions
to each holder of record of certificates
that immediately prior to the Effective
Time represented outstanding shares of
Management Company Common Stock, which
form and instructions are to be used in
forwarding such certificates for
surrender and exchange for (i)
certificates representing that number of
whole shares of Shurgard Class A Common
Stock that such holder has the right to
receive pursuant to the Merger and (ii)
cash for any fractional share of Shurgard
Class A Common Stock to which such holder
otherwise would be entitled. See "THE
MERGER-- Exchange of Shares of Management
Company Common Stock."
Trading of Shares of Shurgard
REIT Common Stock on the
Nasdaq National Market........... The shares of Shurgard Class A Common
Stock to be issued in the Merger have
been approved for trading on the Nasdaq
National Market, subject to official
notice of issuance.
Business of the Management
Company Pending the Merger....... The Management Company has agreed that,
prior to the Effective Time or earlier
termination of the Merger Agreement,
except as permitted by the Merger
Agreement, the Management Company will
pursue its business in the ordinary
course and will not engage in any of a
number of actions specified in the Merger
Agreement. See "THE MERGER--Business of
the Management Company Pending the
Merger."
No Solicitation.................. The Shurgard REIT and the Management
Company have each agreed that before the
Closing it will not initiate, solicit or
encourage, directly or indirectly, any
inquiries or the making or implementation
of any proposal or offer with respect to
a merger, acquisition or similar trans-
action involving, or any purchase of all
or any significant portion of the assets
or any equity securities of, such party.
See "THE MERGER--No Solicitation."
-4-
<PAGE> 14
Indemnification Shares........... Pursuant to the Merger Agreement, subject
to certain exceptions, 10% of the shares
of Shurgard Class A Common Stock issuable
upon the Closing will be deposited in
escrow. While the indemnification escrow
is in place, the Shurgard REIT will be
entitled to recover to the extent of such
shares, subject to certain exceptions and
thresholds, the full dollar amount of
losses incurred as a result of (i) any
breach of representation or warranty made
by the Management Company, (ii) any breach
by the Management Company of any covenant
or agreement contained in the Merger
Agreement, (iii) any liability for taxes
assessed resulting from a determination
that the InterMation Spin-off (as defined
below) does not qualify for tax-free
treatment, (iv) any overstatement of
Management Company equity reflected in the
final statement of assets and liabilities
of the Management Company delivered at the
Closing, and (v) liability and associated
costs that may arise with respect to
general partnership interests. The
indemnification escrow will remain in
place for three years from the Closing,
except that the Shurgard REIT's rights to
indemnification with respect to matters
other than employee benefit and retirement
plans and certain tax liabilities will
terminate after two years. Following such
three- year period, any remaining shares
in escrow will be returned to the
Management Company shareholders.
Notwithstanding the foregoing, the
Shurgard REIT will have recourse against
such shareholders, severally, for tax
liabilities associated with the
InterMation Spin-off arising prior to
expiration of the applicable statute of
limitations, limited in amount to the
product of the number of shares released
and the Market Value (as defined below) as
of the Closing. An additional 5% of the
shares of Shurgard Class A Common Stock
issuable upon the Closing will be
deposited into escrow, subject to (i) the
audit by Deloitte & Touche LLP of the
closing statement of assets and
liabilities and (ii) the receipt of an
anticipated tax refund due to the
Management Company as a result of its
short taxable year ending as of the
Effective Time. See "THE
MERGER--Indemnification Shares."
Conditions of the Merger......... The Closing of the Merger is subject to
the satisfaction or waiver on or prior to
the Closing Date of certain conditions set
forth in the Merger Agreement. See "THE
MERGER--Conditions to Consummation of the
Merger."
Termination...................... The Merger Agreement may be terminated
at any time prior to the Effective Time,
whether before or after approval of
matters presented in this Proxy
Statement/Prospectus by the Shurgard REIT
shareholders, by mutual written consent of
the Shurgard REIT and the Management
Company or by either the Shurgard REIT or
the Management Company under certain
circumstances, including, (i) if any
required vote of the Shurgard REIT
shareholders or the Management Company
shareholders has not been obtained, (ii)
if the Merger has not been consummated by
May 25, 1995, and (iii) under certain
other circumstances. See "THE
MERGER--Amendment and Waiver;
Termination."
-5-
<PAGE> 15
Tax Treatment of Merger.......... The Shurgard REIT will obtain an opinion
from counsel that the Merger will
constitute a reorganization for federal
income tax purposes under the Internal
Revenue Code of 1986, as amended (the
"Code"), and, accordingly, that among
other things, no gain or loss will be
recognized by the Management Company or
the Shurgard REIT as a result of the
Merger. See "FEDERAL INCOME TAX
CONSEQUENCES--Tax Treatment of the
Management Company and the Shurgard REIT
in the Merger." The Shurgard REIT and the
Management Company believe that the
Management Company shareholders should not
recognize gain or loss as a result of the
conversion of Management Company Common
Stock into shares of Shurgard Class A
Common Stock (except with respect to any
cash received in lieu of fractional shares
of Shurgard Class A Common Stock, with
respect to any dissenting shares and
possible imputed interest on Contingent
Shares when and as received); however,
they are urged to consult their own tax
advisors as to the specific tax
consequences to them of the Merger. See
"FEDERAL INCOME TAX CONSEQUENCES--Tax
Treatment of Management Company
Shareholders in the Merger."
Regulatory Matters............... In connection with the Merger, the
Shurgard REIT and the Management Company
are required to file notifications with
the Federal Trade Commission (the "FTC")
and the Antitrust Division of the
Department of Justice (the "Antitrust
Division") pursuant to the
Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR Act").
Consummation of the Merger is conditioned
upon, among other things, expiration of
the waiting period under the HSR Act. The
parties to the Merger are not aware of any
other regulatory approvals required to
consummate the Merger. See "THE
MERGER--Regulatory Matters."
Accounting Treatment............. The Merger will be accounted for using
the purchase method under generally
accepted accounting principles for
accounting and financial reporting
purposes.
Approval of Merger Agreement
by Management Company
Shareholders..................... The consummation of the Merger is
subject to the approval of the Merger
Agreement by Management Company
shareholders. Certain significant
shareholders of the Management Company,
who had the power to vote shares
representing an aggregate of approximately
79% of the outstanding shares of
Management Company Common Stock as of
December 19, 1994, have agreed to vote in
favor of the Merger Agreement.
Accordingly, approval of the Merger
Agreement by Management Company
shareholders is assured. See "THE
MERGER--Agreement of Management Company
Significant Shareholders to Vote in Favor
of the Merger."
-6-
<PAGE> 16
Restrictions on Resale of
Shares of Shurgard Class A
Common Stock Issued in the
Merger........................... Pursuant to the Merger Agreement, certain
significant shareholders of the Management
Company have agreed not to sell or
otherwise dispose of more than 40% of the
Share Consideration and the Contingent
Shares received by them for a two-year
period commencing on the Closing. In
addition, shares issued to Management
Company shareholders who are deemed to be
"affiliates" of the Management Company for
purposes of Rule 145 under the Securities
Act are not transferable except in
compliance with the Securities Act,
including limitations on volume of sales.
Approximately 80% of the shares of
Shurgard Class A Common Stock to be issued
pursuant to the Merger will be held by
such affiliates. See "THE MERGER--Resale
of Shurgard Class A Common Stock Issued in
the Merger; Affiliates."
Management of the Shurgard
REIT Following the Merger......... As a result of the Merger, the size of the
Shurgard REIT Board will be expanded by
one, with Charles K. Barbo to serve as the
Chairman of the Board. In addition, Mr.
Barbo will be appointed as President and
Chief Executive Officer of the Shurgard
REIT and Harrell L. Beck and Kristin H.
Stred will each be appointed as a Senior
Vice President. Mr. Beck will also retain
his current positions of Treasurer and
Chief Financial Officer of the Shurgard
REIT, and Ms. Stred will retain her current
positions of Secretary and General Counsel
of the Shurgard REIT. The other current
executive officers of the Shurgard REIT
will each remain in their respective
positions after the Merger. See
"MANAGEMENT OF THE SHURGARD REIT."
Interests of Certain Persons
in the Merger..................... The current executive officers of the
Shurgard REIT, Messrs. Beck, Grant and Rowe
and Ms. Stred, also currently serve as
executive officers of the Management
Company. As described above, these
individuals are expected to continue to
serve as executive officers of the Shurgard
REIT following the Merger. As of December
19, 1994, the current executive officers of
the Shurgard REIT beneficially owned
approximately 6.7% of the outstanding
shares of Management Company Common Stock.
See "PRINCIPAL MANAGEMENT COMPANY
SHAREHOLDERS." Holders of outstanding
options to purchase shares of Management
Company Common Stock will have the right to
exercise such options immediately prior to
the Closing, whether or not the vesting
requirements for such options have been
satisfied. The executive officers of the
Shurgard REIT hold options to purchase an
aggregate of 74,500 shares of Management
Company Common Stock, the vesting of 48,833
of which will be accelerated. The Shurgard
REIT has also agreed that it will provide
for limitation of director liability and
indemnification of the Management Company's
directors, officers, employees and agents
at least to the extent that such persons
are entitled thereto under the Management
Company's charter documents. See "INTEREST
OF CERTAIN PERSONS IN THE MERGER."
Dissenters' Rights................ Holders of shares of Shurgard Class A
Common Stock will not be entitled to
dissenters' rights as a result of the
Merger.
-7-
<PAGE> 17
Comparative Rights of
Shareholders..................... The rights of shareholders of the
Management Company, a Washington
corporation, differ in certain respects
from the rights of shareholders of the
Shurgard REIT, a Delaware corporation, as
a result of differences between the WBCA
and the DGCL and differences between the
charter documents of the Shurgard REIT and
the Management Company. See "COMPARISON
OF RIGHTS OF SHAREHOLDERS OF THE SHURGARD
REIT AND THE MANAGEMENT COMPANY." In
addition, the Shurgard REIT has adopted a
shareholder rights plan pursuant to which
shareholders have rights to purchase
shares of capital stock of the Shurgard
REIT in certain circumstances. See
"DESCRIPTION OF SHURGARD REIT CAPITAL
STOCK."
ACTION TAKEN BY MANAGEMENT COMPANY PRIOR TO THE MERGER
InterMation Spin-off and
Disposition of SRA.............. Prior to the Closing, the Management
Company will dispose of certain of its
assets that are unrelated to the property
management, real estate and advisory
services that it performs. The Management
Company currently owns and operates a
commercial records storage business
through a subsidiary, InterMation, Inc.
("InterMation"). This subsidiary will be
spun-off to shareholders of the Management
Company (the "InterMation Spin-off"). In
addition, Shurgard Realty Advisors, Inc.
("SRA"), which is currently a wholly owned
subsidiary of the Management Company, will
be sold by the Management Company. Unless
otherwise indicated, the financial and
other information relating to the
Management Company contained in this Proxy
Statement/Prospectus has been adjusted to
reflect only the core business of the
Management Company, which will be acquired
by the Shurgard REIT in the Merger.
Accordingly, references to the "Management
Company" and to the "Management Company
Core Business" are to the Management
Company as it will be constituted at the
Effective Time of the Merger.
-8-
<PAGE> 18
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited post-merger pro forma balance sheet as of
September 30, 1994 combines the historical Shurgard REIT balance sheet with the
historical Management Company statement of assets and liabilities as if the
Merger occurred September 30, 1994. The unaudited post-merger pro forma
statements of income for the year ended December 31, 1993 and the nine months
ended September 30, 1994 combine the pro forma Shurgard REIT statements of
income (which consist of the historical statements adjusted to reflect
operations as if the Consolidation had occurred January 1, 1993) with the
Management Company's statements of revenues and expenses as if the Merger
occurred January 1, 1993. These statements are prepared on the basis of
accounting for the Merger as a purchase and should be read in conjunction with
all financial statements included elsewhere in this Prospectus/Proxy Statement.
The following unaudited pro forma combined financial information is
not necessarily indicative of actual or future operating results or financial
position that would have occurred or will occur upon the consummation of the
Merger.
POST-MERGER BALANCE SHEET
SEPTEMBER 30, 1994
(in thousands)
<TABLE>
<CAPTION>
SHURGARD
REIT MANAGEMENT POST-MERGER
PRO FORMA COMPANY ADJUSTMENTS PRO FORMA
----------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Assets:
Storage centers ............................... $451,799 $ 7,528 $ 576 $459,903
Cash and cash equivalents...................... 19,299 888 (888)(a) 19,299
Investment in joint ventures................... 2,450 2,450
Other assets................................... 11,226 3,037 23,893 (c) 38,156
-------- ------- ------- --------
Total assets ................................ $484,774 $11,453 $23,581 $519,808
======== ======= ======= ========
Liabilities and shareholders' equity:
Accounts payable and other liabilities ........ $ 10,539 $ 1,279 $ $ 11,818
Lines of credit ............................... 30,000 1,636 (b) 31,636
Notes payable ................................. 125,121 7,275 132,396
-------- ------- ------- --------
Total liabilities ........................... 165,660 8,554 1,636 175,850
-------- ------- ------- --------
Shareholders' equity .......................... 316,348 2,899 21,945 (b)(c) 341,192
Retained earnings ............................. 2,766 2,766
-------- ------- ------- --------
319,114 2,899 21,945 343,958
Total liabilities and shareholders'
equity.............................. $484,774 $11,453 $23,581 $519,808
======== ======= ======= ========
</TABLE>
(a) Represents adjustment of the historical value of the Daly City Storage
Center to fair market value.
(b) Represents adjustments necessary to reconcile Management Company equity to
the expected closing equity. The adjustment consists primarily of amounts
committed to subsidiaries.
(c) Represents adjustments for excess of purchase price over tangible assets to
be recognized in connection with the Merger, assuming the price of Shurgard
Class A Common Stock is $18.78 per share at Closing.
-9-
<PAGE> 19
POST-MERGER CONSOLIDATION
STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1994
(in thousands)
<TABLE>
<CAPTION>
SHURGARD
REIT MANAGEMENT POST-MERGER
PRO FORMA COMPANY ADJUSTMENTS PRO FORMA
--------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Rental revenues................................... $58,169 $ 776 $ -- $58,945
Management fees................................... 5,419 (3,529)(a) 1,890
Equity in earnings of affiliated partnerships..... 226 226
Acquisition and development fees.................. 26 (14)(a) 12
Reimbursements from affiliates.................... 1,798 (1,204)(a) 594
Interest income .................................. 608 81 689
------- ------ ------- -------
Total revenues.................................. 58,777 8,326 (4,747) 62,356
Expenses:
Operating......................................... 13,530 2,763 16,293
Property management fees.......................... 3,480 49 (3,529)(a)
Depreciation and amortization..................... 9,740 189 633 (b) 10,562
Real estate taxes................................. 5,250 5,250
Interest.......................................... 7,931 528 110 (c) 8,569
General and administrative........................ 2,133 2,797 (1,218)(a) 3,712
------- ------ ------- -------
Total expenses.................................. 42,064 6,326 (4,004) 44,386
------- ------ ------- -------
Net income before extraordinary item................ $16,713 $2,000 $ (743) $17,970
======= ====== ======= =======
Funds from operations(d)............................ $26,518 $2,189 $(110) $28,597
======= ====== ===== =======
Per share data:
Net income before extraordinary item.............. $0.98(e) $0.95(f) $0.98(g)
Funds from operations............................. 1.56(e) 1.57(f) 1.56(g)
</TABLE>
(a) Subsequent to the Merger, the Shurgard REIT will be self-administered
and, as such, it will not pay management fees or reimbursements to the
Management Company. Expenses related to personnel and general and
administrative costs now recognized by the Management Company, to the
extent not reimbursed by third parties, will be the responsibility of
the Shurgard REIT.
(b) Adjustment represents the amortization of the excess of the purchase
price over tangible assets and additional depreciation on the Daly
City center to be recognized in connection with the Merger.
(c) Adjustment represents interest at 9% on the line of credit to be
assumed in connection with the Merger.
(d) Funds from operations ("FFO") is defined as net income (determined in
accordance with generally accepted accounting principles) plus
depreciation and amortization, plus or minus nonrecurring income and
expenses, and other noncash items. FFO should not be considered as an
alternative to net income (determined in accordance with generally
accepted
-10-
<PAGE> 20
accounting principles) as an indication of the Shurgard REIT's
financial performance or cash flow from operating activities
(determined in accordance with generally accepted accounting
principles), as a measure of liquidity, nor is it necessarily
indicative of sufficient cash flow to fund all of the Shurgard REIT's
needs.
(e) Per share data is calculated using the actual shares outstanding since
the Consolidation (16,983,887 shares).
(f) Per share data is calculated by dividing Management Company financial
information, net of adjustments shown to give effect to the Merger, by
the net increase in shares of Shurgard REIT Common Stock resulting
from the Merger (1,322,894 shares).
(g) Per share data is calculated using the aggregated number of shares of
(e) plus (f) above.
-11-
<PAGE> 21
POST-MERGER CONSOLIDATION
STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1993
(in thousands)
<TABLE>
<CAPTION>
SHURGARD
REIT MANAGEMENT POST-MERGER
PRO FORMA COMPANY ADJUSTMENTS PRO FORMA
--------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Rental revenues ................................. $72,310 $ 49 $ -- $72,359
Management fees ................................. 6,447 (4,317)(a) 2,130
Equity in earnings of affiliated partnerships ... 243 243
Acquisition and development fees ................ 86 86
Reimbursements from affiliates .................. 1,466 (708)(a) 758
Interest income ................................. 590 124 714
------- ------ ------- -------
Total revenues ................................ 72,900 8,415 (5,025) 76,290
Expenses:
Operating ....................................... 16,840 3,457 20,297
Property management fees ........................ 4,317 (4,317)(a)
Depreciation and amortization ................... 12,887 124 843 (b) 13,854
Real estate taxes ............................... 7,068 7,068
Interest ........................................ 10,303 36 147 (c) 10,486
General and administrative ...................... 2,390 3,492 (708)(a) 5,174
------- ------ ------- -------
Total expenses ................................ 53,805 7,109 (4,035) 56,879
------- ------ ------- -------
Net Income ........................................ $19,095 $1,306 $ (990) $19,411
======= ====== ======= =======
Funds from operations(d)........................... $31,765 $1,430 $ (147) $33,048
======= ====== ======= =======
Per share data:
Net income ...................................... $ 1.12(e) $ 0.24(f) $ 1.06(g)
Funds from operations ........................... 1.87(e) 0.97(f) 1.81(g)
</TABLE>
- ---------------------
(a) Subsequent to the Merger, the Shurgard REIT will be self-administered
and, as such, it will not pay management fees or reimbursements to the
Management Company. Expenses related to personnel and general and
administrative costs now recognized by the Management Company, to the
extent not reimbursed by third parties, will be the responsibility of
the Shurgard REIT.
(b) Adjustment represents the amortization of the excess of the purchase
price over tangible assets and additional depreciation on the Daly
City Center to be recognized in connection with the Merger.
(c) Adjustment represents interest at 9% on the line of credit to be
assumed in connection with the Merger.
(d) FFO is defined as net income before extraordinary items (determined in
accordance with generally accepted accounting principles) plus
depreciation and amortization, plus or minus nonrecurring income and
expenses, and other noncash items. FFO should not be considered as an
alternative to net income (determined in accordance with generally
accepted accounting principles) as an indication of the Shurgard REIT's
financial performance or cash flow from operating activities
(determined in accordance with generally accepted
-12-
<PAGE> 22
accounting principles), as a measure of liquidity, nor is it
necessarily indicative of sufficient cash flow to fund all of the
Shurgard REIT's needs.
(e) Per share data is calculated using the actual shares outstanding since
the Consolidation (16,983,887 shares).
(f) Per share data is calculated by dividing Management Company
information, net of adjustments shown to give effect to the Merger,
by the net increase in shares of Shurgard REIT Common Stock resulting
from the Merger (1,322,894 shares).
(g) Per share data is calculated using the aggregated number of shares of
(e) plus (f) above.
-13-
<PAGE> 23
COMPARATIVE PER SHARE DATA
The following table presents comparative per share data for the
Shurgard REIT (on a historical and a pro forma basis) and for the Management
Company (on a historical and a pro forma equivalent basis) based upon the
historical consolidated financial statements of the Shurgard REIT and of the
Management Company. The pro forma combined information is not necessarily
indicative of actual or future operating results or the financial position that
would have occurred or will occur upon consummation of the Merger. The
information presented below should be read in conjunction with the Unaudited
Pro Forma Combined Financial Statements and the separate historical
consolidated financial statements of the Shurgard REIT and of the Management
Company included elsewhere in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
AT OR FOR NINE
AT OR FOR YEAR ENDED MONTHS ENDED
DECEMBER 31, 1993 SEPTEMBER 30, 1994
-------------------- ------------------
<S> <C> <C>
THE SHURGARD REIT:
Historical:
Net income . . . . . . . . . . . . . . $ 0.89(a) $0.98(b)
Cash dividends . . . . . . . . . . . . 1.56(a) 1.25(b)(c)
Book value . . . . . . . . . . . . . . 17.28(a) 18.79
Post-Merger Pro Forma:
Net income . . . . . . . . . . . . . . 1.06(d) 0.98(d)
Cash dividends . . . . . . . . . . . . 1.45(c) 1.25(c)
Book value . . . . . . . . . . . . . . N/A 18.79(d)
THE MANAGEMENT COMPANY:
Historical(e):
Net income . . . . . . . . . . . . . 0.31 0.48
Cash dividends . . . . . . . . . . . -- --
Book value . . . . . . . . . . . . . 0.74 0.70
Pro Forma Equivalent(f):
Net income . . . . . . . . . . . . . 0.24 0.95
Cash dividends . . . . . . . . . . . -- --
Book value . . . . . . . . . . . . . N/A 18.78
</TABLE>
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(a) Amounts represent the combined historical financial information of the 17
partnerships consolidated into the Shurgard REIT on March 1, 1994 divided
by the equivalent number of shares, assuming all unit holders elected to
receive shares in the Consolidation (20,500,000 shares).
(b) Pro forma net income before extraordinary item is calculated as if the
Consolidation had occurred and the current debt structure existed on
January 1, 1994, divided by the current number of outstanding shares of
Shurgard REIT Common Stock (16,983,887 shares).
(c) Cash dividends per share is calculated by multiplying the corresponding
FFO per share amount by 80% (the ratio of actual Shurgard REIT cash
dividends for the nine months ended September 30, 1994 compared to the
actual FFO for the same period).
(d) The pro forma combined financial data give effect to the Merger by
combining the financial statement data of the Shurgard REIT and of the
Management Company using the purchase method of accounting. Total
Post-Merger outstanding shares (18,306,781) are
assumed to be currently outstanding shares of the Shurgard REIT and the
number of shares expected to be issued to Management Company shareholders
in connection with the Merger.
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<PAGE> 24
(e) Amounts represent the financial information of the Management Company
divided by the number of outstanding shares of Shurgard Incorporated
(4,157,986 shares as of September 30, 1994).
(f) Amounts represent the financial information of the Management Company,
net of adjustments to give effect of the Merger, divided by the 1,322,894
shares to be issued in connection with the Merger.
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<PAGE> 25
RISK FACTORS
In considering the Merger and the Merger Agreement, the Shurgard REIT
shareholders and the Management Company shareholders should take into account
the following:
RISKS RELATING TO THE MERGER
INTERESTS OF CERTAIN PERSONS IN THE MERGER; POSSIBLE CONFLICTS OF
INTEREST. Certain executive officers of the Shurgard REIT and of the
Management Company have interests in connection with the Merger that are in
addition to those of the Shurgard REIT shareholders and the Management Company
shareholders generally. As a result of the Merger, Charles K. Barbo will be
appointed as the Shurgard REIT's Chairman of the Board, President and Chief
Executive Officer and Harrell L. Beck and Kristin H. Stred will each be
appointed as a Senior Vice President. Mr. Beck will also retain his current
positions of Treasurer and Chief Financial Officer of the Shurgard REIT and Ms.
Stred will retain her current positions of Secretary and General Counsel of the
Shurgard REIT. Mr. Barbo and the current executive officers of the Shurgard
REIT, Messrs. Beck, Grant and Rowe and Ms. Stred, also currently serve as
executive officers of the Management Company. As of December 19, 1994, the
current executive officers of the Shurgard REIT beneficially own an aggregate
of 283,882 outstanding shares of Management Company Common Stock and 3,931
shares of Shurgard Class A Common Stock. In addition, such officers expect to
exercise stock options to purchase 74,500 shares of Common Stock of the
Management Company at a weighted average price of $3.34 per share.
Furthermore, such officers may receive bonuses of Management Company Common
Stock that would affect their beneficial ownership of Management Company Common
Stock. The Shurgard REIT has also agreed that it will provide for limitation
of director liability and indemnification of the Management Company's
directors, officers, employees and agents at least to the extent that such
persons are entitled thereto under the Management Company's Articles of
Incorporation and By-Laws. See "INTERESTS OF CERTAIN PERSONS IN THE MERGER."
SHURGARD REIT AS EMPLOYER. The Shurgard REIT does not currently
directly employ any employees. As a result of the Merger, the Shurgard REIT
will directly employ persons that are currently employees of the Management
Company. As an employer, the Shurgard REIT will be subject to those potential
liabilities that are commonly faced by employers, such as workers' disability
and compensation claims, potential labor disputes and other employee-related
grievances.
MANAGEMENT AGREEMENTS. As a result of the Merger, the Shurgard REIT
will become the property manager of certain properties owned by third parties
which have contracted with the Management Company to provide property
management services. The Shurgard REIT will succeed to all of the Management
Company's rights and obligations under such management and related agreements.
These agreements may generally be terminated by the property owner upon short
notice, with or without cause. There can be no assurance that these agreements
will not be terminated or that the Shurgard REIT will continue to realize
revenues from such agreements at levels comparable to those realized by the
Management Company. See "SHURGARD INCORPORATED--Management Services."
TAX RISKS TO THE SHURGARD REIT AND THE MANAGEMENT COMPANY SHAREHOLDERS
RESULTING FROM THE MERGER
MERGER AS A TAXABLE EVENT. In connection with the Merger, Perkins
Coie, counsel to the Shurgard REIT will deliver an opinion that, among other
things, for federal income tax purposes under current law (i) the Merger will
be treated as a reorganization within the meaning of Section 368(a) of the Code
and (ii) no gain or loss will be recognized by the Shurgard REIT or the
Management Company in the Merger. See "FEDERAL INCOME TAX CONSEQUENCES--Tax
Treatment of the Management Company and the Shurgard REIT in the Merger."
This opinion will be based on the accuracy of certain representations
made by the Shurgard REIT, the Management Company and certain Management
Company shareholders and on certain assumptions. Furthermore, this opinion
will not be binding upon the Internal Revenue Service (the "IRS"). Therefore,
the IRS may contest the qualification of the Merger as a reorganization under
Section 368(a) of the Code. If this contest were successful, the Merger would
be a taxable transaction, with the consequences to the Shurgard REIT, the
Management Company and the Management Company shareholders set forth in
"FEDERAL INCOME TAX CONSEQUENCES--Failure of the Merger to Qualify."
Furthermore, immediately prior to the Merger, the Management Company will
distribute all of the shares of
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<PAGE> 26
common stock of InterMation, to the Management Company shareholders in the
InterMation Spin-off, which is intended to be treated as a tax-free
distribution under Section 355(a)(1) of the Code. See "FEDERAL INCOME TAX
CONSEQUENCES--Tax Treatment of the InterMation Spin-off." The failure of the
Merger to qualify under Section 368(a) of the Code may cause the InterMation
Spin-off to fail to qualify under Section 355(a)(1) of the Code. See
"--InterMation Spin-off as a Taxable Event."
INTERMATION SPIN-OFF AS A TAXABLE EVENT. In connection with the
InterMation Spin-off, Riddell, Williams, Bullitt & Walkinshaw, counsel to the
Management Company, will deliver an opinion to the Management Company that
among other things, it is more likely than not under current law that (i) the
distribution of the shares of InterMation common stock in the InterMation
Spin-off will be treated as a distribution under Section 355(a)(1) of the Code,
(ii) no gain or loss will be recognized by (and no amount will be included in
the income of) the Management Company shareholders upon their receipt of the
shares of InterMation common stock, and (iii) no gain or loss will be
recognized by the Management Company upon the distribution of all of the shares
of InterMation common stock to the Management Company shareholders. This
opinion will be based on the accuracy of certain representations made by the
Management Company and certain Management Company shareholders and on certain
assumptions. This opinion will not be binding upon the IRS and, based on its
current ruling guidelines, the IRS has informally stated that it will not rule
on the federal tax treatment with respect to the InterMation Spin-off.
Therefore, the IRS may contest the qualification of the InterMation Spin-off as
a tax-free distribution under Section 355(a)(1) of the Code. If this contest
were successful, the InterMation Spin-off would be a taxable transaction, with
the consequences to the Shurgard REIT, the Management Company and the
Management Company shareholders set forth in "FEDERAL INCOME TAX
CONSEQUENCES--Failure of the InterMation Spin-off to Qualify."
INCREASE IN NONQUALIFYING INCOME. The Management Company currently
performs property management services for third-party self-storage facilities,
which services the Shurgard REIT will perform after the Merger. Gross income
received from such services will not be treated as income qualifying for
certain REIT gross income tests of the Shurgard REIT. If such income, along
with gross income received from ancillary services currently performed by the
Shurgard REIT, were to exceed 5% of the total gross income of the Shurgard
REIT, the REIT status of the Shurgard REIT would terminate for that year and
future years unless the Shurgard REIT meets certain reasonable cause standards.
Even if it meets such standards, however, the Shurgard REIT would be subject to
an excise tax on any excess nonqualifying income. Acquisition of additional
properties pursuant to the Shurgard REIT acquisition plan would significantly
reduce the percentage of nonqualifying income; however, such acquisitions are
not certain. Accordingly, the Shurgard REIT may be required to defer or reduce
its income from such third-party management services to avoid the risk of
terminating its REIT qualification or paying an excise tax. See "FEDERAL
INCOME TAX CONSEQUENCES--Consequences of Merger on the Shurgard REIT's
Qualification as a REIT--Nonqualifying Income."
DISTRIBUTIONS OF ACCUMULATED EARNINGS AND PROFITS. The accumulated
earnings and profits of the Management Company will carry over to the Shurgard
REIT in the Merger. To retain its REIT status, the Shurgard REIT must
distribute all of these acquired Management Company earnings and profits on or
before December 31, 1995. Accordingly, the Shurgard REIT will be required to
accurately determine the amount of acquired Management Company accumulated
earnings and profits and to increase its distributions to its shareholders in
1995 to eliminate these earnings and profits. To the extent the increased
distributions represent the Management Company's accumulated earnings and
profits, they will be treated as a taxable dividend to the Shurgard REIT
shareholders during 1995. In the event the IRS subsequently determines that
the Shurgard REIT failed to distribute all the acquired accumulated earnings
and profits acquired from the Management Company, the Shurgard REIT may lose
its REIT qualification for the year of the Merger and, perhaps, subsequent
years. See "FEDERAL INCOME TAX CONSEQUENCES--Consequences of Merger on the
Shurgard REIT's Qualification as a REIT--Distributions of Accumulated Earnings
and Profits Attributable to Non-REIT Years."
THE SHURGARD REIT'S QUALIFICATION AS A REIT. In the Merger, the
Management Company shareholders will be receiving shares in a publicly traded
REIT as consideration for their interests in the Management Company. The
amount of distributions made to each shareholder with respect to such shares
will depend upon the Shurgard REIT's continued qualification to be taxed as a
REIT. As a REIT, the Shurgard REIT will be entitled to a deduction when
calculating its taxable income for dividends paid to its shareholders. In
order for the Shurgard REIT to qualify as a REIT, however, certain detailed
technical requirements must be met (including certain income, asset and stock
ownership tests). See "FEDERAL INCOME TAX CONSEQUENCES--Tax Consequences to
Management Company Shareholders Receiving the
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<PAGE> 27
Shurgard Class A Common Stock." Furthermore, some of the attributes of the
Management Company may adversely affect the Shurgard REIT's qualification as a
REIT. See "--Increase in Nonqualifying Income" and "--Distributions of
Accumulated Earnings and Profits." For any taxable year that the Shurgard REIT
fails to qualify as a REIT, it would not be entitled to a deduction for
dividends paid to its shareholders in calculating its taxable income.
Consequently, the net assets of the Shurgard REIT and distributions to
shareholders would be substantially reduced because of the increased tax
liability of the Shurgard REIT. Furthermore, to the extent that distribution
had been made in anticipation of the Shurgard REIT's qualification as a REIT,
the Shurgard REIT might be required to borrow additional funds or to liquidate
certain of its investments in order to pay the applicable tax. Should the
Shurgard REIT's qualification as a REIT terminate, the Shurgard REIT may not be
able to elect to be treated as a REIT for the subsequent five-year period. See
"FEDERAL INCOME TAX CONSEQUENCES--Tax Consequences to Management Company
Shareholders Receiving Shurgard Class A Common Stock--Failure of the Shurgard
REIT to Qualify as a REIT."
GENERAL REAL ESTATE INVESTMENT RISKS AND SELF-STORAGE INDUSTRY RISKS
GENERAL. Investments in the Shurgard REIT are subject to the risks
incident to the ownership and operation of self-storage facilities. These
include the risks normally associated with changes in general national economic
or local market conditions, competition for tenants, changes in market rental
rates and the need to periodically renovate, repair and relet space and to pay
the cost therefor.
DEBT FINANCING. The Shurgard REIT is authorized to borrow funds up to
a maximum of the lesser of 50% of its total assets and 300% of its adjusted net
worth. To the extent the Shurgard REIT incurs such indebtedness, it is subject
to the risks associated with debt financing, including the risk that its cash
flow from operations will be insufficient to meet required payments of
principal, the risk that indebtedness on its properties (which in many cases
will not have been fully amortized at maturity) will not be able to be
refinanced or that the terms of such refinancing will not be as favorable as
the terms of existing indebtedness, and the risk that necessary capital
expenditures for such purposes as renovations and reletting space will not be
able to be financed on favorable terms, if at all. If a property is mortgaged
to secure payment of indebtedness and the Shurgard REIT is unable to meet
mortgage payments, the property could be transferred to the mortgagee with a
consequent loss of income and asset value to the Shurgard REIT.
RISKS OF REAL ESTATE DEVELOPMENT. The Shurgard REIT may invest new
capital or reinvest sale or refinancing proceeds to develop properties or to
purchase newly constructed properties that are still in the lease-up stage.
Real estate development involves significant risks in addition to those
involved in the ownership and operation of established properties, including
the risks that financing may not be available on favorable terms for
development projects, that construction may not be completed on schedule,
resulting in increased debt service expense and construction costs, that
long-term financing may not be available upon completion of construction and
that properties may not be leased on profitable terms or in accordance with
scheduled lease-up plans. In addition, in order to develop properties, the
Shurgard REIT must engage appropriate contractors and/or subcontractors to
construct the properties, and problems may arise in connection with such
engagements, increasing the cost of the construction and resulting in delays in
completion. If the Shurgard REIT elects to develop properties, and if any of
the above were to occur, the Shurgard REIT's ability to make expected
distributions to shareholders could be adversely affected.
INVESTMENTS IN MORTGAGES. Since the Shurgard REIT operates primarily
as an equity REIT, it does not use significant portions of its available
capital to acquire or make mortgage loans. Under its By-Laws, the Shurgard
REIT is, however, authorized to invest up to 25% of its total assets in
mortgage loans if the debts are secured by liens on self-storage facilities or
office and business parks. To date, the Shurgard REIT has committed $13
million to mortgage loans. To the extent of its investments in mortgage loans,
the Shurgard REIT is subject to the risks of such investments, which include
the risk that borrowers may not be able to make mortgage service payments or
pay principal when due, the risk that the value of the mortgaged property may
be less than the amounts due, and the risk that interest rates payable on the
mortgage may be lower than the Shurgard REIT's cost of funds. If any of the
above were to occur, funds from operations and the Shurgard REIT's ability to
make expected distributions to shareholders could be adversely affected.
INVESTMENTS IN OTHER COMMERCIAL REAL ESTATE. Although the Shurgard
REIT invests primarily in self-storage facilities and business and office
parks, it may also invest in other commercial real estate if such investments
are specifically approved by the Shurgard REIT Board. The Shurgard REIT has no
present plans to make any such investments. The
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<PAGE> 28
authority of the Shurgard REIT Board to make such investments permits the
Shurgard REIT flexibility in selecting appropriate investments, and in
adjusting to changes in the marketplace, without requiring amendments to its
By-Laws or specific shareholder approval. Investments in other forms of real
estate, if they were to occur, will be subject to the risks unique to such
investments and, in particular, the Shurgard REIT must ensure that such
investments are managed by persons having the experience and expertise
necessary for the effective management and operation of those investments.
Unfamiliarity with local laws, procedures and practices, or in the operation of
such other investments, might adversely affect the Shurgard REIT's funds from
operations and its ability to make expected distributions to shareholders.
INDIRECT INVESTMENTS. The Shurgard REIT may invest in real estate by
acquiring equity interests in limited partnerships, partnerships, joint
ventures, trusts or other legal entities that in turn have invested in real
estate constituting appropriate investments for the Shurgard REIT. Under its
By-Laws, a number of conditions must be satisfied before such investments are
permitted, including, among others, the requirement that the joint investment
does not jeopardize the Shurgard REIT's eligibility to be taxed as a REIT or
result in the Shurgard REIT's becoming an investment company under the
Investment Company Act of 1940, as amended. If the Shurgard REIT makes such
investments, these investments will expose the Shurgard REIT to certain risks
not present had the Shurgard REIT invested directly in the real estate. These
risks include, among others, the risk that the Shurgard REIT may not have
control over the legal entity which has title to the real estate, the
possibility that the Shurgard REIT may invest in an enterprise that has
liabilities that are not disclosed at the time of the investment, and the
possibility that the Shurgard REIT's investments would be illiquid and not
readily accepted as collateral by the Shurgard REIT's lenders. Each of these
risks might reduce the Shurgard REIT's cash flow, or impair its ability to
borrow funds, which ultimately could adversely affect the ability of the
Shurgard REIT to meet debt service obligations and make expected distributions
to shareholders.
COMPETITION. The Shurgard REIT faces competition in the acquisition
and management of its real estate. The Shurgard REIT's competitors include
other businesses, individuals, financial institutions, private and public
pension funds and others engaged in real estate investment, some of which may
have far greater financial resources than the Shurgard REIT. Such competition
may adversely affect the occupancy levels at and the rental revenues of the
Shurgard REIT's properties, which could adversely affect the Shurgard REIT's
funds from operations and its ability to meet debt service obligations and make
expected distributions to shareholders.
UNINSURED LOSSES. The Shurgard REIT carries comprehensive liability,
fire, flood, earthquake, extended coverage and rental loss insurance with
respect to its properties with policy specification and insured limits
customarily carried for similar properties. There are, however, certain types
of losses (such as from environmental liabilities and wars) that are either
uninsurable or not economically insurable. Should an uninsured loss occur, the
Shurgard REIT could lose both its capital invested in and its anticipated
profits from one or more of its properties.
LIMITED ASSET DIVERSIFICATION. The Shurgard REIT intends to limit its
investments primarily to self-storage facilities. The success of an investment
in the Shurgard REIT will depend in large measure upon the profitability of
such businesses and real estate investments. The Shurgard REIT is not expected
to have substantial interests in other real estate investments to hedge against
the risk that national trends might adversely affect the profitability of
self-storage facilities. Should this development occur, this would adversely
affect the Shurgard REIT's ability to meet debt service obligations and make
expected distributions to shareholders.
POSSIBLE LIABILITY RELATING TO ENVIRONMENTAL MATTERS. Under various
federal, state and local laws, ordinances and regulations, an owner or operator
of real property may become liable for the costs of removal or remediation of
certain hazardous substances released on or in its property. Such laws often
impose liability without regard to whether the owner or operator knew of, or
was responsible for, the release of such hazardous substances. The presence of
hazardous substances may adversely affect the owner's ability to sell such real
estate or to borrow using such real estate as collateral.
COST OF COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT AND FIRE AND
SAFETY REGULATIONS. All of the Shurgard REIT's properties are required to
comply with the Americans with Disabilities Act, and the regulations, rules and
orders that may be issued thereunder (the "ADA"). The ADA has separate
compliance requirements for "public accommodations" and "commercial
facilities," but generally requires that buildings be made accessible to
persons with disabilities. Compliance with ADA requirements could require
removal of access barriers and noncompliance could result in the imposition of
fines by the U.S. government or an award of damages to private litigants. In
addition, the Shurgard REIT is
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required to operate its properties in compliance with fire and safety
regulations, building codes, and other land use regulations, as they may be
adopted by governmental agencies and bodies and become applicable to the
Shurgard REIT's properties. Compliance with such requirements may require the
Shurgard REIT to make substantial capital expenditures, which expenditures
would reduce the funds otherwise available for distribution to shareholders.
OTHER GENERAL RISKS
DEPENDENCE ON KEY PERSONNEL. The Shurgard REIT is dependent on the
efforts of its directors and executive officers. See "MANAGEMENT OF THE
SHURGARD REIT." The loss of the services of its key employees could have an
adverse effect on the Shurgard REIT's operations. There can be no assurance
that the Shurgard REIT would be able to recruit additional personnel with
equivalent experience in the self-storage industry.
EFFECT OF MARKET INTEREST RATES ON PRICE OF SHURGARD CLASS A COMMON
STOCK. One of the factors that influences the price of the Shurgard Class A
Common Stock in public trading markets is the annual yield from distributions
by the Shurgard REIT on the price paid for the Shurgard Class A Common Stock as
compared to yields on other financial instruments. Thus, an increase in market
interest rates will result in higher yields on other financial instruments,
which could adversely affect the market price of the Shurgard Class A Common
Stock.
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<PAGE> 30
SPECIAL MEETING OF SHAREHOLDERS
GENERAL
This Proxy Statement/Prospectus is being furnished to holders of
shares of Shurgard Class A Common Stock in connection with the solicitation of
proxies by the Shurgard REIT Board for use at the Special Meeting to be held on
Thursday, March 2, 1995, at the Westin Hotel, 1900 5th Street, Seattle,
Washington, commencing at 10:00 a.m., local time, and at any adjournments or
postponements thereof. This Proxy Statement/Prospectus and the accompanying
form of proxy are first being mailed to holders of shares of Shurgard Class A
Common Stock on or about February __, 1995.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, holders of record of shares of Shurgard Class
A Common Stock as of the close of business on January [20], 1995, will consider
and vote upon (i) a proposal to approve the Merger of the Management Company
with and into the Shurgard REIT pursuant to the Merger Agreement; and (ii) such
other business as may properly come before the Special Meeting or any
adjournments or postponements thereof. Holders of shares of Shurgard Class A
Common Stock will not be entitled to dissenters' rights as a result of the
Merger.
The Merger Agreement provides that, upon the terms and subject to the
conditions thereof, the Management Company will merge with and into the
Shurgard REIT, and the outstanding shares of Management Company Common Stock
will be converted into an aggregate of 1,400,000 shares of Shurgard Class A
Common Stock, subject to certain adjustments based on the market price of the
Shurgard Class A Common Stock and changes to the Management Company's equity
from October 31, 1994 to the Closing, and certain adjustments for persons
exercising dissenters' rights. In addition, pursuant to the Merger Agreement,
Management Company shareholders will be entitled to receive additional shares
of Shurgard Class A Common Stock based on (i) the extent to which, during the
five years following the Closing, the Shurgard REIT realizes value as a result
of certain transactions relating to interests in or assets of six limited
partnerships acquired by the Shurgard REIT in the Merger and (ii) the value, at
the end of five years or in the event of a change of control, of any remaining
interests in such partnerships as established by independent appraisal.
THE SHURGARD REIT BOARD HAS UNANIMOUSLY APPROVED THE MERGER AND THE
MERGER AGREEMENT AND RECOMMENDS THAT THE SHURGARD REIT SHAREHOLDERS VOTE "FOR"
APPROVAL OF THE MERGER. See "BACKGROUND OF AND REASONS FOR THE MERGER."
RECORD DATE; SHARES ENTITLED TO VOTE; VOTE REQUIRED
The close of business on January [20], 1995 (the "Record Date") has
been fixed as the record date for determining the holders of shares of Shurgard
Class A Common Stock who are entitled to notice of and to vote at the Special
Meeting. As of the Record Date, there were 16,829,283 shares of Shurgard Class
A Common Stock outstanding and entitled to vote. The holders of record on the
Record Date of shares of Shurgard Class A Common Stock are entitled to one vote
per share of Shurgard Class A Common Stock. The presence in person or by proxy
of the holders of shares representing a majority of the outstanding shares of
Shurgard Class A Common Stock entitled to vote is necessary to constitute a
quorum for the transaction of business at the Special Meeting. As of the
Record Date, directors and executive officers of the Shurgard REIT and their
affiliates may be deemed to be the beneficial owners of less than 1% of the
outstanding voting shares of Shurgard Class A Common Stock.
The affirmative vote of the holders of shares representing a majority
of the outstanding shares of Shurgard Class A Common Stock entitled to vote at
the Special Meeting is required to approve the Merger. Abstention from voting
and broker nonvotes will have the practical effect of voting against the Merger
since they are not votes in favor of the Merger.
The Merger is being submitted to holders of shares of Shurgard Class A
Common Stock for approval in accordance with Article 16 of the Shurgard REIT's
Restated Certificate of Incorporation. Such section requires the Merger to be
approved only by the holders of shares of Class A Common Stock (which is
referred to in this Proxy Statement/Prospectus as Shurgard Class A Common
Stock). Accordingly, holders of shares of Class B Common Stock of the Shurgard
REIT are not entitled to vote at the Special Meeting.
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PROXIES; PROXY SOLICITATION
Shares of Shurgard Class A Common Stock represented by properly
executed proxies received at or prior to the Special Meeting that have not been
revoked will be voted at the Special Meeting in accordance with the
instructions contained therein. Shares of Shurgard Class A Common Stock
represented by properly executed proxies for which no instruction is given will
be voted "FOR" approval of the Merger. Shurgard REIT shareholders are
requested to complete, sign, date and promptly return the enclosed proxy card
in the postage-prepaid envelope provided for this purpose to ensure that their
shares are voted. A shareholder may revoke a proxy by submitting at any time
prior to the vote on the Merger a later-dated proxy with respect to the same
shares, by delivering a written notice of revocation to the Secretary of the
Shurgard REIT at any time prior to such vote or by attending the Special
Meeting and voting in person. Mere attendance at the Special Meeting will not
in and of itself revoke a proxy.
If the Special Meeting is postponed or adjourned for any reason, at
any subsequent reconvening of the Special Meeting all proxies will be voted in
the same manner as such proxies would have been voted at the original convening
of the Special Meeting (except for any proxies that have theretofore
effectively been revoked or withdrawn), notwithstanding that they may have been
effectively voted on the same or any other matter at a previous meeting.
The Shurgard REIT will bear the cost of soliciting proxies from its
shareholders. The Shurgard REIT will pay D.F. King & Co., Inc. ("D.F. King")
a fee of $75,000 to cover its services in soliciting the forwarding and return
of proxy material, exclusive of certain additional fees for related services
performed by D.F. King. In addition, the Shurgard REIT will reimburse D.F.
King for out-of-pocket expenses incurred in connection therewith. In addition
to solicitation by mail, directors, officers and employees of the Shurgard REIT
may solicit proxies by telephone, telegram or otherwise. Such directors,
officers and employees of the Shurgard REIT will not be additionally
compensated for such solicitation, but may be reimbursed for out-of-pocket
expenses incurred in connection therewith. Brokerage firms, fiduciaries and
other custodians who forward soliciting material to the beneficial owners of
shares of Shurgard Class A Common Stock held of record by them will be
reimbursed for their reasonable expenses incurred in forwarding such material.
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BACKGROUND OF AND REASONS FOR THE MERGER
BACKGROUND
On March 1, 1994, the Shurgard REIT completed the acquisition of 17
publicly held limited partnerships administered by the Management Company as a
means of assembling an initial portfolio of real estate investments (the
"Consolidation"). The Management Company and the general partners of the
partnerships included in the Consolidation initially intended for the Shurgard
REIT to be operated as a self-administered and self-managed REIT, and planned
to accomplish this by merging the Management Company with the Shurgard REIT
concurrently with the Consolidation. This proposed feature of the
Consolidation was, however, eliminated when, during the initial review of the
Shurgard REIT's registration statement, the California Department of
Corporations opposed the merger on the grounds that it was prohibited by
California's recently enacted statute regulating partnership roll-ups.
Although the California Department of Corporations reversed its position prior
to the completion of the Consolidation, the Shurgard REIT decided not to
restructure its proposal in view of the expected costs and delays of obtaining
regulatory clearance for a restructured consolidation program. The Shurgard
REIT did agree, however, to provide in its Certificate of Incorporation that it
would not acquire substantially all of the assets of or merge with the
Management Company without obtaining the approval of shareholders holding a
majority of the outstanding shares of Shurgard Class A Common Stock.
In connection with the Consolidation, several class action lawsuits
were filed against various parties involved in the Consolidation, including the
Shurgard REIT and the Management Company. These class action lawsuits were
settled pursuant to a Stipulation of Settlement (the "Settlement") among the
parties involved in the lawsuits. Under the terms of the Settlement, the
Shurgard REIT agreed that, if it proposed to merge or consolidate with the
Management Company within three years of the Settlement, it would retain Green
Street Advisors or some other recognized independent expert to provide a
fairness opinion, based on an independent financial analysis, in connection
with such proposed merger or consolidation. In addition, the Settlement
requires that the Shurgard REIT not be obligated to pay any termination fee to
the Management Company in connection with any such merger or consolidation. As
described below, the Special Committee retained Alex. Brown to provide the
fairness opinion required by the Settlement.
On March 17, 1994, as part of the special meeting of the Shurgard REIT
Board, one of the independent directors raised the subject of whether, in light
of the potential synergies of a self-managed REIT, it would be appropriate to
explore the possibility of a merger or other business combination with the
Management Company. The directors requested that at the next scheduled Board
meeting counsel lead a discussion regarding the issues unique to the Shurgard
REIT in connection with a possible acquisition.
On April 26, 1994, as part of the regular meeting of the Shurgard REIT
Board, the Board received a preliminary report from counsel regarding certain
issues for consideration in connection with a proposed business combination
with the Management Company, including the background of the existing
relationship between the Shurgard REIT and the Management Company, the merger
process and certain tax issues. In addition, counsel presented a preliminary
timetable traditional to business combinations of this magnitude. After
discussion, the Special Committee of independent directors of the Board,
consisting of Dan Kourkoumelis, Donald W. Lusk and Wendell J. Smith, was
formally established to consider the feasibility of a possible merger
transaction between the Shurgard REIT and the Management Company. The Shurgard
REIT Board concluded, however, that before the Special Committee should begin
any formal analysis of a combination with the Management Company, further
assurance from counsel was required regarding how the potential merger might
affect the Shurgard REIT's tax status as a REIT. Following the meeting, the
Special Committee appointed independent counsel to provide advice with respect
to the fiduciary obligations of the Special Committee in examining any
potential acquisition involving related parties.
On April 28, 1994, the Shurgard REIT issued a press release
announcing, among other things, that its independent directors had formed a
committee to consider the feasibility of the Shurgard REIT becoming a
self-administered and self-managed REIT through the acquisition of the
Management Company.
On May 25, 1994, as part of a special meeting of the Shurgard REIT
Board, counsel to the Shurgard REIT outlined certain tax issues that might
arise in connection with a merger of the Shurgard REIT and the Management
Company, including the impact of succeeding to certain forms of income and the
effects of acquiring the accumulated
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earnings and profits of the Management Company. Following discussions, the
Board authorized the Special Committee to negotiate the terms of any proposed
merger transactions (and any alternatives to such transaction), to consider
information regarding the financial condition and operations of the Shurgard
REIT and the Management Company (to the extent relevant to any proposed merger
transaction or any alternative transaction), and to make recommendations to the
Shurgard REIT Board and shareholders with respect to any proposed transaction.
On June 9, 1994, the Special Committee, along with independent
counsel, interviewed representatives of Alex. Brown, Green Street Advisors and
other nationally recognized financial advisors in order to determine which of
such firms (or others) might be appropriate, given the circumstances, to assist
the Special Committee with an analysis of an appropriate value for the
Management Company. After deliberation regarding which of such advisors might
best provide valuable service to the Special Committee, given the context of
the transaction and considering, among other matters, the fiduciary obligations
of the Special Committee, fees and expenses, the interested or disinterested
nature of those firms interviewed and other issues, the Special Committee
contacted Alex. Brown to determine whether it would act at financial advisor to
the Special Committee in connection with a potential merger.
On July 27, 1994, Charles K. Barbo, President, Chief Executive Officer
and Chairman of the Board of the Management Company, together with other senior
officers of the Management Company and representatives of the Management
Company's financial advisor, met with the Special Committee to outline the
terms and conditions on which the owners of the Management Company would be
prepared to merge the Management Company with and into the Shurgard REIT. Such
presentation included a report and proposal for the Management Company
prepared for such purpose by Nomura Securities Inc., who had been retained by
the Management Company to act as financial advisor to the Management Company in
connection with the proposed merger transaction. The proposal included a
suggested market value of $34,800,000, prior to certain balance sheet
adjustments. Mr. Barbo, however, believed that at this price the transaction
would be dilutive on a prospective basis to the Shurgard REIT shareholders and
as a result he suggested a price of $32,250,000, prior to certain balance sheet
adjustments, which he believed would be non-dilutive to the Shurgard REIT
shareholders (resulting in the issuance of approximately 1,500,000 shares of
Shurgard Class A Common Stock). Under the terms proposed, the merger would
include all of the Management Company's tangible and intangible assets, except
shares of the Shurgard REIT owned by the Management Company and those assets
related to the Management Company's investment in InterMation that would be
spun off, together with related earning and profits, to the Management
Company's existing shareholders.
On July 28, 1994, as part of the regular meeting of the Shurgard REIT
Board, the Board authorized the Special Committee to retain, at the Shurgard
REIT's expense, advisors (including attorneys, investment bankers, and other
experts or agents) in order further to explore a proposed merger of the
Shurgard REIT and the Management Company. Later that day, the Special
Committee formally engaged Alex. Brown to provide its opinion as to the
fairness, from a financial point of view, of the consideration payable by the
Shurgard REIT in connection with the proposed merger.
On July 29, 1994, members of the Special Committee, along with
independent counsel, spoke with representatives of Alex. Brown regarding the
scope of the due diligence inquiry, financial analysis and related matters to
be performed by Alex. Brown and the procedures and anticipated timetable of
such activities.
On August 12, 1994, representatives of Alex. Brown spoke with members
of the Special Committee and independent counsel regarding the status of their
investigation, the sufficiency of data received and their preliminary thoughts
with respect to the valuation of the Management Company underlying the proposal
presented by the Management Company's management on July 27.
On September 9, 1994, the Special Committee, along with its legal
counsel, again spoke with representatives of Alex. Brown, who reviewed with the
Special Committee the various methodologies to be employed thereby to evaluate
the proposed transaction, including a discounted cash flow analysis, an
analysis of selected publicly traded real estate companies and an analysis of
selected real estate company transactions. In addition, representatives of
Alex. Brown spoke with the Special Committee concerning the business and
prospects of the Shurgard REIT after the completion of the Merger. During such
conversation, representatives of Alex. Brown also discussed the concept of
dilution to the existing shareholders of the Shurgard REIT, noting that
consideration in the form of shares of Shurgard Class A Common Stock had been
requested by the Management Company's management. In their discussion, the
Alex. Brown representatives
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stressed the importance of a nondilutive transaction and made certain
observations regarding a range of values for the Management Company. Concepts
such as an earn-out with respect to the earnings realized from certain assets
and appropriate closing adjustments to a purchase price were discussed.
On October 13, 1994, representatives of Alex. Brown made a formal
presentation to the Special Committee. At such meeting, members of the Special
Committee, together with the Special Committee's legal and financial advisors,
reviewed, among other things, the background of the proposed merger, the
strategic rationale for the proposed merger, a summary of due diligence
findings, and financial and valuation analyses of the transaction.
Representatives of Alex. Brown noted that as part of Alex. Brown's engagement
it had reviewed, among other data, publicly available financial information
concerning the Shurgard REIT, certain internal financial information provided
by the Shurgard REIT and the Management Company and certain historical and
projected financial data provided by the parties, visited certain self-storage
centers managed by the Management Company, reviewed the price and trading
volume of the Shurgard Class A Common Stock, reviewed certain information
regarding select public companies engaged in the real estate management
industry and reviewed the financial terms of certain business combinations
involving real estate companies.
As part of the discussion, members of the Special Committee and Alex.
Brown commented on the potential synergies to be enjoyed by the Shurgard REIT
as a result of the proposed merger, including the opportunity to acquire a
high-quality, experienced management team; internalize the successful capital
markets expertise of the Management Company's management; realize certain
efficiencies arising from self-managed structures; align the interest of the
Management Company's management and the Shurgard REIT shareholders; enable the
Shurgard REIT to capitalize on the Management Company's name, goodwill and
other intangible assets; and enjoy enhanced market perception as a
self-administered and self-managed REIT.
As part of its presentation, representatives of Alex. Brown described
the various valuation methodologies employed, including (i) a discounted cash
flow analysis using net income, earnings before interest, taxes, depreciation
and amortization ("EBITDA"), and funds from operations, (ii) a comparison of
the proposed transaction with certain transactions in the marketplace (taking
into account selected publicly traded real estate companies), and (iii)
suitable multiples derived from selected real estate company transactions.
Based on this meeting, the Special Committee, with further input from Alex.
Brown, concluded that the overall transaction must not only be nondilutive to
the Shurgard REIT shareholders but to the extent possible, accretive in some
measure, that the offer should be framed in terms of a fixed number of shares,
subject to certain adjustments, and that certain partnership interests
currently held by the Management Company should be the subject of an earn-out
whereby further shares of Shurgard Class A Common Stock may be earned based
upon the profit realized upon disposition of such interests or the underlying
assets. Additional terms of the initial offer were discussed by the Special
Committee in conference with counsel.
On October 14, 1994, the Special Committee met with Mr. Barbo, on
behalf of the Management Company, to present the initial terms of the proposed
merger, which included a price of $28,000,000, payable in shares of Shurgard
Class A Common Stock, as well as the possibility of additional shares of
Shurgard Class A Common Stock being paid as described above, a portion of the
former subject to an indemnification escrow against certain contingent
liabilities. The Special Committee met later that day to discuss Mr. Barbo's
reaction to the offer, as proposed. As there were further legal, tax and
financial issues to explore, the Special Committee requested Alex. Brown to
consider several additional factors and requested from counsel to the Shurgard
REIT further information regarding the impact to the Shurgard REIT from a tax
standpoint of the earnings and profits of the Management Company that would be
acquired by the Shurgard REIT in the proposed merger.
On October 18, 1994, the members of the Special Committee, independent
counsel, and representatives of Alex. Brown received a preliminary report from
counsel to the Shurgard REIT regarding the legal and tax implications of the
earnings and profits to be acquired by the Shurgard REIT as a result of the
proposed acquisition of the Management Company. As there were still several
pieces of information outstanding that prevented reasonable quantification of
the tax impact to the Shurgard REIT of the proposed transaction, the Special
Committee requested that counsel to the Shurgard REIT continue to refine its
report regarding same until such time as the impact, if any, of these tax
issues on the negotiations could be assessed.
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On November 21, 1994, the Special Committee met with independent
counsel to review the terms of the outstanding offer and the matters
outstanding for resolution and to receive the report of counsel to the Shurgard
REIT regarding the impact to the Shurgard REIT of the accumulated earnings and
profits to be acquired by the Shurgard REIT in connection with the proposed
merger.
On November 22, 1994, representatives of Alex. Brown spoke with the
Special Committee and independent counsel regarding their revised findings,
based in part on the resolution of the impact of the earnings and profits tax
issue, as well as developments with respect to the results of operations and
prospects of the Shurgard REIT, the Management Company and the marketplace
generally. During this meeting, representatives of Alex. Brown discussed with
the Special Committee certain refinements to the offer, as proposed, including
the appropriateness of requiring certain adjustments to the purchase price
based on changes to Management Company equity as of the closing of the proposed
merger. Following the conclusion of such meeting, independent counsel to the
Special Committee met with a representative of the Management Company to
communicate the terms of the revised offer, which included a purchase price of
$27,100,000, assuming and including specified levels of cash and receivables,
the contingent share feature described above, and a 10% escrow for
indemnification, as well as certain closing adjustments to the share
consideration to permit limited appreciation in the stock price, but preserve
an overall transaction value.
On November 23, 1994, the Special Committee, independent counsel,
members of the Management Company's management and its counsel met to begin
negotiating the principal terms of the proposed transaction. Following this
meeting, Mr. Kourkoumelis resigned from the Special Committee due to time
constraints resulting from his other business activities. Later that day a
preliminary draft of a merger agreement was circulated to all parties and their
advisers. In addition, the members of the Special Committee met again to
discuss several of the issues remaining to be negotiated.
On November 29, 1994, the Special Committee, independent counsel,
members of the Management Company's management and its counsel again met to
negotiate certain terms of the proposed merger. At this meeting, discussion
focused on an appropriate purchase price and methodology for calculating the
share consideration and suitable closing adjustments to the same. There was
neither resolution as to price nor the appropriate methodology to quantify the
same; therefore the parties concluded discussions pending clarification of
certain financial data.
On December 1, 1994, the Special Committee and its counsel and
representatives of Alex. Brown spoke regarding certain benchmarks against which
to measure the accretion or dilution resulting from the proposed purchase
price, the statement of assets and liabilities entries and marketplace
perceptions generally.
On December 5, 1994, the Special Committee and its counsel and members
of the Management Company's management and its counsel again spoke to negotiate
certain terms of the proposed merger. The meeting focused on those issues
discussed on November 29, with the Special Committee presenting its
justification for the share consideration offered and benchmarks for
appropriate closing adjustments to the same. As there continued to be no
agreement on either price or the appropriate methodology to quantify the same,
the negotiations concluded for the day.
On December 8, 1994, Mr. Lusk, on behalf of the Special Committee, and
Mr. Barbo, on behalf of the Management Company, met to discuss certain issues
relating to the purchase price. At the conclusion of such meeting, a tentative
agreement had been reached with respect to a $27,100,000 base purchase price,
subject in its entirety to suitable resolution regarding appropriate closing
adjustments, permitted activities prior to the closing of the proposed merger,
and the scope and limitations of the indemnification escrow.
On December 13, 1994, Mr. Lusk, on behalf of the Special Committee,
and Mr. Barbo, on behalf of the Management Company, spoke with respect to the
scope and limitations of the indemnification escrow, tentatively agreeing upon
a framework that balanced the Shurgard REIT's need for redress against certain
liabilities with the Management Company shareholders' interest in liquidity.
On December 16, 1994, the Special Committee, Mr. Kourkoumelis,
independent counsel and representatives of Alex. Brown met to discuss and
review the then terms of the proposed merger. After extensive discussion
regarding the mechanics of the closing adjustments and the matters subject to
indemnification by the Management Company shareholders, the Special Committee
concluded that further negotiations with the Management Company were necessary.
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Later that day, Mr. Smith, on behalf of the Special Committee, along with
independent counsel and a representative of Alex. Brown, met with members of
the Management Company's management to explore further the matters referred to
above. That same day, Mr. Barbo, together with other executive officers of the
Management Company, communicated to independent counsel and a representative of
Alex. Brown a proposal that reflected a share consideration of 1,400,000 shares
of Shurgard Class A Common Stock ($26,300,000 based on the 30-day average
trading price of the Shurgard Class A Common Stock), an indemnification
provision that included recovery for potential liability as a result of the
InterMation Spin-off and a $1,500,000 cap to the balance sheet adjustments
contemplated.
On December 17, 1994, the Special Committee, Mr. Kourkoumelis,
independent counsel and a representative of Alex. Brown spoke regarding the
terms and financial ramifications of the offer of December 16. During such
meeting, the Special Committee requested that independent counsel pursue
clarification of certain issues regarding the timing of the receipt by the
Management Company of an anticipated tax refund. The meeting was adjourned
until December 19.
On December 19, 1994, the Special Committee, Mr. Kourkoumelis,
independent counsel and a representative of Alex. Brown met to review the terms
of the proposed transaction and to receive the report of Alex. Brown regarding
the fairness of such terms, from a financial point of view, to the Shurgard
REIT. Following considerable discussion regarding certain contemplated
transactions by the Management Company, as well as the timing of the receipt of
an anticipated tax refund in the context of the indemnification escrow, the
Special Committee requested independent counsel to negotiate certain additional
terms. That same morning, independent counsel met with representatives of the
Management Company's management to discuss these final issues, as a result of
which the terms of the Merger were settled. On the basis of that resolution,
representatives of Alex. Brown delivered to the Special Committee their opinion
that the consideration to be paid by the Shurgard REIT to the shareholders of
the Management Company pursuant to the Merger Agreement is fair, from a
financial point of view, to the Shurgard REIT, and, as more fully discussed
below, the Special Committee concluded that the transaction was fair to and in
the best interest of the Shurgard REIT and its shareholders and unanimously
recommended the transaction for approval by the Shurgard REIT Board.
REASONS FOR THE MERGER; RECOMMENDATIONS OF THE SPECIAL COMMITTEE AND THE
SHURGARD REIT BOARD
SPECIAL COMMITTEE. The Special Committee has unanimously determined
the Merger to be fair to and in the best interests of the Shurgard REIT and its
shareholders. ACCORDINGLY, THE SPECIAL COMMITTEE HAS UNANIMOUSLY APPROVED THE
MERGER AND RECOMMENDS THAT THE SHURGARD REIT SHAREHOLDERS VOTE "FOR" APPROVAL
OF THE MERGER.
In reaching its conclusion to recommend that the Shurgard REIT Board
approve the Merger Agreement and the Merger and that the shareholders of the
Shurgard REIT approve the Merger, the Special Committee considered, without
assigning relative weights to, a number of factors, including the following:
(i) the proven expertise and substantial experience of the
employees of the Management Company, who will become employees of the Shurgard
REIT through the Merger, in the development, acquisition and management of
self-storage properties;
(ii) through the Merger, the Shurgard REIT will internalize the
successful capital markets experience of the Management Company;
(iii) the fact that the Merger will enable the Shurgard REIT to
realize certain efficiencies arising from a self-managed structure in that it
will pay for management and advisory services directly and will not be paying a
third party for such services;
(iv) the interests of the Management Company will be aligned with
those of the Shurgard REIT;
(v) through the Merger, the Shurgard REIT will acquire the
"Shurgard" name and goodwill associated with that name;
(vi) the belief of the Special Committee that the Merger with the
Management Company, which will enable the Shurgard REIT to be a self-managed
and self-administered REIT, will make the Shurgard REIT more attractive to
investors and will enable it to enjoy enhanced market perception;
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(vii) the terms and conditions of the Merger Agreement, including
the type and amount of consideration being paid to the Management Company,
which is nondilutive to Shurgard REIT shareholders as to FFO; the adjustments
to the purchase price; and the indemnification escrow, which will enable the
Shurgard REIT to recover damages if certain events occur;
(viii) the Merger's structure, which will not result in recognition
of income or gain for federal income tax purposes by the Shurgard REIT or
Shurgard; and
(ix) the written opinion of Alex. Brown delivered to the Special
Committee on December 19, 1994 that on such date and based on various
assumptions and considerations, the consideration to be paid by the Shurgard
REIT in the Merger is fair to the Shurgard REIT, from a financial point of
view.
SHURGARD REIT BOARD. The Shurgard REIT Board based its determination
that the Merger is fair to, and in the best interests of, the Shurgard REIT
shareholders primarily on the analyses and conclusions of the Special Committee
(which were adopted by the Shurgard REIT Board as its own), on the arm's-length
negotiations of the Special Committee with representatives of the Management
Company, which resulted in a decrease in a negotiated price significantly below
that proposed by the Management Company, and on the Alex. Brown opinion
delivered to the Special Committee. The Board did not find it practicable to,
and did not, quantify or otherwise assign relative weights to the specific
factors considered in reaching its determination. THE SHURGARD REIT BOARD HAS
UNANIMOUSLY APPROVED THE MERGER AND RECOMMENDS THAT THE SHURGARD REIT
SHAREHOLDERS VOTE "FOR" APPROVAL OF THE MERGER.
OPINION OF FINANCIAL ADVISOR TO THE SPECIAL COMMITTEE
ALEX. BROWN FAIRNESS OPINION. As a condition to the acquisition of
the Management Company, the Special Committee retained Alex. Brown to act as
its financial advisor and to render its opinion as to the fairness to the
Shurgard REIT, from a financial point of view, of the consideration to be paid
by the Shurgard REIT to the shareholders of the Management Company (the
"Fairness Opinion"). Alex. Brown assisted in the Special Committee's
discussions and negotiations with the Management Company leading up to the
execution of the Merger Agreement and in the consideration by the Special
Committee of the Merger. At a meeting of the Shurgard REIT Board held on
December 19, 1994, Alex. Brown delivered a written opinion to the Special
Committee to the effect that, as of the date of delivery of the opinion, the
consideration payable by the Shurgard REIT to the shareholders of the
Management Company under the Merger Agreement is fair, from a financial point
of view, to the Shurgard REIT.
In arriving at its opinion, Alex. Brown reviewed the Merger Agreement
and certain publicly available financial information and internal financial
analyses concerning the Shurgard REIT and internal financial analyses
concerning the Management Company and held discussions with members of senior
management of the Shurgard REIT and the Management Company regarding the
business and prospects of their respective companies and the business and
prospects of the Shurgard REIT on a post-Merger basis. In addition, Alex.
Brown reviewed the reported price and trading volume of the Shurgard Class A
Common Stock, compared certain financial information of the Management Company
with similar information for certain selected companies engaged in the real
estate management industry whose securities are publicly traded, reviewed the
financial terms of selected recent business combinations, reviewed certain pro
forma analyses regarding the business and prospects of the Shurgard REIT after
the completion of the Merger, visited certain self-storage centers managed by
the Management Company and performed such other studies and analyses as Alex.
Brown considered appropriate. Alex. Brown assumed the accuracy, completeness
and fairness of the financial and other information on which it relied in
rendering its opinion and did not independently verify such information. Alex.
Brown also assumed that the financial projections supplied to it were
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the managements of the Shurgard REIT and the Management
Company. In addition, Alex. Brown neither made an independent evaluation or
appraisal of the assets of the Shurgard REIT or the Management Company in
connection with its analyses. No limitations were imposed by the Special
Committee on Alex. Brown with respect to the information reviewed by or the
procedures followed by Alex. Brown in rendering its opinion.
A COPY OF THE WRITTEN OPINION OF ALEX. BROWN DATED DECEMBER 19, 1994,
WHICH INCLUDES THE MATTERS CONSIDERED, THE ASSUMPTIONS MADE AND THE LIMITS OF
ITS REVIEW, IS ATTACHED HERETO AS APPENDIX II, AND IS INCORPORATED HEREIN BY
REFERENCE. SHAREHOLDERS ARE URGED TO READ SUCH OPINION IN ITS ENTIRETY. ALEX.
BROWN'S OPINION IS DIRECTED
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ONLY TO THE FAIRNESS TO THE SHURGARD REIT, FROM A FINANCIAL POINT OF VIEW, OF
THE CONSIDERATION PAYABLE BY THE SHURGARD REIT TO THE SHAREHOLDERS OF THE
MANAGEMENT COMPANY UNDER THE MERGER AGREEMENT.
REASONS FOR SELECTION OF ALEX. BROWN. The Shurgard REIT selected
Alex. Brown as its financial advisor on the basis of Alex. Brown's experience
and expertise in transactions similar to the Merger and its familiarity with
the real estate and REIT industries. Since 1985, Alex. Brown has underwritten
nearly $5.0 billion in equity on 75 REIT securities offerings, making it one of
the largest underwriters of equity REITs, and advised on a number of real
estate and REIT merger and acquisition transactions. Alex. Brown is a
nationally recognized investment banking firm that is involved regularly in the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings and private placements, and valuations
for corporate and other purposes. Neither Alex. Brown nor any of its
affiliates has been engaged previously to provide investment banking or other
financial services for either the Shurgard REIT or the Management Company.
ALEX. BROWN COMPENSATION. Pursuant to a letter agreement dated July
18, 1994 (the "Engagement Letter"), the Shurgard REIT engaged Alex. Brown to
provide investment banking advice and services in connection with the Special
Committee's review and analysis of a potential business combination with the
Management Company. The Shurgard REIT agreed to pay Alex. Brown (i) a retainer
fee of $100,000 upon execution of the Engagement Letter and (ii) a fee of
$200,000 at the time of delivery of the Fairness Opinion. The Shurgard REIT
also has agreed to reimburse Alex. Brown for reasonable out-of-pocket expenses,
including fees and disbursements of counsel, incurred by Alex. Brown in
carrying out its duties under the Engagement Letter, and to indemnify Alex.
Brown for certain liabilities to which it may be subjected in connection with
its engagement.
ANALYSIS AND CONCLUSIONS. The following is a summary of the material
factors considered and principal financial analyses performed by Alex. Brown in
connection with the preparation of the Fairness Opinion:
In valuing the Management Company, Alex. Brown considered a variety of
valuation methodologies, including (i) discounted cash flow analysis, (ii)
comparable company analysis, and (iii) comparable transaction analysis. Alex.
Brown also considered the effect of the Merger on the Shurgard REIT's financial
position, including the likely impact on the price of Shurgard Class A Common
Stock, funds from operations per share and the Shurgard REIT's ability to
maintain its current per share dividend rate.
The discounted cash flow approach assumes, as a basic premise, that
the intrinsic value of any business is the current value of the future cash
flow that the business will generate for its owners. To establish a current
value under this approach, future cash flow must be estimated and an
appropriate discount rate must be determined. Alex. Brown used projections and
other information provided by the Management Company to estimate future net
income, EBITDA, and funds from operations (net income, excluding gains or
losses from debt restructuring and sales of property, plus depreciation,
amortization and minority interests, and after adjustment for unconsolidated
entities in which the Management Company holds an interest) for the Management
Company for each year of a 10-year period beginning with 1995. Alex. Brown
then employed various discount rates between 10% and 20%.
Alex. Brown also analyzed selected publicly traded real estate
companies engaged primarily as managers and advisors in the real estate
business. Alex. Brown considered the following companies: Grubb & Ellis
Company, Christiana Companies, Inc. and Insignia Financial Group, Inc. Alex.
Brown compared the market value of each company, as determined by the closing
price recorded for each company's common stock on December 16, 1994, with each
company's revenue, net income, EBITDA and shareholders' equity. In addition,
Alex. Brown considered the projected earnings per share, EBITDA margins, price
to earnings and debt to equity ratios and other financial characteristics of
these companies.
Alex. Brown also compared the proposed acquisition of the Management
Company by the Shurgard REIT with acquisitions by selected public companies
engaged primarily in the real estate management, development and acquisition
business. Under this approach, Alex. Brown considered, among others, the
acquisition of Security Management Corporation and Angeles Corporation by
Insignia Financial Group, Inc., the acquisition of Koll Management Services,
Inc. by an investor group that included certain members of its management, the
acquisition of BT Venture Corporation by Boddie-Noell Properties, Inc. and the
consolidation of Franchise Finance Corporation of America with existing related
real estate limited partnerships. Alex. Brown determined the multiples of
sales price to revenue, net income, EBITDA and
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shareholders' equity for each of these companies. Alex. Brown then applied the
high, low and average of each of these multiples to the revenue, net income,
EBITDA and shareholders' equity of the Management Company. Alex. Brown also
considered other financial characteristics of these companies.
Alex. Brown deemed it inappropriate to employ the asset value approach
in rendering the Fairness Opinion because services companies, like the
Management Company, are generally valued in terms of the profitability and cash
flow of their operations, and not in terms of asset value. Nevertheless, the
ratio of assets to earnings was considered in the selected company and selected
transactions analyses.
Alex. Brown also reviewed certain acquisitions of real estate advisory
and management companies by publicly traded REITs. This review included
calculating the multiples obtained by comparing the prices paid to acquire such
companies with the advisory fees earned by the acquired companies during the
last full fiscal year prior to the REIT's becoming self-advised and with the
funds from operations and total assets of the acquiring REITs. Under this
approach, Alex. Brown considered Bradley Real Estate Trust, Boddie-Noell
Properties, Inc., Burnham Pacific Properties, Inc., Meditrust, Real Estate
Investment Trust of California, Health Equity Properties, Incorporated,
American Health Properties, Inc., Nationwide Health Properties, Inc., Health
Care Property Investors, Inc. and BRE Properties, Inc. Alex. Brown also
considered other financial and operating characteristics of these companies.
Based on the foregoing, Alex. Brown concluded that, as of the date of
the Fairness Opinion and based on various assumptions and considerations, the
consideration to be paid by the Shurgard REIT to the shareholders of the
Management Company pursuant to the Merger Agreement is fair, from a financial
point of view, to the Shurgard REIT.
The summary set forth above does not purport to be a complete
description of the analyses performed by Alex. Brown in arriving at the
Fairness Opinion. The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of these methods to the particular circumstances,
and therefore, such an opinion is not readily susceptible to summary
description. Accordingly, notwithstanding the separate factors summarized
above, Alex. Brown believes that its analyses must be considered as a whole and
that selecting portions of its analysis and the factors considered by it,
without considering all analyses and factors, could create an incomplete view
of the evaluation process underlying the Fairness Opinion.
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<PAGE> 40
SHURGARD STORAGE CENTERS, INC.
BUSINESS
GENERAL. The Shurgard REIT was formed through the consolidation on
March 1, 1994 of 17 publicly held real estate limited partnerships (the
"Consolidation") that had been sponsored by the Management Company. The
Shurgard REIT is one of the largest operators of self-storage properties in the
United States. It now owns directly and through joint ventures 159 premium
self-storage properties, containing approximately 10.8 million net rentable
square feet, located in 21 major metropolitan areas in 18 states. The Shurgard
REIT's self-storage properties offer low-cost, easily accessible storage space
for personal and business use. In addition, the Shurgard REIT owns two
business parks. As of September 30, 1994, the Shurgard REIT's self-storage
properties had a weighted average occupancy of 90% and a weighted average
annual rent per square foot of $8.51.
The Shurgard REIT's self-storage properties are currently managed by
the Management Company and are operated under the "Shurgard" name, which is
owned by the Management Company. The Management Company performs all real
estate acquisition, design and development and oversees the operations of the
Shurgard REIT's self-storage centers. Additionally, the Management Company
performs various administrative services, including legal, financial,
accounting, marketing and human resources. See "SHURGARD
INCORPORATED--Relationship With the Shurgard REIT." Upon the consummation of
the Merger, the Shurgard REIT will be a self-administered and self-managed
REIT.
The Shurgard REIT seeks to maximize shareholder value by increasing
funds from operations through internal growth and through the acquisition and
development of additional self-storage properties, as well as other real estate
investments. The Shurgard REIT believes that its access to capital markets,
the experience of its management team in acquiring and developing self-storage
properties, its geographic diversification and its emphasis on quality will
enhance its ability to achieve this objective.
The Shurgard REIT's strategy for internal growth is to increase rental
rates while maintaining strong occupancy levels, provides high-quality
facilities, achieve high levels of customer satisfaction, and employ skilled
facility managers who have the ability to operate the properties with
considerable autonomy. The Shurgard REIT's external growth strategy is
designed to capitalize on the current fragmentation in the self-storage
industry through acquisition and development of facilities in appropriate
markets. In particular, the Shurgard REIT seeks to acquire or develop
high-quality properties concentrated in its existing markets and in new markets
that fit well within its current network.
The Shurgard REIT expects to fund future acquisitions through the
incurrence of additional indebtedness, future offerings of its debt and equity
securities and retained cash flow. As of September 30, 1994, the Shurgard REIT
had a debt to total market capitalization ratio of 30%.
RECENT DEVELOPMENTS. On September 1, 1994, the Shurgard REIT
completed the purchase of 20 properties from Colonial Self Storage. The new
properties acquired by the Shurgard REIT were 98% occupied with average rent
per square foot of $7.34 as of June 30, 1994. These properties are located in
the Washington D.C. metropolitan area, Raleigh, North Carolina, Richmond,
Virginia, Virginia Beach, Virginia and Charlottesville, Virginia. In the
aggregate, these properties represent 732,312 total square feet .
On April 9, 1993, the Management Company entered into an agreement
with Freeman Management Corporation ("FMC"), a property development company
located in Nashville, Tennessee, pursuant to which the Management Company (or
its assignee) and FMC agreed to jointly acquire or develop self-storage
facilities in Tennessee and Kentucky. To date, the Shurgard REIT (as assignee
of the Management Company) has entered into two joint venture agreements with
partnerships affiliated with FMC to develop two self-storage facilities in the
Nashville area. The Shurgard REIT owns a 67% interest in one of the joint
ventures and a 50% interest in the other joint venture. Development of each of
the facilities is expected to be substantially completed in 1995, and they will
have an aggregate of approximately 107,000 net rentable square feet.
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<PAGE> 41
On August 26, 1994, the Shurgard REIT entered into a commitment with a
major financial services company to provide an additional two-year $50 million
revolving credit facility. The facility will be used to fund the acquisition
and development of self-storage properties. The Shurgard REIT expects to
finalize this credit facility by the end of 1994.
On October 21, 1994, the Shurgard REIT entered into a commitment to
invest up to $3 million in a Belgian partnership ("Benelux SCS") that will own
and operate self-storage facilities in Benelux region of Europe. The Shurgard
REIT expects to make such investment prior to the Closing of the Merger. The
Management Company has also made an investment in Benelux SCS. In the Merger,
the Shurgard REIT will acquire the Management Company's interest in Benelux
SCS.
On October 27, 1994, the Shurgard REIT entered into two participating
loan agreements with William B. Wrench ("Wrench") and partnerships of which
Wrench serves as the managing general partner pursuant to which the Shurgard
REIT agreed to advance nonrecourse loans to be secured by self-storage
facilities located in the Fairfax, Virginia area and managed by the Management
Company. The loans, totaling $12,000,000, were advanced on December 14, 1994
and are secured by four self-storage facilities containing a total of
approximately 206,700 square feet of net rentable storage space and
approximately 28,300 square feet of net rentable office/warehouse space. The
Shurgard REIT also agreed to advance, under certain conditions, up to an
additional $1,000,000 to fund the future construction of additional
improvements at one of the facilities. The two loans bear interest at 8% per
annum during their 10-year terms, plus additional interest from cash flow and
gain at maturity. In addition, the Shurgard REIT has been granted options to
acquire each of the properties at established purchase prices, which options
generally become exercisable in five years and extend for the balance of the
original loan terms. The Management Company (or the Shurgard REIT as its
successor) will continue to manage the four properties during the terms of the
loans.
INDUSTRY BACKGROUND. The self-storage industry initially developed in
the early 1960s in the southwestern portion of the United States. These
facilities were developed in response to the growing need for low-cost
accessible storage. A number of factors accelerated the demand for low-cost
storage including, among others, a more mobile society, with individuals moving
to new homes and new cities needing short-term storage for their belongings,
the increasing cost of residential housing (with the result that houses were
becoming smaller), the increased popularity of apartments and condominiums,
more individuals with growing discretionary income (resulting in the purchase
of items such as boats and recreational vehicles that cannot be stored at
residences), the growing number of small businesses and the escalating cost of
other storage alternatives. As the demand for such storage increased, and the
acceptance of self-storage became more widespread, self-storage facilities were
built throughout the United States. Generally, such facilities were
constructed along major thoroughfares which provided ready access and public
visibility or in outlying areas where land was inexpensive. In certain areas
of the country, where new construction was impractical because of construction
costs, lack of suitable sites or other restrictions, older structures have been
converted to self-storage facilities.
While a substantial majority of self-storage facilities in the United
States are owned by privately held businesses that do not make statistical
information publicly available, industry sources estimate that there are in
excess of 20,000 facilities throughout the United States with annual gross
income of over $8 billion. The industry is highly fragmented, with facilities
owned and operated by individuals, small businesses, institutional investors,
REITs and syndicated partnerships. It is anticipated that the demand for
self-storage will continue to expand in view of existing high construction
costs and the continuing need for low-cost storage. It is expected, however,
that the competition will increase as the self-storage industry expands. See
"--Competition."
DESCRIPTION AND USE OF PROPERTIES. The Shurgard REIT owns directly
and through joint ventures 159 premium self-storage properties located in 21
major metropolitan areas in 18 states. The Shurgard REIT's self-storage
facilities are designed to offer low-cost accessible storage space for personal
and business use. Individuals usually rent space in self-storage facilities
for storage of furniture, household appliances, personal belongings, motor
vehicles, boats, campers, motorcycles and other household and recreational
goods. Businesses typically use space for storage of inventory, business
records, seasonal goods, equipment and fixtures. The Shurgard REIT estimates
that business users rent approximately 35% to 40% of the space at its
properties. The Shurgard REIT's self-storage facilities are divided into a
number of self-enclosed rental units that generally range in size from 25 to
360 square feet. In addition, many facilities have uncovered storage outside
the buildings for parking motor vehicles, boats, campers and other similar
items suitable for outside
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<PAGE> 42
storage. As a general rule, customers have access to their leased space
without additional charge during normal business hours and control access to
such space through the use of padlocks.
Self-storage facilities differ from warehouses and other storage
facilities in that the tenants are generally responsible for delivering and
retrieving stored goods. Several facilities also offer truck rentals and
inventory sales to the public. See "--Investment Policies and
Restrictions--Ancillary Services." The leasing, maintenance and operation of
the facility are the responsibility of on-site managers who frequently reside
in an apartment located at the facility. The facility's security is provided
through a variety of systems that may include, among others, on-site personnel,
electronic devices such as intrusion and fire alarms, access controls and video
and intercom surveillance devices, facility fencing and lighting.
Most self-storage facilities consist of one or more single-story
buildings that are located on a site of 1-1/2 to five acres of land, depending
on the size of the facility. The facilities frequently are constructed with
concrete block or tilt-up concrete panels, with steel columns or precast
concrete columns that rest on concrete footings and slabs and have built-up tar
roofs or pitched truss roofs with shingles or standing seam metal roofs. The
interior walls are generally constructed with metal studs and partitions or
other construction materials that are secure but readily movable. Access to
the storage units is usually provided through roll-up or swing doors. The
parking areas and driveways are generally paved with asphalt, cement or other
similar materials. Most facilities have fencing, floodlights, sliding or
swinging gates and certain of the security devices mentioned above.
In some cases, multistory buildings able to bear substantial weight
loads, such as warehouses and newspaper plants, have been converted into
self-storage facilities. In addition, similar multistory buildings for
self-storage have been constructed in dense urban areas where land costs,
zoning and other development considerations make it impractical or undesirable
to construct single-story buildings.
Generally, tenants can access leased space directly by automobile,
truck or other delivery device but some facilities, in particular the
multistory buildings, have separate loading docks and elevators available for
delivery and retrieval of stored goods.
LEASING OF PROPERTIES. Rental units are usually rented on a
month-to-month basis, but longer term leases are used in some circumstances.
The typical total rental period for a tenant is approximately 1-1/2 years.
Business tenants tend to lease space for longer periods than individuals.
Rental income from leased space constitutes the primary revenue from such
facilities, but additional revenues are received from incidental services
rendered at the facilities, such as lock and box sales and truck rentals.
Rental rates vary substantially depending on the size of the storage space and
the facility location and quality of the facility. In addition, self-storage
facilities range considerably in size. Of the facilities owned by the Shurgard
REIT, the smallest facility is approximately 30,000 square feet, while the
largest facility is approximately 300,000 square feet. Storage units within a
facility typically range from 25 to 300 square feet of storage area. Smaller
units are usually leased to individuals for consumer goods, while large spaces
are frequently leased to business and commercial users.
OFFICE AND BUSINESS PARKS. Office and business parks are designed to
provide affordable rental space that is easily accessible to the public,
usually in a campus-like setting. Such rental space is used for a wide range
of business, industrial and commercial uses including, among other things,
office space, light manufacturing and assembly, research and development
activities, storage and warehousing and professional and business services.
The combination of users available in any particular park depends on the market
demands in the local area. The tenants of such properties are generally new or
small commercial, industrial or professional businesses. Business and office
parks vary considerably in size and nature of construction, depending on the
properties' location, quality and purpose. The typical park consists of one to
10 separate buildings located on a site of two to 15 acres. Such parks
generally provide approximately 50,000 to 250,000 square feet of rental space
with rental units ranging in size from 500 to 5,000 square feet. Such
properties are generally landscaped and provide open or covered parking spaces
for tenants and their customers. The leasing of business and office parks
differs considerably from property to property. As a general rule, leases on
such properties have a term of one to three years. Current leasing practices
differ from area to area and actual lease terms depend on market circumstances.
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<PAGE> 43
COMPETITION
In the past 25 years there has been considerable construction and
development of self-storage facilities to meet the demand for low-cost
storage. This development has increased the competition among existing
self-storage facilities. To the extent that the existing properties operate
profitably, this will likely stimulate further development and result in
greater competition between the newly developed and existing properties. Entry
into the self-storage business through acquisition of existing facilities is
relatively easy for persons or institutions with the required initial capital.
Development of new self-storage facilities is more difficult, however, due to
zoning, environmental and other regulatory requirements. In the operation of
office and business parks, the Shurgard REIT will compete with, among others,
national and regional developers. Some of the Shurgard REIT's competitors may
have more resources than the Shurgard REIT.
Competitors may include insurance companies, mortgage banks, pension
funds and other real estate investors, including foreign investors, real estate
syndications and REITs. The primary factors upon which competition will be
based are location, rental rates, suitability of the property's design to
prospective tenants' needs and the manner in which the property is operated and
marketed. Competition may be accentuated by any increase in availability of
funds for investment in real estate. The extent to which the Shurgard REIT is
affected by competition will depend in significant part on general market
conditions.
The Shurgard REIT believes that the significant real estate, operating
and finance experience of the Management Company's employees will substantially
assist the Shurgard REIT in competing effectively with other entities.
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<PAGE> 44
SELECTED FINANCIAL DATA
The following selected financial data of the Shurgard REIT should be
read in conjunction with "--Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the other financial information
included in this Proxy Statement/Prospectus.
SHURGARD STORAGE CENTERS, INC.
SELECTED FINANCIAL INFORMATION (1)
(in thousands, except per share data)
<TABLE>
<CAPTION>
AT AND FOR AT AND FOR
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1993 SEPTEMBER 30, 1994
----------------- ------------------
<S> <C> <C>
OPERATING DATA:
Operating revenues . . . . . . . . . $-- $ 45,701
Earnings . . . . . . . . . . . . . . -- 12,617
Net income per common share . . . . . -- 0.74
Dividends declared per
common share . . . . . . . . . . -- 1.02(2)
BALANCE SHEET DATA: . . . . . . . . .
Total assets . . . . . . . . . . . . 1 484,774
Long-term debt . . . . . . . . . . . -- 155,121
</TABLE>
- ---------------------
(1) Operating data for the year ended December 31, 1993 is not included as it
is de minimis.
(2) Includes dividend of $.44 per share declared in October 1994 based on
financial results for the quarter ended September 30, 1994.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Liquidity and Capital Resources
On March 1, 1994, the Shurgard REIT completed the acquisition of 17
publicly held limited partnerships administered by the Management Company as a
means for assembling an initial portfolio of real estate investments. The
Shurgard REIT acquired the assets, subject to existing liabilities, of each of
the partnerships for a cost of $387.4 million. The acquisition was funded by
the issuance of 16,983,728 shares of Shurgard REIT Common Stock and $67.1 in
proceeds from a note payable to a financial services company. Real estate
assets acquired consisted of 134 self-storage centers and two business parks
located in 17 states, as well as interests in two joint ventures owning an
additional five storage centers.
On June 9, 1994, the Shurgard REIT refinanced substantially all of its
existing debt (including the $104.6 million incurred in connection with the
acquisition discussed above) with Nomura Asset Capital Corp., a subsidiary of
Nomura Securities International, Inc., through a debt purchase transaction.
The $122.58 million loan, secured by certain real estate, provides the Shurgard
REIT with funds for seven years at a fixed rate equal to 8.28% and requires
monthly payments of interest only until maturity. In connection with this
transaction, the Shurgard REIT incurred a $1.2 million loss on early retirement
of debt due to the write off of unamortized loan fees. The refinancing
provides the Shurgard REIT with stabilized debt service costs and greater
flexibility for future growth.
On September 1, 1994, the Shurgard REIT purchased 20 storage centers
from an unaffiliated storage operator based in Raleigh, North Carolina for an
aggregate purchase price of $34 million. The new properties acquired by the
Shurgard REIT were 98% occupied with average rent per square foot of $7.34 as
of June 30, 1994. The average age of these properties is 7.6 years. Selected
information regarding the newly acquired centers is as follows:
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<PAGE> 45
<TABLE>
<CAPTION>
Metropolitan No. of No. of Square
Area Stores Units Feet
------------------- ------ ------ -------
<S> <C> <C> <C>
Washington, D.C. 7 2,399 252,807
Raleigh, NC 5 1,567 195,130
Richmond, VA 3 926 105,225
Virginia Beach, VA 4 1,196 147,550
Charlottesville, VA 1 300 31,600
-- ----- -------
20 6,384 732,312
</TABLE>
In connection with this purchase, the Shurgard REIT borrowed $30
million on its $50 million two-year revolving credit facility. This credit
facility is secured by real estate and interest is payable monthly at 7.33% for
the first six months, thereafter at either the banks' prime rate or LIBOR plus
200 basis points (at the Shurgard REIT's option). The commitment fee for the
revolving period was 75 basis points of the commitment amount and, upon the
expiration of the revolving period, for an additional fee of 37.5 basis points
of the amount outstanding, the Shurgard REIT may extend any outstanding balance
for a one-year term. The Shurgard REIT's total debt at September 30, 1994 was
$155.1 million, of which $122.6 million was at a fixed rate, with an weighted
average interest rate of 8.1%.
Additionally, during August 1994, the Shurgard REIT executed a
commitment letter with a financial services company to provide a second $50
million two-year revolving credit facility. This credit facility will be
secured by real estate, bear interest at LIBOR plus 175 basis points, and
require a draw fee equal to 25 basis points of the amount drawn. The
commitment fee for the revolving period is 100 basis points of the commitment
amount. The commitment is subject to customary contingencies and due diligence
and is expected to close before year-end.
During July 1994, the Shurgard REIT entered into a joint venture with
a storage operator and developer to develop a property in Nashville, Tennessee.
The Shurgard REIT will have a 67% interest in this project, which will
initially have 59,700 net rentable square feet and is expected to be completed
in early 1995. The Shurgard REIT's investment in this project is $600,000.
The Shurgard REIT has guaranteed repayment of $833,500 of the joint venture's
construction loan.
During November 1994, the Shurgard REIT entered into a second joint
venture with the same developer to develop another property in Nashville,
Tennessee. The Shurgard REIT will have a 50% interest in this project, which
will initially have 67,700 net rentable square feet and is expected to be
completed in early 1995. The Shurgard REIT's investment in this project is
$640,000. The Shurgard REIT has guaranteed repayment of $1,110,700 of the joint
venture's construction loan.
In October 1994, the Shurgard REIT entered into a commitment to invest
up to $3 million in a Belgian partnership that will own and operate storage
centers in the Benelux region of Europe.
As of December 14, 1994, the Shurgard REIT has paid $12 million and
committed an additional $1 million for investment in two 10-year participating
mortgage loans which are non-recourse to the borrower and are secured by real
estate including four storage centers and office/warehouse space. All four
centers have been managed by the Management Company for 1.5 years and, under
the loan agreement, will continue to be managed by the Management Company. The
Shurgard REIT will receive interest at 8% per annum plus 50% of both operating
cash flow and distributions from sale of real property, as defined. The
Shurgard REIT has options to purchase the properties at established prices,
generally exercisable in five years and extending until maturity of the loans.
The Shurgard REIT funded this investment through a $12 million draw on its
revolving credit facility.
The Shurgard REIT anticipates that cash flow from operating activities
will continue to provide adequate capital for debt service payments until
maturity as well as for dividend payments in accordance with REIT requirements.
The Shurgard REIT anticipates refinancing outstanding debt upon maturity
through debt or equity or some combination thereof. Cash provided by operating
activities for the seven months of operations was $21.8 million. Dividends
declared by the Shurgard REIT through December 1, 1994 total $1.02 per share.
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RESULTS OF OPERATIONS
March 1, 1994 (beginning of operations) through September 30, 1994.
The Shurgard REIT operates a professionally managed real estate portfolio
consisting primarily of self-storage properties which provide month-to-month
leases for business and personal use. Income before extraordinary item for the
period was $13.8 million, or $0.81 per share, reflecting seven months of
consolidated operations for 139 storage centers and two business parks, and one
month of operations for the 20 newly purchased storage properties in the
following states:
<TABLE>
<CAPTION>
Percentage of Portfolio Sept. 30, 1994-to-date
Based on Original Cost Annualized Property
At Sept. 30, 1994 Performance
--------------------------- -----------------------
<S> <C> <C>
California 15.2% 11.1%
Florida 5.8% 10.7%
New York 5.4% 12.4%
Texas 14.6% 10.9%
Virginia 9.0% 11.7%
Washington 20.2% 11.6%
Other 29.8% 12.5%
------ ------
Total 100% 12.5%
====== ======
</TABLE>
The annualized property performance percentages are determined by
dividing the annualized property level net operating income (rental revenue
less operating expenses, real estate taxes and management fees) for the seven
months ended September 30, 1994 by the original acquisition cost. This
performance is not necessarily indicative of what the actual property
performance percentages for the full year will be. Net operating income is not
reduced by depreciation or certain general and administrative expenses and, had
it been, the percentages would be lower.
PRO FORMA RESULTS OF OPERATIONS
As the Shurgard REIT did not begin operating the properties until
March 1, 1994, management believes the pro forma information presented is
necessary to provide the reader with more meaningful comparative information
for the nine months ended September 30, 1994. The pro forma statements
provided compare the operating results of the combined 17 partnerships for the
nine months ended September 30, 1993 and the pro forma results of operations of
the Shurgard REIT for the nine months ended September 30, 1994 as if the
consolidation of those partnerships had occurred on January 1, 1994.
In connection with the Consolidation, certain of the partners,
representing the equivalent of 3.5 million shares of Shurgard Class A Common
Stock, elected to take cash and liquidate their investment. The Shurgard REIT
borrowed the $67 million required for these cash payments and the corresponding
interest expense is reflected in the 1994 earnings. Interest on the $67
million for the nine months ended September 30, 1994 is approximately $4.2
million. Additionally, as a result of the Consolidation the majority of the
debt held by the partnerships, including short-term debt at relatively low
interest rates, had to be refinanced at a slightly higher rate (8.28%). This
increase in interest expense is the primary reason for the difference in both
expense and earnings for the nine months ended September 30, 1994 compared to
the combined partnership earnings for the same period in 1993.
Rental revenues increased 7.5% to $58 million for the nine months
ended September 30, 1994, primarily due to rental rate increases. Rental rates
for the original portfolio increased by 5.9% to $8.28 per square foot for the
nine months ended September 1994 compared to $7.82 per square foot for the same
period of 1993. Occupancy rates were unchanged at 90% for September 1994 and
for September 1993.
POLICIES REGARDING INVESTMENT AND CERTAIN OTHER ACTIVITIES
Set forth below is a summary of certain of the Shurgard REIT's
policies with respect to investment, financing, conflicts of interest
transactions and certain other activities. The policies with respect to these
activities have been determined by the Shurgard REIT Board. As described
below, a number of these policies are contained in the By-Laws, and
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<PAGE> 47
may not be amended, repealed or modified, or inconsistent provisions adopted
with respect thereto, without an affirmative vote of shareholders holding the
majority of the outstanding shares entitled to vote. The Shurgard REIT Board
may amend or repeal those policies that are not contained in the By-Laws
without shareholder approval if it determines in the future that such change is
in the best interests of the Shurgard REIT and its shareholders.
ACQUISITION, DEVELOPMENT AND INVESTMENT POLICIES
ACQUISITIONS. Subject to specific restrictions in its By-Laws, the
Shurgard REIT may acquire investments in such manner, through such means, and
upon such terms and conditions as may be determined by the Shurgard REIT Board.
Such investments may include, but are not limited to, direct investments by the
Shurgard REIT in real estate interests, as well as investments in corporations,
business trusts, general partnerships, limited partnerships, joint ventures or
other legal entities owning or holding real estate investments that could have
been made by the Shurgard REIT. The Shurgard REIT intends to structure these
investments to permit the Shurgard REIT to qualify as a REIT under the Code.
The timing and extent of such investments will depend on various factors such
as the Shurgard REIT's capitalization, availability of attractive investments,
expected investment returns and other similar economic factors generally
considered when making real estate investments.
PROPERTY DEVELOPMENT. The Shurgard REIT may acquire unimproved
property for development, or existing improvements for conversion, into
self-storage facilities. To the extent that such acquisitions are made, the
Shurgard REIT will be subject to the development and leasing risks associated
with constructing and developing new facilities. See "RISK FACTORS--General
Real Estate Investment Risks and Self-Storage Industry Risks--Risks of Real
Estate Development." It has been the Management Company's experience that a
self-storage facility must be approximately 35% to 40% occupied (on the basis
of square footage of cubicle storage space) in order for gross receipts from
operations to equal or exceed normal operating expenses (exclusive of debt
service payments associated with the property). Given the anticipated lease-up
timeframe, the Shurgard REIT will not normally expect a developed facility to
generate positive cash flow for distribution, or for payment of the Shurgard
REIT's debt service, during the first six months after the acquisition of a
property for development. As a general rule, the Shurgard REIT plans to
acquire and develop facilities primarily in the markets that the Shurgard REIT
already operates in.
MORTGAGE LOANS. Since the Shurgard REIT operates primarily as an
equity REIT (i.e., substantially all of the Shurgard REIT's assets will consist
of equity investments, direct or indirect, in real estate assets, not in debt
investments), the Shurgard REIT does not, generally speaking, intend to utilize
material amounts of its available capital to acquire mortgage loans. Under the
By-Laws, the Shurgard REIT is, however, authorized to invest up to 25% of its
total assets in mortgage loans secured by real estate of a type in which the
Shurgard REIT is authorized to invest. Such investments must also satisfy
certain other restrictions set forth in the By-Laws, including, among others,
the requirements that the aggregate amount of the mortgage loan and all senior
indebtedness secured by the property not exceed 90% of the appraised or
Board-determined value of the property and that the aggregate value of mortgage
loans junior to other secured indebtedness does not exceed 10% of the Shurgard
REIT's total assets. The Shurgard REIT recently committed approximately $13
million in mortgage loans. See "SHURGARD STORAGE CENTERS,
INC.--Business--Recent Developments."
Consistent with these guidelines, the Shurgard REIT may, on occasion,
loan funds to third parties to construct self-storage facilities or office and
business parks. At the time such mortgage loans are made, the Shurgard REIT
may contract to purchase the property upon completion of development or after
certain other conditions, such as minimum net income levels, have been
achieved.
EQUITY INVESTMENTS AND JOINT VENTURES. As a general rule, the
Shurgard REIT invests directly in real estate by obtaining the deed to the
property. There may, however, be situations where the Shurgard REIT Board
considers it preferable for the Shurgard REIT to invest in real estate by
acquiring an equity interest in a separate legal entity, such as a partnership,
limited partnership, joint venture, another REIT or trust, that in turn has an
equitable interest in or legal title to real estate. The By-Laws place certain
restrictions upon the Shurgard REIT's right to invest in general partnerships,
joint ventures, associations, trusts, limited partnerships or other legal
entities. Such investments may not be made if they would jeopardize the
qualification of the Shurgard REIT as a REIT under the Code or result in the
Shurgard REIT's becoming an investment company (within the meaning of the
Investment Company Act of 1940, as amended). Prior to making any such
investment, the Shurgard REIT Board must determine that its terms and
conditions are fair to the Shurgard REIT and that
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the principal purpose of the joint enterprise is to invest in properties that
would constitute appropriate investments for the Shurgard REIT, or to render
ancillary services in connection with such real estate investments. Though
there is no policy requiring the Shurgard REIT to exercise control of joint
enterprises, the Shurgard REIT Board may determine that such control is in the
best interests of the Shurgard REIT under the circumstances. The Shurgard REIT
has recently entered into two joint ventures to develop self-storage facilities
in the Nashville area and recently invested in Benelux SCS. See "SHURGARD
STORAGE CENTERS, INC.--Business--Recent Developments."
NONSTORAGE FACILITY INVESTMENTS. Although the Shurgard REIT's primary
investment objectives are to acquire and develop income-producing self-storage
facilities and office and business parks with property level cash flow growth
potential, it is allowed to invest in commercial real estate other than
self-storage facilities or office and business parks if such investments are
specifically approved by the Shurgard REIT Board after certain determinations
have been made. This authority is intended to afford the Shurgard REIT Board
flexibility in selecting appropriate investments for the Shurgard REIT and
adjusting to changes in the marketplace, without requiring amendments to the
By-Laws and shareholder approval. No such investments will be made unless the
Shurgard REIT Board makes the following determinations as to the proposed
investment: (i) the acquisition and holding of the investment would not
jeopardize, or in the future be likely to jeopardize, the qualification of the
Shurgard REIT as a REIT under the Code; (ii) the Shurgard REIT's management has
the experience and expertise necessary for effective management of the
investment or has contracted or will contract, on behalf of the Shurgard REIT,
with a third party having such experience and expertise; and (iii) the
investment constitutes a prudent and reasonable investment by the Shurgard REIT
and is being made for the purpose of (a) maximizing the value of property
acquired by the Shurgard REIT, a portion of which is being used as or was
acquired for the purpose of a self-storage facility or office and business
park, or (b) diversifying the Shurgard REIT's portfolio to protect the value of
its assets and to hedge against the risk of having the Shurgard REIT's assets
concentrated in self-storage facilities and office and business parks. Since
the Consolidation, the Shurgard REIT has not made, and has no present plans to
make, any such investments.
TEMPORARY INVESTMENTS. Before investing or reinvesting its funds in
properties or other suitable investments, the Shurgard REIT may invest
available funds (as well as its reserves) in the following temporary
investments: United States Government securities, bankers' acceptances,
certificates of deposit, bank repurchase agreements covering securities of the
United States Government or governmental agencies, commercial paper rated A-1
or better by Moody's Investors Services, Inc. or any other nationally
recognized rating agency, interest-bearing time deposits in banks and thrift
institutions, money market funds, mortgage-backed securities issued or
guaranteed by the United States Government or its agencies, debt securities or
equity securities collateralized by debt securities rated A-1 or better by
Moody's Investors Services, Inc. or any other nationally recognized rating
agency, other short- or medium-term liquid investments or hybrid debt/equity
securities approved by the Shurgard REIT Board or any combination of these
investments. As of December 1, 1994, the Shurgard REIT had invested $9.7
million in such temporary investments.
OTHER INVESTMENT RESTRICTIONS. In addition to the various investment
restrictions discussed elsewhere in this Proxy Statement/Prospectus, the
Shurgard REIT may not:
(a) invest more than 10% of its Total Assets in unimproved real
property or mortgage loans secured by unimproved real property (generally
speaking, unimproved real property is defined as property for which no
significant development activity is planned within one year of acquisition);
(b) invest in foreign currency, bullion, commodities or commodity
future contracts;
(c) invest in contracts for the sale of real estate;
(d) engage in underwriting or the agency distribution of
securities issued by others;
(e) issue "redeemable securities" (as defined in Section 2(a)(32)
of the Investment Company Act of 1940, as amended), "face amount certificates
of the installment type" (as defined in Section 2(a)(15) thereof) or "periodic
payment plan certificates" (as defined in Section 2(a)(27) thereof (i.e.,
securities of the type that might cause the Shurgard REIT to be regarded as an
investment company under the Investment Company Act of 1940, as amended));
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(f) issue options, warrants or similar evidences of a right to
purchase the Shurgard REIT's securities except in accordance with specific
requirements set forth in the By-Laws;
(g) engage in short sales or borrow, on an unsecured basis, if
such borrowing will result in asset coverage of less than 300%;
(h) engage in trading activities in securities, as compared with
investment activities; or
(i) acquire securities in any company holding investments or
engaging in activities prohibited by paragraphs (a) through (d), (f) and (h)
hereof.
FINANCING AND RESERVE POLICIES
INDEBTEDNESS RESTRICTIONS. Subject to the following restrictions, the
Shurgard REIT may, at any time, at the discretion of the Shurgard REIT Board,
borrow funds, on a secured or unsecured basis, and in connection therewith
execute, issue and deliver promissory notes, commercial paper, notes,
debentures, bonds and other debt obligations (which may be convertible into
shares or other equity interests or be issued together with warrants to acquire
shares or other equity interest). Under the By-Laws, the Shurgard REIT may not
incur debt if after giving effect to such borrowing, the Shurgard REIT's
Indebtedness (as defined below) would exceed 50% of its total assets or 300% of
its adjusted net worth. The ceiling imposed upon the Shurgard REIT's
Indebtedness does not prohibit the Shurgard REIT from incurring Indebtedness as
necessary to refinance Indebtedness previously obtained by the Shurgard REIT,
which was permissible at the time such Indebtedness was obtained, and to make
distributions to shareholders to preserve the eligibility of the Shurgard REIT
as a REIT under the Code. The restriction on the Shurgard REIT's authorization
to borrow funds is to be applied at the time the borrowing is obtained by the
Shurgard REIT. Any borrowing by the Shurgard REIT permitted at such time does
not become unauthorized, or constitute a violation of the By-Laws, even if,
subsequent to the Shurgard REIT's borrowing such funds, the Shurgard REIT's
Indebtedness exceeds the applicable limitation, whether or not such excess is
due, in part, to any accrued but unpaid interest, late fees or penalties,
finance charges or other amounts due with respect to the Shurgard REIT's new
borrowing or previous borrowings. As of September 30, 1994, the Shurgard
REIT's Indebtedness was 32% of its Total Assets (as defined below).
"Indebtedness" means all amounts due on financial obligations of the
Shurgard REIT evidencing its obligations to repay funds borrowed to finance its
business and affairs. "Indebtedness" includes all forms of borrowing, excludes
other liabilities of the Shurgard REIT such as accounts payable, lease
obligations (including leases required to be capitalized in accordance with
generally accepted accounting principles), liabilities or claims against the
Shurgard REIT arising from contract disputes or torts (except to the extent
that such liabilities and claims are with respect to contracts for the payment
of money) or the liabilities of other issuers in which the Shurgard REIT might
have invested. "Indebtedness" includes amounts borrowed by any of the Shurgard
REIT's wholly owned subsidiaries.
"Total Assets" means, as of the date the amount is to be determined,
the greater of (i) the Shurgard REIT's total assets computed in accordance with
generally accepted accounting principles, consistently applied (and which would
be reflected on the Shurgard REIT's balance sheet if such balance sheet were
prepared as of such date), plus all accumulated depreciation and amortization
as of such date, and (ii) the fair market value of the Shurgard REIT's assets
determined in accordance with guidelines established by the Shurgard REIT
Board, consistently applied. In the event the Shurgard REIT Board believes the
fair market value of the Shurgard REIT's assets exceeds their book value plus
accumulated depreciation and amortization, the Shurgard REIT may implement
procedures to ascertain the fair market value of the assets. There is no
requirement that these valuations be established through appraisals from third
parties, or be computed in accordance with any particular set of guidelines,
but only that the same valuation procedures be applied on a consistent basis
over time. The Shurgard REIT Board may, however, change such valuation
procedures for convenience or for such other purposes as it deems appropriate,
as long as such changes in the valuation procedures would not, if applied
retrospectively, have prohibited the Shurgard REIT from borrowing funds at any
time that funds were borrowed by the Shurgard REIT.
Funds borrowed by the Shurgard REIT may be used, as directed by the
Shurgard REIT Board, to make investments, pay dividends or ensure the Shurgard
REIT's continuing eligibility to qualify as a REIT, pay operating or other
expenses, refinance the Shurgard REIT's other obligations, and cover other
expenses and costs incurred by the Shurgard
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REIT or for other purposes deemed appropriate by the Shurgard REIT Board. Such
funds may be borrowed from institutional lenders, banks, savings and loan
institutions or other sources of capital.
Furthermore, to the extent the Shurgard REIT must pledge all or a
portion of the assets to secure borrowings, the Shurgard REIT may be required
by lenders to transfer such assets to one or more corporate subsidiaries
created and wholly owned by it. The subsidiaries' purpose is to segregate and
shield the properties securing the particular borrowings from the Shurgard
REIT's other creditors and restrict the Shurgard REIT's use of related cash
flow from the properties other than for the repayment of the related
borrowings. The Shurgard REIT intends that such subsidiaries, if created, will
qualify as "qualified REIT subsidiaries," as that term is defined in the Code,
and their existence should not adversely affect the Shurgard REIT's
qualification as a REIT. See "FEDERAL INCOME TAX CONSEQUENCES--Tax
Consequences to Management Company Shareholders Receiving Shurgard Class A
Common Stock--Nature of Assets."
RESERVES. The Shurgard REIT has specific reserve requirements as to
capital expenditures, taxes and insurance for certain properties that secure
debt. In addition, the Shurgard REIT regularly evaluates and establishes
working capital reserves as it deems appropriate to meet normal contingencies
in connection with the operation of its business and investments. In the event
that reserves established by the Shurgard REIT are not sufficient to cover
operating expenses or unanticipated liabilities and claims, the Shurgard REIT
may attempt to borrow funds or liquidate assets. There can be no assurance
that the Shurgard REIT will be able to borrow such funds or liquidate
investments on terms favorable to the Shurgard REIT. Funds held in working
capital reserves may be invested as discussed under "--Temporary Investments."
CONFLICT OF INTEREST POLICIES
Except as specifically provided in the By-Laws, the Shurgard REIT may
not engage in a transaction with any director, officer, shareholder owning or
controlling 10% or more of the Shurgard REIT's outstanding voting securities,
its advisor and/or any affiliate of the foregoing (collectively, the
"interested parties"). As to proposed transactions between the Shurgard REIT
and any of the interested parties, the following apply:
(a) The Shurgard REIT may not purchase property from any of the
interested parties unless after the disclosure to the Shurgard REIT Board of
the interested party's interest in the proposed transaction, a majority of the
directors not otherwise interested in such transaction (including a majority of
the independent directors) determines in good faith that the property is being
offered to the Shurgard REIT upon terms fair and reasonable to the Shurgard
REIT and at a price no greater than the cost of such asset to the interested
party.
(b) The Shurgard REIT may not sell any property to its advisor, a
director or any affiliate thereof.
(c) The Shurgard REIT may not make loans to, or borrow funds from,
any of the interested parties unless, after disclosure to the Shurgard REIT
Board of the interested party's interest in the proposed transaction, a
majority of directors not otherwise interested in such transaction (including a
majority of the independent directors) approve the transaction as being fair,
competitive and commercially reasonable and no less favorable to the Shurgard
REIT than loans between unaffiliated lenders and borrowers under the same
circumstances.
(d) The Shurgard REIT may not enter into any other transaction
with an interested party unless:
(i) the terms and conditions of such transaction have
been disclosed to the Shurgard REIT Board in advance and approved by a majority
of the directors not otherwise interested in the matter (including a majority
of independent directors) (the disclosure required by this paragraph to be in
writing and to describe all material terms and conditions of the proposed
transaction) and
(ii) such directors in approving the transaction have in
good faith determined that the transaction is fair, reasonable to and no less
favorable to the Shurgard REIT than transactions available from unaffiliated
third parties.
The determinations required of the Shurgard REIT Board must be set forth in
writing, together with such explanation as the directors deem necessary or
advisable, and must be filed with the Shurgard REIT's books and records.
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POLICY WITH RESPECT TO DIVIDENDS AND CERTAIN OTHER ACTIVITIES
DIVIDEND POLICY. Dividends will be paid to shareholders from time to
time when declared by the Shurgard REIT Board, in accordance with the following
policies. The Shurgard REIT intends to distribute to shareholders each year at
least 95% of its "REIT Taxable Income" so that the Shurgard REIT will be
eligible for tax treatment as a REIT. Generally speaking, "REIT Taxable
Income" includes taxable income from operations (including depreciation
deductions), but excludes gains from the sale or refinancing of properties and
deductions for dividends paid. The Shurgard REIT may, in addition, distribute
cash flow sheltered by depreciation deductions if such amounts are not needed
for working capital reserves, debt payments and capital improvements and
replacements. In 1995, the Shurgard REIT will make distributions in excess of
its REIT Taxable Income to eliminate any accumulated earnings and profits
acquired from the Management Company in the Merger. See "FEDERAL INCOME TAX
CONSEQUENCES--Consequences of Merger on the Shurgard REIT's Qualification as a
REIT--Distributions of Accumulated Earnings and Profits Attributable to
Non-REIT Years." The Shurgard REIT does not intend to distribute net cash
receipts from sales or refinancings of assets, but to retain such funds to make
new investments or for other corporate purposes.
The Shurgard REIT is required to distribute its REIT Taxable Income
without regard for, or reduction of, principal payments made on account of the
Shurgard REIT's indebtedness because principal payments do not reduce the
Shurgard REIT's Taxable Income. To the extent the Shurgard REIT is obligated
to make substantial principal payments in any year, such payments might make it
difficult or impossible for the Shurgard REIT to satisfy its obligation of
distributing 95% of its REIT Taxable Income. See "FEDERAL INCOME TAX
CONSEQUENCES--Tax Consequences to Management Company Shareholders Receiving
Shurgard Class A Common Stock--Annual Distribution Requirements."
ANCILLARY SERVICES. While rental income from leased space constitutes
the primary source of revenues from the properties owned by the Shurgard REIT,
additional revenues are received from incidental services and products
available at the properties for tenants and others (the "Ancillary Services").
Currently, approximately 50% of the properties owned by the Shurgard REIT
receive revenues through truck rental operations conducted at the properties
and lock and box sales to tenants and others. While revenues from Ancillary
Services constitute Nonqualifying Income (i.e., income other than generally
rents, dividends, interest or gains from the sale of real property) that,
together with other sources of Nonqualifying Income, may not exceed 5% of the
Shurgard REIT's gross revenues without jeopardizing the Shurgard REIT's
qualification as a REIT, the Shurgard REIT believes that revenues from such
Ancillary Services are an integral part of its properties' operation. See
"FEDERAL INCOME TAX CONSEQUENCES--Consequences of the Merger on the Shurgard
REIT's Qualification as a REIT--Nonqualifying Income." As a result, the
Shurgard REIT may offer a number of Ancillary Services directly, but only if
the provision of Ancillary Services does not, in the Shurgard REIT Board's
judgment, jeopardize the Shurgard REIT's eligibility for tax treatment as a
REIT under the Code.
ISSUANCE AND REPURCHASE OF SECURITIES. The Shurgard REIT Board is
authorized to issue up to 40,000,000 shares of Preferred Stock. No such shares
have been issued, and the Shurgard REIT Board does not presently contemplate
the issuance of any Preferred Stock, except such as may be issued in accordance
with the Shurgard REIT's shareholder rights plan. The Shurgard REIT may issue
securities in exchange for property or repurchase or otherwise reacquire its
capital stock. In particular, the Certificate of Incorporation allows the
repurchase of "Excess Stock." Since its incorporation, however, the Shurgard
REIT has not engaged in these activities and has no current plans to do so.
See "DESCRIPTION OF SHURGARD REIT CAPITAL STOCK."
AMENDMENT OF THE ORGANIZATIONAL DOCUMENTS. The Shurgard REIT's
Certificate of Incorporation may be amended as provided by the DGCL upon the
affirmative vote of more than 50% of the total shares entitled to vote.
Generally, a majority of the directors may amend the By-Laws without the vote
or consent of the shareholders of the Shurgard REIT. The shareholders of the
Shurgard REIT may propose and adopt amendments to the By-Laws by a majority
vote of the shareholders.
ANNUAL REPORT. The Shurgard REIT Board is required to cause to be
sent to the Shurgard REIT's shareholders an annual report that contains
financial statements prepared in accordance with generally accepted accounting
principles and reported on by independent certified public accountants. The
report must disclose the ratio of the costs of raising capital to the capital
raised, the aggregate fees paid to the advisor and its affiliates, and all
material terms, factors and circumstances
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surrounding any and all transactions involving the Shurgard REIT and its
directors, advisors and the affiliates thereof for the previous fiscal year.
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SHURGARD INCORPORATED
The Management Company is a fully integrated real estate operating
company, with in-house expertise covering all aspects of the self-storage
industry, including real estate acquisition, development and disposition,
project design and consulting, full-service property management capabilities,
marketing, property finance and disposition, personnel management, legal,
accounting and finance. The Management Company currently employs, directly or
through affiliated owners, approximately 600 employees and is one of the
largest self-storage operators in the United States. The Management Company
was formed in 1972 by Charles K. Barbo and Donald B. Daniels to sponsor and
operate real estate investments. To finance these investments, the Management
Company organized a series of investment partnerships, in the form of limited
partnerships, joint ventures and general partnerships, that were separately
funded through partnership contributions to acquire and/or develop single
assets or pools of assets, and provided for the management of these assets by
the Management Company. The Management Company rendered to each of these
entities a variety of services relating to the acquisition, development and
management of the assets. On occasion, the Management Company has also
contracted with third parties to manage their properties.
Since its formation, the Management Company has been involved in the
organization of 10 private partnerships, which have raised approximately $88
million from investors, and 20 public partnerships, which have raised
approximately $600 million from 80,600 investors. As of December 1, 1994, the
Management Company had under management 245 self-storage facilities with
approximately 15.6 million net rentable square feet and three office and
business parks with approximately 220,000 net rentable square feet. These
properties are located in 20 states. Of these, 161 properties (representing
65% of all properties managed) are owned by the Shurgard REIT, 69 properties
(representing 28%) are owned by entities affiliated with the Management Company
and 18 properties (representing 7%) are managed by the Management Company under
third-party management contracts for unaffiliated owners. The Management
Company maintains its corporate headquarters in Seattle, Washington, and has
offices in the Atlanta, Dallas, Phoenix and Seattle metropolitan areas.
Over the years, the Management Company has developed and refined
operational systems and procedures to enhance the value of the real estate
investments under its management. The Management Company maintains extensive
market research on its primary markets that permits it to track occupancy
levels, rental rates and other relevant operational information regarding
self-storage facilities within the market, monitor the number of new projects
and identify investments for potential acquisition. Through its involvement in
the development of facilities for sponsored programs, the Management Company
has obtained substantial design, engineering and architectural experience and,
while actual construction and design services are performed by outside
architects and engineers, the Management Company supervises and oversees
property development through its in-house technical staff. The Management
Company has implemented various employee-incentive programs and a quality-
control system to maximize property performance. Detailed monthly financial
reports are prepared for each of the properties managed by the Management
Company to permit monitoring of property performance, identify operational
concerns, track the success of quality control and incentive programs and
assess employee performance. The Management Company sends periodic reports
(usually quarterly) to investors to apprise them of their investments'
performance.
MANAGEMENT SERVICES
GENERAL. As a result of the Merger, the Shurgard REIT will become
responsible for the day-to-day management of its own properties and will become
the property manager of certain other properties owned by affiliates of the
Management Company and by third parties which have contracted with the
Management Company to provide property management services. The Shurgard REIT
will succeed to all of the Management Company's rights under the management and
related agreements with these other entities (collectively, the "Management
Agreements"). As of December 1, 1994, the Management Company managed 87
self-storage facilities for owners other than the Shurgard REIT. Income
received by the Shurgard REIT for providing these services to third parties
will be Nonqualifying Income. See "FEDERAL INCOME TAX
CONSEQUENCES--Consequences of Merger on the Shurgard REIT's Qualification as a
REIT--Nonqualifying Income."
Set forth below is a table that summarizes the properties currently
managed by the Management Company, as well as the compensation received by the
Management Company with respect to its management services, which (subject to
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obtaining any necessary consents) will accrue to the Shurgard REIT as the
Management Company's successor. The table does not include amounts received by
the Management Company for distributions due to ownership interests in certain
partnerships, or amounts reimbursed to the Management Company. Except as
otherwise indicated, the property management and other fees paid to the
Management Company consist of a standard management fee of 6% of gross revenues
from self-storage operations and 5% of gross revenues from office and business
parks (the "Standard Management Fee") and a standard advertising fee of $75 per
property per month (the "Standard Advertising Fee"). The Standard Management
Fee is reduced to 3% with respect to rental units for which leasing services
are performed by a party other than the Management Company, but such 3% fee is
in addition to the fees payable to such other party for leasing services. In
addition to the Standard Advertising Fee, the property owner pays for the
actual cost of all advertising materials, time and space provided to the owner
by the Management Company.
<TABLE>
<CAPTION>
PROPERTY MANAGEMENT AND
OTHER FEES PAID TO THE
MANAGEMENT COMPANY
AGGREGATE ------------------------------
NET RENTABLE NINE MONTHS EXCEPTIONS TO
SQUARE FEET YEAR ENDED ENDED STANDARD MANAGEMENT FEE AND
NUMBER OF OF DECEMBER 31, SEPTEMBER 30, STANDARD ADVERTISING FEE
PROPERTY OWNER PROPERTIES PROPERTIES 1993 1994 (FOOTNOTE REFERENCES)
-------------- ---------- ------------ ------------ ------------- ---------------------------
<S> <C> <C> <C> <C> <C>
Shurgard Storage Centers, Inc. 161 10,583,000 $4,547,533 $3,633,165 1, 2, 3, 4
Shurgard Incorporated 1 96,000 2,975 49,456 4
IDS/Shurgard Income Growth 8 498,000 243,700 192,017
Partners L.P.
IDS/Shurgard Income Growth 8 499,000 224,301 180,813
Partners L.P. II
IDS/Shurgard Income Growth 17 1,051,000 272,576 313,438
Partners L.P. III
Shurgard Institutional Fund 7 391,000 215,411 169,676
L.P.
Shurgard Institutional Fund 3 120,000 38,298 105,773 5
L.P. II
Shurgard Evergreen Limited 7 442,000 197,825 205,152 6
Partnership
Shurgard Institutional Partners 3 190,000 96,161 70,314
Shurgard/Canyon Park Self- 1 69,000 41,162 31,136 2, 7
Storage Limited Partnership
B-D Mini-Storage of Billings 1 66,000 18,998 13,269
B-D Mini-Storage of Flint West 1 48,000 15,426 12,591
B-D Mini-Storage of Puyallup 1 28,000 13,321 9,205
Potomac Mini-Storage 4 207,000 80,867 87,545
Self-Service Storage 10 447,000 169,480 128,957 8
Partners, L.P.
Shurgard Limited Edition 1 66,000 24,690 20,289
Shurgard Mini-Storage of 1 44,000 12,833 10,592
Flint South
Shurgard Mini-Storage of West 1 60,000 15,194 10,838
Yakima
Shurgard of Des Moines 1 58,000 21,689 17,300
Shurgard of Everett Mall 1 100,000 9,905 17,794
Shurgard of Factoria 1 103,000 28,667 30,581
Shurgard of Fife 1 43,000 17,407 13,112
Shurgard of Gig Harbor 1 35,000 17,474 13,237
Shurgard of Greenspoint 1 40,000 9,193 14,129
Shurgard of Old Hickory 1 64,000 0 8,196 9
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C> <C>
Shurgard of South Hill 1 44,000 17,786 11,693 10
Shurgard of Stanwood 1 43,000 0 6,892
Shurgard of Taylor 1 66,000 26,978 21,074
Shurgard of Twin Lakes 1 57,000 17,311 16,493
Shurgard of Woodhaven 1 50,000 7,576 11,445
--- ---------- ---------- ----------
Total 248 15,608,000 $6,404,737 $5,426,172
========== ========== ==========
</TABLE>
- ------------
1 The Management Company also receives an advisory fee equal to one-half of
1% of the value of new real estate related investments made by the Shurgard
REIT subsequent to March 1, 1994. This fee will be discontinued upon the
consummation of the Merger.
2 The Shurgard REIT has a 90% interest in Capital Hill Partners, a Limited
Partnership. This table includes 100% of this partnership's applicable
fees.
3 The Shurgard REIT has a 30% interest in Shurgard Joint Partners II. This
partnership has four properties. The remaining interest is owned by a
partnership affiliated with the Management Company. This table includes
100% of this partnership's applicable fees.
4 The Standard Management Fee, Standard Advertising Fee and the advisory fee
(with respect to the Shurgard REIT) will be eliminated upon the
consummation of the Merger.
5 The Management Company also receives a monthly asset management fee equal
to .067% of the property value of the partnership's real estate investments
computed at the end of each month.
6 The Management Company also receives a quarterly asset management fee equal
to $1,625 for each property owned by or invested in by the partnership,
subject to a minimum of $12,500 per quarter.
7 Shurgard Institutional Fund L.P. serves as the sole general partner of this
limited partnership and, pursuant to the agreement of limited partnership,
is entitled to approximately 85% of the partnership's cash distributions
and tax allocations. The balance of the partnership's interests are owned
by the sole limited partner, an entity not affiliated with the Management
Company.
8 The Management Company receives an asset management fee equal to 1% of
gross monthly revenues of the partnership for performing certain
administrative functions for the partnership.
9 The Management Company does not receive the Standard Management Fee or the
Standard Advertising Fee for this property. The Management Company
receives 2% of gross revenues from operation of this self-storage facility
under an affiliation agreement with the owner. This fee is comprised of 1%
for licensing the use of the Shurgard name and 1% for providing certain
accounting and administrative services.
10 The Management Company is entitled to the Standard Management Fee of 6% of
gross revenues from operation of the self-storage facilities, but has
permitted 1% to be deferred.
SCOPE OF SERVICES. Under the Management Agreements, the Shurgard REIT
will be vested with general responsibility and authority for all aspects of
property management, including, but not limited to, the establishment of
operational policies, the leasing, marketing, advertising, maintenance and
security of the properties, the supervision of construction, repairs and
improvements and the employment and supervision of on-site personnel, contract
services, consultants, contractors and other professionals. All costs and
expenses of managing these assets will be borne by the relevant owner, except
to the extent that certain items are not reimbursable.
The Shurgard REIT will also be obligated to render certain
administrative services with respect to the properties it manages including but
not limited to, supervising the preparation of investor reports, handling
investor inquiries, coordinating federal and state tax and securities filings,
maintaining books and records, investing uncommitted funds, if any, and
distributing available cash to investors and such entities. The Shurgard
REIT's costs and expenses incurred in performing such services will be
reimbursed. Such reimbursement is subject to review by independent certified
public accountants and will be at the lower of actual cost or the amount the
owner of the property would be required to pay to independent parties for
comparable services in the same geographical location. No reimbursement will
be made for services for which a separate fee is paid.
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The Shurgard REIT may delegate any or all of its powers under the
Management Agreements to any third party so long as the Shurgard REIT remains
responsible for supervising the performance of the duties and responsibilities
so delegated and remains liable for such performance to the extent it would be
liable if it had performed the delegated duties and responsibilities itself.
Accordingly, the Shurgard REIT may perform such duties through its own
employees or those of affiliates or may cause the relevant owner to hire its
own employees. It is currently anticipated that the on-site personnel will be
employees of the Shurgard REIT. To the extent the Shurgard REIT delegates,
with a consent of the owner, responsibility for leasing, re-leasing or other
leasing related services to an independent contractor, the monthly management
fee attributable to gross revenues from any space leased as a result of such
services will be reduced to 3% of gross revenues of such leases.
The Management Agreements generally give the Management Company the
right to assign its management interest so long as the assignee assumes all of
the Management Company's management obligations under the applicable agreement.
To the extent a Management Agreement requires that the owner consent to the
assignment, the Management Company and the Shurgard REIT will seek such
consent. The Management Agreements may generally be terminated by the owner
upon 60 days' written notice to the Shurgard REIT, with or without cause. The
Shurgard REIT may likewise terminate the Management Agreement, with or without
cause, upon 60 days' written notice. However, in some cases the Shurgard
REIT's right to terminate the Management Agreement will be restricted for the
term of the Management Agreement or a specified shorter period of time, during
which termination is only permitted if the owner has defaulted in performing
its obligations or upon the bankruptcy of the owner or the Shurgard REIT or
other similar events evidencing an inability to pay obligations as they become
due.
SHURGARD SERVICE MARK. In 1978, the Management Company registered the
name "Shurgard" and related service marks with the U.S. Patent and Trademark
Office to protect the exclusive use of such name and service marks in the
United States. Subsequently, the Management Company registered the mark in
several foreign jurisdictions. The Shurgard REIT's properties, as well as the
other properties managed by the Management Company are operated under the
common name of "Shurgard," for the purpose of creating business goodwill and a
recognizable symbol in the self-storage industry. Use of the service mark
"Shurgard" by the Shurgard REIT and the owners of other properties managed by
the Management Company is governed by the terms of the respective Management
Agreements permitting the nonexclusive use of "Shurgard" and related trademarks
and service marks for the rental and operation of the properties. Upon
termination of the Management Agreements, the owners' right to use the service
mark "Shurgard" terminates, and signs bearing the name "Shurgard" are to be
removed at the owners' expense. In the event that a Management Agreement is
terminated by the Management Company for reasons other than the owners' breach
thereof, or the Management Company is terminated for cause, the owner has the
right to the continued use of the name "Shurgard" until its properties are sold
or otherwise disposed of. However, such rights may not be passed on to
subsequent purchasers of the properties. The Management Company has attempted
to operate its managed properties to enhance the goodwill associated with the
name "Shurgard" and to have the name represent a commitment to quality,
consistency and reliability in service. Through the Merger with the Management
Company, the Shurgard REIT will acquire all of the Management Company's rights
to the "Shurgard" service mark, subject to existing licenses covering
Tennessee, Kentucky, portions of Florida, Belgium, the Netherlands and
Luxembourg and the contractual right of a co-founder of the Management Company
to use the Shurgard name with respect to six properties.
RELATIONSHIP WITH THE SHURGARD REIT
The following sections describe those investment advisory services and
property management services currently performed by the Management Company for
the Shurgard REIT. These arrangements will terminate upon the Closing. The
Management Company will not be entitled to any termination fee upon such
termination in connection with the Merger.
INVESTMENT ADVISORY SERVICES. The Shurgard REIT engages the
Management Company to provide certain investment advisory services pursuant to
the terms of an Advisory Agreement. The Management Company provides
acquisition, development and disposition services to the Shurgard REIT with
respect to real property and mortgage loans and performs the day-to-day
administrative functions of the Shurgard REIT, including internal and external
reporting, shareholder relations and supervision of stock registrar and
transfer services. In consideration of its investment advisory services, the
Management Company is paid an annual advisory fee equal to .5% of (i) the fair
market value of properties
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acquired subsequent to the Consolidation, (ii) the original principal balance,
plus accrued interest, of any mortgage loans made subsequent to the
Consolidation, and (iii) the average daily balance of the Shurgard REIT's cash
equivalent investments in excess of the amount of cash equivalent investments
of the Shurgard REIT immediately subsequent to consummation of the
Consolidation. The advisory fee is paid monthly, based on the annual operating
budget approved by a majority of the Shurgard REIT's directors, and is adjusted
within 110 days after the end of each fiscal year, with the unpaid balance of
the fees, if any, paid promptly to the Management Company and, in the event of
overpayments, the overage offset against the next estimated advisory fees
payable to the Management Company. For purposes of computing the Management
Company's annual advisory fee, during the initial term of the Advisory
Agreement and the first four renewal terms, the "fair market value" of the
properties acquired subsequent to the Consolidation will equal the purchase
price paid by the Shurgard REIT for those properties. Within 90 days prior to
the commencement of the fifth renewal term, and every two years thereafter, the
Shurgard REIT will have the properties acquired by it subsequent to the
Consolidation appraised, which appraised value will be used as the "fair market
value" for purposes of computing the annual advisory fee. The Management
Company would also receive an incentive advisory fee on the sale or refinancing
of all property acquired subsequent to the Consolidation (the "Additional
Properties") equal to 10% of, in the case of a sale, the excess of the sales
price over the original purchase price of the property (reduced by any prior
incentive advisory fee payments out of the net refinancing proceeds on such
property) or, in the case of a refinancing, the net cash proceeds realized by
the Shurgard REIT as a result of the refinancing.
The Management Company's receipt of the annual and incentive advisory
fees is subject to the limitation that the Shurgard REIT's annual total
operating expenses may not exceed the greater of (i) 2% of the average invested
assets of the Shurgard REIT for the year or (ii) 25% of the net income of the
Shurgard REIT for such year. In the event the Shurgard REIT's expenses exceed
such amount, the Management Company is required to remit to the Shurgard REIT
that portion of its advisory fee necessary to eliminate the excess amount.
The Advisory Agreement has a one-year term, but is automatically
renewed for additional one-year terms unless the Shurgard REIT notifies the
Management Company of its decision not to renew the Advisory Agreement at least
60 days prior to the expiration of the initial or renewal term. In addition,
either the Shurgard REIT or the Management Company may terminate the Advisory
Agreement without cause upon 60 days' notice to the other party. The Shurgard
REIT may terminate the Advisory Agreement immediately if the Management Company
commits an act of fraud, embezzlement or theft or any act intentionally against
the interests of the Shurgard REIT that causes the Shurgard REIT material
injury. Either party may terminate the Advisory Agreement immediately if the
other party is found by a court to have breached the Advisory Agreement, has an
involuntary bankruptcy petition filed against it or commences a voluntary
bankruptcy proceeding. In the event the Shurgard REIT terminates the Advisory
Agreement without cause or does not renew it, the Management Company will
receive a termination fee equal to the annual advisory fee it received for the
immediately preceding year. In addition, in the event the Advisory Agreement
is terminated by the Shurgard REIT without cause, or the Shurgard REIT elects
not to renew the term of the Advisory Agreement for reasons other than cause,
the Management Company may be entitled to incentive advisory fees, since the
Advisory Agreement treats the termination as the liquidation of the Additional
Properties. The Additional Properties are, at the time of the Management
Company's termination, deemed to have been sold at a price equal to (i) their
fair market value determined through an independent appraiser selected by the
Shurgard REIT and the Management Company or (ii) in the event that such
termination or expiration results from the merger, consolidation, acquisition
or liquidation of the Shurgard REIT, in an amount equal to (a) the net
aggregate consideration paid to the Shurgard REIT's shareholders upon such
occurrence plus the aggregate liabilities, to the extent such liabilities are
assumed by, or remain liabilities secured by assets transferred to, the
acquiring or surviving entity, multiplied by (b) the cash flow from operations
of the Additional Properties divided by the aggregate cash flow from operations
of all of the Shurgard REIT's properties. No later than 60 days after the
termination, the Shurgard REIT will pay the Management Company any incentive
advisory fee resulting from the deemed liquidation of the Additional
Properties. Upon termination or renewal of the Advisory Agreement, the
Shurgard REIT must cease using the "Shurgard" name.
PROPERTY MANAGEMENT SERVICES. The Shurgard REIT also engages the
Management Company to manage the day-to-day operations of its properties
pursuant to a Management Agreement that has an initial five-year term. Such
services include the establishment of operational policies, the leasing,
marketing, advertising, maintenance and security of the facilities, and the
employment of on-site personnel, contract services, consultants, contractors
and other professionals. In consideration of its property management services,
the Management Company receives a monthly fee equal to 6% of the
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gross revenues from self-storage operations and 5% of the gross revenues from
office and business parks, and a monthly advertising fee typically equal to $75
for each property. The Shurgard REIT retains the right to terminate the
Management Company as the property manager with or without cause upon 60 days'
written notice. The Management Company also renders certain administrative
services and certain acquisition and development services to the Shurgard REIT
for which it is reimbursed. Under the Management Agreement, the Management
Company granted the Shurgard REIT a nonexclusive license to use the name,
trademark and service mark "Shurgard" and related marks, slogans and service
items in the rental and operation of the properties and in the name of the
Shurgard REIT. Upon termination of the Management Agreement, all use of the
name "Shurgard" will terminate, subject to the right to continue using the name
at the property sites until the next publication dates of the yellow page
advertisements in the local markets where the properties are located.
Thereafter, the Shurgard REIT must cease using the name and remove and replace
all signage at the properties.
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SELECTED FINANCIAL DATA
The following selected financial data of the Management Company should
be read in conjunction with "--Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the other financial
information included in this Proxy Statement/Prospectus.
MANAGEMENT COMPANY
SELECTED FINANCIAL INFORMATION (1)
(in thousands)
<TABLE>
<CAPTION>
AT AND FOR YEAR ENDED AT DECEMBER 31, AT AND FOR
---------------------------------------- NINE MONTHS ENDED
1991 1992 1993 SEPTEMBER 30, 1994
------ ------ ------- ---------------------
<S> <C> <C> <C> <C>
OPERATING DATA:
Operating revenues . . $6,418 $7,189 $ 8,048 $ 8,019
Excess of revenues
over expenses . . . . 1,166 1,397 1,306 2,000
BALANCE SHEET DATA:
Total assets . . . . . $4,723 $4,432 $14,195 $11,453
Long-term debt . . . . -- -- 7,275 7,275
</TABLE>
- ---------------
(1) Per share data has not been included as the Management Company represents
only a portion of Shurgard Incorporated.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1994. In
March 1994, the Management Company completed the consolidation of 17 of the
Shurgard partnerships into a real estate investment trust. Through this
consolidation, the Shurgard REIT gained access to new capital, thereby providing
means to acquire and develop additional storage centers. Under the Advisory
Agreement between the Management Company and the Shurgard REIT, the Management
Company is responsible for execution of the Shurgard REIT's growth plan. The
Shurgard REIT reimburses the Management Company for costs incurred in acquiring
and developing storage centers on behalf of the Shurgard REIT. To date,
the Management Company has completed the acquisition of 20 storage centers, put
together two joint venture development transactions and negotiated
participating mortgages on four storage centers and ancillary commercial
office space for the Shurgard REIT. Most of the personnel dedicated to these
transactions were employed in 1992 and 1993 and, as such, the reimbursement
of their time had a direct effect on the net earnings of the Management Company.
In 1994, annualized net income increased $460,000 as a result of
increased reimbursement of costs incurred by the acquisition and development
department. Management's efforts during 1993 focused on planning for the
consolidation; in anticipation of this, the Management Company did not pursue
other means of raising capital for investment in new storage centers. Real
estate investment activities in 1993 were limited primarily to the expansion and
improvement of storage centers currently managed by the Management Company. As
such, a lower percentage of department costs were reimbursable in 1993.
Annualized net income increased $840,000 due to property management
fees from stores managed throughout the period. Increased rental revenues at the
store level resulted in increased fees paid to the Management Company; however,
few additional expenses were incurred related to those stores. New storage
centers brought under management in 1994 had no material impact on net income as
they were purchased by the Shurgard REIT on September 1, 1994.
The Daly City storage center, purchased in late December 1993, has
provided additional revenues of $776,000 for the nine months ended September
30, 1994. This acquisition is responsible for the majority of the increase in
operating
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expenses from 1993 to 1994. Annualized operating expenses for the nine months
ended September 30, 1994 increased 9.3%, or $660,000, over 1993. Of this
increase, approximately 66% is the result of the Daly City acquisition. This
acquisition was 100% non-recourse leveraged under a participating mortgage that
is reflected in the increase in interest expense. The participating mortgage
requires interest at 8% plus additional interest calculated at 90% of cash
flow. Although this acquisition had a $75,000 book loss for the nine months
ended September 30, 1994, the investment provided approximately $14,000 in
operating cash flow after payment of additional interest.
RESULTS OF OPERATIONS - 1992 VS. 1993.
During 1992, the Management Company determined that the formation of a
self-administered real estate investment trust was the best alternative for
investors. Management's efforts during 1992 and 1993 focused on the necessary
planning for the consolidation of 17 of the Shurgard REIT partnerships.
Accordingly, the Management Company did not pursue other means of raising
capital for investment in new storage centers. During 1993, the regulator in
California mandated that the Consolidation could not be combined with the
merger of the Management Company. Acquisition and development activities in
1992 were limited to investment of remaining capital from commitments obtained
in 1991. Real estate investment activities in 1993 focused on maximizing the
revenue generating capabilities of storage centers managed by the
Management Company through expansion and facility improvements.
Net income in 1993, exclusive of the $337,000 gain on sale of land,
increased $246,000 over 1992. This resulted from a $200,000 lower contribution
by the acquisition and development department due to the factors discussed in
the preceding paragraph and an increased contribution of $450,000 from property
management. This increase in property management earnings is attributable to
both increased rental revenues and new storage centers under management.
Operating expenses increased 13% from 1992 to 1993 due primarily to
the increase in property management personnel, travel and administrative
expenses necessary to manage the 20 additional storage centers brought into the
system during 1993. Some of these increased expenses were reimbursed by
affiliates. Other factors that affected expenses for that period
included preparation for the January 1994 opening of a national telephone sales
center and the implementation of a national strategic plan.
RESULTS OF OPERATIONS - 1991 VS. 1992. Earnings for the Management
Company rose 20% from 1991 to 1992 due primarily to the $337,000 gain on sale
of land held for investment. Rising earnings from property management were
offset by a decrease in reimbursements and acquisition fees.
Property management fees increased 22% from 1991 to 1992 due to
increases in both rental revenues and the number of storage centers managed.
From December 1991 to December 1992, the number of storage centers managed by
the Management Company increased 14% from 185 to 210 properties. Rental
revenues on a same store basis increased 15% from $74 million in 1991 to $85
million in 1992.
Reimbursements and acquisition/development fees decreased 14%, or
$253,000, due primarily to a reduction in funds available for investment
through acquisition or development as discussed above.
Operating expenses increased 17% from 1991 to 1992 due primarily to
the increase in property management personnel to manage the 25 additional
storage centers brought into the system during 1992. Other factors that
affected expenses for that period included rising health insurance costs and
the administrative expenses related to servicing the additional storage
centers.
LIQUIDITY AND CAPITAL RESOURCES. The changes in the statements of
assets and liabilities from December 31, 1992 to December 31, 1993 to September
30, 1994 reflect primarily the following three transactions:
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(1) During 1992 and 1993, the Management Company funded costs
related to the Consolidation and formation of the Shurgard REIT, which were
reimbursed in 1994. The payment and accrual of these costs are reflected in
the balances of the partnership consolidation costs receivable and accrued
partnership consolidation costs.
(2) On December 16, 1993, the Management Company purchased the
Daly City storage center, located near San Francisco, California, from a
nonaffiliated entity for $7,200,000 plus closing costs. The purchase was
funded with proceeds from a $7,275,000 nonrecourse participating mortgage note
payable to a commercial insurance company and cash. The nonamortizing mortgage
note, which matures January 1, 2004, is secured by a deed of trust on the
property and an assignment of leases and note requires monthly fixed interest
payments at 8% per annum and quarterly additional interest payments of 90% of
net cash flow, as defined.
(3) At September 30, 1994, the Management Company distributed
approximately $2 million of cash to InterMation, a subsidiary that will be
spun off prior to the Merger. Prior to the Closing, the Management Company
expects to distribute an additional $3 million which will be funded from
operating cash flow and its line of credit.
The operating cash flow of the Management Company is sufficient to
meet its interest and operating requirements until the maturity of the mortgage
note payable. The Management Company expects to refinance this note upon
maturity.
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THE MERGER
THE DESCRIPTION OF THE MERGER AGREEMENT SET FORTH BELOW DOES NOT
PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
MERGER AGREEMENT, A COPY OF WHICH IS ATTACHED AS APPENDIX I TO THIS PROXY
STATEMENT/PROSPECTUS AND INCORPORATED HEREIN BY REFERENCE.
TERMS OF THE MERGER
THE MERGER. Subject to the terms and conditions of the Merger
Agreement, the Management Company will merge with and into the Shurgard REIT at
the Effective Time. The separate corporate existence of the Management Company
will then cease, and the internal corporate affairs of the Shurgard REIT (the
"Surviving Corporation") will continue to be governed by the laws of the state
of Delaware.
CERTIFICATE OF INCORPORATION AND BY-LAWS. The Merger Agreement
provides that the Shurgard REIT's Certificate of Incorporation and By-Laws in
effect immediately before the Effective Time will be the Certificate of
Incorporation and the By-Laws of the Surviving Corporation.
CONVERSION OF MANAGEMENT COMPANY COMMON STOCK IN THE MERGER. At the
Effective Time, all the issued and outstanding shares of Management Company
Common Stock (except shares as to which dissenters' rights are exercised and
are not subsequently withdrawn) will be converted into (a) an aggregate of
1,400,000 shares of Shurgard Class A Common Stock, reduced pro rata based on
shares as to which dissenters' rights have been duly exercised and not
subsequently withdrawn and subject to certain adjustments as described below
(the "Share Consideration"), and (b) the right to receive additional shares of
Shurgard Class A Common Stock (the "Contingent Shares") based on (i) the extent
to which, during the five years following the Closing, the Shurgard REIT
realizes value as a result of certain transactions relating to interests in or
assets of six limited partnerships acquired by the Shurgard REIT in the Merger
and (ii) the value, at the end of five years or in the event of a change of
control, of any remaining interests as determined by independent appraisal.
DIRECTORS AND OFFICERS. As a result of the Merger, at the Effective
Time the directors of the Surviving Corporation will be the existing four
directors of the Shurgard REIT plus Charles K. Barbo, each to serve until his
successor has been duly elected or appointed and qualified or until his earlier
death, resignation or removal. In addition, the officers of the Surviving
Corporation will be the officers of the Shurgard REIT plus Charles K. Barbo,
who will serve as the Chairman of the Board, President, and Chief Executive
Officer. Harrell L. Beck, who is currently President, will serve as Senior
Vice President, Chief Financial Officer, and Treasurer and Kristin H. Stred,
who is currently Secretary and General Counsel, will serve as Senior Vice
President, Secretary and General Counsel. Each will serve until a successor
has been duly elected or appointed and qualified or until his or her earlier
death, resignation or removal.
ADJUSTMENTS TO SHARE CONSIDERATION
The Share Consideration will be subject to adjustment in the event
that, as of the Closing, the product obtained by multiplying the Share
Consideration by the then Market Value (as hereinafter defined) of the Shurgard
Class A Common Stock equals or exceeds $31,165,000 (the "Upper Limit"). In
such case, the Share Consideration will be adjusted and reduced to that number
of shares of Shurgard Class A Common Stock obtained by dividing the Upper Limit
by the Market Value of Shurgard Class A Common Stock as of the Closing.
References to Market Value with respect to a specified date means the
average of the daily closing price for the Shurgard Class A Common Stock for
each of the 30 trading days preceding such date.
In addition, the Share Consideration will be subject to adjustment
based on certain increases or decreases in Management Company equity based on a
comparison of a Management Company statement of assets and liabilities as of
October 31, 1994 (the "October Statement") with a statement of assets and
liabilities as of a date within five days preceding the Closing (the "Closing
Statement"). In the event that there has been a reduction in Management
Company equity from that set forth in the October Statement, the Share
Consideration will be reduced by the quotient obtained by dividing such
reduction by the Market Value of the Shurgard Class A Common Stock as of the
Closing. If there has been an increase in Management Company equity compared
to the October Statement, the Share Consideration will be increased
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by the quotient obtained by dividing such increase by the Market Value of the
Shurgard Class A Common Stock as of the Closing, subject to a $1,500,000 cap.
Within 30 days following the Closing, Deloitte & Touche LLP will
conduct an audit of the Closing Statement (the "Final Statement"), with any
further reductions to Management Company equity resulting in the return of
Shurgard Class A Common Stock, computed on the same basis, from the Adjustment
Indemnification Shares (as defined below) and, if required, the Indemnification
Shares referred to below. To the extent the Final Statement reflects any
further increases to Management Company equity, the Shurgard REIT will be
obligated to issue additional shares of Shurgard Class A Common Stock, computed
on the same basis, pro rata to the Management Company shareholders.
Between October 31, 1994 and the Closing, the Management Company
expects to contribute up to approximately $2.6 million in working capital to
InterMation prior to the InterMation Spin-off. To finance the contribution,
the Management Company expects to incur indebtedness under its line of credit,
which would be assumed by the Shurgard REIT in the Merger. This contribution
would also have the effect of reducing the Management Company's equity, as
reflected in the Closing Statement, below that reflected in the October 31
Statement, thereby reducing the Share Consideration below 1,400,000 shares.
The Share Consideration, before adjustments, was determined without
taking into account the 282,572 shares of Shurgard Class A Common Stock
currently owned by the Management Company and the October Statement used as a
reference for calculating changes in Management Company equity at the Closing
does not include any of such shares. To the extent, however, that all or a
portion of such shares are not distributed to the shareholders of the
Management Company or otherwise transferred to a third party, they will be
acquired by the Shurgard REIT in the Merger and therefore will be included in
the Closing Statement, valued at their Market Value as of the Closing. The
inclusion of such shares in the Closing Statement will increase the Share
Consideration on a share-for-share basis. Completion of the Merger will,
however, result in the cancellation of the shares acquired by the Shurgard REIT
in the Merger, thereby offsetting such increase in Share Consideration.
INDEMNIFICATION SHARES
As part of the Merger, 10% of the Share Consideration, net of the
Shurgard Class A Common Stock acquired by the Shurgard REIT in the Merger, will
be deposited in escrow (the "Indemnification Shares"). The Indemnification
Shares will be deducted pro rata from that portion of the Share Consideration
otherwise issuable to each of the Management Company shareholders and will be
held in escrow for three years from the Closing Date. Following the expiration
of such term, any remaining Indemnification Shares will be released and
returned to the Management Company shareholders. While the indemnification
escrow is in place, the Shurgard REIT will, subject to a claims threshold of
$50,000 and certain indemnity exceptions, be entitled to recover from the
Indemnification Shares the full dollar amount of any provable or ascertainable
loss, liability, damage, cost, obligation or expense incurred by the Shurgard
REIT (net of any benefits, insurance or other recoveries received or entitled
to be received by the Shurgard REIT with respect thereto) as a result of (i)
any breach of representation or warranty made by the Management Company in the
representation and warranty section of the Merger Agreement, (ii) any breach by
the Management Company of any covenant or agreement on its part contained in
the Merger Agreement, (iii) certain tax liabilities that may be incurred in
connection with the InterMation Spin-off, (iv) subject to the procedures set
forth below with respect to Adjustment Indemnification Shares, the full dollar
amount of any reduction in Management Company equity as reflected on the Final
Statement when compared to the Closing Statement (an "Over-Statement") (as well
as any overstatement of any tax refund (the "Refund") due the Management
Company as a result of its short taxable year ending on the Effective Date of
the Merger), and (v) liabilities and associated costs suffered by the Shurgard
REIT in its capacity as general partner of the Partnerships to the extent
arising out of facts and circumstances in existence prior to the Closing Date,
net of certain interim distributions by the Partnerships. Notwithstanding the
three year escrow term, Indemnification with respect to matters except employee
stock ownership plans and certain tax liabilities will terminate two years
after the Closing. The determination of the number of Indemnification Shares
to be transferred to the Shurgard REIT incident to an indemnification claim
will be based upon the Market Value of the Shurgard Class A Common Stock as of
the Closing.
Notwithstanding the foregoing, the Shurgard REIT will, under the terms
of the indemnification, continue to have recourse severally against the former
Management Company shareholders with respect to certain tax liabilities that
may be
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incurred in connection with the InterMation Spin-off, which will remain in
effect until the expiration of all applicable statutory periods of limitation.
The dollar value of such claims made against the Management Company
shareholders is, however, limited to the product obtained by multiplying the
number of Indemnification Shares released to the shareholders by the Market
Value of Shurgard Class A Common Stock as of the Closing.
An additional 5% of the Share Consideration, net of the Shurgard Class
A Common Stock acquired by the Shurgard REIT in the Merger (the "Adjustment
Indemnification Shares"), will be deposited in escrow for a period ending ten
days following the later of (i) the final determination of any Over-Statement
and (ii) the date on which the Refund is received by the Shurgard REIT or the
date on which the Shurgard REIT receives notice that the Refund will not be
paid. The Adjustment Indemnification Shares will be deducted pro rata from
that portion of the Share Consideration otherwise issuable to each of the
Management Company shareholders. The Shurgard REIT's only rights with respect
to the Adjustment Indemnification Shares will be recovery of (i) any
Over-Statement and (ii) the difference between any Refund claimed (as set forth
in the Closing Statement) and the actual amount received. Any amounts
recoverable over and above the value of the Adjustment Indemnification Shares
will be recoverable against the Indemnification Shares, as described above. At
the termination of the Adjustment Indemnification Share period, any Adjustment
Indemnification Shares not required to reimburse the Shurgard REIT will be
released to the Management Company Shareholders.
CONTINGENT SHARES
The Management Company owns partnership interests in six limited
partnerships (the "Partnerships") that are being acquired by the Shurgard REIT
in the Merger. The Partnerships either own self-storage centers (the
"Partnership Facilities") or direct or indirect interests in partnerships (the
"Project Partnerships") that in turn own Partnership Facilities. The
partnership agreements (the "Partnership Agreements") that govern the
Partnerships and the Project Partnerships provide for allocation of
distributions from the sale or refinancing of partnership assets and
Partnership Facilities among the various partners based on a variety of
formulas, as described in the table presented later in this section. In many
cases, the level of distributions to the Management Company depends on
satisfying prior distribution requirements to other partners, primarily returns
of capital and preferred returns.
The amounts that the Management Company may ultimately realize from
the Partnerships cannot be calculated with certainty at this time and will
depend on a number of factors, including, among others (i) the timing of sales
of Partnership interests or Partnership Facilities, (ii) the financial
performance of the Partnership Facilities during the period prior to such sale,
including the net operating income of the Partnership Facilities, (iii) the
allocation of interim distributions among the Management Company and other
partners, in accordance with the terms of their respective Partnership
Agreements, (iv) changes in such allocation arrangements depending on the
satisfaction of certain capital and preferred return requirements to which
partners other than the Management Company are entitled, (v) capitalization
rates typically applied to net operating income at the time of sale in order to
price the Partnership Facilities, (vi) the individual circumstances of the
Partnership Facility or the Project Partnership that affect sale price and
timing and (vii) changes in general economic conditions that could affect net
operating income, cash flows, capitalization rates and sales prices of the
Partnership Facilities.
Due to these factors, the Shurgard REIT concluded that it would be
difficult to value the Management Company's interests in the Partnerships on a
current basis and, instead, proposed that the Management Company shareholders
receive additional consideration to the extent that Partnership interests or
Partnership Facilities were sold and the Shurgard REIT received gross proceeds
thereof in accordance with the Partnership Agreements or, at certain times, the
Partnership Facilities were treated as if they had been sold for values
established by independent appraisal and the gross proceeds were deemed
distributed in liquidation. In this way, the Shurgard REIT would defer
issuance of additional shares into the future, when the value of the
Partnership interests would actually be realized or when that value was likely
to be more clearly established through longer periods of operation of the
Partnership Facilities. In the meantime, the Shurgard REIT would be entitled
to all Partnership distributions from the operating cash flow of the
Partnership Facilities, without payment of further consideration.
In accordance with these general principles, the Merger Agreement
provides that, in addition to the Share Consideration, the Management Company
shareholders will receive additional consideration in the form of Contingent
Shares to be issued by the Shurgard REIT based on the Profits (as defined
below), if any, arising from the Shurgard
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REIT's interests in the Partnerships. Contingent Shares will be issued as a
result of the following events: (i) the receipt of proceeds by the Shurgard
REIT from the sale or other disposition by the Shurgard REIT of all or any part
of its interests in the Partnerships (a "Disposition"); (ii) the receipt by the
Shurgard REIT of any distribution from a Partnership attributable to the sale,
refinancing, liquidation or other disposition by a Partnership or a Project
Partnership of one or more of its Partnership Facilities or attributable to the
sale by a Partnership (or by any Project Partnership that is itself an owner of
an interest in a Project Partnership) of all or any part of its interest in a
Project Partnership (a "Distribution"); or (iii) a deemed liquidating
distribution from a Partnership to the Shurgard REIT on the fifth anniversary
date of the closing date of the Merger or as a result of a change in control of
the Shurgard REIT (a "Deemed Distribution").
The Partnership interests subject to this Contingent Share arrangement
and their respective interests in the Project Partnerships are described below.
For a description of the number and size of Partnership Facilities owned by the
respective Partnerships or Project Partnerships, see "SHURGARD INCORPORATED - -
Management Services.
<TABLE>
<CAPTION>
PARTNERSHIP DESCRIPTION INTEREST DESCRIPTION
<S> <C> <C>
Shurgard Partners L.P. Shurgard Partners L.P., a Washington The Management Company is entitled to all
limited partnership, is the general proceeds from Shurgard Partners L.P. including
partner in Shurgard Institutional Fund all proceeds received from Shurgard Partners
L.P., a Washington limited partnership L.P.'s interest in Fund I after Shurgard
formed in March, 1989 and financed Partners L.P.'s general partners receive an
exclusively with public and private amount equal to 1% of all available cash flow of
pension funds ("Fund I"). The Fund I. Generally, Shurgard Partners L.P.'s
Management Company is the sole limited interest in Fund I entitles it to the following
partner in Shurgard Partners L.P. allocation of proceeds from a sale or
refinancing of Fund I assets:
(a) 6% of available cash flow from Fund I until
the Fund I limited partners receive a return of
their invested capital;
(b) After the Fund I limited partners next
receive an 8% preferred return on their invested
capital, Shurgard Partners L.P. is entitled to
distributions in amounts necessary to cause it
to have received 20% of the total amount
distributed after the limited partners have
received a return of their invested capital; and
(c) Thereafter, 20% of all remaining available
cash flow.
</TABLE>
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<PAGE> 66
<TABLE>
<S> <C> <C>
Shurgard Partners L.P. II Shurgard Partners L.P. II , a The Management Company is entitled to 50% of all
Washington limited partnership, is the proceeds from Shurgard Partners L.P. II
general partner in Shurgard including all proceeds received from Shurgard
Institutional Fund L.P. II, a Partners L.P. II's interest in Fund II after
Washington limited partnership formed Shurgard Partners L.P. II's general partners
in January, 1991 and financed receive an amount equal to 1% of all available
exclusively with public and private cash flow of Fund II. Generally, Shurgard
pension funds ("Fund II"). The Partners L.P. II's interest in Fund II entitles
Management Company owns 50% of the it to the following allocation of proceeds from
limited partner interests in Shurgard a sale or refinancing of Fund II assets:
Partners L.P. II.
(a) After the Fund II limited partners receive a
return of capital plus an 8% preferred return,
Shurgard Partners L.P. II is entitled to
distributions in amounts necessary to cause it to
have received 20% of the total amount previously
distributed to the limited partners from such
sale or refinancing; and
(b) Thereafter, 20% of all remaining available
cash flow.
Shurgard Associates L.P., The IDS Partnerships, each a The Management Company is entitled to proceeds
Shurgard Associates L.P. II Washington limited partnership, hold from the IDS Partnerships depending upon the
and Shurgard Associates L.P. general partner interests in IDS amount of proceeds received by the IDS
III (the "IDS Partnerships") Shurgard Income Growth Partners L.P., Partnerships from the IDS Funds. Generally, the
IDS Shurgard Income Growth Partners IDS Partnerships are entitled to receive 5% of
L.P. II and IDS Shurgard Income Growth distributable sales proceeds from the IDS Funds
Partners L.P. III respectively (the until the limited partners of the IDS Funds
"IDS Funds"). The IDS Funds were receive a return of capital plus a 9% preferred
formed in 1988, 1989 and 1990 return. Thereafter, the IDS Partnerships
respectively. The Management Company receive 20% of distributable sales proceeds from
holds a limited partner interest in the IDS Funds.
each of the IDS Partnerships.
The Management Company will receive from the IDS
Partnerships 40% of all IDS Fund distributions
received by the IDS Partnerships pursuant to the
5% distribution provision described above.
Thereafter, the Management Company will receive
from the IDS Partnerships, 45% of IDS Fund
distributions received by the IDS Partnerships.
Shurgard Evergreen Limited The Management Company is the general The Management Company is generally entitled to
Partnership partner in Shurgard Evergreen Limited 20% of all cash flow distributions after the
Partnership. This partnership limited partners receive a return of capital and
directly owns self-storage facilities. a 9% preferred return.
</TABLE>
Generally, in the event of a Disposition, Distribution or Deemed
Distribution, Profits will be determined as follows:
(i) The Profits pursuant to a Disposition will consist of
the gross proceeds received by the Shurgard REIT from such Disposition, net of
the carrying value of the respective Partnership interest on the Final
Statement and the
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Shurgard REIT's reasonable costs and legal and accounting expenses incurred in
connection with such Disposition, provided that, in the event of a Disposition
to an Affiliate of the Shurgard REIT, the gross proceeds received by the
Shurgard REIT will be deemed to be the greater of (x) the portion of the
amount, determined by appraisal, that would have been distributed to the
Shurgard REIT had there been a Deemed Distribution as of the date of such
Disposition; or (y) the actual gross proceeds received by Shurgard REIT with
respect to such Disposition.
(ii) The Profits received upon a Distribution will be
calculated with reference to the amounts actually received by the Shurgard REIT
with respect to such Distribution, provided that in the event a Partnership
Facility or interest in a Project Partnership is acquired directly by the
Shurgard REIT or an Affiliate thereof, the amount received by the Shurgard REIT
will be deemed to be the greater of (x) the portion of the amount, determined
by appraisal, that would have been distributed to the Shurgard REIT had there
been a Deemed Distribution as of the date of such acquisition; (y) the actual
amount received by the Shurgard REIT with respect to such Distribution or (z)
the amount of any credit towards the purchase price for the Partnership
Facility afforded the Shurgard REIT in exchange for cancellation of its
interest in the Partnership.
(iii) The Profits received upon a Deemed Distribution will
be calculated with reference to the amounts the Shurgard REIT would have
received pursuant to the terms of the respective Partnership agreement had such
Partnership and the Project Partnership, if any, in which such Partnership may
hold an interest, liquidated the Partnership Facilities for an amount
determined by appraisal, less reasonable costs and legal, accounting and
appraisal expenses incurred.
The number of Contingent Shares, if any, to be issued by the Shurgard
REIT in a Disposition or Distribution will be determined on a quarterly basis
by (i) multiplying the Profits received in connection with a Disposition or
Distribution occurring in such quarter by 95% and (ii) dividing such product by
the Market Value as of the last business day of such fiscal quarter.
The number of Contingent Shares, if any, to be issued by the Shurgard
REIT in a Deemed Distribution will be determined at the time of a change in
control or at the end of five years from the Closing, as the case may be, by
reference to independent appraisals of the Partnership Facilities and assuming
a liquidation of the Project Partnerships. The resulting Profits deemed
received by the Shurgard REIT will be multiplied by 95% and divided by the
Market Value as of the date of the applicable event to determine the number of
Contingent Shares.
The number of Contingent Shares so determined will be issued pro rata
to those who were Management Company shareholders immediately prior to the
Effective Time.
As indicated above, the Profits received or deemed to be received by
the Shurgard REIT cannot be computed on a current basis because they depend on
future economic conditions and future events. To demonstrate how the
Contingent Share provisions could work, however, the Shurgard REIT has prepared
three examples based on the following assumptions: (i) the net operating
incomes of the Partnership Facilities and the related partnership distributions
increase by 4% annually based on the estimated net operating income of the
Partnership Facilities for the year ending December 31, 1994, (ii) all
Partnership Facilities are sold in a single transaction as of a specified date
at sale prices based on a capitalization rate of 10.5% of net operating income,
(iii) a selling cost of 5% of the sale price is incurred, (iv) the estimated
net operating income of Partnership Facilities for the year ending December 31,
1994 is based on the 1994 budgets for such Partnership Facilities (which are
consistent with the net operating income for the 11 months ended November 30,
1994), except Partnership Facilities which are still in the rent up stage, in
which case the net operating income has been appropriately increased, and (v)
for purposes of applying the allocation provisions of the Partnership
Agreements, the aggregate capital contributions received by the Partnerships
and the Project Partnerships and the cumulative partnership distributions made
by such partnerships as of December 31, 1994 have been estimated based on the
unaudited amounts as of November 30, 1994. The Shurgard REIT believes,
however, that it is likely that the Partnership Facilities will actually be
sold at different times, that net operating incomes will vary over time based
on changes in economic conditions, typical capitalization rates will change and
negotiated sale prices will be affected by individual circumstances.
Nevertheless, based on such assumptions and assuming the distribution of sale
proceeds in accordance with the provisions of the respective Partnership
Agreements, Profits resulting from the sale of all Partnership Facilities at
December 31, 1995, 1997 and 1999 would be approximately $2.7 million, $5.6
million and $11 million, respectively.
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Based on a Market Value of the Shurgard Class A Common Stock of $18.78 (the
average price for the 30 days ending December 16, 1994), the number of
Contingent Shares issuable at such dates in the future would be 136,581 shares,
283,280 shares and 556,443 shares, respectively. Since the Market Value at
these future dates could be substantially different from the current Market
Value, the number of Contingent Shares could vary accordingly and would not be
issuable until such future dates. It is important to understand that neither
the timing nor the terms of sale transactions involving the Partnership
Facilities or Partnership interests can be predicted and that the foregoing
examples are only illustrative.
In the event of a change of control or at the end of five years
following the Closing, the Shurgard REIT may issue Contingent Shares based on
the value of all of the unsold Partnership Facilities determined by appraisal,
but without actual sale transactions and without receiving distributions from
the Partnerships or recognizing gain or income for financial reporting or tax
purposes. While the Shurgard REIT would continue to own the Partnership
interests and would benefit from additional appreciation in the value of the
Partnership Facilities after such appraisal, if any, it would recognize gain or
income and receive sales proceeds in the future only in connection with an
actual sale of such assets.
All distributions or other payments (to the extent such distributions
or other payments do not constitute a Disposition or Distribution) and all
voting rights and other indicia of beneficial ownership with respect to such
Partnerships will inure to the benefit of the Shurgard REIT. Accordingly, the
Shurgard REIT will receive and retain all distributions from the Partnership
attributable to operating cash flow. For the 11 months ending November 30,
1994, this was $295,000. Dividends or other distributions and all voting
rights and other indicia of beneficial ownership with respect to Contingent
Shares will inure to the benefit of the former holder of Management Company
Common Stock only when and from the time that such Contingent Shares are
issued, if ever, in accordance with the provisions of the Merger Agreement.
The rights to Contingent Shares are not assignable.
No fractional Contingent Shares will be issued. In lieu of any such
fractional securities, each holder of rights to Contingent Shares who would
otherwise have been entitled to a fraction of a Contingent Share will be paid
an amount in cash, without interest, equal to the Market Value of one
Contingent Share (as calculated above), multiplied by such fraction.
In light of certain Internal Revenue Service guidelines, the parties
have agreed in the Merger Agreement that the aggregate number of shares of
Shurgard Class A Common Stock delivered by the Shurgard REIT as Contingent
Shares shall not exceed that number of shares of Shurgard Class A Common Stock
issued at the Effective Time. The parties, however, do not believe that this
maximum limit will ever be reached and this limit does not represent an
estimate by the parties of the payment of the Contingent Shares.
EFFECTIVE TIME OF THE MERGER
Promptly following the satisfaction or waiver (where permissible) of
the conditions to the Merger, the Merger will be consummated and become
effective on the date and at the time the certificate of merger is duly filed
with the Secretary of State of the state of Delaware and the articles of merger
are duly filed with the Secretary of State of the state of Washington or such
later date and time as may be specified in such certificate of merger and
articles of merger. See "THE MERGER--Conditions to Consummation of the
Merger."
FRACTIONAL SHARES
No fractional shares of Shurgard Class A Common Stock will be issued
in the Merger. In lieu thereof, the Shurgard REIT will pay cash based on the
Market Value of Shurgard Class A Common Stock immediately preceding the Closing
to any holder otherwise entitled to a fractional share.
EXCHANGE OF SHARES OF MANAGEMENT COMPANY COMMON STOCK
The Merger Agreement provides that the exchange of shares of
Management Company Common Stock in the Merger will be effected as follows:
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<PAGE> 69
(a) The Shurgard REIT will deliver to each holder of
record of a certificate or certificates that immediately prior to the Effective
Time represented outstanding shares of Management Company Common Stock (the
"Certificates") a form of letter of transmittal and instructions for use in
effecting the surrender of the Certificates for payment;
(b) Upon surrender of the Certificates for cancellation
to the Shurgard REIT, together with letters of transmittal duly executed and
any other required documents, holders of such Certificates will receive in
consideration therefor (i) a certificate representing that number of whole
shares of Shurgard Class A Common Stock to which such holder is entitled as
Share Consideration; (ii) the right to receive Contingent Shares; and (iii)
cash in lieu of a fractional share of Shurgard Class A Common Stock; and
(c) After the Effective Time, each outstanding
unsurrendered Certificate will be deemed to represent only the right to receive
upon such surrender (or thereafter in the case of Contingent Shares) the number
of shares of Shurgard Class A Common Stock and the cash in lieu of a fractional
share into which such shares of Management Company Common Stock will have been
converted; however, the holders of outstanding unsurrendered Certificates after
the Effective Time will not be entitled to receive any dividends or
distributions with a record date after the Effective Time theretofore paid with
respect to the shares of Shurgard Class A Common Stock until such Certificates
are surrendered, although any such dividends or distributions will accrue and
be payable to the holder, without interest, upon surrender of the Certificate.
EFFECT ON MANAGEMENT COMPANY STOCK OPTION, EMPLOYEE BENEFIT AND STOCK PLANS
Under the Management Company Stock Option Plan, holders of outstanding
options to purchase shares of Management Company Common Stock will have the
right to exercise such options immediately prior to the Closing, whether or not
the vesting requirements for such options have been satisfied. Accordingly,
shares acquired on exercise of such options will be included in the shares of
Management Company Common Stock outstanding as of the Effective Time. All
outstanding options to purchase shares of Management Company Common Stock that
are not exercised prior to Closing will terminate.
At the Effective Time, and as a result of the Merger, the Shurgard
REIT will become the successor employer to the Management Company's employee
stock ownership ("ESOP") and incentive savings (401(k) plans.
TRADING OF SHARES OF SHURGARD CLASS A COMMON STOCK
The shares of Shurgard Class A Common Stock to be issued in the Merger
have been approved for trading on the Nasdaq National Market, subject to
official notice of issuance.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement includes various customary representations and
warranties of the parties thereto. The Merger Agreement includes
representations and warranties of the Management Company as to, among other
things: (i) the corporate organization, standing and power of the Management
Company; (ii) approval by the Management Company's Board of Directors of the
Merger Agreement; (iii) the Management Company's capitalization; (iv) pending
or threatened litigation; (v) the Merger Agreement's noncontravention of any
agreement, law or charter or bylaw provision and the absence of the need
(except as specified) for governmental or third-party consents to the Merger;
(vi) the terms, existence, operations, liabilities and compliance with
applicable laws of the Management Company's employee plans, and certain other
matters relating to the Employee Retirement Income Security Act of 1974, as
amended; (vii) payment of taxes; (viii) ownership of and rights to use certain
intellectual property; (ix) the Management Company's consolidated financial
statements; (x) the conduct of the Management Company's business in the
ordinary and usual course and the absence of any material adverse change in the
Management Company's financial condition, business, results of operations,
properties, assets, liabilities or prospects; (xi) certain contracts and leases
of the Management Company; (xii) certain matters with respect to compliance
with environmental laws and regulations; (xiii) certain transactions with
affiliates; and (xiv) certain information to be supplied by the Management
Company for inclusion in this Proxy Statement/Prospectus and in the
Registration Statement.
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<PAGE> 70
The Merger Agreement also includes representations and warranties of
the Shurgard REIT as to, among other things: (i) the corporate organization,
standing and power of the Shurgard REIT and its subsidiaries; (ii) approvals by
the Shurgard REIT Board of Directors and the authorization of the Merger
Agreement; (iii) the Shurgard REIT's capitalization; (iv) the authorization of
Shurgard Class A Common Stock to be issued pursuant to the Merger Agreement;
(v) pending or threatened litigation; (vi) the Merger Agreement's
noncontravention of any agreement, law or charter or bylaw provision and the
absence of the need (except as specified) for governmental or third-party
consents to the Merger; (vii) the accuracy of the Shurgard REIT's consolidated
financial statements and filings with the Commission; and (viii) the accuracy
of information to be supplied by the Shurgard REIT for inclusion in this Proxy
Statement/Prospectus and in the Registration Statement.
BUSINESS OF THE MANAGEMENT COMPANY PENDING THE MERGER
The Management Company has agreed that, except as contemplated by the
Merger Agreement, during the period from the date of the Merger Agreement to
the Effective Time, the Management Company will pursue its business in the
ordinary course, with no less diligence and effort than would be applied in the
absence of the Merger Agreement. The Management Company has also agreed on
terms expressly set forth in the Merger Agreement, it will seek to preserve
intact its current business organization, maintain certain levels of working
capital, keep available the services of its current officers and employees and
preserve its relationships with customers, suppliers and others having business
dealings with it with the objective that their good will and ongoing businesses
shall be unimpaired at the Effective Time. The Management Company has also
agreed that before the Effective Time, unless the Shurgard REIT agrees in
writing or as otherwise permitted by the Merger Agreement, it will not, among
other things, enter into transactions or take actions that would, among other
things, change its capitalization, make distributions to its shareholders,
change existing employee benefits or agreements, effect any business
combination or corporate reorganization or restructuring, amend its Articles of
Incorporation or establish or amend a material agreement.
NO SOLICITATION
The Shurgard REIT and the Management Company have each agreed that
before the Effective Time (i) neither of them will, and each of them will
direct and use its best efforts to cause its respective officers, directors,
employees, agents and representatives (including, without limitation, any
investment banker, attorney or accountant retained by it) not to, initiate,
solicit or encourage, directly or indirectly, any inquiries or the making or
implementation of any proposal or offer (including, without limitation, any
proposal or offer to its shareholders) with respect to a merger, acquisition,
tender offer, exchange offer, consolidation or similar transaction involving,
or any purchase of all or any significant portion of the assets or any equity
securities of, such party, or engage in any negotiations concerning, or provide
any confidential information or data to, or have any discussions with, any
person relating to such proposal or offer, or otherwise facilitate any effort
or attempt to make or implement such proposal; (ii) it will immediately cease
and cause to be terminated any existing activities, discussions or negotiations
with any parties conducted prior to December 19, 1994 with respect to any of
the foregoing and each will take the necessary steps to inform the individuals
or entities referred to above of the obligations undertaken pursuant to the
Merger Agreement; and (iii) it will notify the other party immediately if any
such inquiries or proposals are received by, any such information is requested
from, or any such negotiations or discussions are sought to be initiated or
continued with, it. Notwithstanding the foregoing, nothing in the Merger
Agreement will prohibit either the Shurgard REIT Board or the Management
Company's Board from furnishing information to, or entering into discussions or
negotiations with, any person or entity that makes an unsolicited bona fide
proposal, if, and only to the extent that the Board of Directors of such party
determines in good faith that such action is required for the Board to comply
with its fiduciary duties to its shareholders that are imposed by law and such
party keeps the other party informed of the status of any such discussions.
INTERMATION SPIN-OFF
Prior to the Closing, the Management Company will distribute all the
shares of capital stock of InterMation held by the Management Company to its
shareholders. See "FEDERAL INCOME TAX CONSEQUENCES--Tax Treatment of the
InterMation Spin-off."
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<PAGE> 71
SHURGARD REALTY ADVISORS
Prior to the Closing, SRA will be sold or otherwise disposed of to
such purchaser and for such consideration as the Management Company's Board of
Directors deems appropriate. In addition, SRA will have entered into an
agreement with the Shurgard REIT providing that so long as (i) SRA is
maintained as a legal entity licensed as a broker dealer and (ii) the Shurgard
REIT reimburses SRA for the cost of maintaining its licenses as in
broker-dealer, SRA will provide the Shurgard REIT broker-dealer services on
financial terms substantially similar to those provided to the Shurgard REIT in
connection with the Consolidation; provided, however, that SRA has the right,
upon 30 days' notice to the Shurgard REIT, to allow SRA's broker-dealer
licenses to lapse and/or to dissolve SRA.
CONDITIONS TO CONSUMMATION OF THE MERGER
CONDITIONS TO EACH PARTY'S OBLIGATIONS TO EFFECT THE MERGER. The
respective obligations of the Shurgard REIT and the Management Company to
effect the Merger are subject to certain conditions, including the following:
(i) the Merger will have been duly approved by the holders of a majority of
outstanding shares of Shurgard Class A Common Stock and the Management Company
shareholders; (ii) the waiting period under the HSR Act applicable to the
Merger will have expired or been terminated; (iii) the Registration Statement
will have been declared effective and will not be the subject of any stop order
suspending the effectiveness thereof or any proceeding seeking such a stop
order; and (iv) subject to certain exceptions, there will not be in effect any
judgment, writ, order, injunction or decree of any court or governmental body
enjoining or otherwise preventing consummation of the transactions contemplated
by the Merger Agreement nor will there be pending or threatened by any
governmental body or other person any suit, action or proceeding seeking to
restrain or restrict the consummation of the Merger or seeking damages in
connection therewith.
In addition, the respective obligations of the parties to effect the
Merger are subject to the satisfaction or mutual waiver of certain conditions
including the following: (i) all required authorizations or other third-party
consents in connection with the execution and delivery of the Merger Agreement
and the performance of the obligations thereunder will have been obtained; (ii)
the shares of Shurgard Class A Common Stock issuable pursuant to the Merger
Agreement will have been approved for trading on the Nasdaq National Market or
any national exchange upon which the Shurgard Class A Common Stock is then
listed; (iii) Mr. Barbo shall have entered into a noncompetition agreement, and
certain existing agreements shall have been terminated; and (iv) certain major
shareholders of the Management Company shall have entered into agreements
limiting sales of Shurgard Class A Common Stock received in the Merger.
CONDITIONS TO THE OBLIGATION OF THE SHURGARD REIT. In addition to the
foregoing conditions, the obligation of the Shurgard REIT to effect the Merger
is further subject to satisfaction or waiver of the following conditions, among
others: (i) the representations and warranties of the Management Company
contained in the Merger Agreement will be true and correct in all material
respects; (ii) the Management Company will have performed all agreements
required to be performed by it under the Merger Agreement; (iii) the Shurgard
REIT will have received a tax opinion of Perkins Coie that the Merger will
constitute a reorganization under Section 368(a) of the Code, with the Shurgard
REIT and the Management Company being parties to that reorganization within the
meaning of Section 368(b) of the Code such that the Management Company does not
recognize taxable gain or loss on the transaction; (iv) the InterMation
Spin-off will have occurred by virtue of a transaction that is intended to
qualify for tax-free treatment under Section 355 of the Code; (v) the Shurgard
REIT shall have received an "agreed-upon procedures" report from Deloitte &
Touche LLP, independent public accountants, with respect to the Management
Company's consolidated financial statements included in this Proxy
Statement/Prospectus; (vi) the Shurgard REIT shall have received the Management
Company's Closing Statement, conforming to the requirements of the Merger
Agreement; (vii) from December 19, 1994 through the Effective Time, there shall
not have occurred any change in the financial condition, business or operations
of the Management Company and its subsidiaries, taken as a whole, that would
have or would be reasonably likely to have a material adverse effect on the
Management Company's financial condition, business or operation; (viii) holders
in excess of 10% of the shares of Management Company Common Stock shall not
have exercised dissenters' rights under applicable law; (ix) the InterMation
Spin-off shall have occurred; (x) the disposition of SRA described in the
Merger Agreement shall have occurred; (xi) all consents necessary to transfer
certain intellectual property rights to the Surviving Corporation shall have
been obtained; and (xi) the Closing Statement shall reflect an aggregate of
cash and cash equivalents, short-term investments, fees, accounts receivable
and reimbursements receivable of not less than $1,060,700.
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CONDITIONS TO THE OBLIGATIONS OF THE MANAGEMENT COMPANY. In addition
to the foregoing conditions, the obligation of the Management Company to effect
the Merger are further subject to satisfaction or waiver of the following
conditions, among others: (i) the representations and warranties of the
Shurgard REIT contained in the Merger Agreement shall be true in all material
respects; (ii) the Shurgard REIT shall have performed all agreements required
to be performed by it under the Merger Agreement; (iii) from December 19, 1994
to the Effective Time, there shall not have occurred any change in the
financial condition, business or operations of the Shurgard REIT and its
subsidiaries, taken as a whole, that would have or would be reasonably likely
to have a material adverse effect on the Shurgard REIT's business, properties,
operations, condition (financial or other) or prospects; and (iv) the
Management Company shall have received a tax opinion of Riddell, Williams,
Bullitt & Walkinshaw that the InterMation Spin-off more likely than not
qualifies for tax-free treatment under Section 355 of the Code.
AMENDMENT AND WAIVER; TERMINATION
The parties to the Merger Agreement may not amend, change, supplement,
waive or otherwise modify the Merger Agreement, except by an instrument in
writing signed by the party against whom enforcement is sought.
The Merger Agreement may be terminated at any time prior to the
Effective Time, whether before or after approval by the Management Company
shareholders or the Shurgard REIT shareholders, either by the mutual written
consent of the Shurgard REIT and the Management Company or by the mutual action
of their respective Board of Directors. The Merger Agreement may also be
terminated by action of either the Shurgard REIT Board or the Management
Company's Board of Directors if (i) the Merger has not been consummated by May
25, 1995 (provided that the terminating party shall not have breached in any
material respect its obligations under the Merger Agreement in any manner that
shall have proximately contributed to the occurrence of the failure of the
Merger to occur on or before such date); (ii) either the holders of the
Management Company Common Stock or the holders of the Shurgard Class A Common
Stock shall fail to approve the Merger; or (iii) any court or governmental body
in the United States has issued a final and nonappealable order, decree or
ruling or taken any other final and nonappealable action permanently
restraining, enjoining or otherwise prohibiting the Merger (provided that the
party seeking such termination has used all reasonable efforts to remove such
order, decree, ruling or injunction).
REGULATORY MATTERS
The Merger is subject to the expiration or termination of the
applicable waiting period under the HSR Act. Certain aspects of the Merger
will require notifications to, and filings with, certain securities and other
authorities in certain states, including jurisdictions where the Shurgard REIT
and the Management Company currently operate.
Under the HSR Act and the rules promulgated thereunder by the FTC, the
Merger may not be consummated until notifications have been given and certain
information has been furnished to the FTC and the Antitrust Division and the
applicable waiting period has expired or been terminated. The Shurgard REIT
and the Management Company expect to file notification and report forms under
the HSR Act with the FTC and the Antitrust Division in January 1995. Unless it
is extended, the waiting period for these filings will terminate 30 days after
the filing is made. At any time before or after consummation of the Merger,
the Antitrust Division or the FTC could take such action under the antitrust
laws as it deems necessary or desirable in the public interest, including
seeking to enjoin the consummation of the Merger or seeking divestiture of
substantial assets of the Shurgard REIT or the Management Company. At any time
before or after the Effective Time, and notwithstanding that the waiting period
under the HSR Act has expired, any state could take such action under the
antitrust laws as it deems necessary or desirable in the public interest. Such
action could include seeking to enjoin the consummation of the Merger or
seeking divestiture of substantial assets of the Shurgard REIT or the
Management Company. Private parties may also seek to take legal action under
the antitrust laws under certain circumstances.
Based on information available to them, the Shurgard REIT and the
Management Company believe that the Merger can be effected in compliance with
federal and state antitrust laws. However, there can be no assurance that a
challenge to consummation of the Merger on antitrust grounds will not be made
or that, if such a challenge were made, the Shurgard REIT and the Management
Company would prevail or would not be required to accept certain adverse
conditions in order to consummate the Merger.
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INDEMNIFICATION OF MANAGEMENT COMPANY DIRECTORS AND OFFICERS
Under the Merger Agreement, the Shurgard REIT has agreed to keep in
effect provisions in its Certificate of Incorporation and By-Laws providing for
limitation of director liability and indemnification of directors, officers,
employees and agents at least to the extent such persons are entitled thereto
under the Articles of Incorporation and By-Laws of the Management Company as of
December 19, 1994, subject to Delaware law. To the extent the Shurgard REIT
Certificate of Incorporation and By-Laws do not provide for indemnification of
directors or officers of predecessor corporations the Shurgard REIT will,
subject to Delaware law, contractually assume the indemnification obligations
under the Management Company's By-Laws. In addition, such provisions will not
be amended, repealed or otherwise modified in any manner that would adversely
affect the rights of individuals who at any time prior to the Effective Time
were directors, officers, employees or agents of the Management Company in
respect of actions or omissions occurring at or prior to the Effective Time
(including, without limitation, the transactions contemplated by the Merger
Agreement), unless such modification is required by law.
RESALE OF SHARES OF SHURGARD CLASS A COMMON STOCK ISSUED IN THE MERGER;
AFFILIATES
The Merger Agreement provides that Messrs. Barbo, Buerk, Daniels,
Grant, Knutzen (as trustee of the Barbo family trust) and Rowe will agree not
to sell, pledge (on a nonrecourse basis), transfer or otherwise dispose of
(except by operation of law) more than 40% of the Share Consideration and the
Contingent Shares received by them for a two-year period commencing on the
Closing.
Except as provided above, the shares of Shurgard Class A Common Stock
to be issued in the Merger will be freely transferable, except that shares
issued to any Management Company shareholder who may be deemed to be an
"affiliate" (as defined under the Securities Act, and generally including,
without limitation, directors, certain executive officers and beneficial owners
of 10% or more of a class of capital stock) of the Management Company for
purposes of Rule 145 under the Securities Act shall not be transferable except
in compliance with the Securities Act. Approximately 81.6% of the shares of
Shurgard Class A Common Stock to be issued pursuant to the Merger will be held
by such "affiliates."
Such "affiliates" have delivered a letter to the Shurgard REIT
indicating that they will not sell, pledge, transfer or otherwise dispose of
any shares of the Shurgard Class A Common Stock issued pursuant to the Merger
except (i) in accordance with an effective registration statement, (ii) in
compliance with the Rule 145 under the Securities Act, or (iii) pursuant to a
transaction exempt from, or otherwise not subject to, the registration
requirements of the Securities Act.
This Proxy Statement/Prospectus does not cover resales of shares of
Shurgard Class A Common Stock received by any person who may be deemed to be an
affiliate of the Management Company.
AGREEMENT OF MANAGEMENT COMPANY SIGNIFICANT SHAREHOLDERS TO VOTE IN FAVOR OF
THE MERGER
Certain significant shareholders of the Management Company (the
"Management Company Significant Shareholders") have entered into a Shareholders
Agreement pursuant to which each of the Management Company Significant
Shareholders has agreed to attend (in person or by proxy) the special meeting
of Management Company shareholders at which the Merger Agreement will be
presented for approval and to vote all shares of Management Company Common
Stock that such shareholder has the right to vote in favor of the Merger
Agreement. As of December 19, 1994, the Management Company Significant
Shareholders had the power to vote shares representing an aggregate of
approximately 80% of the outstanding shares of Management Company Common Stock.
Accordingly, approval of the Merger Agreement by the Management Company
shareholders is assured.
ACCOUNTING TREATMENT
The Merger will be accounted for using the purchase method under
generally accepted accounting principles for accounting and financial reporting
purposes.
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EXPENSES AND FEES
Each party will bear its own expenses, including the fees and expenses
of any attorneys, accountants, investment bankers, brokers, finders or other
intermediaries, incurred in connection with the Merger Agreement and the
transactions contemplated thereby. Notwithstanding the foregoing, the Merger
Agreement provides that if an officer, director or affiliate of the Management
Company (collectively, the "Litigation Parties") is involuntarily made a party
to a lawsuit in connection with the Merger, the Shurgard REIT will defend,
indemnify and pay the costs associated with the defense of such Litigation
Parties. In addition, if it is deemed appropriate, such Litigation Parties may
retain separate legal counsel to defend actions brought in connection with the
Merger and the Shurgard REIT will likewise pay the associated costs. Further,
the Management Company and the Shurgard REIT have each agreed in the Merger
Agreement not to enter into settlement proceedings without the consent of the
other. The Shurgard REIT will have no duty to indemnify any of the Litigation
Parties for any liability imposed under a final judgment to the extent such
judgement has been finally adjudicated and determined to have been the result
of an untrue statement or an omission of a material fact made by the Management
Company in certain sections of the Registration Statement or this Proxy
Statement/Prospectus, or as a result of fraud, intentional misconduct or
knowing violation of the law by such Litigation Parties.
RIGHTS OF DISSENTING MANAGEMENT COMPANY SHAREHOLDERS
Holders of Shurgard Class A Common Stock will not be entitled to
dissenters' rights as a result of the Merger.
A record or beneficial holder of Management Company Common Stock will
have the right to dissent with respect to the Merger and, subject to certain
conditions, will be entitled to receive a cash payment equal to the fair value
of his or her shares under the WBCA. Any Management Company shareholder who
intends to exercise his or her dissenters' rights must not vote his or her
shares in favor of the Merger and must satisfy the procedural requirements
concerning dissenters' rights specified in the WBCA. The Management Company
will be required to pay to each Management Company dissenting shareholder who
complies with the procedures of the WBCA, within 30 days after the later of the
Effective Time and the date the payment demand is received, the amount that the
Management Company estimates to be the fair value of the shareholders shares,
plus accrued interest. The Management Company will provide, along with such
payment, certain financial information, and an explanation of how the
Management Company estimated the fair value of the shares. Any dissenting
shareholder who is dissatisfied with such payment may, within 30 days of such
payment, notify the Management Company in writing of such shareholder's
estimate of fair value of his or her shares and the amount of interest due, and
demand payment thereof.
If any Management Company dissenting shareholder's demand for payment
is not settled within 60 days after receipt by the Management Company of such
shareholder's payment demand, the WBCA requires that the Management Company
commence a proceeding in King County Superior Court, and petition the court to
determine the fair value of the shares and accrued interest. Such a
determination of fair value could result in a price higher than, lower than or
equal to the price available to Management Company shareholders pursuant to the
Merger. Under the WBCA, a court may consider a variety of factors in
determining fair value. The WBCA requires that the court consider all relevant
facts and circumstances in determining the fair value and that it not give
undue emphasis to any one factor.
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FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion summarizes those federal income tax
considerations resulting from the Merger that materially affect the Shurgard
REIT, the Management Company and their respective shareholders. The discussion
is general in nature and is not intended as a substitute for professional tax
advice. Accordingly, the discussion does not purport to be a complete analysis
or listing of all potential effects relevant to a decision whether to vote in
favor of the Merger. The discussion neither addresses the tax consequences
that may be relevant to a particular Shurgard REIT or a Management Company
shareholder nor a Shurgard REIT or a Management Company shareholder that is
subject to special treatment under certain federal income tax laws, such as
dealers in securities, banks, insurance companies, tax-exempt organizations and
non-United States persons, nor does it address any consequences arising under
laws of any state, local or foreign jurisdiction. The discussion is based upon
the Code, Treasury regulations promulgated thereunder and administrative
rulings and court decisions as of the date hereof. The foregoing is subject to
change either prospectively or retroactively and any such change could affect
the continuing validity of the discussion. THE SHURGARD REIT AND MANAGEMENT
COMPANY SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS CONCERNING THE
FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE MERGER TO THEM.
TAX TREATMENT OF THE MANAGEMENT COMPANY AND THE SHURGARD REIT IN THE MERGER
The following is a summary of the material federal income tax
consequences of the Merger. No ruling from the IRS will be applied for with
respect to the federal income tax consequences of the Merger. Thus, there can
be no assurance that the IRS will agree with the conclusions set forth in this
Proxy Statement/Prospectus.
In connection with the Merger, Perkins Coie, counsel to the Shurgard
REIT, will deliver an opinion that for federal income tax purposes under
current law, assuming that the Merger and related transactions will take place
as described in the Merger Agreement and that certain factual matters
represented by the Shurgard REIT, the Management Company and the Shurgard
Significant Shareholders are true and correct at the Effective Time, the
following would be the material federal income tax consequences of the Merger:
(a) the Merger will be treated as a reorganization under Section
368(a) of the Code;
(b) each of the Shurgard REIT and the Management Company will be a
party to the reorganization under Section 368(b) of the Code;
(c) no gain or loss will be recognized by the Shurgard REIT or the
Management Company in the Merger;
(d) immediately following the Effective Time, the assets of the
Management Company in the hands of the Shurgard REIT will have the same
adjusted tax basis as they had in the hands of the Management Company
immediately prior to the Effective Time; and
(e) the holding period for each of the assets of the Management
Company in the hands of the Shurgard REIT following the Effective Time will
include the period each asset was held by the Management Company immediately
prior to the Effective Time.
The opinion of Perkins Coie, counsel to the Shurgard REIT, regarding
the federal income tax consequences of the Merger will be limited to the
foregoing.
CONTINGENT SHARES AND INDEMNIFICATION SHARES. The Shurgard REIT will
recognize no gain or loss upon the issuance of Contingent Shares. It is likely
that the Shurgard REIT would recognize no gain or loss upon the receipt of
Indemnification Shares from the escrow fund, although the IRS might take the
position that such return constituted ordinary income to the Shurgard REIT if
the related indemnification claim was for lost profits of the Shurgard REIT.
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TAX TREATMENT OF MANAGEMENT COMPANY SHAREHOLDERS IN THE MERGER
The following are the likely federal income tax consequences of the
Merger for a Management Company shareholder:
(i) no gain or loss will be recognized by Management Company
shareholders upon receipt of shares of Shurgard Class A Common Stock in
exchange for their shares of Management Company Common Stock (other than
Contingent Shares recharacterized as interest as discussed at "--Receipt of
Contingent Shares"), except that Management Company shareholders who receive
cash in lieu of a fractional share of Shurgard Class A Common Stock will
recognize gain equal to the difference between such cash and the tax basis
allocated to their fractional shares of Shurgard Class A Common Stock, and such
gain will constitute capital gain if their shares of Management Company Common
Stock were held as a capital asset at the Effective Time;
(ii) the tax basis of the shares of Shurgard Class A Common Stock
received (including fractional shares of Shurgard Class A Common Stock deemed
received) in the Merger by Management Company shareholders (other than
Contingent Shares recharacterized as interest as discussed at "--Receipt of
Contingent Shares") will be the same as the tax basis of their shares of
Management Company Common Stock exchanged therefor and, until the final payment
of Contingent Shares, such basis shall be determined as though the maximum
number of Contingent Shares had been issued under the Merger Agreement (see
"--Receipt of Contingent Shares") and all of the Indemnification Shares are
released at the end of the escrow period (see "--Indemnification Shares"); and
(iii) the holding period of the shares of Shurgard Class A Common
Stock in the hands of the Management Company shareholders (other than
Contingent Shares recharacterized as interest as discussed at "--Receipt of
Contingent Shares") will include the holding period of their shares of
Management Company Common Stock exchanged therefor, provided such shares of
Management Company Common Stock are held as a capital asset at the Effective
Time.
RECEIPT OF CONTINGENT SHARES. The Shurgard REIT may issue Contingent
Shares during each fiscal quarter ending after the Effective Time, through the
fifth anniversary of the Closing. See "THE MERGER--Contingent Shares."
Generally, the offering and issuance of Contingent Shares should not adversely
affect the tax-free nature of the Merger. Nonetheless, a portion of the
Contingent Shares issued to Management Company shareholders will be taxable
upon receipt by the Management Company shareholders as interest income. The
amount of interest income recognized will equal the excess of (i) the fair
market value of the Contingent Shares at the time they are issued over (ii)
such fair market value discounted back to the Effective Time using an
applicable federal interest rate. Because of the factual uncertainty regarding
the amount and timing of the issuance of the Contingent Shares, the amount of
the interest income to be recognized by the Management Company shareholders is
uncertain.
INDEMNIFICATION SHARES AND ADJUSTMENT INDEMNIFICATION SHARES. Subject to
certain limitations, a total of 15% of the Share Consideration will be
deposited into an escrow account at the Closing to allow the Shurgard REIT to
recover from the Indemnification Shares and Adjustment Indemnification Shares
costs or expenses arising from certain events. See "THE
MERGER--Indemnification Shares." Each Management Company shareholder will be
deemed to own at the Effective Time that portion of the Indemnification Shares
and Adjustment Indemnification Shares that he or she would receive upon the
release of such shares if no payment of such shares is made during the escrow
period. The issuance of the Indemnification Shares and Adjustment
Indemnification Shares should not adversely affect the tax-free nature of the
reorganization nor adversely impact a Management Company shareholder. The IRS
has ruled that the payment of shares as indemnification from an escrow fund of
the type used in the Merger Agreement will not result in gain or loss to the
beneficial owner of the shares if the payment is calculated on the basis of the
fair market value of the shares at the time of the initial reorganization.
Rev. Rul. 76-42, 1976-1 C.B. 102. Accordingly, the Management Company
shareholders should recognize no gain or loss upon a transfer of
Indemnification Shares or Adjustment Indemnification Shares to the Shurgard
REIT. Additionally, the basis of such shares will be added to the basis of the
Indemnification Shares and Adjustment Indemnification Shares remaining in the
escrow fund.
EXERCISE OF DISSENTERS' RIGHTS. Management Company shareholders who
exercise dissenters' rights will recognize gain or loss equal to the difference
between such cash and the tax basis in their shares of Management Company
Common Stock subject to dissenters' rights, and such gain or loss will
constitute capital gain or loss if their shares of
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Management Company Common Stock are held as a capital asset at the Effective
Time. However, such exercise may be subject to the provisions and limitations
of Section 302 of the Code. Accordingly, under certain limited circumstances,
a Management Company shareholder exercising dissenters' rights may recognize
ordinary income to the extent of the cash received if the resulting redemption
were not treated as a complete termination of the interest of the Management
Company shareholder in the Shurgard REIT, after application of certain
attribution rules under Section 302 of the Code. For example, if persons
related (within the meaning of Section 318 of the Code) to a Management Company
shareholder who exercises dissenters' rights own shares of the Shurgard REIT
after the Merger, or the Management Company shareholder exercises dissenters'
rights for some, but not all, of their shares, the cash received upon the
exercise of dissenters' rights may result in dividend treatment. Management
Company shareholders should consult their own tax advisers to determine whether
dividend treatment could apply to their particular circumstances.
BUILT-IN GAIN RULES
Under the "Built in Gain Rules" of Notice 88-19, 1988-1 C.B. 486, the
Shurgard REIT will be subject to a corporate tax if it disposes of any of the
assets acquired from the Management Company in the Merger during the 10-year
period beginning at the Effective Time (the "Restriction Period"). This tax is
imposed at the top regular corporate rate (currently 35%) on the excess of (i)
the lesser of (a) the fair market value at the Effective Time of the assets
disposed of and (b) the selling price of such assets over (ii) the Shurgard
REIT's adjusted basis at the Effective Time in such assets (such excess being
referred to as the "Built-in Gain"). The Shurgard REIT does not intend to
dispose of any of the assets acquired in the Merger during the Restriction
Period. However, the Merger Agreement does contemplate (x) the Shurgard REIT's
disposition of certain Partnership Interests acquired from the Management
Company in the Merger and (y) the sale of some or all of the assets of these
Partnerships, as described in "THE MERGER--Contingent Shares." On such a
disposition, if the fair market value of a Partnership Interest at the
Effective Time exceeded the Shurgard REIT's basis therein or if the fair market
value of the Partnership assets at the Effective Time exceeded the
Partnership's basis therein, the Shurgard REIT would be taxed at the time of
the disposition on the resulting gain at the top corporate rate under the
Built-in Gain Rules. See, e.g., Prop. Treas. Reg. 1.1374-4(h).
The results described above with respect to the recognition of
Built-in Gain assume that the Shurgard REIT will make a certain election
pursuant to the Built-in Gain Rules or applicable future administrative rules
or Treasury Regulations. The Shurgard REIT intends to make this election. If
the Shurgard REIT does not make this election, the Management Company will be
taxed on the Built-in Gain on the Effective Time at regular corporate tax
rates. Furthermore, if the Shurgard REIT does not make the election, the
InterMation Spin-off may fail to qualify under Section 355 of the Code. See
"--Tax Treatment of the InterMation Spin- off" and "--Failure of the
InterMation Spin-off to Qualify."
FAILURE OF THE MERGER TO QUALIFY
CONSEQUENCES TO THE MANAGEMENT COMPANY AND MANAGEMENT COMPANY
SHAREHOLDERS. Should any of the assumptions or representations upon which the
tax opinions regarding the Merger are based prove inaccurate, the Merger may
not qualify as a tax- free reorganization under Section 368(a) of the Code.
Furthermore, such tax opinions are not binding upon the IRS, which may
challenge the qualification of the Merger as a reorganization under Section
368(a) of the Code. If the Merger does not so qualify, (i) the Management
Company shareholders will recognize gain or loss upon the Merger in an amount
equal to the difference between the fair market value of the Effective Time of
the Shurgard Class A Common Stock received, including Contingent Shares when
and as received, and their adjusted tax basis in the shares of Management
Company Common Stock exchanged therefor including Contingent Shares when and as
received and (ii) the Management Company will recognize gain or loss in an
amount equal to the difference between the fair market value of the Shurgard
Class A Common Stock issued in the Merger, including Contingent Shares when and
as received, and the adjusted tax basis of the assets that it transfers to the
Shurgard REIT in the Merger.
Furthermore, the failure of the Merger to qualify under Section 368(a)
of the Code may cause the InterMation Spin-off to fail to qualify under Section
355 of the Code. For a discussion of the InterMation Spin-off, including the
adverse tax consequences to the Management Company and the Management Company
shareholders that may result from the InterMation Spin-off's failure to qualify
under Section 355 of the Code, see "--Tax Treatment of the InterMation
Spin-off."
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CONSEQUENCES TO THE SHURGARD REIT. The Shurgard REIT will not
directly recognize gain or loss as a result of the failure of the Merger to
qualify as a reorganization under Section 368(a) of the Code. Nonetheless, the
Shurgard REIT will be primarily liable as the successor to the Management
Company for the resulting tax liability imposed upon the Management Company,
which liability is described under "--Failure of the InterMation Spin-off to
Qualify--Consequences to the Management Company and Management Company
Shareholders." Furthermore, the failure of the Merger to qualify under Section
368(a) of the Code may cause the InterMation Spin-off to fail to qualify under
Section 355 of the Code. For a discussion of the InterMation Spin-off,
including the adverse tax consequences to the Shurgard REIT that may result
from its failure to qualify under Section 355 of the Code, see "--Tax Treatment
of the InterMation Spin-off."
TAX TREATMENT OF THE INTERMATION SPIN-OFF
The following is a summary of the material federal income tax
consequences of the InterMation Spin-off. Based on its guidelines for
submitting a ruling, the IRS has informed the Management Company that it will
not consider a ruling regarding these consequences. Accordingly, there can be
no assurance that the IRS will determine that the InterMation Spin-off
qualifies under Section 355 of the Code.
In connection with the InterMation Spin-off, Riddell, Williams,
Bullitt & Walkinshaw, counsel to the Management Company, will deliver an
opinion that for federal income tax purposes under current law, assuming that
the InterMation Spin-off and related transactions will take place as described
in an Agreement and Plan of Corporate Separation between the Management Company
and InterMation and that certain factual matters represented by the Management
Company, InterMation and certain Management Company shareholders are true and
correct at the time of the InterMation Spin-off, the following would more
likely than not be the material federal income tax consequences of the
InterMation Spin-off:
(a) the distribution of the shares of InterMation common stock in
the InterMation Spin-off will be treated as described in Section 355(a)(1) of
the Code;
(b) no gain or loss will be recognized by (and no amount will be
included in the income of) the Management Company shareholders upon the receipt
of the shares of InterMation common stock distributed to them by the Management
Company;
(c) no gain or loss will be recognized by the Management Company
upon the distribution of all the shares of InterMation common stock held by it
to its shareholders;
(d) the basis of the shares of Management Company Common Stock and
the shares of InterMation common stock held by the Management Company
shareholders after the distribution will be the same as the basis of the shares
of Management Company Common Stock held immediately prior to the distribution,
allocated in proportion to the relative fair market values of the shares of
Management Company Common Stock and the shares of InterMation common stock on
the date of the distribution;
(e) provided that the shares of Management Company Common Stock
were held as a capital asset on the date of the distribution, the holding
period of the shares of InterMation common stock received by the Management
Company shareholders will include the holding period of the shares of
Management Company Common Stock exchanged therefor; and
(f) the earnings and profits of the Management Company immediately
before the distribution will be allocated between the Management Company and
InterMation in proportion to the relative fair market values of the two
corporations as of the date of distribution, with the amount of earning and
profits allocated to InterMation being limited to the net worth of InterMation
as of the date of the distribution.
The opinion of Riddell, Williams, Bullitt & Walkinshaw, counsel to the
Management Company, regarding the InterMation Spin- off will be limited to the
foregoing.
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FAILURE OF THE INTERMATION SPIN-OFF TO QUALIFY
CONSEQUENCES TO THE MANAGEMENT COMPANY AND MANAGEMENT COMPANY
SHAREHOLDERS. The tax opinion regarding the InterMation Spin-off is based on a
number of assumptions and representations, including, among others, that (i)
the assumption that the Merger will take place and that it will qualify as a
tax-free reorganization under Section 368(a)(1) of the Code and (ii) the
parties to the Merger Agreement have entered into the Merger Agreement for
valid business reasons and not for the purpose of tax avoidance. Should any of
these assumptions prove inaccurate, the InterMation Spin-off may not qualify as
a distribution under Section 355(a)(1) of the Code. Furthermore, the tax
opinion regarding the InterMation Spin-off is not binding on the IRS, which may
challenge the qualification of the InterMation Spin-off as a distribution under
Section 355(a)(1) of the Code. If the InterMation Spin-off does not so
qualify, (i) the Management Company shareholders will recognize income as a
result of the InterMation Spin-off in an amount equal to the fair market value
of the InterMation common stock received, and (ii) the Management Company will
recognize gain in an amount equal to the difference between the fair market
value of the shares of InterMation common stock it distributes in the
InterMation Spin-off and its basis in such shares.
CONSEQUENCES TO THE SHURGARD REIT AND THE SHURGARD REIT SHAREHOLDERS.
The Shurgard REIT will not directly recognize any gain or loss in the event the
InterMation Spin-off fails to qualify as a distribution under Section 355(a)(1)
of the Code. Nonetheless, the Shurgard REIT will be primarily liable as the
successor to the Management Company for the tax liability imposed upon the
Management Company. In the event the Shurgard REIT is held primarily liable
for this resulting tax liability, the Shurgard REIT will be partially or
completely indemnified for the tax costs associated with the disqualified
InterMation Spin-off. If the resulting tax liability is determined within
three years of the Effective Time, the indemnification will be satisfied, to
the extent possible, through retention of the Indemnification Shares. If the
resulting tax liability is determined after such time, the Shurgard REIT will
have recourse against the Management Company Significant Shareholders, subject
to certain limitations. See "THE MERGER--Indemnification Shares." Because the
amount of such liability will be based on facts that are not available at this
time, including the fair market value of the InterMation common stock on the
date of distribution, it is not possible to determine with reasonable certainty
the amount of any potential tax liability should the InterMation Spin-off fail
to qualify as tax-free. Accordingly, it is possible that the amount of any
resulting tax liability, including potential interest, penalties and
professional costs, may exceed the extent of the available indemnity.
If the InterMation Spin-off does not qualify under Code Section 355,
however, the amount of accumulated earnings and profits acquired by the
Shurgard REIT from the Management Company in the Merger will be reduced.
See"--Consequences of the Merger on the Shurgard REIT's Qualification as a
REIT--Distributions of Accumulated Earnings and Profits Attributable to
Non-REIT Years." The taxable distribution of InterMation shares by the
Management Company prior to the Merger has the net effect of reducing the
Management Company's accumulated earnings and profits by the adjusted tax basis
of the distributed shares. By reducing the amount of the earnings and profits,
the amount of Shurgard REIT distributions previously characterized as dividends
will be equally reduced and such distributions would be treated as a tax-free
return of capital to the Shurgard REIT shareholders to the extent of their
basis in their Shurgard Class A Common Stock, and thereafter as capital gain
income. Accordingly, if the InterMation Spin-off is subsequently determined to
be taxable, the Shurgard REIT shareholders may be entitled to a tax refund
associated with any distribution made during 1995 that was incorrectly reported
as a dividend.
CONSEQUENCES OF MERGER ON THE SHURGARD REIT'S QUALIFICATION AS A REIT
THE SHURGARD REIT'S SELF-ADMINISTRATION OF MANAGEMENT SERVICES.
Because of the unique federal income tax requirements attributable to REITs, a
number of federal income tax issues must be addressed in connection with the
Merger that are unique to the Shurgard REIT's status as a REIT. Of primary
importance is the issue of whether the Shurgard REIT is permitted to perform
its property management functions internally. Generally, REITs are permitted
to perform services for their own tenants, which services are usually and
customarily rendered in connection with the rental of space for occupancy only
and are not considered to be "rendered to the occupant." If a REIT performs
services beyond this extent, the income received for the use of its property
will not satisfy the REIT income tests. See "--Tax Consequences to Management
Company Shareholders Receiving Shurgard Class A Common Stock--Income Tests."
Failure to satisfy these tests would result in the disqualification of Shurgard
REIT as a REIT. See "--Tax Consequences to
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Management Company Shareholders Receiving Shurgard Class A Common
Stock--Failure of the Shurgard REIT to Qualify as a REIT."
As a result of the Merger, the Shurgard REIT will perform or
"self-administer" the property management activities for properties it owns.
Prior to the Consolidation, and on behalf of the Shurgard REIT, the Management
Company obtained an IRS private letter ruling in which the IRS ruled that,
should the Shurgard REIT acquire the Management Company and self-administer the
management activities of its properties, such property management services
rendered by the Shurgard REIT would not adversely affect the characterization
of the Shurgard REIT's rents from real property. Based on this ruling, the
property management services rendered by the Shurgard REIT on its own
properties should not adversely affect the characterization of the Shurgard
REIT as a REIT.
NONQUALIFYING INCOME. The Shurgard REIT must meet several annual
gross income tests to retain its REIT qualification. See "--Tax Consequences
to Management Company Shareholders Receiving Shurgard Class A Common
Stock--Income Tests." Under the 95% gross income test, the Shurgard REIT must
derive at least 95% of its total gross income from specified classes of income
related to real property, dividends, interest or gains from the sale or other
disposition of stock or other securities that do not constitute "dealer
property." Income related to real property includes: (i) proceeds from the
rental of self-storage facilities; (ii) interest on obligations secured by
mortgages on real property; and (iii) gains from the sale or other disposition
of real property (other than real property held by the Shurgard REIT as a
dealer).
In the event the Shurgard REIT fails to meet the 95% test during any
taxable year, its REIT status would terminate for that year and future years
unless it satisfies each of the following: (i) it reported the source and
nature of each item of its gross income in its federal income tax return for
such year; (ii) the inclusion of any incorrect information in its return is not
due to fraud with intent to evade tax; and (iii) the failure to meet such test
is due to a reasonable cause and not to willful neglect. Accordingly, if the
failure to meet the 95% test is based on a reasonable cause such as a
miscalculation or interpretation as to the nature of the gross income and the
Shurgard REIT reports all of its nonqualifying income on its tax return, the
Shurgard REIT would not lose its REIT status. If the Shurgard REIT has
projected that it may have excess nonqualifying income for any years and fails
to cure such problem, it may face termination of its REIT status. If so
terminated, the Shurgard REIT cannot again elect REIT status for five years
unless it can prove that such termination was due to reasonable cause, not
willful neglect.
Furthermore, in the event the Shurgard REIT fails to meet the 95%
test, even if the Shurgard REIT's REIT status is not terminated, the Shurgard
REIT would still be subject to an excise tax on any excess nonqualifying
income. Generally, if the Shurgard REIT fails the 95% test but still retains
its qualification as a REIT, it would be subject to a 100% excise tax on the
amount of the excess nonqualifying income multiplied by a fraction, the
numerator of which is the Shurgard REIT's taxable income (computed without its
distribution deduction) and the denominator of which is the Shurgard REIT's
gross income from all sources. This excise tax has the general effect of
causing the Shurgard REIT to pay all net profits generated from this excess
nonqualifying income to the IRS.
Presently, the Shurgard REIT obtains a small percent of its gross
income from activities that do not qualify under this 95% gross income test
("Nonqualifying Income"). For a description of these activities, see "SHURGARD
STORAGE CENTERS, INC.--Investment Policies and Restrictions--Ancillary
Services." For example, income received by the Shurgard REIT from the sale of
inventory products such as locks, boxes and packing materials and commissions
from the rental of Ryder trucks do not qualify under this 95% test. Currently,
on an annualized basis, gross income from these nonqualifying activities
accounts for approximately 2.84% of the total gross income of the Shurgard
REIT.
Upon the Merger, the gross income received by the Shurgard REIT from
property management services on properties owned by third parties will be
treated as income not qualifying under the 95% test. For a discussion
regarding the third-party property management contracts of the Management
Company, see "SHURGARD INCORPORATED--Management Services." In addition, to the
extent third parties reimburse the Management Company for legal, acquisition,
accounting, operations or other administrative services performed by Management
Company employees, the amount of such reimbursement should similarly be treated
as Nonqualifying Income. If there was no change in the Shurgard REIT's current
revenues and assuming that the Merger closed on March 31, 1995, the Shurgard
REIT would earn nonqualifying
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income at or near 5% of its total gross income in 1995 and would earn
Nonqualifying Income of approximately 5.75% of its total gross income for
subsequent years, thereby failing the 95% test.
The percentage of Nonqualifying Income may be reduced in a variety of
ways. Because the income tests are based on a percentage of total gross
income, increases in qualifying rents will reduce the percentage of
Nonqualifying Income. Pursuant to Shurgard REIT's existing acquisition
program, additional assets may be acquired by it during 1995 that would
generate additional qualifying income, thereby lowering the percentage of total
Nonqualifying Income recognized by it. There can, of course, be no assurance
that future acquisitions will be made in amounts or at such times to satisfy
these gross income requirements. Increases in other Nonqualifying Income may
similarly affect these calculations.
Accordingly, if the Shurgard REIT determines any time during the year
that the receipt of third-party management fees could adversely affect its
ability to satisfy the 95% test, it will notify the third-party property owners
to which it provides property management services and request that management
fees be paid at reduced rates for the remainder of the year. The Shurgard REIT
will, to the extent possible under existing tax guidelines, defer receipt of
such fees to a succeeding year in which recognition of the Nonqualifying Income
does not jeopardize its qualification as a REIT. If such deferral is not
possible, however, the Shurgard REIT would reduce the fees without condition or
deferral. Although this measure would reduce the Shurgard REIT's gross income
(and correspondingly its net profits), it would effectively reduce the Shurgard
REIT's overall Nonqualifying Income and preserve its REIT status. The Shurgard
REIT anticipates that this measure will be taken only as necessary and intends
to pursue less costly alternatives when appropriate.
DISTRIBUTIONS OF ACCUMULATED EARNINGS AND PROFITS ATTRIBUTABLE TO
NON-REIT YEARS. A REIT is not allowed to have accumulated earnings and profits
attributable to non-REIT years. A REIT has until the close of its first
taxable year in which it has non-REIT earnings and profits to distribute any
such accumulated earnings and profits. In a corporate reorganization
qualifying as a tax-free statutory merger, the acquired corporation's
accumulated earnings and profits are carried over to the surviving corporation.
Any accumulated earnings and profits treated as having been acquired by a REIT
through such a merger will be treated as accumulated earnings and profits of a
REIT attributable to non-REIT years. Accordingly, any accumulated earnings and
profits of the Management Company will carry over to the Shurgard REIT and the
Shurgard REIT will be required to rid itself of these accumulated earnings and
profits prior to the close of 1995 (the year in which the Merger occurs).
Failure to do so would result in disqualification of the Shurgard REIT's REIT
status.
The amount of the accumulated earnings and profits of the Management
Company acquired by the Shurgard REIT will be based on the consolidated
earnings and profits of the Management Company (including each of its
subsidiaries) at the time of the InterMation Spin-off (the "Consolidated
Earnings"). The Consolidated Earnings will be determined, in part, through an
earnings and profits study based on (i) the corporate tax returns of the
Management Company for the years beginning on the Management Company's date of
incorporation through December 31, 1994 and (ii) consolidated earnings and
profits for the 1995 period ending on the date of the InterMation Spin-off.
The Consolidated Earnings will then be allocated between the Management Company
and InterMation based on the relative fair market values of the two separate
corporations at the time of the InterMation Spin-off. As the basis for this
allocation, the Management Company will use the share consideration paid in the
Merger (exclusive of Contingent Shares) for the value of the Management Company
and will obtain an independent valuation for InterMation. The amount of
accumulated earnings and profits allocated to the Management Company will then
be adjusted for its activities occurring between the date of the InterMation
Spin-off and the closing date of the Merger to arrive at the amount of
accumulated earnings and profits acquired by the Shurgard REIT (the "Acquired
Earnings").
The amount of the Acquired Earnings is estimated between $6,100,000
and $6,800,000 depending on the relative values of InterMation assumed for
allocating the Consolidated Earnings on the InterMation Spin-off. This
estimate also assumes, among other things, (i) a reduction in the Consolidated
Earnings resulting from the exercise of stock options and the payment of cash
bonuses to pay taxes associated with such exercise; and (ii) a reduction in the
Consolidated Earnings resulting from payment of stock and cash bonuses during
1994 and 1995. Because of the uncertainty of these and other assumptions, the
amount of Acquired Earnings may differ from the range estimated above.
To determine the amount of distributions required to be made by the
Shurgard REIT during 1995 to distribute these Acquired Earnings, the Shurgard
REIT must determine the source of each of its distributions made during 1995.
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Only those distributions that are sourced to the Acquired Earnings will be
treated as reducing such earnings and profits. In determining the source of a
distribution, consideration should generally be given first, to the earnings
and profits of the taxable year and second, to earnings and profits accumulated
in prior years. Accordingly, to distribute the Acquired Earnings, the Shurgard
REIT must distribute during 1995 all current year earnings and profits plus the
sum of (i) the amount of any accumulated and undistributed 1994 Shurgard REIT
earnings and profits and (ii) the amount of the Acquired Earnings.
Furthermore, if annual distributions are made only in cash and are in
excess of current year earnings and profits, then a proportionate amount of
each distribution will be treated as sourced from current year earnings and
profits. That portion of each such distribution that is not sourced to current
year earnings and profits will be sourced to earnings and profits accumulated
in prior years that are available at the time of the distribution.
Accordingly, any distribution made by the Shurgard REIT during 1995 but prior
to the Closing will not be treated as partially reducing the Acquired Earnings.
This may cause the Shurgard REIT to further increase the amount of its
distributions during 1995 to eliminate the Acquired Earnings should the Closing
extend beyond the date of its first quarter distribution.
Based on its quarterly dividend history during 1994, the Shurgard REIT
will be required to increase its distributions during 1995 to distribute the
Acquired Earnings. The Shurgard REIT may accomplish these additional
distributions by either increasing its quarterly distribution, making special
distributions during the year or making a special year-end distribution. A
year-end distribution must be declared within the last three months of the year
and paid prior to January 31, 1996. This distribution would be treated for all
purposes as a 1995 dividend to the Shurgard REIT shareholders even though
received by the shareholders after year-end. As a result of these increased
distributions, the Shurgard REIT shareholders will recognize additional
dividend income to the extent that such distributions received represents
accumulated earnings and profits of the Shurgard REIT. Any amounts received by
shareholders in excess of such earnings and profits will be treated as either a
return of capital or capital gain. See "--Tax Consequences to Management
Company Shareholders Receiving Shurgard Class A Common Stock--Federal Income
Taxation of Shurgard REIT Shareholders."
The calculation of the amount of Acquired Earnings is subject to
challenge by the IRS. First, there can be no assurance that the IRS will not
examine the Management Company's prior tax returns and propose adjustments to
increase its taxable income. Because the earnings and profits study used to
calculate the amount of Acquired Earnings is based on these returns, such
adjustments may increase the amount of the Acquired Earnings, particularly
since the IRS may consider all taxable years as open for review for purposes of
determining earnings and profits. Second, there is also no assurance that the
IRS will respect the valuations used for purposes of allocating the
Consolidated Earnings between the Management Company and InterMation on the
InterMation Spin-off. If the IRS determines that the Management Company has a
proportionately greater value than InterMation at the time of the InterMation
Spin- off, the amount of Acquired Earnings would proportionately increase.
In the event the IRS subsequently determines that it failed to
distribute all the Acquired Earnings, the Shurgard REIT may make an additional
distribution within 90 days of such determination to distribute these earnings
and profits plus pay the IRS an interest charge based on 50% of such amount not
previously distributed. If such additional distribution is made, the Shurgard
REIT may retain its REIT qualification for years subsequent to the Merger.
Nonetheless, if such determination is made, the Shurgard REIT would not be
treated as a REIT for the year of the Merger.
ACQUISITION OF AFFILIATED SHURGARD PARTNERSHIP INTERESTS. In the
Merger, the Shurgard REIT will acquire interests in various partnerships that
act as general partners in partnerships that own and operate self-storage
facilities. The Shurgard REIT, for purposes of satisfying its REIT asset and
income tests, will be treated as if it owns a proportionate share of each of
the assets of the these partnerships attributable to such interests. For these
purposes, the Shurgard REIT's interest in each of the partnerships will be
determined in accordance with its capital interest in such partnership. The
character of the various assets in the hands of the partnership and the items
of gross income of the partnership will retain their same character in the
hands of the Shurgard REIT for these purposes. Accordingly, to the extent the
partnership receives real estate rentals and holds real property, a
proportionate share of such qualified income and assets, based on the Shurgard
REIT's capital interest in the partnerships, will be treated as qualified
rental income and real estate assets of the Shurgard REIT for purposes of
determining its REIT characterization. It is expected that substantially all
of the properties
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of the partnerships will constitute real estate assets and generate qualified
rental income for these REIT qualification purposes.
The Shurgard REIT will acquire interests in each of these partnerships
that entitle the Shurgard REIT to a percentage of profits in excess of the
percentage of total capital contributed to the partnership. Regulatory
authority does not specifically address this situation and it is uncertain,
based on existing authority, the treatment of these profit interests when
applying these rules. For example based on the existing rules, if the amount
received by a REIT based on a profit interest in a partnership is in excess of
it capital interest in the underlying gross income, the amount of such excess
should be entirely disregarded for these REIT qualification purposes.
Furthermore, these rules do not specifically address the manner in which a REIT
is to determine its capital interest. There is no reference to the capital
account or special allocation rules of Section 704(b) of the Code and the
Treasury Regulations promulgated thereunder and these rules do not address
acquisitions of partnership interests for valuable consideration. Based on the
fact that the Shurgard REIT is acquiring the Partnership Interests for valuable
consideration and at a time when the partnership assets may have some
appreciated capital value, the Shurgard REIT may be treated as having a capital
percentage in the Partnerships at the time of the Merger. This may increase
the amount of qualifying income recognized by the Shurgard REIT. In the event
the IRS determines that the percentage of capital contributed is the proper
indicator of a capital interest, however, a portion of the income recognized by
the Shurgard REIT attributable to its interest in these Partnerships may be
disregarded when applying these gross income requirements.
TAX CONSEQUENCES TO MANAGEMENT COMPANY SHAREHOLDERS RECEIVING SHURGARD CLASS A
COMMON STOCK
The Management Company shareholders will be receiving shares of
Shurgard Class A Common Stock as consideration for the Merger. The Shurgard
REIT is a publicly traded corporation that has elected to qualify as a REIT, as
defined in Section 856 of the Code. As a REIT, the Shurgard REIT avoids paying
federal income tax on income that it currently distributes to its shareholders.
If the Shurgard REIT at any time fails to qualify as a REIT, the Shurgard REIT
will be taxed on its distributed income, thereby reducing the amount of cash
available for distribution to its shareholders. Accordingly, the continued
qualification of the Shurgard REIT as a REIT is a significant consideration for
Management Company shareholders deciding to vote in favor of approval of the
Merger.
OVERVIEW OF REIT QUALIFICATION RULES.
The following summarizes the basic requirements for REIT status:
(a) The Shurgard REIT stock must be transferable and held
by more than 100 shareholders, and no more than 50% of the value of the
Shurgard REIT's stock may be held by five or fewer individuals.
(b) Generally, 75% (by value) of the Shurgard REIT's
investments must be in real estate, mortgages secured by real estate, cash or
government securities.
(c) The Shurgard REIT's gross income must meet three
income tests:
(i) At least 75% of the gross income must be derived from
specific real estate sources;
(ii) At least 95% of the gross income must be from the
real estate sources includable in the 75% test, or
from dividends, interest or gains from the sale or
disposition of stock and securities; and
(iii) 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"
properties or from the sale of stock or securities
having a short-term holding period.
(d) The Shurgard REIT must distribute to its shareholders
in each taxable year an amount at least equal to 95% of the Shurgard REIT's
"REIT taxable income" (which is generally equivalent to taxable ordinary
income).
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The discussion set forth below explains these REIT qualification
requirements in greater detail. It also addresses how these highly technical
rules may be expected to impact the Shurgard REIT in its operations, noting
areas of uncertainty that perhaps could lead to adverse consequences to the
Shurgard REIT and its shareholders.
SHARE OWNERSHIP. The shares of the Shurgard REIT are fully
transferable, with the exception of certain shares that are subject to
contractual transfer restrictions. Furthermore, the Shurgard REIT has more
than 100 shareholders and its Certificate of Incorporation provides, to
decrease the possibility that the Shurgard REIT will ever be closely held, that
no individual, corporation or partnership is permitted to acquire more than
9.8% of the number of outstanding shares of Shurgard Class A Common Stock.
This limitation may be adjusted, however, by the Shurgard REIT Board in certain
circumstances. Shares acquired in excess of such limit may be redeemed by the
Shurgard REIT. In addition, the Certificate of Incorporation provides that
shares acquired in excess of such limit will automatically convert into
nondividend-paying and nonvoting shares of excess stock. See "DESCRIPTION OF
SHURGARD REIT CAPITAL STOCK--Excess Stock." Contractual or securities law
restrictions on transferability should be disregarded for purposes of
determining the transferability of REIT shares.
NATURE OF ASSETS. On the last day of each calendar quarter, at least
75% of the value of the Shurgard REIT's total assets must consist of (i) real
estate assets (including interests in real property interest and mortgages on
loans secured by real property), (ii) cash and cash items (including
receivables), and (iii) government securities (collectively, the "real estate
assets"). In addition, no more than 25% of the value of the Shurgard REIT's
assets may consist of securities (other than government securities). Finally,
except for certain "qualified REIT subsidiaries," as described below, the
securities of any one nongovernmental issuer may not represent more than 5% of
the value of the Shurgard REIT's total assets or 10% of the outstanding voting
securities of any one issuer. There are no investment restrictions on the
remainder of the Shurgard REIT's assets.
While, as noted above, a REIT cannot own more than 10% of the
outstanding voting securities of any single nongovernmental issuer, an
exception to this rule permits REITs to own "qualified REIT subsidiaries." A
"qualified REIT subsidiary" is any corporation in which 100% of its stock is
owned by the REIT at all times during which the corporation was in existence.
The Shurgard REIT currently has three wholly owned corporate subsidiaries that
were formed and owned at all times during their existence by the Shurgard REIT.
These corporations should be treated as "qualified REIT subsidiaries" and
should not adversely affect the Shurgard REIT's qualification as a REIT.
INCOME TESTS. To maintain its qualification as a REIT, the Shurgard
REIT must meet three gross income requirements that must be satisfied annually.
First, at least 75% of the REIT's gross income (excluding gross income from
prohibited transactions) for each taxable year must be derived directly or
indirectly from investments relating to real property or mortgages on real
property (including "rents from real property" and, in certain circumstances,
interest) or from certain types of temporary investments. Second, at least 95%
of the REITs gross income (excluding gross income from prohibited transactions)
for each taxable year must be derived from such real property investments, and
from dividends, interest and gain from the sale or disposition of stock or
securities, or from any combination of the foregoing. Third, short-term gain
from the sale or other disposition of stock or securities, gain from prohibited
transactions and gain from the sale or other disposition of real property held
for less than four years (apart from involuntary conversions and sales of
foreclosure property) must represent less than 30% of the REIT's gross income
(including gross income from prohibited transactions) for each taxable year.
Rents received by the Shurgard REIT on the lease of self-storage
facilities will qualify as "rents from real property" in satisfying the gross
income requirements for a REIT described above only if several conditions are
met. First, the amount of rent must not be based in whole or in part on the
income or profits of any person. However, an amount received or accrued
generally will not be excluded from the term "rents from real property" solely
by reason of being based on a fixed percentage or percentages of receipts of
sales. Second, the Code provides that rents received from a tenant will not
qualify as "rents from real property" in satisfying the gross income test if
the Shurgard REIT, or an owner of 10% or more of the Shurgard REIT, directly or
constructively owns 10% or more of such tenant (a "Related-Party Tenant").
Third, if rent attributable to personal property leased in connection with the
lease of real property is greater than 15% of the total rent received under the
lease, then the portion of rent attributable to such personal property will not
qualify as "rents from real property." The Shurgard REIT does not anticipate
charging rent for any portion of any property that is based in whole or in part
on the income or profits of any person and the Shurgard REIT does not
anticipate
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receiving rents in excess of a de minimis amount from Related-Party Tenants.
Furthermore, the Shurgard REIT does not lease personal property in connection
with its rental of self-storage facilities.
Finally, for rents to qualify as "rents from real property," the
Shurgard REIT must not operate or manage the property or furnish or render
services to tenants other than through an "independent contractor" from whom
the Shurgard REIT derives no revenue. As described above, the "independent
contractor" requirement does not apply to the extent that services provided by
the Shurgard REIT are usually and customarily rendered in connection with the
rental of space for occupancy only and are not otherwise considered "rendered
to the occupant." The Management Company has, on behalf of the Shurgard REIT,
obtained a private letter ruling from the IRS ruling that the management
services provided by the Shurgard REIT for its own properties after the Merger
will not cause the rents received by the Shurgard REIT to be treated as other
than "rents from real property." See "--Consequences of Merger on the Shurgard
REIT's Qualification as a REIT--The Shurgard REIT's Self-Administration of
Management Services." The Shurgard REIT may, however, receive fees and
consideration for performance of management and administrative services with
respect to properties that are not owned entirely by the Shurgard REIT. Such
income will not qualify under either the 75% or 95% gross income test and, if
it exceeds 5% of the Shurgard REIT's total gross income, may adversely affect
the Shurgard REIT's continued qualification as a REIT. See "--Consequences of
Merger on the Shurgard REIT's Qualification as a REIT--Nonqualifying Income."
If the Shurgard REIT fails to satisfy one or both of the 75% and 95%
gross income tests for any taxable year, it may nevertheless qualify as a REIT
for such year if it is entitled to relief under certain provisions of the Code.
These relief provisions generally will be available if the Shurgard REIT's
failure to meet such test was due to reasonable cause and not willful neglect
and the Shurgard REIT attaches a schedule of its income sources to its tax
return that does not fraudulently or intentionally exclude any income sources.
As discussed above, even if these relief provisions apply, a tax would be
imposed with respect to such excess income. See "--Consequences of Merger on
the Shurgard REIT's Qualification as a REIT--Nonqualifying Income."
ANNUAL DISTRIBUTION REQUIREMENTS. Each year, the Shurgard REIT must
have a deduction for dividends paid (determined under Section 561 of the Code)
to its shareholders in an amount equal to (i) 95% of the sum of (a) its "REIT
taxable income" as defined below, (b) any net income from foreclosure property
less the tax on such income, minus (ii) any excess "non-cash income," as
defined below. "REIT taxable income" is the taxable income of a REIT computed
without a deduction for dividends paid and excluding any net capital gain.
REIT taxable income is further adjusted by certain items, including, without
limitation, an exclusion for net income from foreclosure property, a deduction
for the excise tax on the greater of the amount by which the REIT fails the 75%
or the 95% income test, and an exclusion for an amount equal to any net income
derived from prohibited transactions. "Excess noncash income" means the excess
of certain amounts that the REIT is required to recognize as income in advance
of receiving cash, such as original issue discount on purchase money debt, over
5% of the REIT taxable income before deduction for dividends paid and excluding
any net capital gain.
Such distributions must be made in the taxable year to which they
relate, or in the following taxable year if declared before the REIT timely
files its tax return for such year and is paid on or before the first regular
dividend payment after such declaration. To the extent that the Shurgard REIT
does not distribute all of its net capital gain or distributes at least 95%,
but less than 100%, of its REIT taxable income, as adjusted, it will be subject
to tax on the undistributed amount based on regular corporate tax rates.
Furthermore, if the Shurgard REIT should fail to distribute during such
calendar year at least the sum of (i) 85% of its REIT ordinary income for such
year, (ii) 95% of its REIT capital gain income for such year, and (iii) any
undistributed taxable income from prior periods, the Shurgard REIT would be
subject to a 4% excise tax on the excess of such required distribution over the
amounts actually distributed.
Under certain circumstances, the Shurgard REIT may be able to rectify
a failure to meet the distribution requirement for a year by paying "deficiency
dividends" to shareholders in a later year that may be included in the Shurgard
REIT's deduction for dividends paid for the earlier year. Thus, the Shurgard
REIT may be able to avoid being taxed on amounts distributed as deficiency
dividends; however, the Shurgard REIT will be required to pay to the IRS
interest based on the amount of any deduction taken for deficiency dividends.
FAILURE OF THE SHURGARD REIT TO QUALIFY AS A REIT. If the Shurgard
REIT fails to qualify for taxation as a REIT in any taxable year, and the
relief provisions do not apply, the Shurgard REIT would be subject to tax
(including
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any applicable alternative minimum tax) on its taxable income at regular
corporate rates. Distributions to shareholders in any year in which the
Shurgard REIT fails to qualify would not be deductible by the Shurgard REIT nor
would they be required to be made. In such an event, to the extent of current
and accumulated earnings and profits, all distributions to shareholders would
be taxable as ordinary income and, subject to certain limitations in the Code,
corporate distributees may be eligible for the dividends received deduction.
Unless entitled to relief under specific statutory relief provisions, the
Shurgard REIT would also be disqualified from taxation as a REIT for the four
taxable years following the year during which such qualification was lost. It
is not possible to state whether in all circumstances that the Shurgard REIT
would be entitled to such statutory relief.
FEDERAL INCOME TAXATION OF SHURGARD REIT SHAREHOLDERS. As long as the
Shurgard REIT qualifies for federal income taxation as a REIT, distributions
made to the Shurgard REIT shareholders out of current or accumulated earnings
and profits (and not designated as capital gain dividends) will be recognized
by the shareholders as ordinary income for federal income tax purposes. None
of these distributions will be eligible for the dividends received deduction
for corporate shareholders. Distributions that are designated as capital gain
dividends will be taxed as long-term capital gains (to the extent they do not
exceed the Shurgard REIT's actual net capital gain for the taxable year)
without regard to the period for which the shareholder has held his or her
stock in the Shurgard REIT. Shurgard REIT shareholders, however, may be
required to treat up to 20% of certain capital gain dividends as ordinary
income.
Distributions in excess of current or accumulated earnings and profits
will not be taxable to a shareholder to the extent that they do not exceed the
adjusted basis of the shareholder's shares. Shareholders will be required to
reduce the tax basis of their shares by the amount of such distributions until
such basis has been reduced to zero, after which such distributions will be
taxable as capital gain (ordinary income in the case of a shareholder who holds
his or her shares a dealer). The tax basis as so reduced will be used in
computing the capital gain or loss, if any, realized on the sale of the shares.
Any loss upon a sale or exchange of shares by a shareholder who held such
shares for six months or less (after applying certain holding period rules)
will generally be treated as long-term capital loss to the extent such
shareholder previously received capital gain distributions with respect to such
shares.
Shareholders may not include in their individual federal income tax
returns any net operating losses or capital losses of the Shurgard REIT. In
addition, any distribution declared by the Shurgard REIT in October, November
or December of any year payable to a shareholder of record on a specified date
in any such month shall be treated as both paid by the Shurgard REIT and
received by the shareholder on December 31 of such year, provided that the
dividend is actually paid by the Shurgard REIT no later than January 31 of the
following year. The Shurgard REIT may contemplate making such a year-end
distribution to rid itself of accumulated earnings and profits acquired from
the Management Company that are attributable to non-REIT years. See
"--Consequences of Merger on the Shurgard REIT's Qualification as a
REIT--Distributions of Accumulated Earnings and Profits Attributable to
Non-REIT Years."
BACKUP WITHHOLDING. Distributions from the Shurgard REIT will
ordinarily not be subject to withholding of federal income taxes. However, the
Shurgard REIT will be required to withhold tax at the rate of 31% from
distributions paid to those shareholders who (i) have failed to furnish their
taxpayer identification number ("TIN") to the Shurgard REIT; (ii) have,
according to the IRS, furnished an incorrect TIN to the Shurgard REIT; (iii)
have, according to the IRS, underreported interest, dividends or patronage
dividend income in the past; or (iv) have failed to satisfy the payee
certification requirements of Section 3406 of the Code. Each shareholder will
be required to provide and certify his or her correct TIN and to certify that
he or she is an exempt recipient. Furthermore, the Shurgard REIT may be
required to withhold a portion of capital gain distributions to any shareholder
who fails to certify his or her nonforeign status to the Shurgard REIT.
STATE AND LOCAL TAXES
The Shurgard REIT or its shareholders, or both, may be subject to
state or local taxes in other jurisdictions such as those in which the Shurgard
REIT may be deemed to be engaged in activities or in which shareholders reside
or own property or other interests. Such tax treatment of the Shurgard REIT
and its shareholders in states having taxing jurisdiction over them may differ
from the federal income tax treatment described in the summary. Each
shareholder should consult his or her tax advisor as to the status of the
Shurgard Class A Common Stock under the respective state laws applicable to
them.
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INTERESTS OF CERTAIN PERSONS IN THE MERGER
APPOINTMENT OF OFFICERS AND A DIRECTOR OF THE SHURGARD REIT
As a result of the Merger, Charles K. Barbo will be appointed as the
Shurgard REIT's Chairman of the Board, President and Chief Executive Officer.
Mr. Barbo will serve in such capacities until his successor has been duly
elected or appointed. Mr. Barbo is a co-founder of the Management Company, and
currently serves as its Chairman of the Board and President. As of December
19, 1994, Mr. Barbo beneficially owned 1,724,000 shares of Management Company
Common Stock constituting a 41% beneficial ownership interest in the Management
Company. Upon completion of the Merger, Mr. Barbo will beneficially own
647,925 shares of Shurgard REIT Common Stock constituting a 3.5% ownership
interest in the Shurgard REIT. As a condition to the Closing, Mr. Barbo will
enter into a non-competition agreement with the Shurgard REIT, but he will
otherwise have no written employment contract or formal arrangements concerning
his title, powers, compensation or tenure.
In addition, the Merger Agreement provides that Harrell L. Beck and
Kristin H. Stred will each be appointed as a Senior Vice President of the
Shurgard REIT. Mr. Beck will also retain his current positions of Treasurer
and Chief Financial Officer of the Shurgard REIT, and Ms. Stred will retain her
current positions of Secretary and General Counsel of the Shurgard REIT.
Michael Rowe, Executive Vice President and Director of Storage Operations for
the Shurgard REIT and David K. Grant, Executive Vice President and Director of
Real Estate Investment for the Shurgard REIT, currently hold similar positions
with the Management Company. They will remain in their positions on behalf of
the Shurgard REIT after the Merger.
ACCELERATION OF THE MANAGEMENT COMPANY STOCK OPTIONS
Holders of outstanding options to purchase shares of Management
Company Common Stock will have the right to exercise such options immediately
prior to the closing of the Merger, whether or not the vesting requirements for
such options have been satisfied. The executive officers of the Shurgard REIT
hold options to purchase an aggregate of 74,500 shares of Management Company
Common Stock; the vesting of 48,833 of such options will be accelerated. All
outstanding options to purchase shares of Management Company Common Stock that
are not exercised prior to the Closing will terminate.
INDEMNIFICATION OF DIRECTORS AND OFFICERS PURSUANT TO THE MERGER AGREEMENT
Under the Merger Agreement, the Shurgard REIT has agreed to keep in
effect provisions in its Certificate of Incorporation and By-Laws providing for
limitation of director liability and indemnification of directors, officers,
employees and agents at least to the extent such persons are entitled thereto
under the Articles of Incorporation and By-Laws of the Management Company as of
December 19, 1994, subject to Delaware law. To the extent the Shurgard REIT
Certificate of Incorporation and By-Laws do not provide for indemnification of
directors or officers of predecessor corporations the Shurgard REIT will,
subject to Delaware law, contractually assume the indemnification obligations
under the Management Company's By-Laws. In addition, such provisions will not
be amended, repealed or otherwise modified in any manner that would adversely
affect the rights of individuals who at any time prior to the Effective Time
were directors, officers, employees or agents of the Management Company in
respect of actions or omissions occurring at or prior to the Effective Time
(including, without limitation, the transactions contemplated by the Merger
Agreement), unless such modification is required by law.
The Merger Agreement provides that if an officer, director or
affiliate of the Management Company (collectively, the "Litigation Parties") is
involuntarily made a party to a lawsuit in connection with the Merger, the
Shurgard REIT will defend, indemnify and pay the costs associated with the
defense of such Litigation Parties. In addition, if it is deemed appropriate,
such Litigation Parties may retain separate legal counsel to defend actions
brought in connection with the Merger and the Shurgard REIT will likewise pay
the associated costs. Further, the Management Company and the Shurgard REIT
have each agreed in the Merger Agreement not to enter into settlement
proceedings without the consent of the other. The Shurgard REIT will have no
duty to indemnify any of the Litigation Parties for any liability imposed under
a final judgment to the extent such judgement has been finally adjudicated and
determined to have been the result of an untrue statement or an omission of a
material fact made by the Management Company in certain sections of the
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Registration Statement or this Proxy Statement/Prospectus, or as a result of
fraud, intentional misconduct or knowing violation of the law by such
Litigation Parties.
CONTINGENT SHARES
Contingent Shares will be issued based on future transactions relating
to interests in or assets of the Partnerships or the appraised value of such
assets, including transactions with the Shurgard REIT. See "THE MERGER --
Contingent Shares." The general partner of the Partnerships will manage and
control the disposition of such Partnerships and their assets. Mr. Barbo is
one of the general partners of five of the Partnerships. He also has the right
to receive Contingent Shares, if any, arising from such transactions.
Therefore, his interests may conflict with those of the Shurgard REIT in
connection with transactions resulting in the issuance of Contingent Shares.
COMPARATIVE PER SHARE MARKET INFORMATION
THE SHURGARD REIT
Market prices for the shares of Shurgard Class A Common Stock are
reported on the Nasdaq National Market. The table below sets forth for the
fiscal periods indicated the high and low sale prices per share of Shurgard
Class A Common Stock on the Nasdaq National Market as reported in published
financial sources, and dividends declared. For current price information, the
Shurgard REIT shareholders and the Management Company shareholders are urged to
consult publicly available sources.
<TABLE>
<CAPTION>
PRICE PER SHARE OF
SHURGARD CLASS A COMMON STOCK
----------------------------- DIVIDENDS
HIGH LOW DECLARED(1)
---- --- -----------
<S> <C> <C> <C>
1994
First Quarter (beginning March 28, 1994) . . . . . . . $23.75 $22.00 --
Second Quarter . . . . . . . . . . . . . . . . . . . . 24.25 21.00 .14
Third Quarter . . . . . . . . . . . . . . . . . . . . 23.25 20.50 .44
Fourth Quarter (through December 19, 1994) . . . . . . 23.00 17.75 .44
- -------------
</TABLE>
(1) Dividends are declared quarterly by the Shurgard REIT Board based on
financial results for the prior quarter.
On December 19, 1994, the last full trading day prior to announcement
of the execution of the Merger Agreement, the reported Nasdaq National Market
closing price per share of Shurgard Class A Common Stock was $18.75. On
February __, 1995, the most recent available date prior to printing this Proxy
Statement/Prospectus, the reported Nasdaq National Market closing price per
share of Shurgard Class A Common Stock was $_______.
Holders of shares of Shurgard REIT Common Stock are entitled to
receive distributions when, as and if declared by the Shurgard REIT Board out
of any assets legally available for payment. The Shurgard REIT is required to
distribute annually to its shareholders at least 95% of its "REIT taxable
income," which, as defined by the relevant tax statutes and regulations, is
generally equivalent to net taxable ordinary income. See "SHURGARD STORAGE
CENTERS, INC.--Investment Policies and Restrictions--Dividend Policy."
THE MANAGEMENT COMPANY
There is no public market for shares of Management Company Common
Stock. There were 25 holders of record of shares of Management Company Common
Stock as of December 1, 1994. The Management Company has not paid any cash
dividends since its inception.
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DESCRIPTION OF SHURGARD REIT CAPITAL STOCK
GENERAL
The authorized capital stock of the Shurgard REIT is divided into four
classes: 120,000,000 shares of Class A Common Stock, par value $.001 per share,
500,000 shares of Class B Common Stock, par value $.001 per share, 40,000,000
shares of Preferred Stock, par value $.001 per share, and 160,000,000 shares of
Excess Stock, par value $.001 per share.
COMMON STOCK
The two classes of authorized Common Stock of the Shurgard REIT have
substantially similar rights. Except as provided below, all shares of Class A
Common Stock and Class B Common Stock are entitled to share equally in all
dividends and in the assets available for distribution upon liquidation,
subject to repayment of the Indebtedness of the Shurgard REIT and the prior
rights of the Preferred Stock. Holders of Class A Common Stock and Class B
Common Stock are entitled to receive dividends as declared by the Shurgard REIT
Board out of any assets of the Shurgard REIT legally available for payment.
There are no preemptive rights or other rights to subscribe for any shares
associated with the Class A Common Stock and the Class B Common Stock. The
transfer agent and registrar for the Class A Common Stock and the Class B
Common Stock is Gemisys Corporation.
Holders of Class A Common Stock and Class B Common Stock are entitled
to one vote per share. Each holder of Class B Common Stock was entitled to a
loan from the Shurgard REIT in an amount necessary to satisfy the holder's
general partner capital obligation to certain Partnerships that were acquired
by the Shurgard REIT in the Consolidation. Each loan is secured by a pledge of
the Class B Common Stock held by the borrowing shareholder. Upon repayment of
a portion of the loan, that portion of the Class B Common Stock equal to the
percentage of the loan principal repaid is released from the pledge and is
convertible, on a share-for- share basis, into shares of Class A Common Stock.
Class B Common Stock is not publicly traded but is transferable upon its
release from the pledge.
PREFERRED STOCK
The Shurgard REIT Board is authorized, without further action of the
shareholders of the Shurgard REIT, to issue up to 40,000,000 shares of
Preferred Stock in one or more classes or series and to fix the number of
shares constituting any such series, the voting powers, designations,
preferences and relative, participating, optional or other special rights,
qualifications, limitations or restrictions thereof, including dividend rights,
dividend rate, terms of redemption (including sinking fund provisions),
redemption price or prices, conversion rights and liquidation preferences of
the shares constituting any class or series. For example, the Shurgard REIT
Board is authorized to issue a series of Preferred Stock that would have the
right to vote, separately or with any other series of Preferred Stock, on any
proposed amendment to the Certificate of Incorporation or any other proposed
corporate action, including business combinations or other transactions.
Except as described below with respect to the Rights Agreement,, the Shurgard
REIT Board does not presently contemplate the issuance of any Preferred Stock
and is not aware of any pending or proposed transactions that would be affected
by such issuance.
One of the effects of undesignated Preferred Stock may be to enable
the Shurgard REIT Board to render more difficult or to discourage an attempt to
obtain control of the Shurgard REIT by means of a tender offer, proxy contest,
merger or otherwise, and thereby to protect the continuity of the Shurgard
REIT's management. The issuance of the shares of Preferred Stock pursuant to
the Shurgard REIT Board's authority described above may adversely affect the
rights of the holders of Shurgard REIT's Common Stock. For example, Preferred
Stock issued by the Shurgard REIT after the Consolidation may rank prior to the
Shurgard REIT Common Stock as to dividend rights, liquidation preference or
both, may have full or limited voting rights and may be convertible into shares
of the Shurgard REIT's Common Stock.
EXCESS STOCK
The Certificate of Incorporation provides that the Shurgard REIT may
prevent the transfer and/or call for redemption of shares of the Shurgard REIT
(whether Common or Preferred Stock) if more than 50% of the outstanding
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shares would be owned, directly or indirectly, by five or fewer individuals, if
one person would own, directly or indirectly, more than 9.8% of the total
outstanding shares (or such higher percentage as may be determined by the
Shurgard REIT Board (the "Ownership Limit")). In addition, the Shurgard REIT
may prevent such transfers and/or call for redemption of such shares if the
Shurgard REIT Board determines in good faith that the shares have or may become
concentrated in any extent that may prevent the Shurgard REIT from qualifying
as a REIT. See "FEDERAL INCOME TAX CONSEQUENCES--Tax Consequences to
Management Company Shareholders Receiving Shurgard Class A Common Stock--Share
Ownership" Any class or series of Preferred Stock may be subject to these
restrictions if so stated in the resolutions providing for the issuance of such
Preferred Stock. Any corporate investor wishing to acquire or own more than
9.8% of the total outstanding shares may petition the Shurgard REIT Board in
writing for approval. The Shurgard REIT Board will grant such request unless
it determines in good faith that the acquisition or ownership of such shares
would jeopardize the Shurgard REIT's qualification as a REIT under existing
federal tax laws and regulations. Any corporate investor intending to acquire
shares in excess of the Ownership Limit must given written notice to the
Shurgard REIT of the proposed acquisition no later than the date on which the
transaction occurs and must furnish such opinions of counsel, affidavits,
undertakings, agreements and information as may be required by the Shurgard
REIT Board to evaluate or to protect against any adverse effect of the
transfer. Notwithstanding the foregoing, the Shurgard REIT Board is not
required to grant a request to adjust the Ownership Limit if the Shurgard REIT
Board believes, based on advice from legal counsel, that the granting of such
request would cause the Shurgard REIT Board to breach its fiduciary duties to
the shareholders of the Shurgard REIT.
If, despite the restrictions noted above, any person acquires shares
in excess of the Ownership Limit (applying certain constructive ownership
provisions), the shares most recently acquired by such person in excess of the
limit will be automatically exchanged for an equal number of shares of Excess
Stock. Shares of Excess Stock have the following characteristics: (i) owners
of Excess Stock are not entitled to exercise voting rights with respect to the
Excess Stock; (ii) Excess Stock shall not be deemed outstanding for purposes of
determining a quorum at any annual or special meeting of shareholders; and
(iii) Excess Stock will not be entitled to any dividends or other
distributions. Any person who becomes an owner of Excess Stock is obligated to
immediately give the Shurgard REIT written notice of such fact and certain
information required by the Certificate of Incorporation. Excess Stock is also
deemed to have been offered for sale to the Shurgard REIT or its designee for a
period of 120 days from the later of (a) the date of the transfer that created
the Excess Stock if the Shurgard REIT has actual notice that such transfer
created the Excess Stock, and (b) the date on which the Shurgard REIT Board
determines in good faith that the transfer creating the Excess Stock has
occurred. The Shurgard REIT has the right during such time period to accept
the deemed offer or, in the Shurgard REIT Board's discretion, the Shurgard REIT
may acquire and sell, or cause the owner to sell, the Excess Stock. The price
for the Excess Stock will be the lesser of (i) the closing price of the shares
exchanged into Excess Stock on the national stock exchange on which the shares
are listed as of the date the Shurgard REIT or its designee acquires the Excess
Stock or, if no such price is available, as determined in good faith by the
Shurgard REIT Board, and (ii) the price per share paid by the owner of the
shares that were exchanged into Excess Stock or, if no purchase price was paid,
the fair market value of such shares on the date of acquisition as determined
in good faith by the Shurgard REIT Board. Upon such transfer or sale, the
Excess Stock will automatically convert to Shurgard Class A Common Stock with
all voting and dividend rights effective as of the date of such conversion;
provided, however, that the owner will not be entitled to receive dividends
payable with respect to Shurgard Class A Common Stock for the period during
which the shares were Excess Stock. All certificates of Shurgard Class A
Common Stock and Shurgard Class B Common Stock, any other series of common
stock, and any class or series of Preferred Stock that is made subject to the
restrictions outlined above will bear a legend referring to the restrictions.
SHAREHOLDER RIGHTS PLAN
Pursuant to the Rights Agreement dated as of March 17, 1994, between
the Shurgard REIT and Gemisys Corporation, as Rights Agent (the "Rights
Agreement"), holders of shares of Shurgard Class A Common Stock have certain
rights to purchase shares of Shurgard REIT Series A Preferred Stock (the
"Preferred Shares") exercisable only in certain circumstances (the "Rights").
The Rights, which are represented by certificates for the Shurgard Class A
Common Stock, trade together with the Shurgard Class A Common Stock until a
Distribution Date (as hereinafter defined). Each Right, when it becomes
exercisable as described below, will entitle the registered holder to purchase
one one-hundredth of a Preferred Share at a price of $65 per one one-hundredth
of a Preferred Share (subject to adjustment, the "Purchase Price").
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Until the earlier to occur of (i) 10 days following a public
announcement that a person or group of affiliated or associated persons (an
"Acquiring Person") has acquired beneficial ownership of 10% or more of the
outstanding Shurgard Class A Common Stock and (ii) 10 business days (or such
later date as may be determined by action of the Shurgard REIT Board prior to
such time as any person or group of affiliated persons becomes an Acquiring
Person) following the commencement of, or announcement of an intention to make,
a tender offer or exchange offer, the consummation of which would result in the
beneficial ownership by a person or group of 10% or more of such outstanding
Shurgard Class A Common Stock (the earlier of such dates being called the
"Distribution Date"), the Rights will be evidenced, with respect to any of the
Shurgard Class A Common Stock certificates outstanding as of March 25, 1994
(the "Record Date"), by such Shurgard Class A Common Stock certificate, with a
copy of a Summary of Rights to Purchase Preferred Shares (the "Summary of
Rights") attached thereto.
The Rights Agreement provides that, until the Distribution Date (or
earlier redemption or expiration of the Rights), the Rights will be transferred
with and only with the Shurgard Class A Common Stock. Until the Distribution
Date (or earlier redemption or expiration of the Rights), new Shurgard Class A
Common Stock certificates issued after the Record Date upon transfer or new
issuance of Shurgard Class A Common Stock will contain a notation incorporating
the Rights Agreement by reference. Until the Distribution Date (or earlier
redemption or expiration of the Rights), the surrender for transfer of any
certificates for Shurgard Class A Common Stock outstanding as of the Record
Date, even without such notation or a copy of the Summary of Rights being
attached thereto, will also constitute the transfer of the Rights associated
with the Shurgard Class A Common Stock represented by such certificate. As
soon as practicable following the Distribution Date, separate certificates
evidencing the Rights ("Right Certificates") will be mailed to holders of
record of the Shurgard Class A Common Stock as of the close of business on the
Distribution Date, and such separate Right Certificates alone will evidence the
Rights.
The Rights are not exercisable until the Distribution Date. The
Rights will expire on March 17, 2004 (the "Final Expiration Date"), unless the
Final Expiration Date is extended or unless the Rights are earlier redeemed or
exchanged by the Shurgard REIT, in each case as described below.
The Purchase Price payable and the number of Preferred Shares or other
securities or property issuable upon exercise of the Rights are subject to
adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the
Preferred Shares, (ii) upon the grant to holders of the Preferred Shares of
certain rights or warrants to subscribe for or purchase Preferred Shares at a
price, or securities convertible into Preferred Shares with a conversion price,
less than the then-current market price of the Preferred Shares, or (iii) upon
the distribution to holders of the Preferred Shares of evidences of
indebtedness or assets (excluding regular periodic cash dividends paid out of
earnings or retained earnings or dividends payable in Preferred Shares) or of
subscription rights or warrants (other than those referred to above).
The number of outstanding Rights and the number of one one-hundredths
of a Preferred Share issuable upon exercise of each Right is also subject to
adjustment in the event of a stock split of the Shurgard Class A Common Stock
or a dividend on the Shurgard Class A Common Stock payable in Shurgard Class A
Common Stock or subdivisions, consolidations or combinations of the Shurgard
Class A Common Stock occurring, in any such case, prior to the Distribution
Date.
Preferred Shares purchasable upon exercise of the Rights will not be
redeemable. Each holder of Preferred Shares will be entitled to a minimum
preferential quarterly dividend payment of the greater of $1 per share and a
per share dividend of 100 times the aggregate dividends declared per share of
Shurgard Class A Common Stock. In the event of liquidation, the holders of
Preferred Shares will be entitled to a minimum preferential liquidation payment
of $100 per share or, if greater, to an aggregate per share payment of 100
times the aggregate payment made per share of Shurgard Class A Common Stock.
Each Preferred Share will have 100 votes, voting together with the Shurgard
Class A Common Stock. Finally, in the event of any merger, consolidation or
other transaction in which Shurgard Class A Common Stock are exchanged, each
Preferred Share will be entitled to receive 100 times the amount received per
share of Shurgard Class A Common Stock. These rights are protected by
customary antidilution provisions.
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Because of the nature of the Preferred Shares' dividend, liquidation
and voting rights, the value of the one one-hundredth interest in a Preferred
Share purchasable upon exercise of each Right should approximate the value of
one share of Shurgard Class A Common Stock.
If any person or group of affiliated or associated persons becomes an
Acquiring Person, proper provision will be made so that each holder of a Right,
other than Rights beneficially owned by the Acquiring Person (which will
thereafter be void), will thereafter have the right to receive upon exercise
that number of shares of Shurgard Class A Common Stock having a market value of
two times the exercise price of the Right. If the Shurgard REIT is acquired in
a merger or other business combination transaction, or 50% or more of its
consolidated assets or earning power are sold, proper provision will be made so
that each holder of a Right will thereafter have the right to receive, upon the
exercise thereof at the then-current exercise price of the Right, that number
of shares of common stock of the acquiring company that at the time of such
transaction will have a market value of two times the exercise price of the
Right.
At any time after any person becomes an Acquiring Person and prior to
the acquisition by such person or group of 50% or more of the outstanding
Shurgard Class A Common Stock, the Shurgard REIT Board may exchange the Rights
(other than Rights owned by such person or group that have become void), in
whole or in part, at an exchange ratio of one share of Shurgard REIT Common
Stock, or one one-hundredth of a Preferred Share (or of a share of a class or
series of the Shurgard REIT's Preferred Stock having equivalent rights,
preferences and privileges), per Right (subject to adjustment).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional Preferred Shares will be issued (other than
fractions that are integral multiples of one one-hundredth of a Preferred
Share, which may, at the election of the Shurgard REIT, be evidenced by
depositary receipts) and, in lieu thereof, an adjustment in cash will be made
based on the market price of the Preferred Shares on the last trading day prior
to the date of exercise.
At any time prior to any person becoming an Acquiring Person, the
Shurgard REIT Board may redeem the Rights in whole, but not in part, at the
price of $.0001 per Right, with adjustments for stock splits, stock dividends
or other similar transactions (the "Redemption Price"). The redemption of the
Rights may be made effective at such time, on such basis and with such
conditions as the Shurgard REIT Board in its sole discretion may establish.
Immediately upon any redemption of the Rights, the right to exercise the Rights
will terminate and the only right of the holders of Rights will be to receive
the Redemption Price.
The terms of the Rights may be amended by the Shurgard REIT Board
without the consent of the holders of the Rights, including an amendment to
lower certain 10% thresholds described above to not less than the greater of
(i) the sum of .001% and the largest percentage of the outstanding Shurgard
Class A Common Stock then known to the Shurgard REIT to be beneficially owned
by any person or group of affiliated persons and (ii) 9.8%, except that, from
and after such time as any person or group of affiliated or associated persons
becomes an Acquiring Person, no such amendment may adversely affect the
interests of the holders of the Rights.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of the Shurgard REIT, including, without limitation,
the right to vote or to receive dividends.
The Rights have certain antitakeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Shurgard
REIT without conditioning the offer on substantially all the Rights being
acquired. The Rights will not interfere with any merger or other business
combination approved by the Shurgard REIT Board since the Shurgard REIT Board
may, at its option, at any time prior to any person becoming an Acquiring
Person, redeem all but not less than all the then- outstanding Rights at the
Redemption Price.
DESCRIPTION OF MANAGEMENT COMPANY CAPITAL STOCK
The following description is summarized from the provisions of the
Management Company's Articles of Incorporation.
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The Management Company's authorized capital consists of 10,000,000
shares of Management Company Common Stock. All shares of Management Company
Common Stock are entitled to participate equally in dividends. Each
shareholder has one vote for each share registered in such shareholder's name
as of the applicable record date for any matter presented to shareholders. All
shares of Management Company Common Stock rank equally on liquidation. Holders
of shares of Management Company Common Stock have no preemptive rights and are
not entitled to cumulate their votes in the election of directors.
COMPARISON OF RIGHTS OF SHAREHOLDERS OF THE
SHURGARD REIT AND OF THE MANAGEMENT COMPANY
If the Merger is consummated, holders of shares of Management Company
Common Stock will become holders of shares of Shurgard Class A Common Stock and
the rights of the former Management Company shareholders will be governed by
the laws of the state of Delaware and by the Shurgard REIT's Certificate of
Incorporation and By-Laws. The rights of the Shurgard REIT shareholders under
the Certificate of Incorporation and By-Laws differ in certain respects from
the rights of the Management Company shareholders under the Management
Company's Articles of Incorporation and By-Laws. Certain differences between
the rights of the Shurgard REIT shareholders and the Management Company
shareholders are summarized below. This summary is qualified in its entirety
by reference to the full text of such documents. For information as to how
such documents may be obtained, see "AVAILABLE INFORMATION."
GENERAL
Upon consummation of the Merger, the shareholders of the Management
Company will become shareholders of the Shurgard REIT. Accordingly, the rights
of the Management Company shareholders following the Merger will, subject to
the limitations set forth in the following paragraph, be governed by Delaware
law, as well as by the Shurgard REIT's Certificate of Incorporation and its
By-Laws.
While it is not practical to discuss all changes in the rights of the
Management Company shareholders as a result of the application of Delaware law
in lieu of Washington law, the following is a summary of material differences.
As indicated in the following discussion, the DGCL contains certain provisions
applicable only to "registered corporations," which in essence are publicly
held corporations such as the Shurgard REIT that have a class of voting shares
registered under the Exchange Act.
CHANGES PRINCIPALLY ATTRIBUTABLE TO DIFFERENCES BETWEEN THE DGCL AND THE WBCA
Amendment of Articles/Certificate of Incorporation. The WBCA
authorizes a corporation's board of directors to make various changes of an
administrative nature to its articles of incorporation, including changes of
corporate name, changes to the number of outstanding shares in order to
effectuate a stock split or stock dividend in the corporation's own shares, and
changes to or elimination of provisions with respect to its stock's par value.
Other amendments to a corporation's articles of incorporation must be
recommended to the shareholders by the board of directors, unless the board
determines that because of a conflict of interest or other special
circumstances, it should make no recommendation, and must be approved by
two-thirds (if the corporation is not a public company) of all votes entitled
to be cast by each voting group that has a right to vote on the amendment. The
articles of incorporation of a corporation other than a public company may
provide for a lower percentage of shareholder approval (but not less than a
majority of the votes entitled to be cast). The Management Company's Articles
of Incorporation do not specify a different proportion. Under the DGCL, all
amendments to a corporation's certificate of incorporation require the approval
of shareholders holding a majority of the voting power of the corporation
unless a different proportion is specified in the certificate of incorporation.
The Shurgard REIT's Certificate of Incorporation does not specify a different
proportion.
Provisions Affecting Acquisitions and Business Combinations. The WBCA
imposes restrictions on certain transactions between a corporation and certain
significant shareholders. First, under Section 23.17.020 of the WBCA, subject
to certain exceptions, a merger, share exchange, sale of assets other than in
the regular course of business, or dissolution involving an "Interested
Shareholder" (i.e., a shareholder owning beneficially 20% or more of the
corporation's voting securities) must be approved by the holders of two-thirds
of the outstanding voting securities, other than those of the Interested
Shareholder, of each voting group entitled to vote separately on the
transaction. This restriction does not apply if
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the consideration received as a result of the transaction by noninterested
shareholders is not less than the highest consideration paid by the Interested
Shareholder for shares of the corporation's stock during the preceding two
years, if the transaction is approved by a majority of directors who are not
affiliated with the Interested Shareholder or if the corporation has fewer than
300 shareholders. A Washington corporation may, in its articles of
incorporation, exempt itself from coverage of this provision; the Management
Company has not done so.
Second, chapter 23B.19 of the WBCA prohibits a "target corporation,"
with certain exceptions, from engaging in certain "significant business
transactions" with an "Acquiring Person" who acquires 10% or more of the voting
securities of a target corporation for a period of five years after such
acquisition, unless the transaction or acquisition of shares is approved by a
majority of the members of the target corporation's board of directors prior to
the date of the acquisition. The prohibited transactions include, among
others, merger or consolidation with, disposition of assets to, or issuance or
redemption of stock to or from, the Acquiring Person, termination of 5% or more
of the employees of the target corporation as a result of the Acquiring
Person's acquisition of 10% or more of the shares of the corporation, or
allowing the Acquiring Person to receive any disproportionate benefit as a
shareholder. Target corporations include domestic corporations with their
principal executive offices in Washington and either a majority of or over
1,000 of their employees are residents of the state of Washington. Foreign
corporations which meet additional requirements are also subject to the
statute. The Shurgard REIT does not currently employ, and will not employ
immediately following the Merger, a number of Washington residents that would
require compliance with this statute. A corporation may not "opt out" of this
statute. However, corporations such as the Management Company that do not have
a class of voting stock registered pursuant to Section 12 of the Exchange Act
are not subject to chapter 23B.19.
Delaware has enacted a business combination statute that is contained
in Section 203 of the DGCL providing that any person who acquires 15% or more
of a corporation's voting stock (thereby becoming an "interested shareholder")
may not engage in certain "business combinations" with the target corporation
for a period of three years following the date the person became an interested
shareholder, unless (i) the corporation's board of directors has approved,
prior to that acquisition date, either the business combination or the
transaction that resulted in the person becoming an interested shareholder,
(ii) upon consummation of the transaction that resulted in the person becoming
an interested shareholder, that person owns at least 85% of the corporation's
voting stock outstanding at the time the transaction is commenced (excluding
shares owned by persons who are both directors and officers and shares owned by
employee stock plans in which participants do not have the right to determine
confidentially whether shares will be tendered in a tender or exchange offer),
or (iii) the business combination is approved by the board of directors and
authorized by the affirmative vote (at an annual or special meeting and not by
written consent) of at least 66-2/3% of the outstanding voting stock not owned
by the interested shareholder.
For purposes of determining whether a person is the "owner" of 15% or
more of a corporation's voting stock for purposes of Section 203, ownership is
defined broadly to include the right, directly or indirectly, to acquire the
stock or to control the voting or disposition of the stock. A "business
combination" is also defined broadly to include (i) mergers and sales or other
dispositions of 10% or more of the assets of a corporation with or to an
interested shareholder, (ii) certain transactions resulting in the issuance or
transfer to the interested shareholder of any stock of the corporation or its
subsidiaries, (iii) certain transactions that would result in increasing the
proportionate share of the stock of a corporation or its subsidiaries owned by
the interested shareholder, and (iv) receipt by the interested shareholder of
the benefit (except proportionately as a shareholder) of any loans, advances,
guarantees, pledges or other financial benefits.
These restrictions placed on interested shareholders by Section 203 do
not apply under certain circumstances, including, but not limited to, the
following: (i) if the corporation's original certificate of incorporation
contains a provision expressly electing not to be governed by Section 203, or
(ii) if the corporation, by action of its shareholders, adopts an amendment to
its by-laws or certificate of incorporation expressly electing not to be
governed by Section 203, provided that such an amendment is approved by the
affirmative vote of not less than a majority of the outstanding shares entitled
to vote and that such an amendment will not be effective until 12 months after
its adoption and will not apply to any business combination with a person who
became an interested shareholder at or prior to such adoption. The Shurgard
REIT has expressly elected in its original Certificate of Incorporation to take
itself outside of the coverage of Section 203.
Mergers, Acquisitions and Other Transactions. Under the WBCA, a
merger, consolidation, sale of substantially all of a corporation's assets
other than in the regular course of business, or dissolution of a public
corporation must be approved
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by the affirmative vote of a majority of directors when a quorum is present,
and by two-thirds of all votes entitled to be cast by each voting group
entitled to vote as a separate group, unless another proportion (but not less
than a majority of all votes entitled to be cast) is specified in the articles
of incorporation. The Management Company's Articles of Incorporation provide
that all corporate transactions may be approved by a majority of a quorum of
the outstanding shares entitled to vote; provided, however, the Management
Company's Articles of Incorporation do not expressly state that a merger may be
approved with less than a two-thirds vote of all votes entitled to be cast.
Under the DGCL, a merger, consolidation, sale of all or substantially all of a
corporation's assets other than in the regular course of business or
dissolution of a corporation must be approved by a majority of the outstanding
shares entitled to vote.
Action Without a Meeting. Under the WBCA, shareholder action may be
taken without a meeting if written consents setting forth such action are
signed by all holders of outstanding shares entitled to vote thereon. Unless
otherwise provided in the certificate of incorporation, the DGCL authorizes
shareholder action without a meeting if consents are received from holders of a
majority of the outstanding shares entitled to vote. The Shurgard REIT's
Certificate of Incorporation, however, requires written consents signed by all
shareholders entitled to vote on the proposed subject matter.
Class Voting. Under the WBCA, the articles of incorporation may
authorize one or more classes of shares that have special, conditional or
limited voting rights, including the right to vote on certain matters as a
group. The articles of incorporation may not limit the rights of holders of a
class to vote as a group with respect to certain amendments to the articles of
incorporation and certain mergers that adversely affect the rights of holders
of that class. The Management Company has one authorized class of stock. See
"DESCRIPTION OF MANAGEMENT COMPANY CAPITAL STOCK." The DGCL requires voting by
separate classes only with respect to amendments to the certificate of
incorporation that adversely affect the holders of those classes or that
increase or decrease the aggregate number of authorized shares or the par value
of the shares of any of those classes. The Shurgard REIT has four classes of
stock. See "DESCRIPTION OF SHURGARD REIT CAPITAL STOCK."
Transactions With Officers or Directors. The WBCA sets forth a safe
harbor for transactions between a corporation and one or more of its directors.
A conflicting interest transaction may not be enjoined, set aside or give rise
to damages if: (i) it is approved by a majority of qualified directors; (ii)
it is approved by the affirmative vote of a majority of all qualified shares;
or (iii) at the time of commitment, the transaction was fair to the
corporation. For purposes of this provision, a "qualified director" is one who
does not have (a) a conflicting interest respecting the transaction or (b) a
familial, financial, professional or employment relationship with a second
director, which relationship would reasonably be expected to exert an influence
on the first director's judgment when voting on the transaction. "Qualified
shares" are defined generally as shares other than those beneficially owned, or
the voting of which is controlled, by a director who has a conflicting interest
respecting the transaction.
The DGCL provides that contracts or transactions between a corporation
and one or more of its officers or directors or an entity in which they have an
interest is not void or voidable solely because of such interest or the
participation of the director or officer in a meeting of the board or a
committee that authorizes the contract or transaction if: (i) the material
facts as to the relationship or interest and as to the contract or transaction
are disclosed or are known to the board or the committee, and the board or the
committee in good faith authorizes the contract or transaction by the
affirmative vote of a majority of disinterested directors; (ii) the material
facts as to the relationship or interest and as to the contract or transaction
are disclosed or are known to the shareholders entitled to vote thereon, and
the contract or transaction is specifically approved in good faith by a vote of
the shareholders; or (iii) the contract or transaction is fair to the
corporation as of the time it is authorized, approved or ratified by the board
of directors, a committee thereof or the shareholders.
Appraisal or Dissenters' Rights. Under the WBCA, a shareholder is
entitled to dissent from and, upon perfection of his or her appraisal rights,
to obtain fair value of his or her shares in the event of certain corporate
actions, including certain mergers, consolidations, share exchanges, sales of
substantially all the assets of the corporation, and amendments to the
corporation's articles of incorporation that materially and adversely affect
shareholder rights.
Under the DGCL, appraisal rights are available only in connection with
certain mergers or consolidations, unless otherwise provided in the
corporation's certificate of incorporation. Even in the event of those mergers
or consolidations, unless the certificate of incorporation otherwise provides,
the DGCL does not provide appraisal rights if (i) the shares of the corporation
are listed on a national securities exchange, designated as a national market
system security on an interdealer
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quotation system by the National Association of Securities Dealers, Inc. or
held of record by more than 2,000 shareholders (as long as in the merger the
shareholders receive shares of the surviving corporation or any other
corporation the shares of which are listed on a national securities exchange,
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or held of
record by more than 2,000 shareholders) or (ii) the corporation is the
surviving corporation and no vote of its shareholders is required for the
merger. Because the Shurgard REIT is currently listed on the Nasdaq National
Market and has over 2,000 shareholders of record, shareholders currently would
not have statutory appraisal rights under the DGCL in such mergers.
Indemnification of Directors and Officers. Under the WBCA, if
authorized by the articles of incorporation, a bylaw adopted or ratified by
shareholders, or a resolution adopted or ratified, before or after the event,
by the shareholders, a corporation has the power to indemnify a director or
officer made a party to a proceeding, or advance or reimburse expenses incurred
in a proceeding, under any circumstances, except that no such indemnification
shall be allowed on account of: (i) acts or omissions of a director or officer
finally adjudged to be intentional misconduct or a knowing violation of the
law; (ii) conduct of a director or officer finally adjudged to be an unlawful
distribution; or (iii) any transaction with respect to which it was finally
adjudged that such director or officer personally received a benefit in money,
property or services to which the director or officer was not legally entitled.
Unless limited by the corporation's articles of incorporation, Washington law
requires indemnification if the director or officer is wholly successful on the
merits of the action or otherwise. Any indemnification of a director in a
derivative action must be reported to the shareholders in writing. Written
commentary by the drafters of the WBCA, which has the status of legislative
history, specifically indicates that a corporation may indemnify its directors
and officers for amounts paid in settlement of derivative actions, provided
that the director's or officer's conduct does not fall within one of the
categories set forth above. The Management Company's Articles of Incorporation
provide for the limitation of director liability to the full extent permitted
by the WBCA.
Under the DGCL, indemnification of directors and officers is
authorized to cover judgments, amounts paid in settlement, and expenses arising
out of nonderivative actions where the director or officer acted in good faith
and in or not opposed to the best interests of the corporation.
Indemnification is required to the extent of a director's or officer's
successful defense. Additionally, under the DGCL, a corporation may reimburse
directors and officers for expenses incurred in a derivative action. While the
DGCL provides that these indemnification provisions are not exclusive, which,
in the Shurgard REIT's opinion, indicates that a corporation may provide for
broad indemnification in its charter documents, including circumstances not
specifically authorized under the DGCL, there is some uncertainty as to the
extent to which a corporation may indemnify its directors and officers for
judgments and amounts paid in settlement of derivative actions. There are no
definitive decisions and this uncertainty exists because certain legal
commentators have argued that such indemnification would be circular and thus
against public policy. Also, a proposal to permit such indemnification was
specifically rejected by the General Corporation Law Section of the Delaware
Bar Association. This uncertainty may adversely affect the Shurgard REIT's
ability to recruit and retain highly qualified directors and officers in the
future.
Dividends. Under the WBCA, a corporation may make a distribution in
cash or in property to its shareholders upon the authorization of its board of
directors unless, after giving effect to such distribution, (i) the corporation
would be unable to pay its debts as they become due in the usual course of
business, or (ii) the corporation's total assets would be less than the sum of
its total liabilities plus the amount that would be needed, if the corporation
were to be dissolved at the time of the distribution, to satisfy the
preferential rights of shareholders whose preferential rights are superior to
those receiving the distribution.
A Delaware corporation may pay dividends out of any surplus and, if it
has no surplus, out of any net profits for the fiscal year in which the
dividend was declared or for the preceding fiscal year (provided that such
payment will not reduce capital below the amount of capital represented by all
classes of shares having a preference upon the distribution of assets).
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MANAGEMENT OF THE SHURGARD REIT
It is currently anticipated that the following persons will serve as
the directors and executive officers of the Shurgard REIT following the
Closing. As a result of the Merger, Charles K. Barbo will be appointed as the
Shurgard REIT's Chairman of the Board, President and Chief Executive Officer;
Harrell L. Beck will be appointed as Senior Vice President, Chief Financial
Officer and Treasurer; and Kristin H. Stred will be appointed as Senior Vice
President, General Counsel and Secretary. At the Effective Time, all the
officers and other employees of the Management Company will become direct
employees of the Shurgard REIT.
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH THE SHURGARD REIT FOLLOWING THE MERGER
---------------- --- -------------------------------------------------------------
<S> <C> <C>
Charles K. Barbo 53 Chairman of the Board, President and Chief Executive Officer
Harrell L. Beck 37 Director, Senior Vice President, Chief Financial Officer and
Treasurer
Dan Kourkoumelis(1) 43 Director
Donald W. Lusk(1)(2) 66 Director
Wendell J. Smith(2) 61 Director
Michael Rowe 37 Executive Vice President
David K. Grant 41 Executive Vice President
Kristin H. Stred 35 Senior Vice President, Secretary and General Counsel
- -------------
</TABLE>
(1) Member of the Compensation Committee of the Shurgard REIT Board
(2) Member of the Audit Committee of the Shurgard REIT Board
Charles K. Barbo has been involved as a principal in the real estate
investment industry since 1969. Mr. Barbo is one of the co-founders of the
Management Company, which was organized in 1972 to provide property management
services for self-storage facilities and other real estate and commercial
ventures. He currently serves as the Chairman of the Board and President of
the Management Company. Mr. Barbo is a graduate of the Owner/President
Management Program of Harvard Business School, holds a Bachelor of Arts degree
in history from the University of Washington, and is a licensed real estate
broker and a licensed securities principal and salesman. He is an alumnus of
the Young Presidents Organization.
Harrell L. Beck will serve as Senior Vice President, Treasurer and
Chief Financial Officer of the Shurgard REIT following the Merger. Prior to
the Merger, Mr. Beck also served as President of the Shurgard REIT. He is a
member of the Shurgard REIT Board. Mr. Beck is also the Treasurer and Chief
Financial Officer of the Management Company. He joined the Management Company
in April 1986 as the Eastern Regional Vice President and, in 1990, became its
Chief Financial Officer and, in 1992, its Treasurer. His responsibilities
include supervising all accounting and overseeing the financial and banking
relationships for the Shurgard REIT, the Management Company, and the Management
Company Programs. Mr. Beck was previously a manager with Touche Ross & Co.,
where he was employed for approximately six years providing services primarily
to clients in the real estate and aerospace industries. His clients included
the Management Company and the Partnerships that were consolidated to form the
Shurgard REIT. Mr. Beck has a Bachelor of Arts degree in Business
Administration from Washington State University and is a member of the American
Institute of Certified Public Accountants and the Washington Society of
Certified Public Accountants.
Dan Kourkoumelis is the President, Chief Operating Officer and a
director of Quality Food Centers, Inc. ("QFC"), a publicly held corporation
that operates the largest independent supermarket chain in the Seattle area.
Mr. Kourkoumelis joined QFC in 1967 and has held a variety of positions since
then. He served as Executive Vice President from 1983 to 1987, when he also
became Chief Operating Officer, and became President in 1989 and a director in
1991. Mr. Kourkoumelis has a Bachelor of Arts degree in Marketing from the
University of Washington.
Donald W. Lusk is the President of Lusk Consulting Group, which is
engaged in general management consulting, as well as the formation and delivery
of management development programs in Western Canada. From 1974 to 1991,
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Mr. Lusk was Regional Managing Partner of Management Action Programs in the
Pacific Northwest. Mr. Lusk has a Bachelor of Arts degree from Pomona College.
He currently serves as director of Robert E. Bayley Construction Company and
G.T. Development Corporation. He has previously served as a director of
Management Action Programs, Inc., The Bekins Company, California Pacific
National Bank, I.C.X. Corporation, Laguna Manufacturing Company, Ormand
Industries and Pacific United Services Corporation and was Chairman of the
Board of the School of Business and Economics Advisory Board of Seattle Pacific
University.
Wendell J. Smith retired in 1991 from the State of California Public
Employees Retirement System ("Calpers") after 27 years of employment, the last
21 in charge of all real estate equities and mortgage acquisitions for Calpers.
During those 21 years, Calpers invested over $8,000,000,000 in real estate and
mortgages. In 1991, Mr. Smith established W.J.S. & Associates, which provides
advisory and consulting services for pension funds and pension fund advisors.
Michael Rowe is currently an Executive Vice President and the Director
of Storage Operations of the Shurgard REIT. He is also currently the Executive
Vice President and Director of Storage Operations of the Management Company.
Prior to his employment with the Management Company, he was employed with
Touche Ross & Co., where he participated in independent audits of major real
estate syndication, development and management companies in the Pacific
Northwest. His clients included the Management Company and the Partnerships
that were consolidated to form the Shurgard REIT. He became Controller of the
Management Company in 1982 and Vice President and Treasurer in 1983. In 1987,
Mr. Rowe was named Director of Operations of the Management Company. He also
was the first Regional Vice President for the Management Company's Southwest
Region. Mr. Rowe's responsibilities include supervising the Management
Company's property management services. Mr. Rowe has a Bachelor of Arts degree
in Business Administration from Washington State University.
David K. Grant is currently an Executive Vice President and the
Director of Real Estate Investment of the Shurgard REIT. Mr. Grant joined the
Management Company in November 1985 as Director of Real Estate Investment and
continues to serve in that capacity. He is also an Executive Vice President of
the Management Company. Mr. Grant is responsible for overseeing the
acquisition, development and disposition of real estate investments for the
Shurgard REIT, the Management Company, and the Management Company Programs. He
is a licensed securities principal and salesperson. Mr. Grant was previously a
manager with Touche Ross & Co., where he was employed for approximately 10
years providing financial consulting, accounting and auditing services
primarily to clients in the real estate, construction and engineering
industries. His clients included the Management Company and the Partnerships
that were consolidated to form the Shurgard REIT. Mr. Grant has a Bachelor of
Arts degree in Business Administration and a Bachelor of Science degree in
Accounting, both from Washington State University.
Kristin H. Stred serves as Secretary and General Counsel of the
Shurgard REIT. Ms. Stred joined the Management Company in July 1992 as
Secretary and General Counsel. She was previously an attorney with The Boeing
Company from October 1991 to July 1992 and Assistant General Counsel with King
Broadcasting Company from July 1987 to September 1991. Ms. Stred has a
Bachelor of Arts degree with honors in general studies from Harvard University
and a J.D. from Harvard Law School. She is a member of the Washington State
Bar Association, is a former president of Washington Women Lawyers and is a
member of the Executive Committee of the Corporate Counsel Section of the
Washington State Bar Association.
COMMITTEES OF THE SHURGARD REIT BOARD
Audit Committee. The Audit Committee of the Shurgard REIT Board
recommends to the Board the independent public accountants to be selected to
audit the Shurgard REIT's annual financial statements and approve any special
assignments given to such accountants. The Audit Committee also reviews the
planned scope of the annual audit and the independent accountants' letter of
comments and management's responses thereto, any major accounting changes made
or contemplated and the effectiveness and efficiency of the Shurgard REIT's
internal accounting staff. The Audit Committee is comprised solely of
independent directors.
Compensation Committee. The Compensation Committee of the Shurgard
REIT Board establishes remuneration levels for officers of the Shurgard REIT,
reviews management organization and development, reviews significant employee
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benefits programs and establishes and administers executive compensation
programs, including bonus plans, stock option and other equity-based programs,
deferred compensation plans and any other cash or stock incentive programs.
The Board of Directors may from time to time establish certain other
committees to facilitate the management of the Shurgard REIT.
COMPENSATION TO THE SHURGARD REIT'S DIRECTORS AND OFFICERS
Directors who are not officers of the Shurgard REIT receive an annual
fee of $12,000 for serving on the Board of Directors. Such directors also
receive fees of $1,000 for attending each Board of Directors meeting and $500
for attending each Board of Directors committee meeting (in person or by
telephone). In addition, the Shurgard REIT reimburses such directors for
travel expenses incurred in connection with their activities on behalf of the
Shurgard REIT. Each member of the Board of Directors who is not an employee or
officer of the Shurgard REIT receives an annual stock option grant to purchase
400 shares of Shurgard Class A Common Stock pursuant to the Stock Option Plan
for Nonemployee Directors. The members of the Special Committee each received
$6,000 in fees for their services on the Special Committee.
Prior to the consummation of the Merger, no officer of the Shurgard
REIT received cash compensation for serving the Shurgard REIT as a member of
the Board of Directors or on any of its committees. The officers of the
Shurgard REIT received no remuneration for their services to the Shurgard REIT
but are compensated by the Management Company in their capacities as officers
and employees of the Management Company, except to the extent that certain
stock options may be granted to such officers by the Board of Directors.
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EXECUTIVE COMPENSATION
COMPENSATION SUMMARY
The following table sets forth the compensation for services rendered
during the fiscal year ended December 31, 1993, for Charles K. Barbo, who will
be appointed Chairman of the Board, President and Chief Executive Officer of
the Shurgard REIT in connection with the Merger, and for the two other most
highly compensated executive officers of the Shurgard REIT following the
Merger. No other individuals who will serve as executive officers of the
Shurgard REIT following the Merger received compensation of more than $100,000
during the fiscal year ended December 31, 1993. Although certain of the
individuals named below served as directors or officers of the Shurgard REIT
prior to the Merger, they were not compensated for such services by the
Shurgard REIT but instead were compensated by the Management Company.
Accordingly, all amounts shown were paid by the Management Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION SHARES ALL OTHER
-------------------------- UNDERLYING COMPENSATIONN
NAME AND PRINCIPAL POSITION SALARY($) BONUS($)(1) OPTIONS (#) ($)(2)
- --------------------------- --------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Charles K. Barbo $150,000 $25,000 -- $2,316
Chairman, President and Chief
Executive Officer
Michael Rowe $100,000 $30,340 10,000 $7,844
Executive Vice President and
Director of Storage Operations
David K. Grant, Executive Vice $100,000 $15,000 10,000 $7,844
President and Director of Real
Estate Investment
- ------------
</TABLE>
(1) Includes bonus awards earned during the year ended December 31, 1993
pursuant to the terms of certain incentive compensation and profit-sharing
arrangements.
(2) Includes employer matching contributions made by the Management Company
under its Employee's Retirement Savings Plan of $200 per person, matching
contributions of $2,116 per person made under its employee stock ownership
plan and, with respect to Messrs. Rowe and Grant, interests in Management
Company cash distributions from investments in certain Partnerships.
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OPTION GRANTS
The following table sets forth certain information regarding options
to purchase shares of Management Company Common Stock granted during the fiscal
year ended December 31, 1993, to the individuals for whom compensation is
reported in this Proxy Statement/Prospectus. Such individuals were not granted
any options to purchase shares of Shurgard REIT Common Stock during the fiscal
year ended December 31, 1993.
OPTION GRANTS IN FISCAL 1993
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
- --------------------------------------------------------------------------------- VALUE AT ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK PRICE
SHARES TOTAL OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE TERM($)(2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ---------------------------
NAME GRANTED(#)(1) FISCAL YEAR ($/SHARE) DATE 5% 10%
- ----------------- ------------- ----------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Charles K. Barbo -- -- -- -- -- --
Michael Rowe 10,000 7.14% $3.61 8/25/03 $22,703 $57,534
David K. Grant 10,000 7.14% $3.61 8/25/03 $22,703 $57,534
</TABLE>
- ------------
(1) Options are granted at the fair market value on the date of grant. Each
option vests in installments of 33-1/3% after the third anniversary of the
date of grant, 66-2/3% after the fourth anniversary of the date of grant
and 100% after the fifth anniversary. Pursuant to the stock option plan,
vesting of such options will be accelerated immediately prior to the
Closing, and if not exercised prior to the Closing, will be terminated.
(2) The dollar amounts under these columns are the result of calculations at
assumed rates of appreciation of 5% and 10% and are not intended to
forecast future appreciation. No value will be realized if the stock price
does not exceed the exercise price of the options.
OPTION EXERCISES AND YEAR-END VALUES
The following table sets forth certain information as of December 31,
1993, regarding options to purchase shares of Management Company Common Stock
held by the individuals for whom compensation is reported in this Proxy
Statement/Prospectus. Such individuals did not hold any options to purchase
shares of Shurgard REIT Common Stock as of December 31, 1993. None of such
individuals exercised any options during the fiscal year ended December 31,
1993.
AGGREGATED FISCAL 1993 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
TOTAL NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
FISCAL YEAR-END(#) AT FISCAL YEAR-END($)(1)
------------------------------ ---------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Charles K. Barbo -- -- -- --
Michael Rowe 2,333 21,667 $5,483 32,576
David K. Grant 1,000 19,000 $2,350 26,310
- ------------
</TABLE>
(1) This amount is the aggregate number of the outstanding options multiplied
by the difference between the fair market value of Management Company
Common Stock as of December 31, 1993, as determined by the Management
Company Board of Directors, minus the exercise price of such options.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On March 1, 1994, the Shurgard REIT made a $1,981,000 interest-free
loan to Mr. Barbo to enable him to make certain capital contributions that were
required in connection with the Consolidation. Mr. Barbo's Shurgard Class B
Common Stock has been pledged as collateral for the loan. Upon repayment of
the loan, a percentage of the Shurgard Class B Common Stock will be released
from the pledge equal to the percentage of the loan principal being repaid, and
Mr. Barbo will then have the option to convert his Shurgard Class B Common
Stock, on a share-for-share basis, into Shurgard Class A Common Stock. The
terms of this loan to Mr. Barbo will not be affected by the Merger.
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PRINCIPAL SHURGARD REIT SHAREHOLDERS
The following table sets forth, as of December 19, 1994, certain
information with respect to the beneficial ownership of shares of Shurgard REIT
Common Stock by (i) each director and director nominee of the Shurgard REIT,
(ii) each of the Shurgard REIT's executive officers for whom compensation is
reported in this Proxy Statement/Prospectus, and (iii) all directors and
executive officers of the Shurgard REIT as a group. Except as otherwise noted,
the Shurgard REIT believes that the beneficial owners of the shares of Shurgard
REIT Common Stock listed below, based on information furnished by such owners,
have sole voting and investment power with respect to such shares. In
addition, except as otherwise noted, all shares included in the following table
are shares of Shurgard Class A Common Stock. As of December 19, 1994, no
shareholder beneficially owned more than 5% of the shares of Shurgard REIT
Common Stock.
<TABLE>
<CAPTION>
SHARES OF SHURGARD REIT SHARES OF SHARES OF SHURGARD REIT
COMMON STOCK SHURGARD REIT COMMON STOCK
BENEFICIALLY COMMON STOCK TO BENEFICIALLY
OWNED PRIOR TO MERGER(1) BE ISSUED OWNED AFTER MERGER(1)
------------------------ IN CONNECTION -----------------------
NAME AND ADDRESS NUMBER PERCENT WITH MERGER(2) NUMBER PERCENT
- --------------------------------- ------- ------- --------------- ------ -------
<S> <C> <C> <C> <C> <C>
Charles K. Barbo(3) 110,666 *% 537,259 647,925 3.5%
David K. Grant 2,150 * 40,775 42,925 *
Michael Rowe 1,322 * 56,541 57,863 *
Dan Kourkoumelis -- -- -- -- --
Donald W. Lusk -- -- -- -- --
Wendell J. Smith -- -- -- -- --
Harrell L. Beck 159 * 11,968 12,127 *
Kristin H. Stred 300 * 2,362 2,662 *
All directors and executive
officers as a group (8 persons) 114,597 *% 648,905 763,502 4.2%
- ---------------
</TABLE>
* less than one percent
(1) The shares of Shurgard REIT Common Stock reported in this table as
beneficially owned prior to the Merger by the named persons do not include
282,572 shares of Shurgard Class A Common Stock owned by the Management
Company, which shares increase the Share Consideration and are included in
shares beneficially owned after the Merger. See "THE MERGER--Adjustments
to Share Consideration."
(2) Assumes 1,400,000 shares of Shurgard Class A Common Stock are issued at the
Closing. Does not include any Contingent Shares that may subsequently be
issued to Management Company shareholders pursuant to the Merger Agreement.
(3) Shares of Shurgard REIT Common Stock reported as beneficially owned by Mr.
Barbo prior to and after the Merger include 76,529 shares of Shurgard Class
B Common Stock. Class B Common Stock entitled Mr. Barbo to a loan in an
amount necessary to satisfy his general partner capital obligations
resulting from the Consolidation. The Shurgard Class B Common Stock is
convertible into Shurgard Class A Common Stock at a one-to-one ratio upon
repayment of the loan.
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<PAGE> 104
PRINCIPAL MANAGEMENT COMPANY SHAREHOLDERS
The following table sets forth as of December 19, 1994 certain
information with respect to the beneficial ownership of shares of Management
Company Common Stock and shares of Shurgard REIT Common Stock by (i) each
person known by the Management Company to beneficially own more than 5% of the
shares of Management Company Common Stock, (ii) each director of the Management
Company, (iii) the Management Company's chief executive officer and each other
executive officer for whom compensation is reported in this Proxy
Statement/Prospectus, and (iv) all directors and executive officers of the
Management Company as a group. Except as otherwise noted, the Management
Company believes that the beneficial owners of shares of Management Company
Common Stock listed below, based on information furnished by such owners, have
sole voting and investment power with respect to such shares. Except as
otherwise noted, all shares of Shurgard REIT Common Stock included in the
following table are shares of Shurgard Class A Common Stock.
<TABLE>
<CAPTION> SHARES OF
SHARES OF THE MANAGEMENT SHARES OF SHARES OF SHURGARD REIT
COMPANY COMMON STOCK SHURGARD REIT SHURGARD REIT COMMON STOCK
BENEFICIALLY OWNED COMMON STOCK COMMON STOCK BENEFICIALLY
PRIOR TO MERGER BENEFICIALLY TO BE ISSUED IN OWNED AFTER MERGER
------------------------ OWNED PRIOR CONNECTION ---------------------
NAME AND ADDRESS NUMBER PERCENT TO MERGER(1) WITH MERGER(2) NUMBER PERCENT
----------------------------- ---------- ------- ------------- --------------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Charles K. Barbo 1,724,600(3) 38.3% 110,666 537,259 647,925(4) 3.5%
1201 Third Avenue, Suite 2200
Seattle, WA 98101
Arthur W. Buerk 1,044,696 23.2 83,221(3) 325,450 408,671(5) 2.2
3831 49th N.E.
Seattle, WA 98105
Donald B. Daniels 538,124 11.9 10,589 167,640 178,229 *
1601 Sylvester St. S.W.
P.O. Box 7046
Olympia, WA 98501
Ronald C. Knutzen 297,399(6) 6.6 -- 92,647 92,647 *
1462 Allen West Road
Bow, Washington
Michael Rowe 181,498(7) 4.0 1,322 56,541 57,863 *
David K. Grant 130,887(8) 2.9 2,150 40,775 42,925 *
Harrell L. Beck 38,416(9) * 159 11,968 12,127 *
Kristin H. Stred 7,581(10) * 300 2,362 2,662 *
All directors and executive
officers as a group (7 3,963,201 88.1 208,407 1,234,642 1,443,049 7.85%
persons)
- ---------------
</TABLE>
* less than one percent
(1) The shares of Shurgard REIT Common Stock reported in this table as
beneficially owned by the named persons do not include 282,572 shares of
Shurgard Class A Common Stock owned by the Management Company, which shares
may be distributed to the Management Company shareholders in connection
with the Merger. See "THE MERGER--Adjustments to Share Consideration."
(2) Assumes 1,400,000 shares of Shurgard Class A Common Stock are issued at the
Closing. Does not include Contingent Shares that may subsequently be
issued to Management Company shareholders pursuant to the Merger Agreement.
(3) Includes 8,007 shares of Management Company Common Stock held for Mr.
Barbo's individual account under the Management Company's Employee's
Retirement Savings Plan.
-95-
<PAGE> 105
(4) Shares of Shurgard REIT Common Stock reported as beneficially owned by Mr.
Barbo prior to and after the Merger include 76,529 shares of Shurgard Class
B Common Stock.
(5) Shares of Shurgard REIT Common Stock reported as beneficially owned by Mr.
Buerk prior to and after the Merger include 76,529 shares of Shurgard Class
B Common Stock.
(6) Mr. Knutzen holds his shares as trustee for the Charles K. and Linda K.
Barbo Trust, a trust created for the benefit of Mr. Barbo's three
children. Mr. Knutzen has sole dispositive and voting power over the
shares of Management Company Common Stock held in the trust.
(7) Includes 24,000 shares of Management Company Common Stock issuable upon the
exercise of 10,000 vested and 14,000 unvested options. Vesting of such
options will be accelerated in connection with the Merger. In addition,
includes 7,498 shares of Management Company Common Stock held for Mr.
Rowe's individual account under the Management Company's Employee's
Retirement Savings Plan.
(8) Includes 20,000 shares of Management Company Common Stock issuable upon
exercise of 6,000 vested and 14,000 unvested options. Vesting of such
options will be accelerated in connection with the Merger. In addition,
includes 5,887 shares of Management Company Common Stock held for Mr.
Grant's individual account under the Management Company's Employee's
Retirement Savings Plan.
(9) Includes 23,000 shares of Management Company Common Stock issuable upon the
exercise of 9,667 vested and 13,333 unvested options. Vesting of such
options will be accelerated in connection with the Merger. In addition,
includes 5,416 shares of Management Company Common Stock held for Mr.
Beck's individual account under the Management Company's Employee's
Retirement Savings Plan.
(10) Includes 7,500 shares of Management Company Common Stock issuable upon
the exercise of unvested options. Vesting of such options will be
accelerated in connection with the Merger. In addition, includes 81 shares
of Management Company Common Stock held for Ms. Stred's individual account
under the Management Company's Employee's Retirement Savings Plan.
LEGAL OPINION
The legality of the shares of Shurgard Class A Common Stock to be
issued in connection with the Merger is being passed upon for the Shurgard REIT
by Perkins Coie, Seattle, Washington.
TAX OPINION
Certain of the tax consequences of the Merger to the Shurgard REIT and
the Management Company will be passed upon at the Effective Time, as a condition
to the Merger, by Perkins Coie, counsel to the Shurgard REIT. See "FEDERAL
INCOME TAX CONSEQUENCES--Tax Treatment of the Management Company and the
Shurgard REIT in the Merger."
EXPERTS
The financial statements of Shurgard Storage Centers, Inc. as of
December 31, 1993 and for the period then ended, the financial statements of
the Management Company of Shurgard Incorporated as of December 31, 1993 and for
the year then ended, and the combined financial statements of the 17
partnerships as of December 31, 1993 and 1992 and for each of the three years
in the period ended December 31, 1993 included in this propectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports appearing herein and elsewhere in the Registration Statement, and have
been so included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
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<PAGE> 106
Appendix I
AGREEMENT AND PLAN OF MERGER
BETWEEN
SHURGARD STORAGE CENTERS, INC.,
a Delaware corporation,
and
SHURGARD INCORPORATED,
a Washington corporation,
dated as of
December 19, 1994
<PAGE> 107
CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE 1 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE 2 THE MERGER; EFFECTIVE TIME; CLOSING . . . . . . . . . . . . . . . . . . . . . . . . 9
2.1 The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.2 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.3 Effective Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE 3 TERMS OF MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.1 Certificate of Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.2 By-laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.3 Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.4 Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE 4 MERGER CONSIDERATION; CONVERSION OR CANCELLATION OF SHARES; ADJUSTMENTS . . . . . . 11
4.1 Share Consideration; Conversion or Cancellation of Shares . . . . . . . . . . . . . 11
4.2 Payment for Shares in the Merger . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.3 Fractional Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.4 Transfer of Shares After the Effective Time . . . . . . . . . . . . . . . . . . . . 15
4.5 Lost, Stolen or Destroyed Certificates . . . . . . . . . . . . . . . . . . . . . . 15
4.6 Dissenters' Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.7 Additional Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.8 Indemnification Shares; Claims Against the Escrow . . . . . . . . . . . . . . . . . 20
4.9 Appointment of Shareholders' Representatives . . . . . . . . . . . . . . . . . . . 24
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF MANAGEMENT COMPANY . . . . . . . . . . . . . . . 25
5.1 Organization, Etc. of Management Company . . . . . . . . . . . . . . . . . . . . . 25
5.2 Partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
5.3 Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
5.4 Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
5.5 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
5.6 Compliance With Other Instruments, Etc. . . . . . . . . . . . . . . . . . . . . . . 27
5.7 Compensation and Employee Matters . . . . . . . . . . . . . . . . . . . . . . . . . 28
5.8 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
5.9 Labor Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
5.10 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
5.11 Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
5.12 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
5.13 Absence of Certain Changes or Events . . . . . . . . . . . . . . . . . . . . . . . 33
</TABLE>
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<PAGE> 108
<TABLE>
<S> <C> <C>
5.14 Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
5.15 Contracts and Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
5.16 Title to Properties; Encumbrances . . . . . . . . . . . . . . . . . . . . . . . . . . 34
5.17 Real Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
5.18 Environmental Laws and Regulations . . . . . . . . . . . . . . . . . . . . . . . . . 35
5.19 Affiliated Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
5.20 Brokers and Finders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
5.21 S-4 Registration Statement and Proxy Statement/Prospectus . . . . . . . . . . . . . . 36
5.22 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
5.23 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF SHURGARD REIT . . . . . . . . . . . . . . . . . 38
6.1 Organization, Etc. of Shurgard REIT . . . . . . . . . . . . . . . . . . . . . . . . . 38
6.2 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
6.3 Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
6.4 Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
6.5 Authorization for Shurgard REIT Common Shares . . . . . . . . . . . . . . . . . . . . 40
6.6 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
6.7 Compliance With Other Instruments, Etc. . . . . . . . . . . . . . . . . . . . . . . . 41
6.8 Reports and Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . 41
6.9 Brokers and Finders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
6.10 S-4 Registration Statement and Proxy Statement/Prospectus . . . . . . . . . . . . . . 42
6.11 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
ARTICLE 7 ADDITIONAL COVENANTS AND AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . 43
7.1 Conduct of Business of Management Company . . . . . . . . . . . . . . . . . . . . . . 43
7.2 Other Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
7.3 Meetings of Shareholders and Stockholders . . . . . . . . . . . . . . . . . . . . . . 46
7.4 Registration Statement/Proxy Materials . . . . . . . . . . . . . . . . . . . . . . . 47
7.5 Filings; Other Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
7.6 Access to Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
7.7 Listing Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
7.8 Affiliates of Management Company . . . . . . . . . . . . . . . . . . . . . . . . . . 48
7.9 Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
7.10 InterMation Spin-Off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
7.11 Shurgard Realty Advisors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
7.12 Management and Advisory Agreements . . . . . . . . . . . . . . . . . . . . . . . . . 52
7.13 Intellectual Property Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
7.14 Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
7.15 Reorganization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
7.16 Public Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
7.17 ESOP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
</TABLE>
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<PAGE> 109
<TABLE>
<S> <C> <C>
7.18 Letter of Shurgard's Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
7.19 Opinion of Financial Advisor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
7.20 Notice of Certain Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
7.21 Director and Officer Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
7.22 Working Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
7.23 Contingent Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
7.24 Further Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
ARTICLE 8 CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
8.1 Conditions to Each Party's Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
8.2 Conditions to Obligations of Management Company to Effect the Merger . . . . . . . . . . . . . . 58
8.3 Conditions to Obligation of Shurgard REIT to Effect the Merger . . . . . . . . . . . . . . . . 59
ARTICLE 9 TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
9.1 Termination by Mutual Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
9.2 Termination by Either Shurgard REIT or Management Company . . . . . . . . . . . . . . . . . . . 60
9.3 Effect of Termination and Abandonment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
ARTICLE 10 MISCELLANEOUS AND GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
10.1 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
10.2 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
10.3 Amendments, Waivers, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
10.4 No Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
10.5 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
10.6 Specific Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
10.7 Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
10.8 No Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
10.9 No Third-Party Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
10.10 Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
10.11 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
10.12 Name, Captions, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
10.14 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
</TABLE>
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<PAGE> 110
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (the "Agreement"), dated as of
December 19, 1994, by and between Shurgard Storage Centers, Inc., a Delaware
corporation ("Shurgard REIT"), and Shurgard Incorporated, a Washington
corporation ("Management Company").
RECITALS
WHEREAS, the respective Boards of Directors of Shurgard REIT
and Management Company have determined that it is in the best interests of
their respective stockholders and shareholders for Management Company to merge
with and into Shurgard REIT (the "Merger"), upon the terms and subject to the
conditions of this Agreement;
WHEREAS, for federal income tax purposes, it is intended that
the Merger shall qualify as a reorganization within the meaning of Section
368(a)(1) of the Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, the parties desire to make certain representations,
warranties, and agreements in connection with the Merger.
NOW, THEREFORE, in consideration of the mutual
representations, warranties, and agreements set forth herein, the parties
hereby agree as follows:
ARTICLE 1
DEFINITIONS
As used in this Agreement, the following terms shall have the
respective meanings set forth below:
"Acquisition Proposal": As defined in Section 7.2.
"Adjustment Indemnification Period": As defined in Section
4.8(c).
"Adjustment Indemnification Shares": As defined in Section
4.8(c).
"Affiliate": As defined in Rule 12b-2 under the Exchange Act.
"Affiliate Letter": As defined in Section 7.8(a).
"Alex. Brown": Alex. Brown & Sons Incorporated.
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<PAGE> 111
"Appraised Amount": As defined in Section 4.7.
"Articles of Merger": The articles of merger with respect to
the Merger containing the provisions required by, and executed in accordance
with, RCW 23B.11.050.
"Associates": As defined in Section 4.9(b).
"Audit": As defined in Section 4.1(d).
"Authorization": Any consent, approval or authorization of,
expiration or termination of any waiting period requirement (including pursuant
to the HSR Act) by, or filing, registration, qualification, declaration or
designation with, any Governmental Body.
"Barbo": Charles K. Barbo.
"Barbo Trust": Charles K. and Linda K. Barbo Trust dated
December 10, 1991.
"Benefit Arrangement": As defined in Section 5.8(a).
"Benelux": Shurgard Benelux SA, a Belgian corporation.
"Benelux SCS": a Belgian Societe en Commandite Simple.
"Buerk": Arthur W. Buerk.
"Business Combination": As defined in Section 4.1(a).
"Certificate of Merger": The certificate of merger with
respect to the Merger containing the provisions required by, and executed in
accordance with, DGCL Section 252.
"Certificates": As defined in Section 4.1(b).
"Change in Control": For purposes of this Agreement, a change
in control shall be deemed to occur on the earlier of (i) first date of public
announcement by Shurgard REIT or an Acquiring Person (as such term is defined
in the Rights Agreement) that an Acquiring Person has become such; or (ii) the
first date on which Shurgard REIT or any other Person publicly announces (a)
the agreement by Shurgard REIT to consolidate with, or merge with and into any
other person (b) the agreement of any Person to consolidate with Shurgard REIT,
or merge with and into Shurgard REIT and in connection with such merger all or
part of the Shurgard REIT Common Shares are to be changed into or exchanged for
stock or other securities of any other Person (or Shurgard REIT) or cash or any
other property, or (c) Shurgard REIT's agreement to sell or otherwise transfer,
in one or more
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transactions, assets or earning power aggregating 50% or more of the assets or
earning power of Shurgard REIT and its subsidiaries (taken as a whole) to any
other Person other than Shurgard REIT or one or more of its wholly-owned
subsidiaries.
"Change in Control Date": The date a Change in Control shall
be deemed to occur.
"Closing": The closing of the Merger.
"Closing Date": The date on which the Closing occurs.
"Closing Statement": As defined in Section 4.1(d).
"Closing Statement Date": As defined in Section 4.1(d).
"Code": The Internal Revenue Code of 1986, as amended.
"Contingent Amount": As defined in Section 4.7(e).
"Contingent Partnerships": As defined in Section 4.7(a).
"Contingent Share Closing Date": As defined in Section 4.7(c).
"Contingent Share Period": As defined in Section 4.7(d).
"Contingent Shares": As defined in Section 4.7(a).
"Contingent Shares Agreement": As defined in Section 4.7(g).
"DGCL": The Delaware General Corporation Law.
"Damages": "Damages" means any provable or ascertainable
loss, liability, damage, cost, obligation or expense (including reasonable
costs of investigation, defense and prosecution of litigation and attorneys'
fees) incurred by Shurgard REIT, net of any tax benefits and insurance or
indemnification recoveries (other than those received pursuant to this
Agreement) received or entitled to be received by Shurgard REIT with respect
thereto, after reasonable efforts to mitigate such loss, liability, damages,
cost, obligation or expense.
"Daniels": Donald B. Daniels.
"Deemed Distribution": As defined in Section 4.7.
"Disposition": As defined in Section 4.7(a).
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"Distribution": As defined in Section 4.7(a).
"Effective Time": As defined in Section 2.3.
"Employee Plan": As defined in Section 5.8(a).
"Employees": As defined in Section 5.8(a).
"ERISA": The Employee Retirement Income Security Act of 1974,
as amended, and all regulations promulgated thereunder, as in effect from time
to time.
"ERISA Affiliates": Any trade or business, whether or not
incorporated, that is now or has at any time in the past been treated as a
single employer with Management Company or any of its Subsidiaries under
Section 414(b) or (c) of the Code and the Treasury Regulations thereunder.
"ESOP": As defined in Section 5.8(f).
"Excess Stock": As defined in the Shurgard REIT Restated
Certificate of Incorporation.
"Exchange": Either the National Association of Securities
Automated Quotations National Market or the national securities exchange (as
defined in Section 12(b) of the Exchange Act) upon which the Shurgard REIT
Common Shares are then listed for trading.
"Exchange Act": The Securities Exchange Act of 1934, as
amended.
"Final Determination": (a) (i) A decision of the United
States Tax Court, which has become final and non-appealable, or (ii) a
judgment, decree, or other order by another court or other tribunal with
appropriate jurisdiction, which has become final and non-appealable; (b) a
final and binding settlement or compromise with the Internal Revenue Service or
another administrative agency with appropriate jurisdiction, including, but not
limited to, a closing agreement under Section 7121 of the Code; (c) a
deficiency assessment or other determination which is not protested or appealed
by the taxpayer within the appropriate period for protest or appeal and which
therefore has become final and non-appealable; or (d) any final disposition by
reason of the expiration of all applicable statutes of limitations.
"Final Statement": As defined in Section 4.1(d).
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"Governmental Body": Any federal, state, municipal, political
subdivision or other governmental department, commission, board, bureau, agency
or instrumentality, domestic or foreign.
"HSR Act": The Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended.
"Increase": As defined in Section 4.1(d).
"Indemnification Escrow Agent": As defined in Section 4.8(a).
"Indemnification Escrow Agreement": As defined in Section
4.8(a).
"Indemnification Period": As defined in Section 4.8(b).
"Indemnification Shares": As defined in Section 4.8(a).
"Independent Expert": As defined in Section 4.1(d).
"InterMation": InterMation, Inc., a Washington corporation
and subsidiary of Management Company.
"InterMation Spin-Off": As defined in Section 7.10.
"InterMation Spin-Off Opinion": As defined in Section 8.2(b).
"Knowledge": The term "knowledge" or "best knowledge" and any
derivatives thereof when applied to any party to this Agreement shall refer to
the knowledge which such party or any director, officer of senior manager
thereof has or could reasonably be expected to have as a result of the conduct
of its business or the performance of his or her duties in the ordinary course,
but no information known by any other employee, or any attorney, accountant or
other representative, of such party shall be imputed to such party.
"Litigation Parties": As defined in Section 10.1.
"Majority Interest": As defined in Section 4.9.
"Management Company": Shurgard Incorporated, a Washington
corporation.
"Management Company Common Stock": Common Stock, par value
$.01 per share, of Management Company.
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"Management Company Disclosure Statement": The disclosure
statement dated the date of this Agreement delivered by Management Company to
Shurgard REIT.
"Management Company Equity": As defined in Section 4.1(d).
"Management Company Financial Statements": As defined in
Section 5.12.
"Management Company Intellectual Property Rights": All
intellectual property rights in the United States of America or abroad,
including, but not limited to, patents, patent applications, trademarks,
trademark applications and registrations, service marks, service mark
applications and registrations, tradenames, tradename applications and
registrations, copyrights, copyright applications and registrations, licenses,
logos, corporate and partnership names and customer lists, proprietary
processes, formulae, inventions, trade secrets, know-how, development tools and
other proprietary rights used by Management Company, pertaining to any product,
software, system or service manufactured, marketed, licensed, sublicensed, used
or sold by Management Company in the conduct of their business or used,
employed or exploited in the development, license, sale, marketing,
distribution or maintenance thereof, and all documentation and media
constituting, describing or relating to the above, including, but not limited
to, manuals, memoranda, know-how, notebooks, software, records and disclosures.
"Management Company Material Adverse Effect": As defined in
Section 5.1.
"Management Company Option Plan": As defined in Section
4.1(c).
"Management Company Proxy Materials": As defined in Section
7.4.
"Management Company Shareholders Meeting": As defined in
Section 7.3(a).
"Market Value": For purposes of this Agreement, the per-share
value of Shurgard REIT Common Shares, which shall be the average of its daily
closing price on the Exchange for each of the thirty (30) trading days on which
shares of Shurgard REIT Common Shares were traded immediately preceding (i) the
Closing Date, for purposes of the adjustment, if any, to the Share
Consideration (as set forth in Section 4.1(d) hereof), and the payment of cash,
if any, in lieu of issuance of fractional Shurgard REIT Common Shares (as set
forth in Section 4.3 hereof), (ii) the last business day of the relevant fiscal
quarter, for purposes of the calculation of the Contingent Shares (as set forth
in Section 4.7(a) hereof), (iii) the Contingent Share Closing Date, for
purposes of the final calculation of Contingent Shares (as set forth in Section
4.7(b) hereof), or (iv) the Closing Date for purposes of calculating the amount
of Adjustment Indemnification Shares or Indemnification Shares, if any, to be
withheld (as set forth in Section 4.8 hereof).
"Material Agreements": As defined in Section 515.
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"Merged Plan": As defined in Section 7.17.
"Merger": The merger of Management Company with and into
Shurgard REIT as contemplated by Section 2.1.
"Minimum Working Capital": As defined in Section 7.22.
"NASD": The National Association of Securities Dealers, Inc.
"Nomura": Nomura Securities International, Inc.
"October 31 Statement": As defined in Section 4.1(d).
"Option": As defined in Section 4.1(c).
"Over-Statement": As defined in Section 4.1(d).
"Partnerships": As defined in Section 5.2.
"Partnership Facilities": As defined in Section 4.7(a).
"Permitted Liens": As defined in Section 5.16.
"Person": Any individual or corporation, company,
partnership, trust, incorporated or unincorporated association, joint venture
or other entity of any kind.
"Profits": As defined in Section 4.7(b).
"Project Partnerships": As defined in Section 4.7(a).
"Proxy Statement/Prospectus": As defined in Section 7.4.
"Qualified Appraiser": As defined in Section 4.7(d).
"RCW": The Revised Code of Washington.
"Reduction": As defined in Section 4.1(d).
"Representatives": As defined in Section 4.9(a).
"Riddell": Riddell, Williams, Bullitt & Walkinshaw.
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"Rights Agreement": The Rights Agreement dated as of March
17, 1994 between Shurgard REIT and Gemisys Corporation, as Rights Agent.
"Rule 145 Affiliates": As defined in Section 7.8(a).
"S-4 Registration Statement": As defined in Section 7.4.
"SEC": The Securities and Exchange Commission.
"Securities Act": The Securities Act of 1933, as amended.
"Share Consideration": As defined in Section 4.1(a).
"Shareholders Voting Agreement": As defined in Section 7.3(a).
"Shares": Collectively, the shares of Management Company
Common Stock.
"Shurgard Realty Advisors": Shurgard Realty Advisors, Inc., a
Washington corporation and wholly-owned subsidiary of Management Company.
"Shurgard REIT": Shurgard Storage Centers, Inc., a Delaware
corporation.
"Shurgard REIT Common Shares": Shares of Class A common
stock, $0.001 par value per share, of Shurgard REIT (including any associated
purchase rights pursuant to the Rights Agreement).
"Shurgard REIT Disclosure Statement": The disclosure
statement dated the date of this Agreement delivered by Shurgard REIT to
Management Company.
"Shurgard REIT Financial Statements": The financial
statements included in the Shurgard REIT SEC Reports.
"Shurgard REIT Material Adverse Effect": As defined in
Section 6.1.
"Shurgard REIT SEC Reports": As defined in Section 6.8.
"Shurgard REIT Stockholders Meeting": As defined in Section
7.3(b).
"Special Committee": The Special Committee of independent
members of the Board of Directors of Shurgard REIT, appointed specifically for
the purpose of negotiating the terms of any proposed merger with Management
Company and any alternatives to such transaction and to make recommendations to
the Shurgard REIT Board of Directors and stockholders with respect to same.
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"SRA Letter": As defined in Section 7.11.
"Subsidiary": As to any Person, any other Person of which at
least 10% of the equity or voting interests are owned, directly or indirectly,
by such first Person. Notwithstanding the foregoing, the term "Subsidiary"
shall not include InterMation, Shurgard Realty Advisors, Benelux, Benelux SCS
or any Partnership.
"Surviving Corporation": The surviving corporation in the
Merger.
"Tax" or "Taxes": Any federal, state, local or foreign
income, excise, sales, capital stock, license, franchise, property, use, gross
receipts, payroll, employment, windfall profits, environmental, holding, social
security, unemployment, estimated, or other tax of any kind whatsoever,
including any interest penalty in addition thereto, whether disputed or not.
"Tax Return": Any return, declaration of estimated tax, tax
report, customs declaration, claim for refund or information return relating to
Taxes, including any amendment thereto.
"Under-Statement": As defined in Section 4.1(d).
"Upper Limit": As defined in Section 4.1(d).
"WBCA": The Washington Business Corporation Act.
"1983 Agreements": The Redemption Agreement, 1983 Shareholder
Agreement and Business Agreement entered into by and between the Management
Company, Barbo, Daniels and Buerk as of July 1, 1983.
ARTICLE 2
THE MERGER; EFFECTIVE TIME; CLOSING
2.1 The Merger
Subject to the terms and conditions of this Agreement, at the
Effective Time, Management Company shall be merged with and into Shurgard REIT
in accordance with the provisions of the DGCL and the WBCA and with the effect
provided in Section 259 of the DGCL and RCW 23B.11.060. The separate corporate
existence of Management Company shall thereupon cease and Shurgard REIT shall
be the Surviving Corporation and shall continue to be governed by the laws of
the State of Delaware.
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2.2 Closing
Subject to Article 9 hereof and the fulfillment or waiver of
the conditions set forth in Article 8, the Closing shall take place at (i) the
offices of Perkins Coie, 1201 Third Avenue, Seattle, Washington on March 3,
1995, or (ii) such other place and/or time and/or on such other date as
Shurgard REIT and Management Company may agree or as may be necessary to permit
the fulfillment or waiver of the conditions set forth in Article 8.
2.3 Effective Time
The Merger shall become effective on the date and at the time
(the "Effective Time") that the Certificate of Merger and Articles of Merger
shall have been accepted for filing by the Secretary of State of the State of
Delaware and the Secretary of State of the State of Washington, respectively
(or such later date and time as may be specified in the Certificate of Merger
and Articles of Merger), which shall occur on the Closing Date or as soon as
practicable thereafter.
ARTICLE 3
TERMS OF MERGER
3.1 Certificate of Incorporation
The Certificate of Incorporation of Shurgard REIT as in effect
immediately prior to the Effective Time shall be the Certificate of
Incorporation of the Surviving Corporation, until duly amended in accordance
with the terms thereof and the DGCL.
3.2 By-laws
The By-laws of Shurgard REIT in effect at the Effective Time
shall be the By-laws of the Surviving Corporation, until duly amended in
accordance with the terms thereof, the Certificate of Incorporation of the
Surviving Corporation and the DGCL.
3.3 Directors
As a result of the Merger, from and after the Effective Time,
the directors of the Surviving Corporation shall be the directors of Shurgard
REIT immediately prior to the Effective Time and Charles K. Barbo ("Barbo"),
each to serve until his successor has been duly elected or appointed and
qualified or until his earlier death, resignation or removal in accordance with
the Surviving Corporation's Certificate of Incorporation and By-laws.
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3.4 Officers
As a result of the Merger, from and after the Effective Time,
the officers of the Surviving Corporation shall be the officers of Shurgard
REIT immediately prior to the Effective Time, except that Barbo shall serve as
Chairman of the Board, President and Chief Executive Officer, Harrell L. Beck
shall serve as Senior Vice-President, Chief Financial Officer and Treasurer,
and Kristin H. Stred shall serve as Senior Vice-President, Secretary and
General Counsel, each to serve until his or her successor has been duly elected
or appointed and qualified or until his or her earlier death, resignation or
removal in accordance with the Surviving Corporation's Certificate of
Incorporation and By-laws.
ARTICLE 4
MERGER CONSIDERATION; CONVERSION OR CANCELLATION OF
SHARES; ADJUSTMENTS
4.1 Share Consideration; Conversion or Cancellation of Shares
Subject to the provisions of this Article 4, at the Effective
Time, by virtue of the Merger and without any action by holders thereof, the
Shares shall be converted as follows:
(a) All of the Shares issued and outstanding immediately
prior to the Effective Time (other than Shares as to which dissenters' rights
have been duly exercised and are not subsequently withdrawn) shall be converted
into:
(i) an aggregate of 1,400,000 Shurgard REIT
Common Shares, reduced pro rata in the proportion that the number of Shares as
to which dissenters' rights have been duly exercised and not subsequently
withdrawn bears to the number of Shares issued and outstanding immediately
prior to the Effective Time, and adjusted in accordance with Section 4.1(d)
(the "Share Consideration"), and
(ii) the right to receive Contingent Shares pro
rata in the proportion set forth in, and to be distributed in accordance with
the terms of, Section 4.7. The right to receive Contingent Shares shall be
nonassignable except by operation of law or by will.
The Share Consideration shall, subject to Section 4.8, be distributed pro rata
to the Management Company shareholders in the proportion that the number of
Shares issued and outstanding in the name of a Management Company shareholder
immediately prior to the Effective Time bears to the total number of Shares
issued and outstanding immediately prior to the Effective Time. If, prior to
the Effective Time, Shurgard REIT should split or combine the Shurgard REIT
Common Shares, or pay a stock dividend or other stock distribution in Shurgard
REIT Common Shares, or otherwise change the Shurgard REIT
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Common Shares into, or exchange Shurgard REIT Common Shares for, any other
securities (whether pursuant to or as part of a merger, consolidation,
acquisition of property or stock, separation, reorganization or liquidation of
Shurgard REIT as a result of which the Shurgard REIT stockholders receive cash,
stock or other property in exchange for, or in connection with, their Shurgard
REIT Common Shares (a "Business Combination")), or make any other dividend or
distribution on the Shurgard REIT Common Shares, then the Share Consideration
will be appropriately adjusted to reflect such split, combination, dividend,
distribution, Business Combination or change.
(b) All Shares to be converted into Shurgard REIT Common
Shares pursuant to this Section 4.1 shall cease to be outstanding, shall be
cancelled and retired and shall cease to exist, and each holder of a
certificate or certificates representing any such Shares (the "Certificates")
shall thereafter cease to have any rights with respect to such Shares, except
the right to receive for each of the Shares, upon the surrender of such
Certificate in accordance with Section 4.2, the Shurgard REIT Common Shares
specified above, the right to Contingent Shares (and cash in lieu of fractional
Contingent Shares) as contemplated by Section 4.7, and cash in lieu of
fractional Shurgard REIT Common Shares as contemplated by Section 4.3 (in each
case subject to the provisions of Section 4.8).
(c) The Management Company shall take all requisite
action so that, by their terms, all options (individually an "Option" and
collectively, the "Options") to purchase Shares outstanding at the Effective
Time which were issued pursuant to Management Company's Amended and Restated
Stock Option Plan (the "Management Company Option Plan") shall terminate.
(d) The Share Consideration shall be calculated and
subject to adjustment as follows:
(i) First, in the event that, as of the Closing
Date, the product obtained by multiplying the Share Consideration by the then
Market Value shall equal or exceed $31,165,000 (such dollar number, the "Upper
Limit"), the Share Consideration shall be adjusted and reduced to that number
of Shurgard REIT Common Shares obtained by dividing the Upper Limit by the
Market Value as of the Closing Date.
(ii) Following any adjustment to the Share
Consideration as set forth in subsection (d)(i) above, the Share Consideration
shall be subject to further adjustment, as follows:
(A) Within five (5) days prior to the
Closing Date, Management Company will deliver to Shurgard REIT a statement of
assets and liabilities of the Management Company (the "Closing Statement")
dated as of the Closing Date or a date within five (5) days prior to the
Closing Date (the "Closing Statement Date"), prepared in a manner consistent
with the accounting methodology described in Section 5.12(b) and the
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accounting methodology described in the statement of assets and liabilities of
the Management Company dated October 31, 1994 (the "October 31 Statement"),
attached hereto as Exhibit A.
(B) In the event that there has been a
reduction in Management Company Equity as set forth in the Closing Statement
when compared to Management Company Equity as set forth in the October 31
Statement (a "Reduction"), the Share Consideration shall be reduced by the
quotient obtained by dividing such Reduction by the Market Value as of the
Closing Date. In the event there has been an increase in Management Company
Equity as set forth in the Closing Statement when compared to the October 31
Statement (an "Increase"), subject to the following sentence, the Share
Consideration shall be increased by the quotient obtained by dividing such
Increase by the Market Value as of the Closing Date. Notwithstanding the
foregoing (1) any adjustment to the Share Consideration resulting from an
Increase shall be limited in amount to $1,500,000 and (2) in calculating the
amount of any Increase, solely for purposes of this sentence, any Shurgard REIT
Common Shares held by Management Company as of the Closing Date shall not be
included in the calculation of the $1,500,000 limitation.
(C) Within thirty (30) days following
the Closing Date, the former directors and officers of Management Company shall
cause Deloitte & Touche, LLP to audit (at Shurgard REIT's sole expense) such
Closing Statement (the "Audit") and deliver the revised and audited Closing
Statement (the "Final Statement") to the Representatives (as defined below) and
Shurgard REIT. The Final Statement shall be prepared in prepared in a manner
consistent with the methodology described in Section 5.12(b) and the accounting
methodology described in the October 31 Statement.
(D) In the event that the Final
Statement reflects Management Company Equity in an amount less than that
reflected on the Closing Statement (an "Over-Statement"), subject to subsection
(E) below, the amount of such Over-Statement shall be deemed conclusively to
constitute Damages for purposes of Section 4.8 hereof and Shurgard REIT shall
be entitled to recover from the Adjustment Indemnification Shares (as defined
below) and, to the extent necessary, the Indemnification Shares, that number of
Adjustment Indemnification Shares or Indemnification Shares, as the case may
be, determined by dividing the Over-Statement by the Market Value as of the
Closing Date, in accordance with the provisions of Section 4.8 and the
Indemnification Escrow Agreement (as defined below). In the event that the
Final Statement reflects Management Company Equity in an amount greater than
that reflected on the Closing Statement (an "Under-Statement"), subject to
subsection (E) below, Shurgard REIT shall promptly issue such number of
additional Shurgard REIT Common Shares to the Management Company shareholders
obtained by dividing such Under-Statement by the Market Value as of the Closing
Date. Such additional shares shall be distributed pro rata in proportion that
the number of Shares formerly held by a Management Company shareholder
immediately prior to the Effective Time bears to the total number of Shares
issued and outstanding immediately prior to the Effective Time (other
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than Shares as to which dissenters' rights have been duly exercised and not
subsequently withdrawn).
(E) In the event that either party
hereto shall dispute the results of the Audit, such party (in the case of
Management Company, acting through the Representatives) may, within ten (10)
days following receipt of the Final Statement, engage such firm of certified
public accountants (the "Independent Expert") as selected by Deloitte & Touche,
LLP. The costs and expenses of such Independent Expert shall be borne by
Shurgard REIT. The Independent Expert shall perform an audit of the Closing
Statement (independent of the Audit) and shall deliver its audited Closing
Statement to Shurgard REIT and the Representatives no later than thirty (30)
days following appointment. The decision of the Independent Expert shall be
final and binding upon the parties.
(F) For purposes of this Agreement and
this Section 4.1(d), "Management Company Equity" shall mean the consolidated
stockholders equity of Management Company and its consolidated subsidiaries as
of the close of business on the relevant statement date prepared in a manner
consistent with the methodology described in Section 5.12(b) and the accounting
methodology described in the October 31 Statement.
4.2 Payment for Shares in the Merger
Shurgard REIT shall deliver to each holder of record of a
Certificate or Certificates (a) a form of letter of transmittal (which shall
provide acknowledgement that (i) the Representatives are authorized to act on
behalf of the Management Company shareholders with respect to the Agreement,
the Indemnification Escrow Agreement and the Contingent Shares Agreement (as
defined below) as set forth in Section 4.9 hereof, (ii) such shareholder agrees
to be bound by the personal indemnification under Section 4.8(b) and (iii)
delivery shall be effected, and risk of loss and title to the Certificates
shall pass, only upon proper delivery of the Certificates to Shurgard REIT at
the Closing) and (b) instructions for use in effecting the surrender of the
Certificates for payment therefor. Except as provided in Section 4.8 below, at
or after the Effective Time, upon surrender of Certificates for cancellation to
Shurgard REIT, together with such letter of transmittal duly executed and any
other required documents, the holder of such Certificates shall receive for
each of the Shares represented by such Certificates (i) his, her or its pro
rata portion of the Share Consideration, (ii) the right to receive Contingent
Shares and cash in lieu of fractional Contingent Shares as contemplated by
Section 4.7, and (iii) cash in lieu of fractional Shurgard REIT Common Shares
as contemplated by Section 4.3, and the Certificates so surrendered shall
forthwith be canceled. Until surrendered, each outstanding Certificate shall,
upon and after the Effective Time, be deemed for all purposes (other than to
the extent provided in the following sentence) to evidence ownership of the
number of shares of Shurgard REIT Common Shares into which such Shares have
been converted pursuant to Section 4.1 hereof and the other rights contemplated
in the preceding sentence. Unless and until such outstanding Certificates are
so surrendered, the holders thereof shall not be entitled
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to receive any dividends or distributions of any kind payable to the holders of
record of Shurgard REIT Common Shares. Upon the surrender of any such
Certificate, however, there shall be paid to the record holder thereof the
aggregate amount of dividends and distributions, if any, which theretofore
became payable in respect of the Shurgard REIT Common Shares into which the
Shares represented by such Certificate have been converted, and such
surrendered Certificate shall be duly cancelled. No interest shall be payable
on or in respect of such deferred dividends or distributions until surrender of
such outstanding Certificates.
4.3 Fractional Shares
No fractional Shurgard REIT Common Shares shall be issued in
the Merger. In lieu of any such fractional securities, each holder of Shares
who would otherwise have been entitled to a fraction of a Shurgard REIT Common
Share upon surrender of Certificates for exchange pursuant to this Article 4
will be paid an amount in cash (without interest) equal to the Market Value of
one Shurgard REIT Common Share as of the Closing Date, multiplied by such
fraction.
4.4 Transfer of Shares After the Effective Time
No transfers of Shares shall be made on the stock transfer
books of Management Company after the close of business on the day prior to the
date of the Effective Time.
4.5 Lost, Stolen or Destroyed Certificates
In the event any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the Person claiming
such Certificate to be lost, stolen or destroyed and, if required by the
Surviving Corporation, the posting of such Person of a bond in such reasonable
amount as the Surviving Corporation may direct as indemnity against any claim
that may be made against it with respect to such Certificate, the Surviving
Corporation will issue in exchange for such lost, stolen or destroyed
Certificate Shurgard REIT Common Shares, cash in lieu of fractional shares, and
unpaid dividends and distributions on shares of Shurgard REIT Common Shares as
provided in Section 4.2, deliverable in respect thereof pursuant to this
Agreement.
4.6 Dissenters' Rights
Notwithstanding anything in this Agreement to the contrary,
Shares which are issued and outstanding immediately prior to the Effective Time
and which are held by holders of record of such Shares who have properly
exercised dissenters' rights with respect thereto in accordance with RCW
23B.13.010 et seq. shall not be converted into or be exchangeable for the right
to receive the consideration paid in the Merger, and holders of
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such Shares shall be entitled to receive payment of the fair value of such
Shares in accordance with the provisions of the WBCA unless and until such
holders fail to perfect or shall have effectively withdrawn or lost their
rights to receive fair value under the WBCA. If, after the Effective Time, any
such holder fails to perfect or shall have effectively withdrawn or lost such
right, such Shares shall thereupon be treated as if they had been converted
into and become exchangeable for, at the Effective Time, the right to receive
consideration paid in the Merger to which the holder of such Shares is entitled
(including that portion of the Share Consideration and right to receive
Contingent Shares as determined pursuant to Section 4.1(a) hereof), without any
interest thereon. Management Company shall give Shurgard REIT prompt notice of
any demands received by Management Company for the receipt of fair value for
Shares and, prior to the Effective Time, Shurgard REIT shall have the right to
participate in all negotiations and proceedings with respect to such demands.
Prior to the Effective Time, Management Company shall not, except with the
prior written consent of Shurgard REIT, make any payment with respect to, or
settle or offer to settle, any such demands.
4.7 Additional Consideration
(a) As set forth in Section 4.1(a)(ii), in addition to
the Share Consideration, the Management Company shareholders will receive
additional consideration in the form of contingent shares ("Contingent Shares")
to be issued by the Shurgard REIT based on the Profits (as calculated below),
if any, received by the Shurgard REIT from its interests in certain limited
partnerships set forth in the Management Company Disclosure Statement (the
"Contingent Partnerships"). The Contingent Partnerships own either
self-storage centers (the "Partnership Facilities") or direct or indirect
interests (through one or more tiers of partnership entities) in several
limited and general partnerships as set forth in the Management Company
Disclosure Statement (the "Project Partnerships") that themselves own
Partnership Facilities. Contingent Shares shall be issued pursuant to the
terms of this Section 4.7 by the Shurgard REIT to the Management Company
shareholders based on Profits (as calculated below) realized by Shurgard REIT
as a result of any of the following events: (i) the receipt of proceeds by the
Shurgard REIT from the sale or other disposition by the Shurgard REIT of all or
any part of its interest in the Contingent Partnerships (a "Disposition"); (ii)
the receipt by the Shurgard REIT of any distribution from any Contingent
Partnership attributable either to the sale, refinancing, liquidation or other
disposition by a Contingent Partnership or a Project Partnership of one or more
of its Partnership Facilities or to the sale by a Contingent Partnership (or by
any Project Partnership that is itself an owner of an interest in a Project
Partnership) of all or any part of its interest in a Project Partnership (a
"Distribution"); or (iii) a deemed liquidating distribution from the Contingent
Partnership to the Shurgard REIT as described in Section 4.7(d) (as defined
therein a "Deemed Distribution"). The jurisdiction of organization and
description of the equity interests held by the Management Company with respect
to each Contingent Partnership and Project Partnership is as set forth in the
Management Company Disclosure Statement.
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(b) Profits ("Profits") with respect to the Contingent
Partnerships shall be calculated as follows:
(i) The Profits pursuant to a Disposition shall
consist of the gross proceeds received by Shurgard REIT from such Disposition,
net of the carrying value of the respective Contingent Partnership interest on
the Final Statement and Shurgard REIT's reasonable costs and legal and
accounting expenses incurred in connection with such Disposition, provided
that, in the event of a Disposition to an Affiliate of the Shurgard REIT, the
gross proceeds received by Shurgard REIT, for purposes of calculating Profits,
will be deemed to be the greater of (x) the portion of the Appraised Amount (as
established in accordance with Subsection 4.7(d)) that would have been
distributed to the Shurgard REIT had there been a Deemed Distribution as of the
date of such Disposition, or (y) the actual gross proceeds received by Shurgard
REIT with respect to such Disposition.
(ii) The Profits received upon a Distribution
shall be calculated with reference to the amounts actually received by Shurgard
REIT with respect to such Distribution, provided that in the event a
Partnership Facility, or interest in a Project Partnership is acquired directly
by the Shurgard REIT or an Affiliate thereof, the amount received by Shurgard
REIT for purposes of calculating Profits will be deemed to be the greater of
(x) the portion of the Appraised Amount (as established in accordance with
subsection 4.7(d)) that would have been distributed to the Shurgard REIT had
there been a Deemed Distribution as of the date of such acquisition; (y) the
actual amount received by the Shurgard REIT with respect to such Distribution
or (z) the amount of any credit towards the purchase price for the Partnership
Facility afforded the Shurgard REIT in exchange for cancellation of its
interest in the Contingent Partnership.
(iii) The Profits received upon a Deemed
Distribution shall be calculated with reference to the amounts Shurgard REIT
would have received pursuant to the terms of the respective Contingent
Partnership agreement had such Contingent Partnership and the Project
Partnership, if any, in which such Contingent Partnership may hold an interest,
liquidated the Partnership Facilities for the Appraised Amount, as described
below, less reasonable costs and legal, accounting and appraisal expenses
incurred pursuant to and as provided in Section 4.7(d).
(c) The number (if any) of Contingent Shares to be issued
by Shurgard REIT pursuant to this Section 4.7 shall be determined for each
fiscal quarter ending after the Effective Time through and including the fifth
anniversary of the Effective Time (the "Contingent Share Closing Date"), as
follows:
(i) The Contingent Amount (as defined below), if
any, shall be computed as promptly as practicable but in no event later than
forty-five (45) days after the end of each fiscal quarter;
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(ii) The number of Contingent Shares, if any, to
be issued for each fiscal quarter shall be determined by dividing the
Contingent Amount by the Market Value as of the last business day of such
fiscal quarter.
(iii) The number of Contingent Shares so determined
shall be issued pro rata to the holders of rights to Contingent Shares in the
proportion that the number of Shares issued and outstanding in the name of a
Management Company shareholder immediately prior to the Effective Time bears to
the total number of Shares issued and outstanding immediately prior to the
Effective Time.
(iv) No fractional Contingent Shares shall be
issued. In lieu of any such fractional securities, each holder of rights to
Contingent Shares who would otherwise have been entitled to a fraction of a
Contingent Share will be paid an amount in cash (without interest) equal to the
Market Value (as calculated above), multiplied by such fraction.
(v) The Contingent Shares shall be issued by
Shurgard REIT to the holders of the right to receive Contingent Shares as
promptly as practicable but in no event later than forty-five (45) days after
(1) the close of each of Shurgard REIT's fiscal quarters during the Contingent
Share Period (as defined in Section 4.7(d) below), (2) the final resolution of
a disputed Profit (which dispute shall be settled by the procedures set forth
in the Contingent Shares Agreement (as defined below), or, (3) in the event of
a Distribution or Deemed Distribution to the Shurgard REIT or an Affiliate
thereof, the determination of the Appraised Amount, whichever is later.
(vi) All distributions or other payments, to the
extent such distributions or other payments do not constitute a Distribution,
and all voting rights and other indicia of beneficial ownership with respect to
the Contingent Partnerships shall inure to the benefit of Shurgard REIT.
Dividends or other distributions and all voting rights and other indicia of
beneficial ownership with respect to Contingent Shares shall inure to the
benefit of the former Management Company shareholders only when and from the
time that such Contingent Shares are issued or are required to be issued, if
ever, in accordance with the provisions of this Section 4.7.
(d) The period during which Contingent Shares may be
earned shall begin at the Effective Time and shall continue through the
Contingent Share Closing Date (the "Contingent Share Period"). To the extent
that (1) a Change in Control of the Shurgard REIT shall occur at any time
during the Contingent Share Period, or (2) the Shurgard REIT shall continue to
hold, at the Contingent Share Closing Date, any residual interest in any of the
Contingent Partnerships, the Project Partnerships, in which such Contingent
Partnerships continue to hold interests, and any Contingent Partnership owning
Partnership Facilities shall be deemed to have sold all of their Partnership
Facilities for the Appraised Amount (as defined below) and to have distributed
the Appraised Amount in liquidation of the Project
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Partnerships or the Contingent Partnerships, as the case may be, pursuant to
the terms of their respective partnership agreement. Any portion of the
Appraised Amounts deemed to have been received by the Contingent Partnerships
shall be deemed to have been distributed (the "Deemed Distribution") to the
Shurgard REIT pursuant to the terms of the Contingent Partnership's partnership
agreement.
(i) Pursuant to this Section 4.7(d), the parties
hereto agree to submit for appraisal the valuation of the Partnership
Facilities (the "Appraised Amount") by an independent appraiser with
self-storage industry valuation experience (a "Qualified Appraiser") and
mutually acceptable to and appointed by Shurgard REIT and the Representatives
within thirty (30) days after the Change in Control Date or the Contingent
Share Closing Date, as the case may be.
(ii) If Shurgard REIT and the Representatives
cannot agree on a Qualified Appraiser within such period, the Appraised Amount
shall be determined jointly by a Qualified Appraiser appointed by Shurgard REIT
and a Qualified Appraiser appointed by the Representatives, each to be
appointed within such thirty (30) day period. Such Qualified Appraisers shall
complete their respective valuations within forty-five (45) days of their
appointment. If the higher of the values determined by either of the initial
Qualified Appraisers is not in excess of 115% of the value determined by the
other Qualified Appraiser, the initial Qualified Appraisers shall be deemed to
have agreed upon a value equal to the average of the two determinations. If
the higher of the values determined by either of the initial Qualified
Appraisers exceeds 115% of the value determined by the other Qualified
Appraiser, such Qualified Appraisers shall (within 60 days after their
appointment) select a third Qualified Appraiser who shall determine (within 45
days after his or her appointment) the Appraised Amount for the purposes hereof
by arriving at a valuation either equal to that determined by one of the
initial two Qualified Appraisers or intermediate between such two initial
valuations. If the two initial Qualified Appraisers are unable to agree upon a
third appraiser, he or she shall be selected by the presiding judge of the
Superior Court for King County, Washington.
(iii) Shurgard REIT shall bear the cost and expense
of any appraisals, provided, however, that Shurgard REIT shall be entitled to
include the cost of any Qualified Appraiser appointed by the Representatives,
and one-half the cost of the initial and third Qualified Appraiser (if any), as
an expense for purposes of calculating Profits pursuant to 4.7(b)(iii).
(iv) The Appraised Amount, as determined by the
Qualified Appraiser(s) pursuant to this Section 4.7, shall be final and binding
on all the parties.
(v) The number of Contingent Shares to be issued
as a result of any such valuation shall be determined by dividing the amount of
the Contingent Amount computed thereby by the Market Value as of the Contingent
Share Closing Date or Change
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in Control Date, as the case may be, and such Contingent Shares (and cash in
lieu of fractional shares) shall be issued to the holders of the right to
receive Contingent Shares as set forth in subsections (c) (iii) and (c) (iv)
above as promptly as practicable but in no event later than twenty (20) days
after the close of business on the day such Appraised Amount is determined.
(e) For purposes of this Agreement and this Section 4.7,
the "Contingent Amount" shall be equal to the product obtained by multiplying
the dollar amount of Profits by .95.
(f) The number of Contingent Shares to be issued to the
Management Company shareholders hereunder shall be reduced by that number of
Contingent Shares having an aggregate Market Value equal to the reasonable
expenses incurred by the Representatives in carrying out their obligations
hereunder. Such Contingent Shares shall be issued to the Representatives as
reimbursement for such expenses.
(g) The foregoing shall be reflected in an agreement (the
"Contingent Shares Agreement"), substantially in the form attached hereto as
Exhibit B, to be entered into by Shurgard REIT and the Representatives on or
prior to the Closing Date.
(h) The Management Company shareholders shall, by virtue
of their collective approval of this Agreement, be deemed to have agreed to,
and be bound by, the terms of the Contingent Shares Agreement.
4.8 Indemnification Shares; Claims Against the Escrow
(a) At the Closing, ten percent (10%) of the shares
received as part of the Share Consideration (net of any Shurgard REIT Common
Shares held by Management Company as of the Closing Date (the "Indemnification
Shares"), shall be deposited in escrow with Seattle First National Bank, as
escrow agent, or such other party as may be agreed upon by the parties prior to
Closing (the "Indemnification Escrow Agent"), to be held and administered in
accordance with the terms and conditions of an Indemnification Escrow
Agreement, substantially in the form attached hereto as Exhibit C (the
"Indemnification Escrow Agreement"). The Indemnification Shares shall be
deducted pro rata from that portion of the Share Consideration, as adjusted,
otherwise issuable to each of the Management Company shareholders. Fractional
Shurgard REIT Common Shares shall not be deposited in escrow. In lieu thereof,
each Management Company shareholder shall round up such fractional share to the
nearest whole number and deposit in escrow an additional Shurgard REIT Common
Share. The Indemnification Shares shall be registered in the name of the
respective Management Company shareholders and shall be accompanied by stock
powers endorsed in blank.
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Shurgard REIT shall be entitled to recover from the
Indemnification Shares the full dollar amount of any Damages that may be
suffered by Shurgard REIT by reason of (i) any breach of representation or
warranty made by Management Company in Article 5, (ii) any breach by Management
Company of any covenant or agreement on its part contained in this Agreement,
(iii) any liability for Taxes assessed against Shurgard REIT (including
penalties and interest) as successor to Management Company (irrespective of
which party is primarily or solely liable under the laws of the applicable
taxing authority) resulting from a determination by an applicable taxing
authority that the InterMation Spin-Off does not qualify under Section
355(a)(1) of the Code; (iv) any Over-Statement in the amount of Management
Company Equity reflected in the Final Statement as compared with the Closing
Statement (including any overstatement of any Tax refund due Management Company
as a result of its short taxable year ending as of the Effective Time (the
"Refund")), subject to Section 4.1(d)(ii)(E); or (v) any liability or
out-of-pocket expenses suffered by Shurgard REIT in its capacity as general
partner of any of the Partnerships to the extent such liability or expense
arises out of facts or circumstances (other than the legal status as a general
partner) in existence prior to the Closing Date (provided, however, that such
liabilities or expenses shall be calculated net of distributions received by
Shurgard REIT from such Partnership which are not included in the calculation
of Profits under Section 4.7). No claims for indemnification hereunder shall
be made by Shurgard REIT until Damages (arising from a single claim or in the
aggregate from multiple claims) equal or exceed $50,000, in which case the full
dollar amount of any Damages shall be recoverable. Notwithstanding the
foregoing, Shurgard REIT shall not be entitled to indemnification or to seek
Damages for any (x) liability with respect to which Shurgard REIT would have
been obligated to indemnify Shurgard, if such liability had arisen prior to the
Effective Time, or (y) Tax liabilities resulting from or arising in connection
with the transactions effected by this Agreement (except as specifically set
forth in subsection (a)(iii) hereof).
(b) For purposes of this Section 4.8, the
"Indemnification Period" shall begin as of the Closing Date and shall continue
through the third anniversary thereof. The period during which claims may be
made from the Indemnification Shares for Damages shall begin as of the Closing
Date and shall continue through the second anniversary of the Closing Date
except with respect to (i) any tax liability assessed against Shurgard REIT
(including penalties and interest) as successor to Management Company if the
InterMation Spin Off does not qualify under Section 355 of the Code, (ii) any
breach of representation or warranty made by Management Company in Sections 5.8
or 5.10, or (iii) any breach of covenant made by Management Company in Section
7.10 or 7.17, which shall continue for the full term of the Indemnification
Period. Nevertheless, any covenant, agreement, representation or warranty in
respect of which indemnity may be sought pursuant to this Section 4.8 shall
survive the time at which it would otherwise terminate if written notice of the
inaccuracy or breach thereof specifying the Damages (including the amount
thereof) giving rise to such right to indemnity shall have been delivered to
the Representatives prior to such time.
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At the termination of the Indemnification Period,
Indemnification Shares not required to reimburse Shurgard REIT for any Damages
which constitute an indemnifiable claim, or which are not pending determination
as an indemnification claim, shall be returned by the Indemnification Escrow
Agent to the Management Company shareholders, pro rata in the same proportion
as originally deducted from the portion of the Share Consideration otherwise
issuable to each Management Company shareholder. Notwithstanding the
foregoing, Shurgard REIT shall be entitled to continuing indemnification from
the Management Company shareholders, personally and severally (not jointly),
pro rata in the same proportion as Indemnification Shares originally were
deducted from the portion of the Share Consideration otherwise issuable to each
Management Company shareholder, with respect to the matters set forth in
subsections (a)(iii) above, which indemnification obligation shall continue
until the expiration of the applicable statutory period of limitations. Such
continuing right to indemnification beyond the Indemnification Period shall be
limited to the recovery of Damages, in the aggregate, in an amount equal to the
product obtained by multiplying the number of Indemnification Shares returned
to the Management Company shareholders by the Market Value of the Shurgard REIT
Common Shares as of the Closing Date.
(c) At the Closing, an additional five percent (5%) of
the shares received as part of the Share Consideration (net of any Shurgard
REIT Common Shares held by Management Company as of the Closing Date (the
"Adjustment Indemnification Shares") shall be deposited with the
Indemnification Escrow Agent to be held and administered in accordance with the
terms and conditions of the Indemnification Escrow Agreement. The Adjustment
Indemnification Shares shall be deducted pro rata from that portion of the
Share Consideration, as adjusted, otherwise issuable to each of the Management
Company shareholders. Fractional Shurgard REIT Common Shares shall not be
deposited in escrow. In lieu thereof, each Management Company shareholder
shall round up such fractional share to the nearest whole number and deposit in
escrow an additional Shurgard REIT Common Share. The Adjustment
Indemnification Shares shall be registered in the name of the respective
Management Company shareholders and shall be accompanied by stock powers
endorsed in blank. Shurgard REIT's only rights with respect to the Adjustment
Indemnification Shares shall be to recover from the Adjustment Indemnification
Shares (i) the full dollar amount of any Over-Statement in the amount of
Management Company Equity reflected in the Final Statement as compared with the
Closing Statement, subject to Section 4.1(d)(ii)(E), and (ii) the difference
between the dollar amount of any Refund claimed as set forth in the Closing
Statement and the actual amount received by the Shurgard REIT. Any amount
defined in subsection (c)(i) and (ii) hereof over and above the value of the
Adjustment Indemnification Shares (as calculated above) shall be deemed
conclusively to constitute Damages for purposes of subsection (a) hereof and
Shurgard REIT shall be entitled to recover from the Indemnification Shares the
full dollar amount calculated by subtracting from the dollar value of such
Damages the value of the Adjustment Indemnification Shares, as calculated in
subsection (a) hereof. The indemnification period with respect to the
Adjustment Indemnification Shares shall begin as of the Closing Date and shall
continue for a
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period lasting ten (10) days following the later of (i) delivery to the
Representatives and Shurgard REIT of the Final Statement or, if an Independent
Expert is appointed, upon delivery to the Representatives and Shurgard REIT of
its report and (ii) the date on which the Refund is received by the Shurgard
REIT or the date on which the Shurgard REIT receives notice that the Refund
will not be paid (the "Adjustment Indemnification Period"). At the termination
of the Adjustment Indemnification Period, Adjustment Indemnification Shares (x)
not required to reimburse Shurgard REIT for any Over-Statement; (y) not
required to reimburse Shurgard REIT for any difference between the Refund
actually received and the amount of the Refund as set forth on the Final
Statement; and (z) which are not pending determination as an indemnification
claim shall be returned by the Indemnification Escrow Agent to the Management
Company shareholders, pro rata in the same proportion as originally deducted
from the portion of the Share Consideration otherwise issuable to each
Management Company shareholder.
(d) Notwithstanding the escrow of the Adjustment
Indemnification Shares and Indemnification Shares, dividends or other
distributions declared and paid on such shares shall continue to be paid by
Shurgard REIT to the Management Company shareholders and all voting rights with
respect to such shares shall inure to the benefit of and be enjoyed by the
Management Company shareholders. Any securities received by the
Indemnification Escrow Agent in respect of any Adjustment Indemnification
Shares or Indemnification Shares held in escrow as a result of stock split or
combination of Shurgard REIT Common Shares, payment of a stock dividend or
other stock distribution in or on Shurgard REIT Common Shares, or change of
Shurgard REIT Common Shares into any other securities pursuant to or as part of
a Business Combination or otherwise, shall be held by the Indemnification
Escrow Agent as, and shall be included within the definition of, Adjustment
Indemnification Shares or Indemnification Shares, as the case may be.
Indemnification procedures shall be as stipulated in the Indemnification Escrow
Agreement.
(e) For purposes of this Section 4.8, the satisfaction of
any Damages owed hereunder shall be made by delivery by the Indemnification
Escrow Agent to Shurgard REIT of that number of Indemnification Shares
calculated by dividing the dollar amount of any Damages by the Market Value as
of the Closing Date. Any Adjustment Indemnification Shares or Indemnification
Shares, as the case may be, returned to Shurgard REIT hereunder shall be
treated, to the extent permitted by law, by the Management Company shareholders
and Shurgard REIT as a purchase price adjustment. The number of
Indemnification Shares to be released to the Management Company shareholders at
the termination of the Indemnification Period shall be reduced by the number of
Indemnification Shares having an aggregate Market Value equal to the reasonable
expenses incurred by the Representatives in carrying out their obligations
hereunder. Such Indemnification Shares shall be released to the
Representatives as reimbursement for such expenses.
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(f) The Management Company shareholders shall, by virtue
of their collective approval of this Agreement, be deemed to have agreed to,
and be bound by, the terms of the Indemnification Escrow Agreement.
4.9 Appointment of Shareholders' Representatives
(a) (i) The Management Company shareholders hereby
appoint and authorize Barbo, Donald B. Daniels ("Daniels") and Arthur W. Buerk
("Buerk") (the "Representatives") as their agents to deal with Shurgard REIT on
behalf of the Management Company shareholders regarding all matters arising
under this Agreement, the Contingent Shares Agreement and the Indemnification
Escrow Agreement.
(ii) Unless and until Shurgard REIT and the
Indemnification Escrow Agent shall have received a written revocation of such
appointment signed by Management Company shareholders who received a majority
of the Share Consideration in the Merger (a "Majority Interest"), together with
a written appointment of successor Representatives for the Management Company
shareholders, Shurgard REIT and the Indemnification Escrow Agent shall be
entitled to rely upon, and shall be fully protected in relying upon, the power
and authority of the Representatives to act on behalf of the Management Company
shareholders.
(iii) If any of the Representatives or any
successor shall die, refuse or become unable to act, resign or otherwise
terminate his or her status as one of the Representatives, a replacement shall
promptly be appointed by a writing signed by Management Company shareholders
holding a Majority Interest, and Shurgard REIT and the Indemnification Escrow
Agent shall be notified of such appointment forthwith. If a replacement shall
not be appointed within thirty (30) days of a Representative's termination of
his or her status as a Representative, Shurgard REIT and the Indemnification
Escrow Agent shall be authorized to act upon written instructions received from
the remaining Representatives until such time as a replacement shall be
appointed.
(b) (i) By virtue of their collective approval of
this Agreement, each of the Management Company shareholders shall be deemed to
agree that the Representatives, acting by majority vote, (1) have full power
and authority to take such action on behalf of the Management Company
shareholders with respect to the Contingent Shares, the Adjustment
Indemnification Shares and the Indemnification Shares as the Representatives in
their sole discretion may determine and (2) shall represent the Management
Company shareholders for all purposes of this Agreement, including the receipt
of notices and the exercise of any rights with respect to Shurgard REIT's
obligations under this Agreement, the Contingent Shares Agreement and the
Indemnification Escrow Agreement and the modification or amendment of the terms
of such agreements and the waiver of conditions, and resolution of disputes or
uncertainties arising thereunder. The Management Company shareholders, by
virtue of their collective approval of this Agreement, also shall be deemed to
agree that such Management Company shareholder shall be bound by all decisions
of the
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Representatives pursuant to the authority granted hereunder, and that, except
as set forth in subsection (a) hereof, such authority may not be revoked during
the term of this Agreement.
(ii) The Representatives, acting by majority vote,
shall have sole discretion with respect to the administration of the
distribution of the Contingent Shares, Indemnification Shares and Adjustment
Indemnification Shares and shall discharge their duties in good faith, with the
care an ordinarily prudent person in a like position would exercise under
similar circumstances and in a manner the Representatives reasonably believe to
be in the best interests of the Shurgard shareholders.
(iii) None of the Representatives nor any of their
respective employees, employers, partners, or agents, or any corporation of
which he or she is an officer, director, or agent (collectively, "Associates")
shall be liable for any action taken or not taken in connection herewith in his
or her capacity as Representative (whether or not pursuant to this Agreement)
in the absence of his or her own gross negligence, bad faith or willful
misconduct.
(iv) None of the Representatives nor any of his or
her respective Associates shall be responsible for or have any duty to
ascertain, inquire into, or verify, in his or her capacity as Representative
(1) any statement, warranty, or representation made in connection with this
Agreement (2) the performance or observance of any of the covenants or
agreements pursuant to this Agreement or (3) the validity, effectiveness, or
genuineness of this Agreement or any other instrument or writing furnished in
connection with this Agreement. None of the Representatives nor any of his or
her Associates shall incur any liability by reason of such Representative
having acted pursuant to this Agreement in reliance upon any oral or written
request, notice, consent, certificate, statement, or other writing (which may
be a facsimile transmission, telex, or similar writing) reasonably believed by
such Representative to be genuine or signed by the proper party or parties.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF MANAGEMENT COMPANY
Except as set forth on the Management Company Disclosure
Statement, Management Company hereby represents and warrants to Shurgard REIT
that as of the date hereof:
5.1 Organization, Etc. of Management Company
Management Company is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Washington and has
all requisite corporate power and authority to own, lease and operate its
properties, to carry on its business as now conducted and proposed by
Management Company to be conducted, to enter into this
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Agreement and to carry out the provisions of this Agreement and consummate the
transactions contemplated hereby. Management Company is duly qualified and in
good standing in each jurisdiction in which the property owned, leased or
operated by it or the nature of the business conducted by it makes such
qualification necessary and where the failure to be so qualified has or would
be reasonably expected (so far as can be foreseen at the time) to have a
material adverse effect on the business, properties, operations, condition
(financial or other) or prospects of Management Company (taking into account
any tax, insurance or indemnification benefits received or to be received) (a
"Management Company Material Adverse Effect").
Management Company has obtained from the appropriate
Governmental Bodies all approvals and licenses necessary for the conduct of its
business and operations as currently conducted, which approvals and licenses
are valid and remain in full force and effect, except where the failure to have
obtained such approvals or licenses or the failure of such licenses and
approvals to be valid and in full force and effect does not have and would not
be reasonably expected (so far as can be foreseen at the time) to have a
Management Company Material Adverse Effect. Management Company's Articles of
Incorporation and Bylaws are listed in the Management Company Disclosure
Statement, and true and correct copies of such documents have been made
available to Shurgard REIT.
5.2 Partnerships; Subsidiaries
The Management Company Disclosure Statement sets forth a true
and complete list, including the name and jurisdiction of organization, of each
general partnership and limited partnership of which Management Company is,
directly or indirectly, a partner (a "Partnership") and the nature and extent
of its equity interest therein. The Partnership agreements are listed in the
Management Company Disclosure Statement and true and correct copies have been
made available to Shurgard REIT. Management Company owns the percentages of
each class of equity interest of each Partnership as set forth in its
respective Partnership agreement, free and clear of all liens, security
interests, charges and encumbrances. With respect to such Partnerships,
Management Company's rights and interests as a partner as identified in the
respective Partnership agreements are unimpaired and in full force and effect.
Management Company does not own, directly or indirectly, any capital stock or
other equity or ownership or proprietary interest in any Subsidiary.
5.3 Agreement
This Agreement and the consummation of the transactions
contemplated hereby have been approved by the Board of Directors of Management
Company and have been duly authorized by all other necessary corporate action
on the part of Management Company (except for the approval of Management
Company's shareholders contemplated by Section 7.3(a)). This Agreement has
been duly executed and delivered by a duly authorized officer of Management
Company and, subject to Management Company shareholder approval,
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constitutes a valid and binding agreement of Management Company, enforceable
against Management Company in accordance with its terms, except as may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium and
other similar laws of general application that may affect the enforcement of
creditors' rights generally and by general equitable principles. Management
Company has delivered to Shurgard REIT true and correct copies of resolutions
adopted by the Board of Directors of Management Company approving this
Agreement and the transactions contemplated hereby.
5.4 Capital Stock
The authorized capital stock of Management Company consists of
ten million (10,000,000) Shares, of which 4,203,854 shares are outstanding as
of the date hereof. All outstanding Shares are duly authorized, validly
issued, fully paid and nonassessable, and no class of capital stock of
Management Company is entitled to preemptive or cumulative voting rights.
There are outstanding on the date hereof no options, warrants, calls, rights,
commitments or any other agreements of any character to which Management
Company is a party or by which it may be bound, requiring it to issue,
transfer, sell, purchase, redeem or acquire any shares of capital stock or any
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for or acquire any shares of capital stock, except Options (vested
or unvested) representing in the aggregate the right to purchase up to 295,300
Shares pursuant to the Management Company Option Plan. The following summary
of all such Options outstanding as of the date hereof is set forth on the
Shurgard Disclosure Statement: date of issuance, vesting schedule, exercise
price, expiration date and number of Shares issuable upon exercise. No Person
has any right to require Management Company to repurchase or otherwise acquire
any of such Person's outstanding securities.
5.5 Litigation
There are no actions, suits, investigations or proceedings
(adjudicatory, rulemaking or otherwise) pending or, to the knowledge of
Management Company, threatened against Management Company (or any Employee Plan
or Benefit Arrangement), or any property (including intellectual property) of
Management Company, in any court or before any arbitrator of any kind or before
or by any Governmental Body, except actions, suits, investigations or
proceedings that, in the aggregate, do not have and would not be reasonably
expected (so far as can be foreseen at the time) to have (a) a Management
Company Material Adverse Effect or (b) a material adverse effect on the ability
of Management Company to perform its obligations under this Agreement.
5.6 Compliance With Other Instruments, Etc.
Management Company is not in violation of any term of (a) its
charter, bylaws or other organizational documents, (b) any Material Agreement,
(c) any applicable law, ordinance, rule or regulation of any Governmental Body,
or (d) any applicable order,
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judgment or decree of any court, arbitrator or Governmental Body, except, as to
subsections (a) through (d) of this Section, where such violation, individually
or in the aggregate, does not have and would not be reasonably expected (so far
as can be foreseen at the time) to have a Management Company Material Adverse
Effect or a material adverse effect on the ability of Management Company to
perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement by Management Company will not result in any
violation of or conflict with, constitute a default under, or require any
consent under any term of the charter or bylaws of Management Company or any
Material Agreement, instrument, permit, license, law, ordinance, rule,
regulation, order, judgment or decree to which Management Company is a party or
to which Shurgard or any of their material assets are subject, or result in the
creation of (or impose any obligation on Management Company to create) any
mortgage, lien, charge, security interest or other encumbrance upon any of the
properties or assets of Management Company pursuant to any such term, except
where such violation, conflict or default, or the failure to obtain such
consent or the creation of such encumbrances, individually or in the aggregate,
does not have and would not be reasonably expected (so far as can be foreseen
at the time) to have a Management Company Material Adverse Effect or a material
adverse effect on the ability of Management Company to perform its obligations
under this Agreement.
5.7 Compensation and Employee Matters
A true, correct and complete list of all directors, officers
and key personnel of Management Company, and the current annual salary, bonuses
paid or accrued for the year ending December 31, 1994 and any commitments to
pay any further bonuses for each such person is set forth on the Management
Company Disclosure Statement. The aggregate accrued vacation pay, if any, of
the employees of Management Company is accurately reflected in the Management
Company Financial Statements consistent with Management Company's employee
policies as in effect on the date of the Management Company Financial
Statements. The Management Company Disclosure Statement also includes a true
and accurate statement of the proposed salaries for officers and key personnel
for the fiscal year ending December 31, 1995.
5.8 Employee Benefit Plans
(a) The Management Company Disclosure Statement sets
forth a true and complete list of all the following: (i) each "employee
benefit plan," as such term is defined in Section 3(3) of ERISA (each, together
with the Management Company Option Plan, an "Employee Plan"), and (ii) each
other plan, program, policy, contract or arrangement providing for bonuses,
pensions, deferred pay, stock or stock-related awards, severance pay, salary
continuation or similar benefits, hospitalization, medical, dental or
disability benefits, life insurance or other employee benefits, or contract or
agreement for compensation to or for any current or former employees, agents,
directors or independent contractors of Management Company ("Employees") or any
beneficiaries or dependents of any Employee,
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whether or not insured or funded, (A) pursuant to which Management Company has
any liability or (B) constituting an employment or severance agreement or
arrangement with any officer or director of Management Company (each, a
"Benefit Arrangement"). Management Company has made available to Shurgard REIT
with respect to each Employee Plan and Benefit Arrangement: (i) a true and
complete copy of all written documents comprising such Employee Plan or Benefit
Arrangement or, if there is no such written document, an accurate and complete
description of such Employee Plan or Benefit Arrangement; (ii) the most recent
Form 5500 or Form 5500-C (including all schedules thereto), if applicable;
(iii) the most recent financial statements and actuarial reports, if any; (iv)
the summary plan description currently in effect and all material modifications
thereof, if any; and (v) the most recent Internal Revenue Service determination
letter, if any. All material contributions required to be made as of the date
hereof to the Employee Plans and Benefit Arrangements have been made or
provided for. Neither Management Company nor any Management Company entity
under "common control" with Management Company within the meaning of ERISA
Section 4001 has contributed to, or been required to contribute to, any
"multiemployer plan" (as defined in Sections 3(37) and 4001(a)(3) of ERISA).
Management Company does not maintain or contribute to any plan or arrangement
which provides or has any liability to provide life insurance, medical or other
employee welfare benefits to any employee or former employee upon his or her
retirement or termination of employment and Management Company has not ever
represented, promised or contracted (whether in oral or written form) to any
employee or former employee that such benefits would be provided.
(b) Each Employee Plan and Benefit Arrangement has been
established and maintained in all material respects in accordance with its
terms and in material compliance with all applicable laws, including, but not
limited to, ERISA and the Code. Neither Management Company nor any of their
current or former directors, officers or employees, nor, to the knowledge of
Management Company, any other disqualified Person or party-in-interest with
respect to any Employee Plan, has engaged directly or indirectly in any
"prohibited transaction," as such term is defined in Section 4975 of the Code
or Section 406 of ERISA.
(c) Management Company does not have an Employee Plan
that is subject to Title IV of ERISA and Management Company has not had an
ERISA Affiliate at any time since the earlier of its inception and September 2,
1974.
(d) Neither the execution or delivery of this Agreement
nor the consummation of the transactions contemplated hereby (either alone or
together with any additional or subsequent events) constitutes an event under
any Employee Plan, Benefit Arrangement or loan to, or individual agreement or
contract with, an Employee that may result in any payment (whether severance
pay or otherwise), restriction or limitation upon the assets of any Employee
Plan or Benefit Agreement, acceleration of payment or vesting, increase in
benefits or compensation, or required funding, with respect to any Employee, or
the forgiveness of any loan or other commitment of any Employees.
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(e) All contributions required under applicable law or
the terms of any Employee Plan or other agreement relating to an Employee Plan
to be paid by Management Company have been completely and timely made to each
Employee Plan when due, and Management Company has established adequate
reserves on its books to meet liabilities for contributions accrued but that
have not been made because they are not yet due and payable.
(f) The Shurgard Incorporated Employee Stock Ownership
Plan ("ESOP") is duly organized and existing under applicable law, is a stock
bonus plan qualified under Section 401(a) of the Code and is an "employee stock
ownership plan" as defined in Section 4975(e)(7) of the Code. The trust under
the ESOP is a duly established and existing trust under applicable law.
Management Company has duly and validly reserved the right to terminate the
ESOP in its entirety at any time.
(g) No amounts paid or payable by Management Company to
or with respect to any Employee will fail to be deductible for federal income
tax purposes by reason of Section 280G of the Code.
(h) No Employees and no beneficiaries or dependents of
Employees are or may become entitled under any Employee Plan or Benefit
Arrangement to post-employment welfare benefits of any kind, including, without
limitation, death or medical benefits, other than coverage mandated by Section
4980B of the Code.
5.9 Labor Matters
Management Company is not a party to, or bound by, any
collective bargaining agreement, contract or other agreement or understanding
with a labor union or labor organization. There is no unfair labor practice or
labor arbitration proceeding pending or, to the knowledge of Management
Company, threatened against Management Company relating to their business. To
the knowledge of Management Company, there are no organizational efforts with
respect to the formation of a collective bargaining unit presently being made
or threatened involving employees of Management Company.
5.10 Taxes
Management Company has (i) timely filed all Tax Returns
required to be filed by it and all such Tax Returns are true, correct and
complete in all respects, (ii) paid all Taxes due or claimed to be due by any
federal state, local or foreign taxing or customs authority and (iii) properly
accrued all such Taxes for such periods subsequent to the periods covered by
such returns. There are no liens for Taxes on any property or assets of
Management Company other than liens for current property taxes not yet due.
The Tax Returns of Management Company are not being and have not been examined
by any taxing authority. Management Company has not executed or filed with the
IRS or any taxing authority any agreement extending the limitations period of
any Taxes. Management
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Company is not a party to any pending action or proceeding by any taxing
authority for assessment or collection of Taxes, and no claim for assessment or
collection of Taxes has been asserted against it, including claims by an
authority in a jurisdiction where it does not file Tax Returns that it is or
may be subject to taxation in that jurisdiction. True, correct and complete
copies of all Tax Returns filed by Management Company and all examination
reports, statements of deficiencies assessed and communications from any taxing
authority relating thereto have been made available to Shurgard REIT.
Management Company has withheld and paid all Taxes required to
have been withheld and paid in connection with amounts paid or owing to any
employee, independent contractor, creditor, stockholder or other third party.
Management Company is not the beneficiary of any extension of time within which
to file any Tax Return. Management Company (i) has not filed a consent under
Section 341(f) of the Code concerning collapsible corporations; (ii) has not
been a United States real property holding corporation within the meaning of
Section 897(c)(2) of the Code during the applicable period specified in Section
897(c)(1)(A)(2)(i) of the Code; (iii) is not a party to any Tax allocation or
sharing agreement; and (iv) has no liability for Taxes of any Person under
Section 1.1592-6 of the Treasury Regulations (or any similar provision of
state, local or foreign law) as a transferor or successor by contract or
otherwise. Management Company has established (and until the Closing shall
establish) on its books and records reserves that are adequate for the payment
of all Taxes not yet due and payable.
All federal, state and local Tax Returns required to be filed
with respect to the short taxable year of the Management Company as of the
Effective Time, will, when filed, be true, correct and complete in all
respects.
5.11 Intellectual Property
(a) The Management Company Disclosure Statement sets
forth a complete list of the trademarks registered by Management Company and a
list of all licenses, sublicenses and agreements to which Management Company is
a party regarding Management Company Intellectual Property Rights material to
Management Company's business.
(b) To its knowledge, Management Company has not
infringed upon or misappropriated any intellectual property rights of third
parties, and Management Company has not received any charge, complaint, claim
or notice alleging any such interference, infringement, misappropriation or
violation. To the knowledge of Management Company, no third party has
interfered with, infringed upon, misappropriated or otherwise come into
conflict with any Management Company Intellectual Property Rights except for
any such interference, infringement, misappropriation or violation which has
not had, and is not likely to have, a Management Company Material Adverse
Effect.
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(c) Management Company has the right to transfer and
assign all of the Management Company Intellectual Property Rights set forth
under Section 5.11(a). To the knowledge of the Management Company, none of
such Management Company Intellectual Property is subject to any lien,
encumbrance or claim of infringement or otherwise, nor requires any consent,
approval or waiver to be conveyed to Shurgard REIT by way of the Merger.
5.12 Financial Statements
(a) Management Company has provided to Shurgard REIT true
and correct copies of its (i) audited consolidated balance sheets as of
December 31, 1991, 1992 and 1993, and related audited statements of income and
cash flows for the fiscal years then ended, and (ii) unaudited consolidated
balance sheets as of March 31, June 30, September 30 and October 31, 1994 and
related unaudited statements of income and other statements for the fiscal
quarters or month then ended (collectively, the "Management Company Financial
Statements"). Each of such balance sheets (including the related notes)
referred to in subsection (i) hereof presents fairly, in all material respects,
the consolidated financial position of Management Company and its subsidiaries
as of the respective dates thereof, and the other related statements (including
the related notes) included therein present fairly, in all material respects,
the results of their operations and their cash flows for the respective periods
or as of the respective dates set forth therein, all in conformity with
generally accepted accounting principles consistently applied during the
periods involved, except as otherwise noted in the auditor's report. Each of
such balance sheets referred to in subsection (ii) hereof presents fairly, in
all material respects, the assets, liabilities, and shareholders' equity of
Management Company and its subsidiaries as of the respective dates thereof, and
the other related statements included therein present fairly, in all material
respects, the results of their operations for the respective periods or as of
the respective dates set forth therein, all on a basis consistent with
Management Company's internal monthly financial statements.
(b) The October 31 Statement, the Closing Statement and
the Final Statement has been or will be prepared in accordance with generally
accepted accounting principles on a going concern basis with the following
exceptions: (i) European investment is accounted for on the equity method,
(ii) investment in affiliated partnerships are accounted for based on the
related 1993 K-1, and (iii) administrative real estate department
reimbursements are accounted for on the cash basis. This basis is consistent
with the audited and unaudited consolidated financial statements of the
Management Company described in (a) and (b) in the preceding paragraph except
for the following items: elimination of InterMation, elimination of Shurgard
Realty Advisors, elimination of incentive management fees, treatment of
administrative real estate reimbursements on a cash basis and elimination of
insurance payments related to buy-sell agreements.
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As to the Closing Statement, as such will be prepared in
advance of the Closing Date, it may include management's good faith estimates
of certain items as to the Closing Date. As to the Closing Statement and the
Final Statement, (a) to the extent that Shurgard REIT Common Shares are
included, such stock will be valued at Market Value as of the Closing Date and
(b) no liability for payments related to dissenting shareholders will be
accrued, and no such liability shall constitute Damages, or be the basis for an
adjustment of the Share Consideration.
5.13 Absence of Certain Changes or Events
Except as otherwise contemplated or as permitted herein in
Section 7.1 or elsewhere, during the period since October 31, 1994 (a) the
business of Management Company has been conducted only in the ordinary course,
(b) Management Company has not entered into any material transaction other than
in the ordinary course, and (c) there has not been any change in the business,
financial condition, results of operations, properties, assets, liabilities or
prospects of Management Company which, in the aggregate, would have a
Management Company Material Adverse Effect.
5.14 Books and Records
(a) The books of account and other financial records of
Management Company are in all material respects true, complete and correct, and
are accurately reflected in all material respects in the Management Company
Financial Statements.
(b) The minute books and other records of Management
Company have been made available to Shurgard REIT, contain in all material
respects accurate records of all meetings and accurately reflect in all
material respects all other corporate action of the shareholders and directors
and any committees of the Board of Directors of Management Company.
5.15 Contracts and Leases
The Management Company Disclosure Statement contains an
accurate and complete listing of all material contracts, leases, agreements or
understandings, whether written or oral, of Management Company (the "Material
Agreements"). A contract, lease, agreement or understanding is "material" if
it involves (i) obligations (contingent or otherwise) of, or payments to
Management Company in excess of $100,000 per annum, (ii) partnership,
management or advisory agreements in excess of $100,000 per annum, or (iii) the
license of any patent, copyright, trade secret or other proprietary right (A)
to Management Company which is necessary for Management Company to carry on its
business or (B) from Management Company which materially limits the ability of
Management Company to carry on its business. Each Material Agreement is in
full force and effect and (a) neither Management Company nor, to the knowledge
of Management Company, any
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other party thereto has breached any of the above or is in material default
thereunder, (b) no event has occurred which, with the passage of time or the
giving of notice, or both, would constitute such a breach or default, (c) no
claim of material default thereunder has been asserted or threatened, and (d)
neither Management Company nor, to the best knowledge of Management Company,
any other party thereto is seeking the renegotiation thereof or substitute
performance thereunder.
5.16 Title to Properties; Encumbrances
Except for properties and assets reflected in the unaudited
consolidated balance sheet as of October 31, 1994 or acquired since such
balance sheet date which have been sold or otherwise disposed of in the
ordinary course of business, Management Company has good, valid and marketable
title to (a) all of its material properties and assets (real and personal,
tangible and intangible), reflected in such balance sheet, except as indicated
in the notes thereto, and (b) all of the properties and assets purchased by
Management Company since such balance sheet date in each case subject to no
encumbrance, lien, charge or other restriction of any kind or character, except
for (i) liens reflected in such balance sheet, (ii) liens consisting of zoning
restrictions or limitations on the use of real property or irregularities in
title thereto which do not materially detract from the value of, or impair the
use of, such property by Management Company in the operation of its business,
(iii) liens for current taxes, assessments or governmental charges or levies on
property not yet due and delinquent and (iv) liens described in the Management
Company Disclosure Statement (liens of the type described in clauses (i), (ii)
and (iii) above are hereinafter sometimes referred to as "Permitted Liens").
5.17 Real Property
The Management Company Disclosure Statement contains an
accurate and complete list of all real property owned in whole or in part by
Management Company and includes the name of the record title holder thereof and
a list of all indebtedness secured by a lien, mortgage or deed of trust
thereon. Management Company has good and marketable title in fee simple to all
the real property owned by it as reflected in the unaudited consolidated
balance sheet as of October 31, 1994, free and clear of all encumbrances,
liens, charges or other restrictions of any kind or character, except for
Permitted Liens. All of the buildings, structures and appurtenances situated
on the real property owned in whole or in part by Management Company are in
good operating condition and in a state of good maintenance and repair, are
adequate and suitable for the purposes for which they are presently being used
and, with respect to each, Management Company has adequate rights of ingress
and egress for operation of the business of Management Company or such
Subsidiary in the ordinary course. None of such buildings, structures or
appurtenances (or any equipment therein), nor the operation or maintenance
thereof, to the knowledge of Management Company, violates any restrictive
covenant or any provision of federal, state or local law, ordinance, rule or
regulation, or encroaches on any property owned by others,
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except for such violations or encroachments which do not have a Management
Company Material Adverse Effect. No condemnation proceeding is pending or
threatened which would preclude or impair the use of any such property by
Management Company for the purposes for which it is currently used.
5.18 Environmental Laws and Regulations
Management Company has made available to Shurgard REIT
information relating to the following items: (a) the nature and quantities of
any Hazardous Materials (as defined below) generated, treated, stored, handled,
transported, disposed of or released, to the knowledge of Management Company,
by Management Company during the past three years, together with a description
of the location of each such activity, and (b) a summary of the nature and
quantities of any Hazardous Materials that, to the knowledge of Management
Company, have been disposed of or found at any site or facility owned or
operated presently or at any previous time by Management Company. To the
knowledge of Management Company, Management Company is in compliance in all
material respects with all applicable federal, state and local laws and
regulations relating to product registration, pollution control and
environmental contamination including, but not limited to, all laws and
regulations governing the generation, use, collection, discharge, or disposal
of Hazardous Materials and all laws and regulations with regard to record
keeping, notification and reporting requirements respecting Hazardous
Materials. Management Company has not been alleged to be in violation of, or
has been subject to any administrative or judicial proceeding pursuant to, such
laws or regulations either now or at any time during the past three years.
Management Company has no knowledge of any facts which Management Company
considers likely to form the basis for any Claim (as defined below) against
Management Company relating to environmental matters including, but not limited
to, any Claim arising from past or present environmental practices asserted
under CERCLA (as defined below) and RCRA (as defined below), or any other
federal, state or local environmental statute, which Management Company
considers likely to have a Management Company Material Adverse Effect.
For purposes of this representation the following terms shall
have the following meanings: (A) "Hazardous Materials" shall mean materials
defined as "hazardous substances," "hazardous wastes" or "solid wastes" in (i)
the Comprehensive Environmental Response, Compensation and Liability Act of
1980, 42 U.S.C. Sections 9601-9657, and any amendments thereto
("CERCLA"), (ii) the Resource Conservation and Recovery Act, 42 U.S.C. Sections
6901-6987 and any amendments thereto ("RCRA"), and (iii) any similar
federal, state or local environmental statute; and (B) "Claim" shall mean any
and all claims, demands, causes of actions, suits, proceedings, administrative
proceedings, losses, judgments, decrees, debts, damages, liabilities, court
costs, attorneys' fees and any other expenses incurred, assessed or sustained
by or against Shurgard.
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5.19 Affiliated Transactions
Set forth in the Management Company Disclosure Statement is a
list of all current material arrangements, agreements and contracts, written or
oral, entered into by Shurgard with any person who is an officer, director or
Affiliate of Management Company (other than Shurgard REIT), any relative of any
of the foregoing or any entity of which any of the foregoing is an Affiliate.
True and correct copies of all such documents have previously been delivered or
made available to Shurgard REIT.
5.20 Brokers and Finders
Except for the fees and expenses paid or payable to Nomura,
which fees are reflected in its agreement with Management Company, Management
Company has not entered into any contract, arrangement or understanding with
any person or firm which may result in the obligation of Management Company or
Shurgard REIT to pay any finder's fees, brokerage or agent's commissions or
other like payments in connection with the negotiations leading to this
Agreement or the consummation of the transactions contemplated hereby. Except
for the fees and expenses paid or payable by Shurgard REIT to Alex. Brown and
to Nomura by Management Company, Management Company is not aware of any claim
for payment of any investment banking fees, finder's fees, brokerage or agent's
commissions or other payments in connection with the negotiations leading to
this Agreement or the consummation of the transactions contemplated hereby.
5.21 S-4 Registration Statement and Proxy Statement/Prospectus
None of the information supplied or to be supplied by
Management Company for inclusion in the S-4 Registration Statement as set forth
in the Sections titled "SUMMARY - The Companies - Shurgard Incorporated,"
"SUMMARY - Action Taken by Management Company Prior to the Merger," "SUMMARY -
Unaudited Pro Forma Combined Financial Statements" (Post Merger Consolidation
financial statements, amounts in columns designated Management Company Core
Business), "SUMMARY - COMPARATIVE PER SHARE DATA" (amounts designated
Management Company), "SHURGARD INCORPORATED," "COMPARATIVE PER SHARE MARKET
INFORMATION - THE MANAGEMENT COMPANY," "DESCRIPTION OF MANAGEMENT COMPANY
CAPITAL STOCK," "EXECUTIVE COMPENSATION," "PRINCIPAL MANAGEMENT COMPANY
SHAREHOLDERS," "FINANCIAL STATEMENTS - MANAGEMENT COMPANY OF SHURGARD
INCORPORATED", the Proxy Statement/Prospectus or the Management Company Proxy
Materials will (a) in the case of the S-4 Registration Statement, at the time
it becomes effective, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not misleading or (b) in the case of the Proxy Statement/Prospectus,
at the time of mailing the Proxy Statement/Prospectus and at the time of the
Shurgard REIT Stockholders Meeting, and in the case of the
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Management Company Proxy Materials, at the time of mailing the Management
Company Proxy Materials and at the time of the Management Company Shareholders
Meeting, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made,
not misleading. If at any time prior to the Effective Time any event with
respect to Management Company or its officers and directors shall occur that is
required to be described in an amendment of, or a supplement to, the Proxy
Statement/Prospectus, the S-4 Registration Statement or the Management Company
Proxy Materials, Management Company shall notify Shurgard REIT thereof by
reference to this Section 5.21 and, in the case of the Proxy
Statement/Prospectus or the S-4 Registration Statement, cooperate with Shurgard
REIT in preparing and filing an amendment or supplement with the SEC and, as
required by law, disseminating to the stockholders of Shurgard REIT and/or the
shareholders of Management Company an amendment or supplement which accurately
describes such event or events in compliance with all provisions of applicable
law.
5.22 Insurance
The Management Company Disclosure Statement contains an
accurate list of all insurance policies of Shurgard, and each such insurance
policy is in full force and effect and issued by a reputable insurer. All
premiums due with respect to such policies have been paid, and no notice of
premium increase, cancellation or termination has been received with respect to
any such policy. Such policies (i) are sufficient for compliance with
requirements of law and with agreements to which Management Company is a party,
(ii) are valid, outstanding and enforceable, (iii) provide insurance coverage
for the assets and operations of Management Company to the extent and in the
manner that Management Company considers reasonable for companies engaged in
business similar to that of Management Company, (iv) will remain in full force
and effect through at least the Closing Date and (v) will not be modified as a
result of, or terminate or lapse by reason of, the transactions contemplated by
this Agreement. Management Company has not been refused any insurance with
respect to its assets or operations, nor has its coverage been materially
limited, by any insurance carrier to which it has applied for any such
insurance or with which it has carried insurance during the last three years.
5.23 Disclosure
The representations and warranties contained in this
Agreement, in the Management Company Disclosure Statement, or in any written
certificate or related agreement furnished or to be furnished to Shurgard REIT
by Management Company in connection with the Closing pursuant to this Agreement
do not contain any untrue statement of a fact or omit to state any material
fact necessary to make the statements and information contained herein or
therein, in light of the circumstances in which they are made, not misleading.
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ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF
SHURGARD REIT
Except as set forth in the Shurgard REIT SEC Reports and the
Shurgard REIT Disclosure Statement, Shurgard REIT hereby represents and
warrants to Management Company that, as of the date hereof:
6.1 Organization, Etc. of Shurgard REIT
Shurgard REIT is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Delaware and has
all requisite corporate power and authority to own, lease and operate its
properties, to carry on its business as now conducted and proposed by Shurgard
REIT to be conducted, to enter into this Agreement and to carry out the
provisions of this Agreement and consummate the transactions contemplated
hereby. Shurgard REIT is duly qualified and in good standing in each
jurisdiction in which the property owned, leased or operated by it or the
nature of the business conducted by it makes such qualification necessary and
where the failure to be so qualified has or would be reasonably expected (so
far as can be foreseen at the time) to have a material adverse effect on the
business, properties, operations, condition (financial or other) or prospects
of Shurgard REIT and its Subsidiaries taken as a whole (taking into account any
tax, insurance or indemnification benefits received or to be received) (a
"Shurgard REIT Material Adverse Effect").
Shurgard REIT has obtained from the appropriate Governmental
Bodies all approvals and licenses necessary for the conduct of its business and
operations as currently conducted, which approvals and licenses are valid and
remain in full force and effect, except where the failure to have obtained such
approvals or licenses or the failure of such approvals and licenses to be valid
and in full force and effect does not have and would not be reasonably expected
(so far as can be foreseen at the time) to have a Shurgard REIT Material
Adverse Effect. Shurgard REIT's and its Subsidiaries' Certificate of
Incorporation, By-laws, organizational documents and partnership agreements are
listed in the Shurgard REIT Disclosure Statement, and true and correct copies
of such documents have been made available to Management Company.
6.2 Subsidiaries
The Shurgard REIT Disclosure Statement sets forth a true and
complete list of each of Shurgard REIT's Subsidiaries (the "Shurgard REIT
Subsidiaries"). Each Shurgard REIT Subsidiary (a) is a corporation or other
legal entity duly incorporated, validly existing and (if applicable) in good
standing under the laws of the jurisdiction of its incorporation or
organization and has the full power and authority to own its properties and
conduct its
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business and operations as currently conducted, except where the failure to be
duly incorporated or organized, validly existing and in good standing does not
have, and would not be reasonably expected (so far as can be foreseen at the
time) to have, a Shurgard REIT Material Adverse Effect, (b) is duly qualified
and in good standing in each jurisdiction in which the property owned, leased
or operated by it or the nature of the business conducted by it makes such
qualification necessary, except where the failure to be so qualified does not
have and would not be reasonably expected (so far as can be foreseen at the
time) to have an Shurgard REIT Material Adverse Effect, and (c) has obtained
from the appropriate Governmental Bodies all approvals and licenses necessary
for the conduct of its business and operations as currently conducted, which
approvals and licenses are valid and remain in full force and effect, except
where the failure to have obtained such approvals and licenses or the failure
of such approvals and licenses to be valid and in full force and effect does
not have and would not be reasonably expected (so far as can be foreseen at the
time) to have a Shurgard REIT Material Adverse Effect.
All outstanding shares of capital stock of each Shurgard REIT
Subsidiary are duly authorized, validly issued, fully paid and nonassessable,
and are owned, of record and beneficially, by Shurgard REIT, free and clear of
any liens, encumbrances, equities, options or claims whatsoever. No shares of
capital stock of any Shurgard REIT Subsidiary are reserved for issuance. There
are outstanding no options, warrants or other rights to acquire capital stock
from any Shurgard REIT Subsidiary. Neither Shurgard REIT nor any Shurgard REIT
Subsidiary owns, directly or indirectly, any capital stock or other equity or
ownership or proprietary interest in any corporation, partnership, association,
trust, joint venture or other entity, except as set forth in the Shurgard REIT
Disclosure Statement.
6.3 Agreement
This Agreement and the consummation of the transactions
contemplated hereby have been approved by the Board of Directors of Shurgard
REIT, and have been duly authorized by all other necessary corporate action on
the part of Shurgard REIT (except for the approval of Shurgard REIT's
stockholders contemplated by Section 7.3(b)). This Agreement has been duly
executed and delivered by a duly authorized officer of Shurgard REIT and,
subject to Shurgard REIT stockholder approval, constitutes a valid and binding
agreement of Shurgard REIT, enforceable against Shurgard REIT in accordance
with its terms, except as may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium and other similar laws of general application that
may affect the enforcement of creditors' rights generally and by general
equitable principles. Shurgard REIT has delivered to Management Company true
and correct copies of resolutions adopted by the Board of Directors of Shurgard
REIT approving this Agreement and the transactions contemplated hereby.
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6.4 Capital Stock
The authorized capital stock of Shurgard REIT consists of (a)
120,000,000 shares of Shurgard REIT Common Shares, (b) 500,000 shares of Class
B Common Stock, $0.001 par value per share, (c) 160,000,000 shares of Excess
Stock, $0.001 par value per share, and (d) 80,000,000 shares of preferred
stock, $0.001 par value per share. All outstanding Shurgard REIT Common Shares
are duly authorized, validly issued, fully paid and nonassessable, and no class
of capital stock of Shurgard REIT is entitled to preemptive or cumulative
voting rights. As of the date hereof, 16,829,283 Shurgard REIT Common Shares,
154,604 shares of Class B Common Stock, no shares of Excess Stock, and no
shares of preferred stock were issued and outstanding. Except as disclosed in
the Shurgard REIT SEC Reports, all outstanding shares of capital stock of the
Subsidiaries of Shurgard REIT are owned by Shurgard REIT or a direct or
indirect wholly-owned Subsidiary of Shurgard REIT, free and clear of all liens,
charges, encumbrances, claims and options of any nature.
6.5 Authorization for Shurgard REIT Common Shares
Prior to the Effective Time, Shurgard REIT will have taken all
necessary action to permit it to issue the number of Shurgard REIT Common
Shares required to be issued pursuant to Article 4 and to reserve for issuance
a sufficient number of Shurgard REIT Common Shares for delivery upon
determination of the Contingent Shares (as contemplated in Section 4.7 above).
The Share Consideration and Contingent Shares will, when issued, be duly
authorized, validly issued, fully paid and nonassessable, and no shareholder of
Shurgard REIT will have any preemptive right of subscription or purchase in
respect thereof. The Share Consideration and Contingent Shares will, when
issued, be registered under the Securities Act and the Exchange Act and will be
registered or exempt from registration under all applicable state securities
laws.
6.6 Litigation
There are no actions, suits, investigations or proceedings
(adjudicatory, rulemaking or otherwise) pending or, to the knowledge of
Shurgard REIT, threatened against Shurgard REIT or any of its Subsidiaries, or
any property (including intellectual property) of Shurgard REIT or any such
Subsidiary, in any court or before any arbitrator of any kind or before or by
any Governmental Body, except actions, suits, investigations or proceedings
that, in the aggregate, do not have and would not be reasonably expected (so
far as can be foreseen at the time) to have (a) a Shurgard REIT Material
Adverse Effect or (b) a material adverse effect on the ability of Shurgard REIT
to perform its obligations under this Agreement.
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6.7 Compliance With Other Instruments, Etc.
Neither Shurgard REIT nor any Subsidiary of Shurgard REIT is
in violation of any term of (a) its charter, by-laws or other organizational
documents, (b) any agreement or instrument related to indebtedness for borrowed
money or any other agreement to which it is a party or by which it is bound,
(c) any applicable law, ordinance, rule or regulation of any Governmental Body,
or (d) any applicable order, judgment or decree of any court, arbitrator or
Governmental Body, except, as to subsections (a) through (d) of this Section,
where such violation, individually or in the aggregate, does not have and would
not be reasonably expected (so far as can be foreseen at the time) to have a
Shurgard REIT Material Adverse Effect or a material adverse effect on the
ability of Shurgard REIT to perform its obligations under this Agreement. The
execution, delivery and performance of this Agreement by Shurgard REIT will not
result in any violation of or conflict with, constitute a default under,
require any consent under or result in the creation or issuance of Excess Stock
under any term of the charter or by-laws of Shurgard REIT (or any of its
Subsidiaries) or any agreement, instrument, permit, license, law, ordinance,
rule, regulation, order, judgment or decree to which Shurgard REIT (or any of
its Subsidiaries) is a part or to which Shurgard REIT (or any of its
Subsidiaries) or any of their material assets are subject, or result in the
creation of (or impose any obligation on Shurgard REIT to create) any mortgage,
lien, charge, security interest or other encumbrance upon any of the properties
or assets of Shurgard REIT or any of its Subsidiaries pursuant to any such
term, except where such violation, conflict or default, or the failure to
obtain such consent or the creation of such encumbrance, individually or in the
aggregate, does not have and would not be reasonably expected (so far as can be
foreseen at the time) to have (a) a Shurgard REIT Material Adverse Effect or
(b) a material adverse effect on the ability of Shurgard REIT to perform its
obligations under this Agreement.
6.8 Reports and Financial Statements
Shurgard REIT has filed all reports required to be filed with
the SEC since February 28, 1994 (collectively, the "Shurgard REIT SEC
Reports"), and has previously furnished or made available to Management Company
true and complete copies of all Shurgard REIT SEC Reports. None of the
Shurgard REIT SEC Reports, as of their respective dates (as amended through the
date hereof), contained any untrue statement of material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. Each of the balance sheets (including the related notes)
included in the Shurgard REIT SEC Reports presents fairly, in all material
respects, the consolidated financial position of Shurgard REIT and its
Subsidiaries as of the respective dates thereof, and the other related
statements (including the related notes) included therein present fairly, in
all material respects, the results of operations and the changes in financial
position of Shurgard REIT and its Subsidiaries for the respective periods or as
of the respective dates set forth therein, all in conformity with generally
accepted accounting principles consistently applied during the
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periods involved, except as otherwise noted therein and subject, in the case of
the unaudited interim financial statements, to normal year-end adjustments and
any other adjustments described therein. All the Shurgard REIT SEC Reports, as
of their respective dates (as amended through the date hereof), complied in all
material respects with the requirements of the Exchange Act and the applicable
rules and regulations thereunder.
6.9 Brokers and Finders
Except for the fees and expenses paid to Alex. Brown with
respect to the delivery of a fairness opinion to the Special Committee, which
fees are reflected in its agreement with the Special Committee, Shurgard REIT
has not employed any investment banker, broker, finder, consultant or
intermediary in connection with the transactions contemplated by this Agreement
which would be entitled to any investment banking, brokerage, finder's or
similar fee or commission in connection with this Agreement or the transactions
contemplated hereby.
6.10 S-4 Registration Statement and Proxy Statement/Prospectus
None of the information supplied or to be supplied by Shurgard
REIT for inclusion or incorporation by reference in the S-4 Registration
Statement, the Proxy Statement/Prospectus or the Management Company Proxy
Materials will (a) in the case of the S-4 Registration Statement, at the time
it becomes effective, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein not misleading or (b) in the case of the Proxy
Statement/Prospectus, at the time of mailing the Proxy Statement/Prospectus and
at the time of the Shurgard REIT Stockholders Meeting, and in the case of the
Management Company Proxy Materials, at the time of mailing the Management
Company Proxy Materials and at the time of the Management Company Shareholders
Meeting, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made,
not misleading. If at any time prior to the Effective Time any event with
respect to Shurgard REIT, its officers and directors or any of its Subsidiaries
shall occur that is required to be described in an amendment of, or a
supplement to, the Proxy Statement/Prospectus, the S-4 Registration Statement
or the Management Company Proxy Materials, Shurgard REIT shall notify
Management Company thereof by reference to this Section 6.10 and, in the case
of the Proxy Statement/Prospectus or the S-4 Registration Statement, such event
shall be so described, and an amendment or supplement shall be promptly filed
with the SEC and, as required by law, disseminated to the stockholders of
Shurgard REIT and/or the shareholders of Management Company, and such amendment
or supplement shall comply with all provisions of applicable law. The S-4
Registration Statement will comply (with
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respect to Shurgard REIT) as to form in all material respects with the
provisions of the Securities Act. The Proxy Statement/Prospectus will comply
(with respect to Shurgard REIT) in all material respects with the requirements
of the Exchange Act and the applicable rules and regulations thereunder.
6.11 Disclosure
The representations and warranties contained in this
Agreement, in the Shurgard REIT Disclosure Statement or in any written
certificate or related agreement furnished or to be furnished to Management
Company by Shurgard REIT in connection with the Closing pursuant to this
Agreement do not contain any untrue statement of a fact or omit to state any
material fact necessary to make the statements and information contained herein
or therein, in light of the circumstances in which they are made, not
misleading.
ARTICLE 7
ADDITIONAL COVENANTS AND AGREEMENTS
7.1 Conduct of Business of Management Company
Except as contemplated by this Agreement or as set forth in
the Management Company Disclosure Statement, during the period from the date of
this Agreement to the Effective Time, Management Company will pursue its
business in the ordinary course, with no less diligence and effort than would
be applied in the absence of this Agreement; will seek to preserve intact its
current business organization, keep available the service of its current
officers and employees and preserve its relationships with customers, suppliers
and others having business dealings with it with the objective that their
goodwill and ongoing businesses shall be unimpaired at the Effective Time; and
will not, without the prior written consent of Shurgard REIT:
(a) except for Shares issuable upon exercise of Options
outstanding as of the date hereof under the Management Company Option Plan,
issue, deliver, sell, dispose of, pledge or otherwise encumber, or authorize or
propose the issuance, delivery, sale, disposition or pledge or other
encumbrances of (i) any additional shares of its capital stock of any class
(including the Shares), or any securities or rights convertible into,
exchangeable for or evidencing the right to subscribe for any shares of its
capital stock, or any rights, warrants, options, calls, commitments or any
other agreements of any character to purchase or acquire any shares of its
capital stock or any securities or rights convertible into, exchangeable for or
evidencing the right to subscribe for any shares of its capital stock, or (ii)
any other securities in respect of, in lieu of or in substitution for Shares
outstanding on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to
redeem, purchase or otherwise acquire, any of its outstanding securities
(including the Shares);
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(c) split, combine, subdivide or reclassify any shares of
its capital stock or declare, set aside for payment or pay any dividend, or
make any other actual, constructive or deemed distribution in respect of any
shares of its capital stock or otherwise make any payments to shareholders in
their capacity as such;
(d) (i) grant any increases in the compensation of any of
its directors, officers or employees, except in the ordinary course of business
consistent with past practice (except within the parameters noted on the
Management Company Disclosure Statement by virtue of Section 5.7 hereof), (ii)
pay or agree to pay any pension, retirement allowance or other material
employee benefit not required or contemplated by any Employee Plan or Benefit
Arrangement as in effect on the date hereof to any such director, officer or
employee, whether past or present, (iii) enter into any new or amend any
existing employment or severance agreement with any such director, officer or
employee, except (1) as required for the termination of such agreement (2) in
the ordinary course and under $10,000 with respect to any employee or (3) as
required for the assumption of such agreement by Shurgard REIT, or as otherwise
approved by Shurgard REIT in its sole discretion, (iv) pay or agree to pay any
bonus to any director, officer or employee (whether in the form of cash,
capital stock or otherwise), or (v) except as may be required to comply with
applicable law, amend any existing, or become obligated under any new, Employee
Plan or Benefit Arrangement;
(e) adopt a plan of complete or partial liquidation,
dissolution, merger, consolidation, restructuring, recapitalization or other
reorganization (other than the Merger);
(f) make any acquisition, by means of merger,
consolidation or otherwise, of (i) any direct or indirect ownership interest in
or assets comprising any business enterprise or operation or (ii) except in the
ordinary course and consistent with past practice, any other assets;
(g) adopt any amendments to its charter or bylaws;
(h) other than borrowings under existing credit
facilities, or other borrowing in the ordinary course, incur any indebtedness
for borrowed money or guarantee any such indebtedness or, except in the
ordinary course consistent with past practice, make any loans, advances or
capital contributions to, or investments in, any Partnership or other Person;
(i) engage in the conduct of any business the nature of
which is materially different than the business Management Company is currently
engaged in;
(j) enter into any agreement providing for acceleration
of payment or performance or other consequence as a result of a change of
control of Management Company;
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(k) enter into any contract, arrangement or understanding
requiring the purchase of equipment, materials, supplies or services over a
period greater than 12 months and for the expenditure of greater than $75,000
per year, which is not cancelable without penalty on 30 days' or less notice,
except in the ordinary course of business;
(l) forgive any indebtedness owed to Management Company
or convert or contribute by way of capital contribution any such indebtedness
owed;
(m) authorize or enter into any agreement providing for
property management services to be provided by Management Company to
third-party property owners or an increase in management fees paid by
third-party property owners under existing property management agreements;
(n) authorize or enter into any agreement that would
jeopardize the qualification of Shurgard REIT as a real estate investment trust
pursuant to Section 856 of the Code if such agreement had been entered into by
Shurgard REIT; or
(o) authorize or announce an intention to do any of the
foregoing, or enter into any contract, agreement, commitment or arrangement to
do any of the foregoing.
7.2 Other Transactions
Prior to the Effective Time, Shurgard REIT and Management
Company each agree (a) that neither of them shall, and each of them shall
direct and use its best efforts to cause its respective officers, directors,
employees, agents and representatives (including, without limitation, any
investment banker, attorney or accountant retained by it) not to, initiate,
solicit or encourage, directly or indirectly, any inquiries or the making or
implementation of any proposal or offer (including, without limitation, any
proposal or offer to its stockholders or shareholders, respectively) with
respect to a merger, acquisition, tender offer, exchange offer, consolidation
or similar transaction involving, or any purchase of all or any significant
portion of the assets or any equity securities of, such party, other than the
transactions contemplated by this Agreement (any such proposal or offer being
hereinafter referred to as an "Acquisition Proposal") or engage in any
negotiations concerning, or provide any confidential information or data to, or
have any discussions with, any person relating to an Acquisition Proposal, or
otherwise facilitate any effort or attempt to make or implement an Acquisition
Proposal; (b) that it will immediately cease and cause to be terminated any
existing activities, discussions or negotiations with any parties conducted
heretofore with respect to any of the foregoing and each will take the
necessary steps to inform the individuals or entities referred to above of the
obligations undertaken in this Section 7.2; and (c) that it will notify the
other party immediately if any such inquiries or proposals are received by, any
such information is requested from, or any such negotiations or discussions are
sought to be initiated or continued with, it; provided, however, that nothing
contained in this Section 7.2 shall prohibit the Board of Directors of such
party from
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(i) furnishing information to or entering into discussions or negotiations
with, any person or entity that makes an unsolicited bona fide Acquisition
Proposal, if, and only to the extent that, (A) the Board of Directors of such
party determines in good faith that such action is required for the Board of
Directors to comply with its fiduciary duties to stockholders or shareholders,
as the case may be, imposed by law, (B) prior to furnishing such information
to, or entering into discussions or negotiations with, such Person or entity,
such party provides written notice to the other party to this Agreement to the
effect that it is furnishing information to, or entering into discussions with,
such person or entity, and (C) subject to any confidentiality agreement with
such person (which such party determined in good faith was required to be
executed in order for the Board of Directors to comply with its fiduciary
duties to stockholders or shareholders, as the case may be, imposed by law),
such party keeps the other party to this Agreement informed of the status (not
the terms) of any such discussions or negotiations; and (ii) to the extent
applicable, complying with Rule 14e-2 promulgated under the Exchange Act with
regard to an Acquisition Proposal. Nothing in this Section 7.2 shall (x)
permit any party to terminate this Agreement, (y) permit any party to enter
into any agreement with respect to an Acquisition Proposal during the term of
this Agreement (it being agreed that during the term of this Agreement, no
party shall enter into any agreement with any person that provides for, or in
any way facilitates, an Acquisition Proposal (other than a confidentiality
agreement in customary form)), or (z) affect any other obligation of any party
under this Agreement.
7.3 Meetings of Shareholders and Stockholders
(a) Management Company will take all action necessary in
accordance with applicable law and its Articles of Incorporation and Bylaws to
convene a meeting of its shareholders (the "Management Company Shareholders
Meeting") as promptly as practicable to consider and vote upon the approval of
the Merger. Subject to the fiduciary duties of Management Company's Board of
Directors under applicable law as advised by counsel, the Board of Directors of
Management Company shall recommend and declare advisable such approval and
Management Company shall take all lawful action to solicit, and use all
reasonable efforts to obtain, such approval. Prior to the Closing Date, the
Management Company shall take all reasonable steps to cause Barbo, Buerk,
Daniels and R. Knutzen (as Trustee for the Barbo Trust) to enter into an
agreement with Shurgard REIT (the "Shareholders Voting Agreement"), pursuant to
which each of such shareholders shall agree to vote all Shares owned by them or
to which they have the right to vote in favor of approval of the Merger at the
Management Company Shareholders Meeting.
(b) Shurgard REIT will take all action necessary in
accordance with applicable law and Shurgard REIT's Certificate of Incorporation
and By-laws to convene a meeting of its stockholders (the "Shurgard REIT
Stockholders Meeting") as promptly as practicable to consider and vote upon the
approval of the Merger and the issuance of Shurgard REIT Common Shares in the
Merger. Subject to the fiduciary duties of Shurgard REIT's Board of Directors
under applicable law as advised by counsel, the Board of
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Directors of Shurgard REIT shall recommend and declare advisable such approval
and Shurgard REIT shall take all lawful action to solicit, and use all
reasonable efforts to obtain, such approval.
7.4 Registration Statement/Proxy Materials
After the date hereof, Shurgard REIT and Management Company
shall cooperate and promptly prepare and Shurgard REIT shall file with the SEC
as soon as practicable a registration statement on Form S-4 (the "S-4
Registration Statement"), containing a proxy statement/prospectus, in
connection with the registration under the Securities Act of the Share
Consideration and the Contingent Shares issuable upon conversion of the Shares
and the other transactions contemplated hereby. Shurgard REIT will also, as
promptly as practicable, prepare and file with the SEC a proxy statement that
will be the same proxy statement/prospectus contained in the S-4 Registration
Statement and a form of proxy, in connection with the vote of Shurgard REIT's
stockholders with respect to the Merger (such proxy statement/prospectus,
together with any amendments thereof or supplements thereto, in each case in
the form or forms mailed to Shurgard REIT's stockholders, is herein called the
"Proxy Statement/Prospectus"). Management Company will, as promptly as
practicable, prepare a notice of the Management Company Shareholders Meeting
and a form of proxy and such other written materials as may be required by the
WBCA or other applicable law in connection with the vote of Management
Company's shareholders with respect to the Merger (such materials, together
with any amendments thereof or supplements thereto, in each case in the form or
forms mailed to Management Company's shareholders, is herein called the
"Management Company Proxy Materials"). Shurgard REIT and Management Company
will use all reasonable efforts to have the S-4 Registration Statement, or
cause it to be, declared effective as promptly as practicable, and also will
take any other action required to be taken under federal or state securities
laws, and will use all reasonable efforts to cause the Proxy
Statement/Prospectus to be mailed to stockholders of Shurgard REIT and the
Management Company Proxy Materials to be mailed to shareholders of Management
Company at the earliest practicable date. If at any time prior to the
Effective Time any event relating to it or affecting Management Company or
Shurgard REIT shall occur as a result of which it is necessary, in the opinion
of counsel for Management Company or of counsel for Shurgard REIT, to
supplement or amend the S-4 Registration Statement in order to make such
document not misleading in light of the circumstances existing at the time
approval of the shareholders of Management Company is sought, Management
Company and Shurgard REIT forthwith will prepare and file with the SEC an
amendment or supplement to the S-4 Registration Statement so that such
document, as so supplemented or amended, will not contain any untrue statement
of a material fact or omit to state any material fact necessary in order to
make the statements therein, in light of the circumstances existing at such
time, not misleading.
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7.5 Filings; Other Action
Management Company and Shurgard REIT shall: (a) to the extent
required, promptly make all filings and thereafter make any other required
submissions under the HSR Act with respect to the Merger; (b) use all
reasonable efforts to cooperate with one another to (i) determine which
Authorizations are required to be made or obtained prior to the Effective Time
in connection with the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby and (ii) timely make and
seek all such Authorizations; (c) use all reasonable efforts to obtain in
writing any consents required from third parties in form reasonably
satisfactory to Shurgard REIT and Management Company necessary to effectuate
the Merger; (d) use all reasonable efforts to promptly take, or cause to be
taken, all other actions and do, or cause to be done, all other things
necessary, proper or appropriate to satisfy the conditions set forth in Article
8 and to consummate and make effective the transactions contemplated by this
Agreement on the terms and conditions set forth herein as soon as practicable
(including seeking to remove promptly any injunction or other legal barrier
that may prevent such consummation); and (e) not take any action which might
reasonably be expected to impair the ability of the parties to consummate the
Merger at the earliest possible time.
7.6 Access to Information
From the date hereof until the Effective Time, Management
Company will give Shurgard REIT, its counsel, financial advisors, auditors and
other authorized representatives full access to the offices, properties, books
and records of Management Company, will furnish to Shurgard REIT, its counsel,
financial advisors, auditors and other authorized representatives such
financial and operating data and other information as such persons may
reasonably request and will instruct Management Company's employees, counsel
and financial advisors to cooperate with Shurgard REIT in its investigation of
the business of Management Company; provided that no investigation pursuant to
this Section shall affect any representation or warranty given by Management
Company to Shurgard REIT hereunder.
7.7 Listing Application
Shurgard REIT promptly shall prepare and submit to the
Exchange a listing application covering the Shurgard REIT Common Shares
issuable in the Merger, and shall use its reasonable efforts to obtain, prior
to the Effective Time, approval for the listing of such Shurgard REIT Common
Shares, subject to official notice of issuance.
7.8 Affiliates of Management Company
(a) Set forth in the Management Company Disclosure
Statement are the persons who may be deemed to be "affiliates" of Management
Company for purposes of Rule
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145 under the Securities Act ("Rule 145 Affiliates") or who may otherwise be
deemed to be Affiliates of Management Company. By agreement dated the date
hereof, each of the Rule 145 Affiliates has delivered a letter (each, an
"Affiliate Letter") to Shurgard REIT indicating that such Rule 145 Affiliate
will not sell, pledge, transfer or otherwise dispose of any Shurgard REIT
Common Shares issued to such Rule 145 Affiliate pursuant to the Merger, except
(i) pursuant to an effective registration statement, (ii) in compliance with
Rule 145 or (iii) pursuant to a transaction exempt from, or otherwise not
subject to, the registration requirements of the Securities Act (provided,
however, that any transferee pursuant to a transaction described in (iii) shall
agree in writing to hold the Shurgard REIT Common Shares subject to the
restrictions set forth in the Affiliate Letter). Shurgard REIT shall be
entitled to place legends as specified in such Affiliate Letters on the
certificates evidencing any Shurgard REIT Common Shares to be received by such
Affiliates pursuant to the terms of this Agreement, and to issue appropriate
stop transfer instructions to the transfer agent for the Shurgard REIT Common
Shares, consistent with the terms of such Affiliate Letters.
(b) Shurgard REIT shall file the reports required to be
filed by it under the Exchange Act and the rules and regulations adopted by the
SEC thereunder, and it will take such further action as any Rule 145 Affiliate
may reasonably request, all to the extent required from time to time to enable
such Rule 145 Affiliate to sell Shurgard REIT Common Shares received by such
Rule 145 Affiliate in the Merger without registration under the Securities Act
pursuant to Rule 145(d)(1) under the Securities Act, as such Rule may be
amended from time to time.
7.9 Tax Matters
(a) Each of Management Company and Shurgard REIT agrees
to report the Merger on all Tax Returns and other filings as a tax-free
reorganization under Section 368(a)(1) of the Code. Furthermore,
notwithstanding the terms and provisions of Sections 4.1(a)(ii) and 4.7 hereof,
the parties hereby agree that the aggregate number of Shurgard REIT Common
Shares issued (a) as Contingent Shares pursuant to Sections 4.1(a)(ii) and 4.7
and (b) as additional Shurgard REIT Common Shares issued as a result of any
Under-Statement pursuant to Section 4.1(d)(ii)(D) shall not exceed the
aggregate number of Shurgard REIT Common Shares issued as Share Consideration
at the Effective Time pursuant to Sections 4.1(a)(i), as adjusted pursuant to
Section 4.1(d), excluding any additional Shurgard REIT Common Shares issued as
a result of any Under-Statement pursuant to Section 4.1(d)(ii)(D). The parties
understand that this limitation is necessary to support the opinion to be
provided by counsel to Shurgard REIT pursuant to Section 8.3(b) that the Merger
qualifies as a reorganization pursuant to Section 368(a)(1) of the Code.
(b) The Representatives shall prepare or cause to be
prepared and filed on behalf of the Management Company, but at the sole cost
and expense of the Shurgard REIT, all federal, state, and local Tax Returns
required to be filed with respect to the short taxable
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year of the Management Company ending as of the Effective Time. Shurgard REIT
and its personnel will cooperate with the Representatives in the preparation
and filing of all such Tax Returns, shall provide reasonable access to the
books and records of the Management Company for such purposes, and shall make
available its personnel, counsel, accountants, and other resources as shall be
reasonably necessary to enable the Representatives to prepare or cause to be
prepared and filed in a timely manner all such Tax Returns. In connection with
the filing of the federal income Tax Return of the Management Company for its
short taxable year ending as of the Effective Time, the InterMation Spin-Off
shall be reported in all respects as a transaction qualifying under Section
355(a)(1) of the Code. The Representatives will promptly update their study of
accumulated earnings and profits to include the year ended December 31, 1994
and the short period ending on the Effective Time. In addition, to the extent
that the Management Company incurs a net operating loss ("NOL") for its short
taxable year ending as of the Effective Time, the Representatives shall prepare
or cause to be prepared and filed with the Internal Revenue Service Form 1139
and shall take such other action as shall be necessary or appropriate to carry
back such NOL to a prior taxable year of the Management Company so that a
refund of federal income tax can be claimed for such taxable year and a
"tentative carry-back adjustment", in the amount of such claimed refund, can be
obtained pursuant to Section 6411 of the Code.
(c) If the Internal Revenue Service or any other taxing
authority initiates an audit or examination of any Tax Return of the Management
Company or denies or disputes payment, or the amount, of the Refund (a "Tax
Audit"), the Shurgard REIT shall give prompt notice thereof to the
Representatives, and the Representatives shall have the sole and exclusive
right to manage and control such Tax Audit and to contest, settle, or
compromise any issues raised during the course of such Tax Audit. In handling
any such Tax Audit the Representatives may engage counsel, accountants, or
other advisors reasonably acceptable to the Shurgard REIT and shall keep
management of the Shurgard REIT regularly advised of the course of such Tax
Audit. If it elects to do so, the Shurgard REIT also may engage counsel,
accountants, or other advisors reasonably acceptable to the Representatives to
monitor the progress of any such Tax Audit. All costs and expenses incurred
either by the Representatives or by the Shurgard REIT in connection with any
such Tax Audit, including the fees and expenses of counsel, accountants, and
other advisors selected either by the Representatives or the Shurgard REIT
shall be borne by the Shurgard REIT, without reimbursement.
(d) If, at the conclusion of a Tax Audit or otherwise,
the Internal Revenue Service or any other taxing authority should assert a
deficiency or claim an underpayment of Tax (including interest and penalties,
if any) against either the Management Company or the Shurgard REIT with respect
to any Tax Return of the Management Company for any taxable year ending on or
before the Effective Time (a "Tax Claim"), and if the payment of such Tax Claim
by the Shurgard REIT, as successor in interest to the Management Company, would
constitute Damages for which the Shurgard REIT is entitled to indemnification
pursuant to Section 4.8, then the Representatives shall have the sole and
exclusive right to
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defend and contest such Tax Claim through such administrative or judicial
proceedings as they may elect (a "Tax Contest"), until a Final Determination is
made with respect to such Tax Claim. The Representatives may engage counsel,
accountants, and other advisors reasonably acceptable to the Shurgard REIT to
assist them in handling the Tax Contest. All costs and expenses incurred by
the Representatives in handling such Tax Contest, if finally resulting in such
Damages, including the fees and costs of counsel, accountants, and other
advisors, shall be paid by the Shurgard REIT and shall constitute additional
Damages for which the Shurgard REIT shall be entitled to indemnification
pursuant to Section 4.8. The Shurgard REIT and its personnel will cooperate
with the Representatives and their advisors in the defense of any such Tax
Claim and in the handling of any such Tax Contest. The Shurgard REIT also may
elect to engage, at its own cost and expense, counsel, accountants, or other
advisors reasonably acceptable to the Representatives to monitor the progress
of the Tax Contest and to assist the Representatives and their advisors as
appropriate. The Representatives shall have the sole and exclusive right to
settle any Tax Contest and compromise any Tax Claim made against the Management
Company or the Shurgard REIT which is subject to indemnification pursuant to
Section 4.8, provided, however, that the Representatives shall not settle any
such Tax Contest or compromise any such Tax Claim without the consent of the
Shurgard REIT, to the extent such settlement or compromise would result in any
Tax liability or other claim (including any pending or reasonably foreseeable
claim) in excess of the amount of Damages that may then be available for
indemnification under Section 4.8 hereunder.
7.10 InterMation Spin-Off
Prior to the Closing, Management Company shall distribute all
of the shares of capital stock of InterMation held by Management Company to its
shareholders pro rata in a transaction intended to qualify for tax-free
treatment under Section 355(a)(1) of the Code pursuant to the terms of an
Agreement and Plan of Corporate Separation between Management Company and
InterMation in form and substance acceptable to Shurgard REIT, acting
reasonably (the "InterMation Spin-Off"). Management Company agrees to report
the InterMation Spin-Off on all Tax Returns and other filings as a tax-free
distribution pursuant to Section 355(a)(1) of the Code. Shurgard REIT will not
take any position on any Tax Return or other filing or in connection with any
audit or examination of any Tax Return which is inconsistent with the
qualification of the InterMation Spin-Off as a tax-free distribution pursuant
to Section 355(a)(i) of the Code. In the event that there is a determination
or a claim by an applicable taxing authority that the InterMation Spin-Off does
not qualify under Section 355(a)(1) of the Code Shurgard REIT will promptly
notify its stockholders regarding the ability to file protective refund claims
and will take all reasonable actions to assist its stockholders in filing and
prosecuting such refund claims.
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7.11 Shurgard Realty Advisors
Prior to the Closing (a) the sale or other disposition of
Shurgard Realty Advisors to such purchaser and for such consideration as the
Board of Directors of Management Company deems appropriate shall have occurred
and (b) Shurgard Realty Advisors shall have entered into an agreement with
Shurgard REIT providing that so long as (i) Shurgard Realty Advisors shall be
maintained as a legal entity licensed as a broker-dealer and (ii) Shurgard REIT
shall reimburse Shurgard Realty Advisors for the costs of maintaining its
licenses as a broker-dealer, Shurgard Realty Advisors shall grant Shurgard REIT
broker-dealer services on financial terms substantially similar to those
provided to Shurgard REIT in connection with the consolidation of Shurgard
REIT; provided that Shurgard Realty Advisors shall have the right, upon thirty
(30) days' notice to Shurgard REIT, to allow Shurgard Realty Advisors'
broker-dealer licenses to lapse and/or to dissolve Shurgard Realty Advisors
(the "SRA Letter").
7.12 Management and Advisory Agreements
Prior to the Closing, Management Company shall use all
reasonable efforts to cause the owners of all properties managed and of all
partnerships advised by Management Company to consent to the management of such
properties and assumption of such advisory functions by the Surviving
Corporation to the extent required by the existing management and advisory
agreements relating thereto.
7.13 Intellectual Property Rights
Prior to the Closing, Management Company shall use all
reasonable efforts to obtain all assignments or other consents necessary with
respect to the Management Company Intellectual Property Rights listed on the
Management Company Disclosure Statement.
7.14 Employees
Shurgard REIT agrees to employ at the Effective Time all
employees of Management Company who are employed on the Closing Date on terms
consistent with Management Company's current employment practices and at
comparable levels of compensation and positions, except that such employment
shall be at will and Shurgard REIT shall be under no obligation to continue to
employ any of such individuals for more than thirty (30) days after Closing.
For purposes of this Section 7.14, the term "employees" shall mean all current
employees of Management Company and its Subsidiaries (including those on
disability or leave of absence, paid or unpaid). Notwithstanding the
foregoing, the terms of (a) that certain Employee Employment Agreement between
Management Company and Allyn Finch dated as of September 1, 1994, (b) that
certain Employee Agreement between Management Company and Kim Kimbrell dated as
of September 1, 1994, and (c) that certain memorandum dated November 3, 1994
regarding a long term incentive compensation plan
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for Ron Newhouse (to the extent executed by same) shall expressly be assumed by
Shurgard REIT.
7.15 Reorganization
From and after the date hereof and prior to the Effective
Time, except for the transactions contemplated or permitted herein, neither
Management Company nor Shurgard REIT shall knowingly take any action that would
be inconsistent with the representations and warranties made by them herein,
including, but not limited to knowingly taking any action, or knowingly failing
to take any action that is known to cause disqualification of (A) the Merger as
a reorganization within the meaning of Section 368(a)(1) of the Code, or (B)
the InterMation Spin-Off as a qualified distribution under Section 355(a)(1) of
the Code. Furthermore, from and after the date hereof and prior to the
Effective Time, except for the transactions contemplated or permitted herein,
Management Company shall use its best efforts to conduct its business and file
Tax Returns in a manner that would not jeopardize the qualification of Shurgard
REIT after the Effective Time as a real estate investment trust as defined
within Section 856 of the Code.
7.16 Public Statements
The parties shall consult with each other prior to issuing any
public announcement or statement with respect to this Agreement or the
transactions contemplated hereby and shall not issue any such public
announcement or statement prior to such consultation, except as may be required
by law or by the rules of the NASD.
7.17 ESOP
(a) Management Company shall take all reasonable steps
toward the end that (i) any merger of Management Company's qualified retirement
plans prior to the transactions that are contemplated hereby will comply with
applicable law and the resulting merged plan ("Merged Plan") will continue to
be qualified under Code Section 401(a); (ii) the transactions contemplated
hereby as they relate to the ESOP or Merged Plan (including, but not limited
to, the exchange of Shares and the redemption of InterMation shares held by the
ESOP) will not result in a prohibited transaction under ERISA or the Code, or
otherwise violate applicable law, nor will they result in the imposition of any
state, federal or local excise tax on Management Company or any other person;
and (iii) following the Merger, InterMation shall offer to repurchase from the
Merged Plan any shares of InterMation capital stock so held at a price per
share reflective of the then fair market value thereof.
(b) Shurgard REIT agrees to take all appropriate and
necessary steps to adopt the Merged Plan as the successor employer thereunder.
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7.18 Letter of Shurgard's Accountants
The Management Company shall use its best efforts to cause to
be delivered to Shurgard REIT an "agreed-upon procedures" report of Deloitte &
Touche LLP, dated a date within two business days before the date on which the
S-4 Registration Statement shall become effective and addressed to Shurgard
REIT, in form and substance reasonably satisfactory to Shurgard REIT and
customary in scope and substance for reports delivered by independent public
accountants in connection with registration statements similar to the S-4
Registration Statement.
7.19 Opinion of Financial Advisor
Shurgard REIT shall use its best efforts to cause Alex. Brown
to provide its opinion, as to the fairness, from a financial point of view, of
the consideration payable in connection with the Merger, and shall include such
opinion in the Proxy Statement/Prospectus.
7.20 Notice of Certain Events
Each party hereto shall promptly notify the other party of (i)
any notice or other communication from any Person alleging that the consent of
such Person is or may be required in connection with the transactions
contemplated by this Agreement; (ii) any notice or other communication from any
Governmental Body in connection with the transactions contemplated by this
Agreement; and (iii) any actions, suits, claims, investigations or proceedings
commenced or, to its knowledge threatened against, relating to or involving or
otherwise affecting either party or any of its Subsidiaries which, if pending
on the date of this Agreement, would have been required to have been disclosed
in the Management Company Disclosure Statement pursuant to Section 5.5 or in
the Shurgard REIT Disclosure Statement pursuant to Section 6.6 or which relate
to the consummation of the transactions contemplated by this Agreement.
7.21 Director and Officer Indemnification
From and after the Effective Date, Shurgard REIT shall keep in
effect provisions in its Certificate of Incorporation and By-laws providing
for limitation of director liability and indemnification of directors,
officers, employees and agents at least to the extent that such persons are
entitled thereto under the Articles of Incorporation and Bylaws of Management
Company on the date hereof, subject to Delaware law (and, to the extent that
the Shurgard REIT By-laws do not provide for indemnification of directors or
officers of predecessor corporations, shall contractually assume the
indemnification obligations under Management Company's Bylaws, subject to
Delaware law), which provisions shall not be amended, repealed or otherwise
modified in any manner that would adversely affect the rights thereunder of
individuals who at any time prior to the Effective Time were directors,
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officers, employees or agents of Management Company in respect of actions or
omissions occurring at or prior to the Effective Time (including, without
limitation, the transactions contemplated by this Agreement), unless such
modification is required by law.
7.22 Working Capital
Management Company agrees that as of the Closing Date, there
shall be an aggregate amount of (i) cash and short-term investments and (ii)
fees and reimbursable receivables of not less than $1,060,700 ("Minimum Working
Capital").
7.23 Contingent Shares
Shurgard REIT agrees to act in good faith with respect to the
Contingent Partnerships and the right of the Management Company shareholders to
receive Contingent Shares and further agrees not to take any action, or fail to
take any action, that reasonably could be anticipated to adversely affect the
Contingent Partnerships, the Project Partnerships, or the value of the
Partnership Facilities or the right of the Management Company shareholders to
receive Contingent Shares, including, without limitation, voting or failing to
vote with respect to any matter submitted to a vote of the partners of any
Contingent Partnership or Project Partnership, or amending the partnership
agreements of any Contingent Partnership or Project Partnership in which
Shurgard REIT is a partner.
7.24 Further Action
Each party hereto shall, subject to the fulfillment or waiver
at or before the Effective Time of each of the conditions of performance set
forth herein, perform such further acts and execute such documents as may
reasonably be required to effect the Merger.
ARTICLE 8
CONDITIONS
8.1 Conditions to Each Party's Obligations
(a) The respective obligations of each party to
consummate the transactions contemplated by this Agreement are subject to the
fulfillment at or prior to the Closing Date of each of the following
conditions, which conditions may not be waived:
(i) Management Company Shareholder Approval
This Agreement and the transactions contemplated hereby shall
have been duly approved or ratified by the requisite holders of Shares in
accordance with applicable
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provisions of the WBCA (including, without limitation, RCW 23B.08.730), the
Articles of Incorporation and Bylaws of Shurgard.
(ii) Shurgard REIT Stockholder Approval
The Agreement and the transactions contemplated hereby shall
have been duly approved by the requisite holders of Shurgard REIT capital stock
in accordance with applicable provisions of the DGCL and the Certificate of
Incorporation and By-laws of Shurgard REIT.
(iii) HSR Act
The waiting period applicable to the consummation of the
Merger under the HSR Act, if applicable, shall have expired or been terminated.
(iv) Contingent Shares Agreement
The Contingent Shares Agreement described in Section 4.7 above
shall have been executed and delivered by all requisite parties thereto.
(v) Indemnification Escrow Agreement
The Indemnification Escrow Agreement described in Section 4.8
above shall have been executed and delivered by all requisite parties thereto.
(vi) No Injunction or Proceedings
There shall not be in effect any judgment, writ, order,
injunction or decree of any court or Governmental Body of competent
jurisdiction restraining, enjoining or otherwise preventing consummation of the
transactions contemplated by this Agreement or permitting such consummation
only subject to any condition or restriction unacceptable to either of Shurgard
REIT or Management Company, each in its reasonable judgment, nor shall there be
pending or threatened by any Governmental Body any suit, action or proceeding,
and there shall not be pending by any other Person any suit, action or
proceeding seeking to restrain or restrict the consummation of the Merger or
seeking damages in connection therewith, which, in the reasonable judgment of
either Shurgard REIT or Management Company could have (a) a Shurgard REIT
Material Adverse Effect or a Management Company Material Adverse Effect,
respectively, or (b) a material adverse effect on the ability of Shurgard REIT
or Management Company, respectively, to perform its obligations under this
Agreement.
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(vii) Registration Statement
The S-4 Registration Statement shall have been declared
effective and shall be effective at the Effective Time, and no stop order
suspending effectiveness shall have been issued; no action, suit, proceeding or
investigation by the SEC to suspend the effectiveness thereof shall have been
initiated and be continuing; and all necessary approvals under state securities
laws or the Securities Act or Exchange Act relating to the issuance or trading
of the Shurgard REIT Common Shares shall have been received.
(b) The respective obligations of each party to
consummate the transactions contemplated by this Agreement are subject to the
fulfillment at or prior to Closing Date of each of the following conditions,
which conditions may only be waived by mutual agreement of the parties hereto:
(i) Consents
All Authorizations and other third-party consents required in
connection with the execution and delivery of this Agreement and the
performance of the obligations hereunder shall have been made or obtained.
(ii) Employment, Non-Competition and Other Agreements
(A) The existing employment agreements by and between each of
Barbo and Daniels, on the one hand, and Management Company, on the other, shall
have been terminated, (B) the 1983 Agreements shall have been terminated, and
(C) and Barbo shall have entered into a noncompetition agreement with Shurgard
REIT, substantially in the form attached hereto as Exhibit D.
(iii) Exchange Listing
The approval for the listing on the Exchange of the Shurgard
REIT Common Shares issuable in the Merger, subject to official notice of
issuance, shall have been obtained.
(iv) Restrictions on Resale of Share Consideration
and Contingent Shares
Barbo, Buerk, Daniels, Michael Rowe, David K. Grant, and R.
Knutzen, as Trustee of the Barbo Trust, each shall have entered into an
agreement with Shurgard REIT pursuant to which they each shall have agreed not
to sell, pledge on a non-recourse basis, transfer and otherwise dispose of
(except by operation of law) more than 40% of the Share Consideration or the
Contingent Shares received for a two-year period commencing upon the Closing
Date, without the written consent of Shurgard REIT and the Representatives.
Such agreement shall provide that the certificates reflecting such Share
Consideration and
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Contingent Shares issued to such Management Company shareholders pursuant to
this Agreement, or any securities that may be paid as a dividend or otherwise
distributed thereon or with respect thereto or issued or delivered in exchange
or substitution therefor, shall bear a legend reflecting such restrictions on
transfer, provided, that certificates issued after the two-year period has
expired need not bear such legend.
8.2 Conditions to Obligations of Management Company to Effect the
Merger
The obligation of Management Company to effect the Merger
shall be subject to the fulfillment at or prior to the Closing Date of the
following conditions, unless waived in writing by Management Company:
(a) Shurgard REIT shall have performed its agreements
contained in this Agreement required to be performed on or prior to the Closing
Date and the representations and warranties of Shurgard REIT contained in this
Agreement shall be true and correct in all material respects as of the Closing
Date as if made on the Closing Date (except for changes therein contemplated or
permitted by this Agreement), and Management Company shall have received a
certificate of the President of Shurgard REIT, dated the Closing Date,
certifying to such effect.
(b) Management Company shall have received the opinion of
Riddell, Williams, Bullitt & Walkinshaw ("Riddell") addressed to Management
Company and dated the effective date of the InterMation Spin-Off, to the effect
that the InterMation Spin-Off more likely than not qualifies for tax-free
treatment under Section 355 of the Code, in form and substance reasonably
acceptable to counsel for Shurgard REIT (the "InterMation Spin-Off Opinion").
Such opinion shall provide that Management Company and its successors,
including Shurgard REIT, shall be entitled to rely on such opinion.
(c) Management Company shall have received from Perkins
Coie, an opinion, dated the Closing Date as to the matters set forth on Exhibit
E.
(d) From the date of this Agreement through the Effective
Time, there shall not have occurred any change in the financial condition,
business or operations of Shurgard REIT and its Subsidiaries, taken as a whole,
that would have or would be reasonably likely to have a Shurgard REIT Material
Adverse Effect.
(e) Any sums then due and owing to Management Company by
Shurgard REIT as a result of obligations arising out of (i) that certain
Management Services Agreement dated as of March 1, 1994 between Management
Company and Shurgard REIT and (ii) that certain Advisory Agreement dated as of
March 1, 1994 between Management Company and Shurgard REIT shall have been
paid.
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8.3 Conditions to Obligation of Shurgard REIT to Effect the Merger
The obligations of Shurgard REIT to effect the Merger shall be
subject to the fulfillment at or prior to the Closing Date of the following
conditions, unless waived in writing by Shurgard REIT:
(a) Management Company shall have performed its
agreements contained in this Agreement required to be performed on or prior to
the Closing Date and the representations and warranties of Shurgard REIT
contained in this Agreement shall be true and correct in all material respects
as of the Closing Date as if made on the Closing Date (except for changes
therein contemplated or permitted by this Agreement), and Shurgard REIT shall
have received a certificate of the President of Management Company, dated the
Closing Date, certifying to such effect.
(b) Shurgard REIT shall have received the opinion of
Perkins Coie, in form and substance reasonably acceptable to counsel for the
Special Committee, to the effect that the Merger will be treated for federal
income tax purposes as a reorganization within the meaning of Section
368(a)(1)(A) of the Code and each of Shurgard REIT and Management Company will
be a party to that reorganization within the meaning of Section 368(b) of the
Code such that Management Company will not recognize gain as a result of the
Merger.
(c) The InterMation Spin-Off Opinion shall have been
delivered.
(d) Shurgard REIT shall have received from Riddell an
opinion, dated the Closing Date, as to the matters set forth on Exhibit F.
(e) Shurgard REIT shall have received an "agreed-upon
procedures" report from Deloitte & Touche LLP, independent public accountants
for Management Company, dated as of a date within two business days before the
date on which the S-4 Registration Statement shall become effective, with
respect to the financial statements of Management Company included in the Proxy
Statement/Prospectus, in form and substance reasonably satisfactory to Shurgard
REIT, and customary in scope and substance for "agreed-upon procedures" reports
delivered by independent public accountants in connection with registration
statements and proxy statements similar to the S-4 Registration Statement and
the Proxy Statement/Prospectus.
(f) Shurgard REIT shall have received the Closing
Statement, conforming to the requirements of Section 4.1(d)(ii)(A) hereof,
within five (5) days prior to the Closing Date.
(g) From the date of this Agreement through the Effective
Time, there shall not have occurred any change in the financial condition,
business or operations of
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Management Company and its Subsidiaries, taken as a whole, that would have or
would be reasonably likely to have a Management Company Material Adverse
Effect.
(h) Holders in excess of 10% of the Shares outstanding
immediately prior to the Closing shall not have exercised dissenters' rights
under applicable law.
(i) The InterMation Spin-Off described in Section 7.10
above shall have occurred.
(j) The disposition of Shurgard Realty Advisors described
in Section 7.11 above shall have occurred.
(k) Shurgard Realty Advisors shall have executed and
delivered the SRA Letter.
(l) All assignments or other consents necessary to
transfer to the Surviving Corporation the Management Company Intellectual
Property Rights set forth on the Management Company Disclosure Statement shall
have been obtained.
(m) The Closing Statement shall reflect ownership by
Management Company of the Minimum Working Capital.
ARTICLE 9
TERMINATION
9.1 Termination by Mutual Consent
This Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time, before or after the approval
by shareholders or stockholders of Management Company or Shurgard REIT,
respectively, either by the mutual written consent of Shurgard REIT and
Management Company, or by mutual action of their respective Boards of
Directors.
9.2 Termination by Either Shurgard REIT or Management Company
This Agreement may be terminated and the Merger may be
abandoned by action of the Board of Directors of Management Company or Shurgard
REIT if (a) the Merger shall not have been consummated by May 25, 1995, (b) the
Management Company Shareholders Meeting duly shall have been convened and held
and the approval of Management Company's shareholders required by Section
7.3(a) shall not have been obtained at such meeting or at any adjournment
thereof, (c) the Shurgard REIT Stockholders Meeting duly shall have been
convened and held and the approval of Shurgard REIT's stockholders
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required by Section 7.3(b) shall not have been obtained at such meeting or at
any adjournment thereof, or (d) a United States federal or state court of
competent jurisdiction or United States federal or state governmental,
regulatory or administrative agency or commission shall have issued an order,
decree or ruling or taken any other action permanently restraining, enjoining
or otherwise prohibiting the transactions contemplated by this Agreement and
such order, decree, ruling or other action shall have become final and
non-appealable, provided, that the party seeking to terminate this Agreement
pursuant to this clause (d) shall have used all reasonable efforts to remove
such order, decree, ruling or injunction; and provided, in the case of a
termination pursuant to clause (a) above, that the terminating party shall not
have breached in any material respect its obligations under this Agreement in
any manner that shall have proximately contributed to the occurrence of the
failure referred to in said clause.
9.3 Effect of Termination and Abandonment
In the event of termination of this Agreement and abandonment
of the Merger pursuant to this Article 9, no party hereto (or any of its
directors or offices) shall have any liability or further obligation to any
other party to this Agreement, except that nothing herein will relieve any
party from liability for any breach of this Agreement.
ARTICLE 10
MISCELLANEOUS AND GENERAL
10.1 Expenses
Each party shall bear its own expenses, including the fees and
expenses of any attorneys, accountants, investment bankers, brokers, finders or
other intermediaries or other Persons engaged by it, incurred in connection
with this Agreement and the transactions contemplated hereby. Notwithstanding
the immediately preceding sentence, in the event that one or more of Management
Company, its officers, directors or Affiliates shall be involuntarily be made
party (collectively, the "Litigation Parties") to any suit, action or
proceeding commenced by any Governmental Body or by any Shurgard REIT
stockholder or other person and seeking to restrain restrict or impede the
consummation of the Merger or seeking damages or other relief in, connection
therewith, Shurgard REIT shall defend, indemnify and hold all such Litigation
Parties harmless from all costs, expenses, losses and liabilities incurred in
connection with any such suit, action or proceeding, including, without
limitation, advancement of all legal and other costs associated with the
defense thereof and all liabilities incurred by way of settlement or final
judgment or decree, provided that: (a) each of such Litigation Parties shall,
in the event that it deems conflict or fiduciary considerations make such
necessary or advisable, have the right to retain separate counsel and to
conduct and control its own defense in such suit, action or proceeding, and all
legal and other costs associated with such separate defense shall likewise be
paid in full by
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Shurgard REIT by advancement or by reimbursement promptly after submission of
invoices relating thereto to Shurgard REIT; (b) no settlement of any such suit,
action or proceeding shall be entered into by Shurgard REIT without the express
written consent of each of the Litigation Parties, which consent, in the case
of any proposed settlement imposing solely monetary sanctions which are to be
paid in full on the settlement date by Shurgard REIT and releasing the
Litigation Parties from any further liability or participation in such suit,
action or proceeding, shall not be unreasonably withheld; (c) no Litigation
Party shall enter into any settlement of any such suit, action or proceeding
for which settlement such Litigation Party intends to seek indemnification from
Shurgard REIT hereunder, without the express written consent of Shurgard REIT;
and (d) Shurgard REIT shall have no duty to indemnify any Litigation Party for
any liability imposed under any final judgment or decree to the extent that
such liability has been finally adjudicated to have been the result of (i) an
untrue statement of or omission of material fact by Management Company in those
sections of the S-4 Registration Statement or the Proxy Statement/Prospectus
specified in Section 5.21 hereof, in violation of said Section 5.21, or (ii)
fraud, intentional misconduct or knowing violation of law by such Litigation
Party."
10.2 Notices, Etc.
All notices, requests, demands or other communications
required by or otherwise with respect to this Agreement shall be in writing and
shall be deemed to have been duly given to any party when delivered personally
(by courier service or otherwise), when delivered by facsimile and confirmed by
return facsimile, or seven days after being mailed by first-class mail, postage
prepaid and return receipt requested in each case to the applicable addresses
set forth below:
<TABLE>
<S> <C>
If to Management Company: with a copy to:
Shurgard Incorporated Riddell, Williams, Bullitt & Walkinshaw
Suite 2200 1001 4th Avenue Plaza, Suite 4400
1201 Third Avenue Seattle, WA 98104
Seattle, WA 98101 Attention: John M. Steel
Attention: Charles K. Barbo Facsimile: (206) 389-1708
Facsimile: (206) 624-1645
If to Shurgard REIT: with a copy to:
Shurgard Storage Centers, Inc. Perkins Coie
Suite 2200 1201 Third Avenue, Suite 4000
1201 Third Avenue Seattle, WA 98104
Seattle, WA 98101 Attention: Michael E. Stansbury
Attention: Harrell Beck Facsimile: (206) 583-8500
Facsimile: (206) 624-1645
</TABLE>
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or to such other address as such party shall have designated by notice so given
to each other party.
10.2 Survival
The covenants, agreements, representations and warranties of
the parties hereto contained in this Agreement or in any certificate or other
writing delivered pursuant hereto or in connection herewith shall survive the
Closing through the second anniversary of the Closing Date, except in the case
of Sections 5.8, 5.10, and 7.17, which in each such case shall survive through
the fourth anniversary of the Closing Date. Notwithstanding the preceding
sentence, any covenant, agreement, representation or warranty in respect of
which indemnity may be sought pursuant to Section 4.8 shall survive the time at
which it would otherwise terminate pursuant to the preceding sentence, if
written notice of the inaccuracy or breach thereof, specifying Damages
(including the amount thereof) giving rise to such right to indemnity shall
have been given to the party against whom such indemnity may be sought prior to
such time.
10.3 Amendments, Waivers, Etc.
This Agreement may not be amended, changed, supplemented,
waived or otherwise modified except by an instrument in writing signed by the
party against whom enforcement is sought.
10.4 No Assignment
This Agreement shall be binding upon and shall inure to the
benefit of and be enforceable by the parties and their respective successors
and assigns; provided that, except as otherwise expressly set forth in this
Agreement, neither the rights nor the obligations of any party may be assigned
or delegated without the prior written consent of the other party.
10.5 Entire Agreement
Except as otherwise provided herein, this Agreement embodies
the entire agreement and understanding between the parties relating to the
subject matter hereof and supersedes all prior agreements and understandings
relating to such subject matter. There are no representations, warranties or
covenants by the parties hereto relating to such matter other than those
expressly set forth in this Agreement (including the Management Company
Disclosure Statement and the Shurgard REIT Disclosure Statement) and any
writings expressly required hereby.
-63-
<PAGE> 173
10.6 Specific Performance
The parties acknowledge that money damages are not an adequate
remedy for violations of this Agreement and that any party may, in its sole
discretion, apply to a court of competent jurisdiction for specific performance
or injunctive or such other relief as such court may deem just and proper to
enforce this Agreement or to prevent any violation hereof.
10.7 Remedies Cumulative
All rights, powers and remedies provided under this Agreement
or otherwise available in respect hereof at law or in equity shall be
cumulative and not alternative, and the exercise or beginning of the exercise
of any thereof by any party shall not preclude the simultaneous or later
exercise of any other such right, power or remedy by such party.
10.8 No Waiver
The failure of any party hereto to exercise any right, power
or remedy provided under this Agreement or otherwise available in respect
hereof at law or in equity, or to insist upon compliance by any other party
hereto with its obligations hereunder, and any custom or practice of the
parties at variance with the terms hereof, shall not constitute a waiver by
such party of its right to exercise any such or other right, power or remedy or
to demand such compliance.
10.9 No Third-Party Beneficiaries
This Agreement is not intended to be for the benefit of and
shall not be enforceable by any Person or entity who or which is not a party
hereto.
10.10 Jurisdiction
Each party hereby irrevocably submits to the exclusive
jurisdiction of the United States District Court for the Western District of
Washington or any court of the state of Washington located in the City of
Seattle in any action, suit or proceeding arising in connection with this
Agreement, and agrees that any such action, suit or proceeding shall be brought
only in such court (and waives any objection based on forum non conveniens or
any other objection to venue therein); provided, however, that such consent to
jurisdiction is solely for the purpose referred to in this Section 10.10 and
shall not be deemed to be a general submission to the jurisdiction of said
courts or in the state of Washington other than for such purpose. Each of the
parties hereby waives any right to a trial by jury in connection with any such
action, suit or proceeding.
-64-
<PAGE> 174
10.11 Governing Law
This Agreement and all disputes hereunder shall be governed by
and construed and enforced in accordance with the internal laws of the state of
Washington, without regard to principles of conflict of laws.
10.12 Name, Captions, Etc.
The name assigned to this Agreement and the section captions
used herein are for convenience of reference only and shall not affect the
interpretation or construction hereof. Unless otherwise specified (a) the
terms "hereof," "herein" and similar terms refer to this Agreement as a whole
and (b) references herein to Articles or Sections refer to articles or sections
of this Agreement.
10.13 Severability
If any term of this Agreement or the application thereof to
any party or circumstance shall be held invalid or unenforceable to any extent,
the remainder of this Agreement and the application of such term to the other
parties or circumstances shall not be affected thereby and shall be enforced to
the greatest extent permitted by applicable law, provided that in such event
the parties shall negotiate in good faith in an attempt to agree to another
provision (in lieu of the term or application held to be invalid or
unenforceable) that will be valid and enforceable and will carry out the
parties' intentions hereunder.
10.14 Counterparts
This Agreement may be executed in any number of counterparts,
each of which shall be deemed to be an original, but all of which together
shall constitute one instrument. Each counterpart may consist of a number of
copies, each signed by less than all, but together signed by all, the parties
hereto.
-65-
<PAGE> 175
IN WITNESS WHEREOF, this Agreement has been executed and
delivered by the parties set forth below.
SHURGARD STORAGE CENTERS, INC., a
Delaware Corporation
By: /s/ Harrell L. Beck
---------------------------------
Harrell L. Beck, President
SHURGARD INCORPORATED,
a Washington Corporation
By: /s/ Charles K. Barbo
---------------------------------
Charles K. Barbo, President
-66-
<PAGE> 176
APPENDIX II
December 19, 1994
Special Committee of the Board of Directors
of Shurgard Storage Centers, Inc.
c/o Bogle & Gates
Two Union Square
601 Union Street
Seattle, Washington 98101-2346
Dear Sirs:
Shurgard Storage Centers, Inc. ("SSCI") and Shurgard Incorporated
("Shurgard") have entered into an Agreement and Plan of Merger, dated as of
December 19, 1994 (the "Agreement"). Pursuant to the Agreement, Shurgard will
be merged with SSCI (the "Merger"), the consideration for which will be
primarily the issuance of shares of common stock of SSCI. Additional
consideration, in the form of additional shares of common stock of SSCI, may be
issued based upon the profits realized, if any, by SSCI with respect to
Shurgard's interest in certain limited partnerships. You have requested our
opinion as to whether the consideration to be paid for the acquisition of
Shurgard is fair, from a financial point of view, to SSCI.
Alex. Brown & Sons Incorporated, as a customary part of its investment
banking business, is engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, private placements and valuations for estate, corporate and
other purposes. We have acted as financial advisor to the Special Committee of
the Board of Directors of SSCI in connection with the Merger and have received
a fee for our services. Alex. Brown & Sons Incorporated regularly publishes
research reports regarding the real estate and real estate investment trust
industries and the businesses and securities of publicly owned companies in
those industries.
In connection with our opinion, we have: (i) reviewed certain
publicly available information regarding SSCI, (ii) reviewed certain internal
financial analyses and other information furnished to us by SSCI, (iii)
discussed the business of and prospects for SSCI with management of SSCI, (iv)
reviewed the price and trading volume of the common stock of SSCI, (v) reviewed
certain internal financial analyses and other information furnished to us by
Shurgard, (vi) discussed the business of and prospects for Shurgard with
management of Shurgard, (vii) reviewed valuations of Shurgard provided to us,
(viii) compared certain financial information of Shurgard with similar
information of certain private and public
<PAGE> 177
Special Committee of the Board of Directors
of Shurgard Storage Centers, Inc.
December 19, 1994
Page 2
companies engaged in the real estate management or financial services
industries, (ix) reviewed the financial terms of certain other business
combinations, (x) reviewed certain pro forma analyses and held discussions with
the management of SSCI and Shurgard regarding the business and prospects of
SSCI after the completion of the Merger, (xi) visited certain Shurgard-managed
self-storage centers, and (xii) performed such other studies and analyses and
considered such other factors as we deemed appropriate.
We have not independently verified the information described above and
for the purposes of this opinion have assumed the accuracy, completeness and
fairness thereof. With respect to information relating to the prospects of
SSCI after the Merger, we have assumed that such information reflects the best
currently available estimates and judgments of the managements of SSCI and
Shurgard as to the likely future financial performance of SSCI. In addition,
we have not made an independent evaluation or appraisal of the assets of SSCI,
the assets of Shurgard or reviewed environmental or other potential contingent
issues relating to SSCI, Shurgard or the Merger. Our opinion is based on
market, economic and other conditions as they exist and can be evaluated as of
the date of this letter.
Based upon and subject to the foregoing, it is our opinion that, as of
the date of this letter, the consideration to be paid for the acquisition of
Shurgard is fair, from a financial point of view, to SSCI.
Very truly yours
ALEX. BROWN & SONS INCORPORATED
By: Alex. Brown & Sons Incorporated
-------------------------------
<PAGE> 178
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
SHURGARD STORAGE CENTERS INC.
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets at December 31, 1993 and September 30, 1994 . . . . . . . . . . F-3
Consolidated Statements of Income for the period from July 23, 1993
(inception) through December 31, 1993 and the nine months ended
September 30, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Shareholders' Equity for the period from July 23,
1993 (inception) through December 31, 1993 and the nine months ended
September 30, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for the period from July 23, 1993
(inception) through December 31, 1993 and the nine months ended
September 30, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . F-7
Pro Forma Consolidated Statements of Income for the nine months ended
September 30, 1993 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-12
MANAGEMENT COMPANY OF SHURGARD INCORPORATED
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-13
Statements of Assets and Liabilities at December 31, 1992 and 1993 and
September 30, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-14
Statements of Revenues and Expenses for the years ended December 31, 1991,
1992 and 1993 and the nine months ended September 30, 1994 . . . . . . . . . . . . . . F-15
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-16
COMBINED PREDECESSOR PARTNERSHIPS
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-21
Combined Balance Sheets at December 31, 1992 and 1993 and March 1, 1994 . . . . . . . . . F-22
Combined Statements of Earnings for the years ended December 31, 1991,
1992 and 1993 and the period ended March 1, 1994 . . . . . . . . . . . . . . . . . . . F-23
Combined Statements of Partners' Equity (Deficit) . . . . . . . . . . . . . . . . . . . . F-24
Combined Statements of Cash Flows for the years ended December 31, 1991,
1992 and 1993 and the period ended March 1, 1994 . . . . . . . . . . . . . . . . . . . F-25
Notes to Combined Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . F-27
</TABLE>
F-1
<PAGE> 179
INDEPENDENT AUDITORS' REPORT
Directors and Shareholders
Shurgard Storage Centers, Inc.
Seattle, Washington
We have audited the accompanying balance sheet of Shurgard Storage
Centers, Inc. (the Company) as of December 31, 1993, and the related statement
of earnings, shareholders' equity and cash flows for the period from July 23,
1993 (inception) to December 31, 1993. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Shurgard Storage
Centers, Inc. as of December 31, 1993 and the results of its operations and its
cash flows for the period from July 23, 1993 to December 31, 1993 in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Seattle, Washington
December 16, 1994
F-2
<PAGE> 180
SHURGARD STORAGE CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1993 1994
------------ -------------
(unaudited)
<S> <C> <C>
ASSETS
Storage centers:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . $ -- $ 87,908
Buildings and equipment, net . . . . . . . . . . . . . . . 363,891
-------- ---------
451,799
Cash and cash equivalents, including restricted cash of $2,717
at September 30, 1994 . . . . . . . . . . . . . . . . . . 1 19,299
Investment in joint ventures . . . . . . . . . . . . . . . . 2,450
Other assets . . . . . . . . . . . . . . . . . . . . . . . . 11,226
-------- ---------
Total assets . . . . . . . . . . . . . . . . . . . . . . $ 1 $ 484,774
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and other liabilities . . . . . . . . . . . $ 1 $ 10,539
Line of credit . . . . . . . . . . . . . . . . . . . . . . . 30,000
Notes payable . . . . . . . . . . . . . . . . . . . . . . . 125,121
-------- ---------
Total liabilities . . . . . . . . . . . . . . . . . . . 1 165,660
Commitments (Notes E and F)
Shareholders' equity:
Class A common stock, $0.01 par value; 120,000,000 shares
authorized; 16,829,283 and 5 shares issued and outstanding 317,434
Class B convertible common stock, $0.01 par value; 500,000
shares authorized; 154,604 shares issued and outstanding at
September 30, 1994; net of loans to shareholders of $4,002 (1,086)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . 2,766
-------- ---------
Total shareholders' equity . . . . . . . . . . . . . . . 319,114
-------- ---------
Total liabilities and shareholders' equity . . . . . . . $ 1 $ 484,774
======== =========
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE> 181
SHURGARD STORAGE CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except share data)
<TABLE>
<CAPTION>
PERIOD FROM
JULY 23, 1993
(INCEPTION) NINE MONTHS
THROUGH ENDED
DECEMBER 31, SEPTEMBER 30,
1993 1994
------------- -------------
(unaudited)
<S> <C> <C>
REVENUE
Rental revenue . . . . . . . . . . . . . . . . . . . . . . . $ -- $45,701
Income from joint ventures . . . . . . . . . . . . . . . . . 109
Interest income . . . . . . . . . . . . . . . . . . . . . . 473
------- -------
Total revenue . . . . . . . . . . . . . . . . . . . . . . 46,283
EXPENSES
Operating expense . . . . . . . . . . . . . . . . . . . . . 10,567
Management fees . . . . . . . . . . . . . . . . . . . . . . 2,739
Depreciation and amortization . . . . . . . . . . . . . . . 7,594
Real estate taxes . . . . . . . . . . . . . . . . . . . . . 4,083
General and administrative . . . . . . . . . . . . . . . . . 1,517
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . 5,814
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 172
------- -------
Total expenses . . . . . . . . . . . . . . . . . . . . . . 32,486
------- -------
Income before extraordinary item . . . . . . . . . . . . . . . 13,797
Extraordinary item - loss on retirement of debt . . . . . . . (1,180)
------- -------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ -- $12,617
======= =======
Net income per share:
Income before extraordinary item . . . . . . . . . . . . . . -- $ 0.81
-------
Extraordinary item - loss on retirement of debt . . . . . . (0.07)
-------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ -- $ 0.74
======= =======
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE> 182
SHURGARD STORAGE CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands except share data)
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK LOANS TO
--------------------- -------------------- CLASS B RETAINED
SHARES AMOUNT SHARES AMOUNT SHAREHOLDERS EARNINGS TOTAL
------ ------ ------ ------ ------------ -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 23, 1993
(inception) and
December 31, 1993 . . . 5 $ -- -- $ -- $ -- $ -- $ --
Issuance of common
stock . . . . . . . . . 16,829,278 317,434 154,604 2,916 (4,002) 316,348
Net income . . . . . . 12,617 12,617
Dividends . . . . . . . (9,851) (9,851)
---------- -------- ------- ------ ------- ------- --------
Balance, September 30,
1994 (unaudited) . . . 16,829,283 $317,434 154,604 $2,916 $(4,002) $ 2,766 $319,114
========== ======== ======= ====== ======= ======= ========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE> 183
SHURGARD STORAGE CENTERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
PERIOD FROM JULY
23, 1993
(INCEPTION) NINE MONTHS
THROUGH ENDED
DECEMBER 31, SEPTEMBER 30,
1993 1994
---------------- -------------
(unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ -- $ 12,617
Adjustments to reconcile earnings to net cash provided by
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . 7,594
Extraordinary loss on retirement of debt . . . . . . . . . 1,180
Earnings in excess of distributions from joint venture . . (29)
Changes in operating accounts:
Other assets . . . . . . . . . . . . . . . . . . . . . . (474)
Accounts payable and other liabilities . . . . . . . . . 1 875
-------- ---------
Net cash provided by operating activities . . . . . . 1 21,763
-------- ---------
INVESTING ACTIVITIES
Acquisition of and improvements to storage centers . . . . . (100,875)
-------- ---------
Net cash used in investing activities . . . . . . . . (100,875)
-------- ---------
FINANCING ACTIVITIES
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . (9,851)
Proceeds from line of credit . . . . . . . . . . . . . . . . 30,000
Proceeds from notes payable . . . . . . . . . . . . . . . . 227,180
Payment of financing costs . . . . . . . . . . . . . . . . . (8,088)
Payment of assumed consolidation liabilities . . . . . . . . (11,662)
Principal payments on notes payable . . . . . . . . . . . . (129,168)
-------- ---------
Net cash provided by financing activities . . . . . . 98,411
-------- ---------
Increase in cash and short-term investments . . . . . . . . . . 1 19,299
Cash and short-term investments at beginning of period . . . .
-------- ---------
Cash and short-term investments at end of period . . . . . . . $ 1 $ 19,299
======== =========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid during the period for interest . . . . . . . . . . $ -- $ 5,631
======== =========
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE> 184
SHURGARD STORAGE CENTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM JULY 23, 1993 (INCEPTION) TO DECEMBER 31, 1993 AND
NINE MONTHS ENDED SEPTEMBER 30, 1994
NOTE A -- ORGANIZATION
Shurgard Storage Centers, Inc. (the "Company") was organized under the
laws of the state of Delaware on July 23, 1993, to serve as a vehicle for
investments in, and ownership of, a professionally managed real estate
portfolio consisting primarily of self-service storage properties that provide
month-to-month leases for business and personal use.
On March 1, 1994, the Company completed the acquisition of 17 publicly
held limited partnerships (the "Partnerships") administered by Shurgard
Incorporated ("Shurgard") as a means for assembling an initial portfolio of
real estate investments (Note E).
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The consolidated financial statements include
the accounts of the Company, SSC Property Holdings, Inc., SSC Acquisitions,
Inc., Shurgard-Freeman Medical Center Joint Venture and Capitol Hill Partners.
SSC Property Holdings, Inc. was established as a wholly owned subsidiary to
hold all storage centers that secure the note payable to a financial services
company (Note G). SSC Acquisitions, Inc. was established as a wholly owned
subsidiary to hold all storage centers that will secure the line of credit with
the same financial service company (Note F). The Company holds a 90% ownership
interest in Capitol Hill Partners and a 67% interest in Shurgard-Freeman
Medical Center Joint Venture. Both joint ventures are with unaffiliated
parties and each owns one storage center or a development site on which a
storage center will be built. All intercompany balances and transactions have
been eliminated upon consolidation. Prior to June 1994, the Company had no
subsidiaries; therefore, the December 31, 1993 financial statements are not
consolidated.
The consolidated interim financial statements included in this report
are unaudited. In the opinion of the Company, all adjustments necessary for a
fair presentation of such financial statements have been included. Such
adjustments consisted only of normal recurring items. Interim results are not
necessarily indicative of results for a full year. Operating activity began
March 1, 1994; the Company was inactive prior to that date.
STORAGE CENTERS: Storage centers are recorded at cost. Depreciation
on buildings and equipment is recorded on a straight-line basis over their
estimated useful lives, which range from three to 30 years.
INVESTMENT IN JOINT VENTURES: The Company consolidates the accounts
of those joint ventures in which the Company has a greater than 50% interest.
Minority interest of $477,000 is included in other liabilities at September 30,
1994. All other investments in joint ventures are accounted for on the equity
method.
CASH EQUIVALENTS: Cash equivalents consist of money market
instruments and securities with original maturities of 90 days or less.
FINANCING COSTS: Financing costs are included in other assets and are
amortized on the effective interest method over the life of the related debt.
F-7
<PAGE> 185
FEDERAL INCOME TAXES: The Company intends to qualify as a real estate
investment trust ("REIT") as defined in Section 856 of the Internal Revenue
Code of 1986, as amended. As a REIT, the Company will not be subject to
federal income taxes provided that it distributes annually at least 95% of its
taxable income and meets certain other requirements. As a result, no provision
for federal income taxes has been made in the Company's consolidated financial
statements.
REVENUE RECOGNITION: Revenue is recognized when earned under accrual
accounting principles.
NET INCOME PER SHARE: Net income per share is calculated based on the
weighted average shares outstanding during the periods presented. No per share
data for 1993 has been included as such is de minimis.
FINANCIAL INSTRUMENTS: The carrying values reflected in the balance
sheet at September 30, 1994, reasonably approximate the fair value of cash and
cash equivalents, other assets, and notes payable. The Company estimates that
the fair value of its notes from shareholders is $2.2 million.
NOTE C -- ADVISORY AND MANAGEMENT AGREEMENTS
The Company has entered into advisory and management agreements under
which Shurgard advises the Company with respect to its investments, manages the
Company's day-to-day operations, and provides property management services.
The agreements provide for an annual advisory fee, incentive advisory fees,
reimbursement for certain costs and expenses, and property management fees.
The property management fee is equal to 6% of gross storage center revenues and
5% of office and business park revenues. The annual advisory fee is equal to
0.5% of the fair market value of new properties acquired after the initial
acquisition (Note E), mortgage loans receivable held and the average daily cash
equivalents invested in excess of cash equivalents acquired from the
Partnerships. The incentive advisory fee equals 10% of realized gain on sale
or refinancing of properties acquired after the initial acquisition. During
the period ended September 30, 1994, $2,753,000 was paid under these
agreements.
NOTE D -- STORAGE CENTERS
Storage centers at September 30, 1994 consist of the following (in
thousands):
<TABLE>
<S> <C>
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 87,908
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . 366,966
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,526
--------
459,400
Less accumulated depreciation . . . . . . . . . . . . . . . . . (7,601)
--------
$451,799
========
</TABLE>
NOTE E -- ACQUISITIONS
On March 1, 1994, the Company acquired the assets, subject to existing
liabilities, of each of the Partnerships for $387 million. A summary of the
assets and liabilities assumed in this transaction are as follows (in
thousands):
<TABLE>
<S> <C>
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . $ 417,218
Interest in joint ventures . . . . . . . . . . . . . . . . . . 7,074
Cash, receivables and other assets . . . . . . . . . . . . . . 10,642
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . (26,192)
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . (21,326)
---------
$ 387,416
=========
</TABLE>
F-8
<PAGE> 186
The acquisition was funded by the issuance of 16,983,728 shares of
common stock and $67,074,813 in proceeds from a note payable to a financial
services company. Real estate assets acquired in the acquisition consisted of
134 self-service storage centers and two business parks located in 17 states,
as well as an interest in two joint ventures owning an additional five storage
centers.
The following unaudited pro forma financial information represents the
results of operations of the Company as if the acquisition had occurred on
January 1, 1993. The pro forma results do not necessarily indicate the actual
results that would have been obtained, nor are they necessarily indicative of
the future operations of the combined companies.
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1993 SEPTEMBER 30, 1994
----------------- ------------------
(in thousands)
<S> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . $ 72,900 $ 58,777
Expenses
Operating . . . . . . . . . . . . . . . . 16,840 13,530
Property management fees . . . . . . . . 4,317 3,480
Depreciation and amortization . . . . . . 12,887 9,740
Real estate taxes . . . . . . . . . . . . 7,068 5,250
Interest . . . . . . . . . . . . . . . . 10,303 7,931
General and administrative . . . . . . . 2,390 2,133
-------- --------
53,805 42,064
-------- --------
Income before extraordinary item . . . . . . $ 19,095 $ 16,713
======== ========
</TABLE>
On September 1, 1994, the Company purchased 20 storage centers for $34
million from an unaffiliated seller. These centers, located in Maryland,
Virginia and North Carolina, were financed through a $30 million draw on the
Company's credit facility, a $1 million note to the seller and approximately $3
million from cash reserves. The note to the seller is due in two $500,000
installments in September 1995 and 1996, which installments include accrued
interest. The discounted value of these notes is estimated to be $917,000.
In July 1994, the Company entered into a joint venture with a storage
operator and developer to develop a property in Nashville, Tennessee. The
Company will have a 67% interest in this project, which will initially have
59,700 net rentable square feet and is expected to be complete in early 1995.
The Company's investment in this project is $600,000. The Company has
guaranteed repayment of $833,500 of the joint venture's construction loan.
In November 1994, the Company entered into a second joint venture with
the same developer to develop a second property in Nashville, Tennessee. The
Company will have a 50% interest in this project, which will initially have
67,700 net rentable square feet and is expected to be complete in early 1995.
The Company's investment in this project is $640,000. The Company has
guaranteed repayment of $1,110,700 of the joint venture's construction loan.
In October 1994, the Company entered into a commitment to invest up to
$3 million in a Belgian partnership that will own and operate storage centers
in the Benelux region of Europe.
As of December 14, 1994, the Company has paid $12 million and
committed an additional $1 million for investment in two 10-year participating
mortgage loans, which are nonrecourse to the borrower and are secured by real
estate, including four storage centers and office/warehouse space. The Company
will receive interest at 8% per annum plus 50% of both operating cash flow and
distributions from sale of real property, as
F-9
<PAGE> 187
defined. The Company has options to purchase the properties at established
prices, generally exercisable in five years and extending until maturity of the
loans.
The Company is currently negotiating with a committee of independent
directors of Shurgard to merge the management, acquisition, development, and
advisory business of Shurgard into SSCI. The potential merger is subject to a
vote of the shareholders of SSCI and Shurgard.
NOTE F -- LINES OF CREDIT
In August 1994, the Company established a $50 million revolving
two-year credit facility with a commercial bank group. This credit facility is
secured by real estate and accrues interest at 7.33% for the first six months,
and thereafter at either the banks' prime rate or LIBOR plus 200 basis points
(at the Company's option). The commitment fee for the revolving period was 75
basis points of the commitment amount. Upon the expiration of the revolving
period, the Company can extend any outstanding balance for a one year term for
an additional fee of 37.5 basis points of the amount outstanding. At December
16, 1994, $42 million was outstanding on this credit facility; outstanding
balances are payable upon expiration of the line in August 1996.
Additionally, in August 1994, the Company executed a commitment letter
with Nomura Asset Capital Corp., a subsidiary of Nomura Securities
International, Inc., to provide a second $50 million two-year revolving credit
facility. This credit facility will be secured by real estate, bear interest
at LIBOR plus 175 basis points, and require a draw fee equal to 25 basis points
of the amount drawn. The commitment fee for the revolving period will be 100
basis points of the commitment amount. The commitment is subject to customary
contingencies and due diligence.
NOTE G -- NOTES PAYABLE
Notes payable at September 30, 1994 consist of the following (in
thousands):
<TABLE>
<S> <C>
Note payable to financial services company . . . . . . . . . . . $122,580
Mortgage note payable . . . . . . . . . . . . . . . . . . . . . 1,468
Other notes payable . . . . . . . . . . . . . . . . . . . . . . 1,073
--------
$125,121
========
</TABLE>
On June 9, 1994, the Company refinanced substantially all of its
existing debt with Nomura Asset Capital Corp., a subsidiary of Nomura
Securities International, Inc. through a debt purchase transaction. The
$122.58 million loan provides the Company with funds for seven years at a fixed
rate equal to 8.28% and requires monthly payments of interest only until
maturity. The refinancing of existing debt resulted in a loss on early
retirement of $1.18 million, consisting of unamortized loan fees. As required
by the loan agreement, the Company deposited cash into restricted accounts to
fund certain expenses, including real estate taxes and insurance.
The mortgage note is secured by a deed of trust on a storage center.
It is due in monthly installments of $13,441, including principal and interest
at 10.25%, and matures April 2001. Other notes payable consists of local
improvement district warrants and a note taken in connection with a real estate
acquisition. The approximate maturities of principal over the next five fiscal
years range from $20,000 to $516,000.
NOTE H -- SHAREHOLDERS' EQUITY
In addition to the rights, privileges and powers of Class A common
stock, Class B common shareholders received loans from the Company to fund
certain obligations to the Partnerships. The loans are
F-10
<PAGE> 188
due between 2001 and 2003 and are secured by the Class B common stock. Class B
common stock is convertible to Class A common stock at a one-to-one ratio as
the loans are repaid.
The Company has authorized 40,000,000 shares of preferred stock, of
which 2,800,000 shares have been designated Series A Junior Participating
Preferred Stock. No shares of preferred stock are issued and outstanding at
September 30, 1994. The Company's Board of Directors is authorized to
determine the rights, preferences and privileges of the preferred stock,
including the number of shares constituting any such series, and the
designation thereof.
NOTE I -- STOCK OPTIONS
The Company has established the 1993 Stock Option Plan (the "Plan")
for the purpose of attracting and retaining the Company's directors, executive
officers and other employees. The Plan provides for the granting of options
for up to 3% of the Company's outstanding shares of Class A common stock at the
end of each year, limited in the aggregate to 5,000,000 shares. In general,
the options vest ratably over five years and must be exercised within 10 years
from date of grant. The exercise price for qualified incentive options under
the Plan must be at least equal to fair market value at date of grant and at
least 85% of fair market value at date of grant for nonqualified options. The
Plan expires in 2003. At September 30, 1994, 32,000 options had been granted
under the Plan at an exercise price of $18.90 per share. No options had been
granted at December 31, 1993.
The Company also has established the Stock Option Plan for Nonemployee
Directors (the "Nonemployee Plan") for the purpose of attracting and retaining
the services of experienced and knowledgeable outside directors. The
Nonemployee Plan provides for the annual grant of options to purchase 400
shares of Class A common stock. Such options vest upon continued service until
the next annual meeting of the Company's shareholders. A total of 20,000
shares are reserved under the Nonemployee Plan. The exercise price for options
granted under the Nonemployee Plan is equal to fair market value at date of
grant. At September 30, 1994, 1,200 options had been granted under the
Nonemployee Plan at an exercise price of $22.93 per share.
NOTE J -- SHAREHOLDER RIGHTS PLAN
In March 1994, the Company adopted a Shareholder Rights Plan and
declared a dividend distribution of one Right for each outstanding share of
common stock. Under certain conditions, each Right may be exercised to
purchase one one-hundredth of a share of Series A Junior Participating
Preferred Stock at a purchase price of $65, subject to adjustment. The Rights
will be exercisable only if a person or group has acquired 10% or more of the
outstanding shares of common stock, or following the commencement of a tender
or exchange offer for 10% or more of such outstanding shares of common stock.
If a person or group acquires more than 10% of the then-outstanding shares of
common stock, each Right will entitle its holder to receive, upon exercise,
common stock (or, in certain circumstances, cash, property or other securities
of the Company) having a value equal to two times the exercise price of the
Right. In addition, if the Company is acquired in a merger or other business
combination transaction, each Right will entitle its holder to purchase that
number of the acquiring company's common shares having a market value of twice
the Right's exercise price. The Company will be entitled to redeem the Rights
at $.0001 per Right at any time prior to the earlier of expiration of the
Rights in March 2004 and the time that a person has acquired a 10% position.
The Rights do not have voting or dividend rights, and, until they become
exercisable, have no dilutive effect on the Company's earnings.
F-11
<PAGE> 189
SHURGARD STORAGE CENTERS, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands except per share data)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 1993(1) SEPTEMBER 30, 1994(2)
--------------------- ---------------------
<S> <C> <C>
Rental revenue . . . . . . . . . . . $53,969 $58,029
Income from joint venture . . . . . . 68 140
Interest income . . . . . . . . . . . 196 608
Litigation settlement . . . . . . . . 317
------- -------
Total revenues . . . . . . . 54,550 58,777
Operating expense . . . . . . . . . . 12,793 13,530
Management fees . . . . . . . . . . . 3,502 3,480
Depreciation and amortization . . . . 10,420 9,740
Real estate taxes . . . . . . . . . . 5,257 5,250
General and administrative . . . . . 1,786 1,950
Other . . . . . . . . . . . . . . . . 132 183
Interest . . . . . . . . . . . . . . 1,716 7,931
------- -------
Total expenses . . . . . . . 35,606 42,064
------- -------
Income before extraordinary item . . $18,944 $16,713
======= =======
Income before extraordinary item per
common and common equivalent
share(3) . . . . . . . . . . . . . $0.92 $0.98
===== =====
</TABLE>
- ---------------
(1) Amounts represent the combined results of operations of each of the 17
partnerships consolidated into the Shurgard REIT on March 1, 1994.
(2) Amounts represent pro forma results of operations as if the
Consolidation had occurred and the current debt structure existed on
January 1, 1994.
(3) Pro forma per share data is based on the outstanding common and common
equivalent shares of the Shurgard REIT at September 30, 1994
(16,989,739 shares). Historical 1993 per share data is based on the
equivalent number of shares assuming all unit holders elected to
receive shares in the Consolidation (20,500,000 shares).
F-12
<PAGE> 190
INDEPENDENT AUDITORS' REPORT
Board of Directors
Shurgard Incorporated
Seattle, Washington
We have audited the accompanying statement of assets and liabilities
of the property management, acquisition, development and advisory business of
Shurgard Incorporated (the "Management Company") as of December 31, 1993, and
the related statement of revenues and expenses of the Management Company for
the year ended December 31, 1993. These financial statements are the
responsibility of Shurgard Incorporated's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the assets and liabilities of the Management Company of
Shurgard Incorporated as of December 31, 1993, and the revenues and expenses of
the Management Company for the year ended December 31, 1993, in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Seattle, Washington
December 16, 1994
F-13
<PAGE> 191
MANAGEMENT COMPANY OF SHURGARD INCORPORATED
STATEMENTS OF ASSETS AND LIABILITIES
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------- SEPTEMBER 30,
1992 1993 1994
----------- -------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . $1,349 $ 53 $ 888
Due from affiliates . . . . . . . . . . . . . 671 839 1,404
Partnership consolidation costs receivable . 1,546 4,447
Other . . . . . . . . . . . . . . . . . . . . 40 90 85
------ ------- --------
Total . . . . . . . . . . . . . . . . . . 3,606 5,429 2,377
FIXED ASSETS, net of accumulated depreciation of
$949, $1,063 and $1,226 . . . . . . . . . . . 462 7,612 7,570
OTHER . . . . . . . . . . . . . . . . . . . . . 364 1,154 1,506
------ ------- --------
$4,432 $14,195 $ 11,453
====== ======= ========
CURRENT LIABILITIES
Lines of credit . . . . . . . . . . . . . . . $ 299 $ 50
Accounts payable . . . . . . . . . . . . . . 289 256 286
Accrued salaries and expenses . . . . . . . . 513 808 563
Accrued partnership consolidation costs . . . 728 2,520
Accrued profit sharing . . . . . . . . . . . 281 226 430
------ ------- --------
Total . . . . . . . . . . . . . . . . . . 2,110 3,860 1,279
LONG-TERM DEBT . . . . . . . . . . . . . . . . . -- 7,275 7,275
COMMITMENTS AND CONTINGENCIES
(Notes H and J)
MANAGEMENT COMPANY EQUITY . . . . . . . . . . . 2,322 3,060 2,899
------ ------- --------
$4,432 $14,195 $ 11,453
====== ======= ========
</TABLE>
See notes to financial statements
F-14
<PAGE> 192
MANAGEMENT COMPANY OF SHURGARD INCORPORATED
STATEMENTS OF REVENUES AND EXPENSES
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
--------------------------------------------- SEPTEMBER 30,
1991 1992 1993 1994
----------- ----------- ----------- ----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUES
Management fees . . . . . . . . . . . . $4,606 $5,630 $ 6,448 $ 5,419
Acquisition and development fees . . . . 611 473 86 26
Reimbursements from affiliates . . . . . 1,201 1,086 1,466 1,798
Rental revenues . . . . . . . . . . . . 48 776
------ ------ ------- -------
Total . . . . . . . . . . . . . . . . . 6,418 7,189 8,048 8,019
EXPENSES
Personnel . . . . . . . . . . . . . . . 3,760 4,348 4,803 3,942
General and administrative . . . . . . . 918 1,218 1,353 1,167
Travel . . . . . . . . . . . . . . . . . 369 399 507 388
Rent . . . . . . . . . . . . . . . . . . 350 359 410 301
------ ------ ------- -------
Total . . . . . . . . . . . . . . . . . 5,397 6,324 7,073 5,798
------ ------ ------- -------
EXCESS FROM MANAGEMENT COMPANY
OPERATIONS . . . . . . . . . . . . . . . 1,021 865 975 2,221
OTHER INCOME (EXPENSE)
Interest expense . . . . . . . . . . . . (55) (8) (36) (528)
Equity in earnings of affiliated
partnerships . . . . . . . . . . . . 163 160 243 226
Interest income . . . . . . . . . . . . 37 43 124 81
Gain on sale of land . . . . . . . . . . 337
------ ------ ------- -------
Total . . . . . . . . . . . . . . . . . 145 532 331 (221)
------ ------ ------- --------
EXCESS FROM MANAGEMENT COMPANY . . . . . $1,166 $1,397 $ 1,306 $ 2,000
====== ====== ======= =======
</TABLE>
See notes to financial statements
F-15
<PAGE> 193
MANAGEMENT COMPANY OF SHURGARD INCORPORATED
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993 AND 1992 AND
NINE MONTHS ENDED SEPTEMBER 30, 1994
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying financial statements have been
prepared in connection with the Agreement and Plan of Merger (the "Merger
Agreement") between Shurgard Incorporated ("Shurgard") and Shurgard Storage
Centers, Inc. ("SSCI") (the "Agreement") under which SSCI would effectively
acquire Shurgard's property management, acquisition, development and advisory
business (the "Management Company") in exchange for common stock of SSCI. The
merger is subject to the approval of the shareholders of SSCI and Shurgard.
The accompanying financial statements have been prepared from the books
and records of Shurgard and present the assets and liabilities of the
Management Company as of December 31, 1993 and 1992 and September 30, 1994, and
the related revenues and expenses for the years ended December 31, 1993, 1992
and 1991 and the period ended September 30, 1994. Accordingly, these statements
do not purport to represent the financial position or results of operations of
Shurgard or any of its subsidiaries.
The statement of revenues and expenses of the Management Company to be
merged into SSCI may not necessarily be indicative of the revenues and expenses
that would have resulted had the operations of the Management Company
functioned as a stand-alone entity. The financial statements exclude the
effects of income taxes, as in accordance with the Agreement, to the extent
that an asset or liability for income taxes of the Management Company exists at
the closing date, such amounts will be added to or deducted from the Purchase
Price as such taxes are intended to be neutral to SSCI.
The statements of assets and liabilities as of December 31, 1992 and
1991 and September 30, 1994 and the statements of revenues and expenses for the
years ended December 31, 1992 and 1991 and the nine months ended September 30,
1994, which are included in this report, are unaudited. In the opinion of
Shurgard's management, all adjustments necessary for a fair presentation of
such financial statements have been included; such adjustments consisted only
of normal recurring items. Interim results are not necessarily indicative of
results for a full year.
BUSINESS: The Management Company includes the ownership, operation and
management of storage centers, as well as acquisition, development and advisory
services. The Management Company earns revenues, fees and reimbursements for:
o Management of property operations. The Management Company generally
earns a monthly management fee based on a percentage of gross
revenues.
o Acquisition and development of self-storage properties. The
Management Company is generally compensated for these services when
provided to affiliates based on a fixed percentage of gross
proceeds from the offering of partnership interests or of invested
capital.
o Reimbursement of allowable costs. Under the terms of the affiliated
partnership and SSCI agreements certain costs are reimbursable to
the Management Company for services, such as
F-16
<PAGE> 194
construction management, legal services, computer support, and
national marketing programs.
o Advisory services. Under agreements with SSCI, the Management
Company provides certain advisory services with respect
to SSCI's investments and provides the day-to-day
administrative functions of SSCI. The Management Company is
compensated for these services based on the value of certain
assets acquired after March 1, 1994.
CASH EQUIVALENTS: Cash equivalents consist of money market instruments
with maturities of 30 days or less.
LAND, BUILDING, EQUIPMENT AND LEASEHOLD IMPROVEMENTS: The Management
Company owns and operates a storage center located in Daly City, California.
Depreciation is provided for on the straight-line method over the estimated
useful lives of the building, furniture and fixtures, equipment and vehicles as
follows:
<TABLE>
<S> <C>
Building ...................................... 39 years
Furniture and fixtures ........................ 5 to 7 years
Equipment and vehicles ........................ 3 to 7 years
</TABLE>
Leasehold improvements are depreciated over the life of the related
lease. Land includes $206,364 of excess land held for sale.
NOTE B -- TRANSACTIONS WITH AFFILIATES
Prior to March 1, 1994, substantially all of Management Company fees
and reimbursements were generated from services performed for affiliated
partnerships in which the majority shareholders of Shurgard held limited
partnership or general partnership interests. The Management Company provides a
variety of services for the partnerships as discussed in Note A.
On March 1, 1994, 17 of the affiliated partnerships were consolidated
into SSCI. At that time Shurgard signed various agreements with SSCI, which
will be included in the Management Company, under which agreements the
Management Company manages and advises SSCI. For the period ended September 30,
1994, 47% of total revenues was earned from SSCI; 53% was earned from the
remaining affiliated partnerships.
Due from affiliates consists of property management fees, cost
reimbursements and acquisition fees payable by affiliated partnerships or by
SSCI; such amounts are payable on demand.
NOTE C -- ACQUISITION
On December 16, 1993, the Management Company purchased the Daly City
Storage Center, located near San Francisco, California, from a nonaffiliated
entity for $7,200,000 plus closing costs. The purchase was funded with proceeds
of a $7,275,000 nonrecourse mortgage note payable to a commercial insurance
company and cash. This loan is a participating mortgage, which is nonamortizing
and matures January 1, 2004. The loan requires: (a) monthly fixed interest only
payments at 8% per annum and (b) quarterly additional interest payments of 90%
of net cash flow, as defined. Additional interest of $99,353 was paid for the
nine months ended September 30, 1994. No additional interest was paid in 1993.
The loan is secured by a deed of trust on the property and an assignment of
leases.
F-17
<PAGE> 195
The acquisition was accounted for as a purchase and, accordingly, the
cost was allocated based on fair value as follows (in thousands):
<TABLE>
<S> <C>
Land ........................................ $1,713
Buildings ................................... 5,428
Furniture, fixtures and equipment ........... 24
Intangible assets ........................... 73
------
$7,238
======
</TABLE>
Unaudited pro forma revenues, expenses and excess of expenses over
revenues, as if the acquisition had occurred at the beginning of 1992, are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------
1992 1993
-------- --------
<S> <C> <C>
Revenues ............................ $ 943 $ 969
Expenses ............................ (1,076) (1,101)
------- -------
Excess of expenses over revenues .... $ (133) $ (132)
======= =======
</TABLE>
NOTE D -- PARTNERSHIP CONSOLIDATION COSTS RECEIVABLE
Partnership consolidation costs receivable consist of direct
out-of-pocket costs such as appraisals and legal fees incurred in connection
with the consolidation of 17 affiliated public limited partnerships into SSCI.
The consolidation closed in March 1994 and partnership consolidation costs were
paid to the Management Company on March 4, 1994.
NOTE E -- OTHER ASSETS
Other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS
---------------------- ENDED
1992 1993 SEPTEMBER 30, 1994
------ ------ ------------------
<S> <C> <C> <C>
Storage center management system ........ $101 $ 835 $1,017
Other ................................... 263 319 489
---- ------ ------
$364 $1,154 $1,506
==== ====== ======
</TABLE>
The storage center management system represents costs incurred in the
development of software, the cost of which, beginning 1995, will be reimbursed
to the Management Company by affiliated entities after the system is fully
installed.
NOTE F -- LINE OF CREDIT AND LONG-TERM DEBT
The Management Company's line of credit agreement with a commercial bank
provides for borrowings up to $1,500,000 and expires in June 1995. The agreement
requires monthly payments of interest at the bank's prime rate plus 0.5% (8.0%
at September 30, 1994) and is secured by accounts receivable, equipment and
other assets of the Management Company. The agreement contains restrictive
covenants that,
F-18
<PAGE> 196
among others (a) require that the Management Company maintain minimum levels of
working capital and tangible net worth and (b) prohibit the declaration or
payment of dividends to shareholders without prior consent.
Long-term debt is comprised of the $7,275,000 mortgage note payable
described in Note C.
NOTE G -- FIXED ASSETS
Fixed assets consist of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS
----------------------- ENDED
1992 1993 SEPTEMBER 30, 1994
-------- --------- ------------------
<S> <C> <C> <C>
Land .................... $ 205 $1,919 $1,919
Buildings ............... 5,460 5,460
Furniture, fixtures and
equipment.............. 1,034 1,131 1,262
Leasehold improvements... 172 165 165
------ ------ ------
1,411 8,675 8,806
Less accumulated
depreciation .......... 949 1,063 1,236
------ ------ ------
$ 462 $7,612 $7,570
====== ====== ======
</TABLE>
NOTE H -- COMMITMENTS
Shurgard has entered into several operating leases for district offices,
which leases continue through 1998. Monthly lease payments are based on fixed
rates adjusted by negotiated periodic increases. Future minimum payments under
these noncancellable operating leases are as follows (in thousands):
<TABLE>
<S> <C>
1994 ............................ $ 367
1995 ............................ 371
1996 ............................ 324
1997 ............................ 250
1998 ............................ 176
------
$1,488
======
</TABLE>
Shurgard has entered into buy-sell agreements with certain Management
Company employees under which the employees purchased 561,174 shares of
Shurgard's stock. Shurgard is obligated to repurchase such stock upon
termination of employment or certain other conditions. The repurchase price
will be determined in accordance with a formula in the buy-sell agreements that
is based on fair value as determined by annual independent valuation. These
agreements will be cancelled prior to the Merger.
In October 1994, the Management Company signed a letter of intent to
invest in a Belgian corporation that will develop and operate storage centers
in the Benelux region of Europe. Pursuant to that letter, the Management
Company has made a $250,000 working capital loan to Shurgard Benelux SA.
In conjunction with the Merger, the Management Company committed to fund
one of its subsidiaries. At December 16, 1994, $1.6 million of this commitment
remained.
NOTE I -- EMPLOYEE BENEFIT PLANS
The Management Company employees participate in Shurgard's employee stock
ownership ("ESOP") and incentive savings (401(k)) plans that cover
substantially all employees of the Management Company.
F-19
<PAGE> 197
Under the ESOP, Shurgard, at the discretion of its Board of Directors, may
contribute a portion of the employee profit-sharing awards to the ESOP in cash
or in qualified securities of Shurgard. Under the 401(k) plan, each
year employees may contribute between 1% and 15% of their annual compensation to
the plan. Shurgard, at its sole discretion, may match a portion of the
employees' contribution. In the years ended December 31, 1992 and 1993 and the
nine months ended September 30, 1994, Shurgard made contributions to the ESOP
on behalf of Management Company employees of approximately $16,000, $39,000 and
$37,000, respectively; no contribution was made in 1991. Under the Merger
Agreement, the ESOP and 401(k) plan will be continued by SSCI.
NOTE J -- CONTINGENCIES
Shurgard is the general partner of Shurgard Limited Edition I, a
partnership which owns a storage center. The Management Company has guaranteed
20% of the outstanding long-term debt, which total debt was $1,211,000 at
September 30, 1994, and is secured by real estate.
F-20
<PAGE> 198
INDEPENDENT AUDITORS' REPORT
Partners
Entities Listed in Note A
Seattle, Washington
We have audited the accompanying combined balance sheets of 17 limited
partnerships (the "Partnerships") described in Note A, as of December 31,
1993 and 1992, and the related combined statements of earnings, partners'
equity (deficit), and cash flows for each of the three years in the period
ended December 31, 1993. These financial statements are the responsibility of
the Partnerships' management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such combined financial statements present fairly, in
all material respects, the financial position of the Partnerships as of
December 31, 1993 and 1992, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1993 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Seattle, Washington
December 16, 1994
F-21
<PAGE> 199
COMBINED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION> DECEMBER 31,
---------------------- MARCH 1,
1992 1993 1994
-------- -------- ---------
(unaudited)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents...................... $ 9,859 $ 9,057 $ 76,546
Stock in Shurgard Storage Centers, Inc. ....... 315,007
Storage centers................................ 382,494 375,035
Other assets................................... 7,829 9,890 132
-------- -------- --------
Total assets............................... $400,182 $393,982 $391,685
======== ======== ========
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
Liabilities:
Accounts payable and accrued expenses........ $ 3,598 $ 5,407 $ --
Accrued consolidation expense................ 3,879
Unearned rent and tenant deposits............ 2,291 2,188
Accrued real estate taxes.................... 2,134 2,330
Distributions payable........................ 391,685
Lines of credit.............................. 1,570 4,190
Notes payable................................ 22,795 21,826
-------- -------- --------
Total liabilities.......................... 32,388 39,820 391,685
-------- -------- --------
Partners' equity (deficit)
Limited partners................................. 368,292 354,787
General partners................................. (498) (625)
-------- -------- --------
Total partners' equity..................... 367,794 354,162
-------- -------- --------
Total liabilities and partners' equity... $400,182 $393,982 $391,685
======== ======== ========
</TABLE>
See notes to combined financial statements
F-22
<PAGE> 200
COMBINED STATEMENTS OF EARNINGS
(in thousands except per unit data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM
----------------------------- JANUARY 1, 1994 TO
1991 1992 1993 MARCH 1, 1994
------- ------- ------- ------------------
(unaudited)
<S> <C> <C> <C> <C>
RENTAL REVENUE
Rental ................................. $59,142 $66,994 $72,217 $ 12,348
Other .................................. 1,625 79 93 15
------- ------- ------- --------
Total .............................. 60,767 67,073 72,310 12,363
EXPENSES
Operating .............................. 13,847 15,554 16,843 2,956
Property management fees ............... 3,695 4,145 4,695 733
Depreciation ........................... 12,987 13,311 13,665 2,347
Real estate taxes ...................... 6,216 7,067 7,066 1,170
Amortization ........................... 455 246 258 43
Administrative ......................... 2,206 2,359 2,390 1,232
------- ------- ------- --------
Total .............................. 39,406 42,682 44,917 8,481
------- ------- ------- --------
EARNINGS FROM OPERATIONS ................. 21,361 24,391 27,393 3,882
------- ------- ------- --------
OTHER INCOME AND EXPENSES
Interest and other income .............. 649 317 590 188
Gain on sale of real estate ............ 946
Interest expense ....................... (2,545) (2,347) (2,288) (487)
Loss on condemnation ................... (306)
Incentive management fees .............. (5,340)
Gain on consolidation .................. 48,223
Litigation, hostile takeover defense
and consolidation expenses ........... (7,411) (12,180)
------- ------- ------- --------
(950) (2,336) (9,109) 30,404
------- ------- ------- --------
EARNINGS ................................. $20,411 $22,055 $18,284 $ 34,286
======= ======= ======= ========
EARNINGS PER UNIT OF LIMITED
PARTNERSHIP INTEREST ................... $ 38.08 $ 41.15 $ 34.08 $ 63.97
======= ======= ======= ========
DISTRIBUTIONS PER UNIT OF LIMITED
PARTNERSHIP INTEREST ................... $ 60.45 $ 56.71 $ 59.57 $ 732.05
======= ======= ======= ========
</TABLE>
See notes to combined financial statements.
F-23
<PAGE> 201
COMBINED STATEMENTS OF PARTNERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
LIMITED GENERAL
PARTNERS PARTNERS TOTAL
--------- -------- ---------
<S> <C> <C> <C>
Balance, January 1, 1991 ...................... $ 388,417 $ (317) $ 388,100
Distributions ................................. (32,075) (313) (32,388)
Earnings ...................................... 20,207 204 20,411
--------- ------- ---------
Balance, December 31, 1991 .................... 376,549 (426) 376,123
Distributions ................................. (30,092) (293) (30,385)
Earnings ...................................... 21,835 221 22,056
--------- ------- ---------
Balance, December 31, 1992 .................... 368,292 (498) 367,794
Distributions ................................. (31,606) (310) (31,916)
Earnings ...................................... 18,101 183 18,284
--------- ------- ---------
Balance, December 31, 1993 .................... 354,787 (625) 354,162
Distributions ................................. (388,432) (4,018) (392,450)
Contribution .................................. 4,002 4,002
Earnings ...................................... 33,645 641 34,286
--------- ------- ---------
Balance, March 1, 1994 (unaudited) ............ $ -- $ -- $ --
========= ======= =========
See notes to combined financial statements
F-24
<PAGE> 202
COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM
---------------------------------- JANUARY 1, 1994
1991 1992 1993 TO MARCH 1, 1994
-------- -------- -------- ----------------
(unaudited)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Earnings............................................ $ 20,411 $ 22,055 $ 18,284 $ 34,286
Adjustments to reconcile earnings to net
cash provided by operating activities:
Depreciation and amortization................... 13,442 13,557 13,923 2,679
Gain on consolidation........................... (48,223)
Loss on condemnation............................ 306
Gain on sale of real estate..................... (946)
Changes in operating accounts:
Other assets.................................. (191) (431) (2,594) 6,314
Accounts payable and accrued expenses......... 644 22 2,135 (1,565)
Accrued real estate taxes..................... 423 (89) 235 (1,119)
Accrued consolidation expense................. 3,879 10,387
Unearned rent and tenant deposits............. 296 (50) (102) 249
-------- -------- -------- --------
Net cash provided by operating activities..... 34,079 35,370 35,760 3,008
-------- -------- -------- --------
INVESTING ACTIVITIES
Purchase of and improvements to storage centers..... (4,084) (5,364) (5,888) (905)
Proceeds from sale of real estate and equipment..... 7,696
Proceeds from consolidation......................... 65,945
Consideration for amortizable assets................ (393)
Improvements to real estate held for resale......... (188)
Distributions in excess of earnings from
investment in joint partnership................... 224 306
-------- -------- -------- --------
Net cash provided by (used in) investing
activities.................................... 3,031 (5,140) (5,582) 65,040
-------- -------- -------- --------
FINANCING ACTIVITIES
Distributions to partners........................... (32,388) (30,384) (31,916) (764)
Distributions to minority interest in joint
partnership (279) (577) (711)
Proceeds from lines of credit....................... 2,620 680
Proceeds from notes payable......................... 5,325 2,125 350
Payment of loan costs............................... (167) (26) (4)
Payments on notes payable........................... (6,106) (2,756) (969) (825)
-------- -------- -------- --------
Net cash used in financing activities........... (33,615) (31,618) (30,980) (559)
-------- -------- -------- --------
</TABLE>
See notes to combined financial statements
F-25
<PAGE> 203
COMBINED STATEMENTS OF CASH FLOWS (CONTINUED)
(in thousands)
<TABLE>
<CAPTION> YEAR ENDED DECEMBER 31, PERIOD FROM
---------------------------------- JANUARY 1, 1994
(Continued) 1991 1992 1993 TO MARCH 1, 1994
-------- -------- -------- ----------------
(unaudited)
<S> <C> <C> <C> <C>
Increase (decrease) in cash and short-term
investment........................................ 3,495 (1,388) (802) 67,489
Cash and cash equivalents at beginning of period.... 7,752 11,247 9,859 9,057
-------- -------- -------- --------
Cash and cash equivalents at end of period.......... $ 11,247 $ 9,859 $ 9,057 $ 76,546
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during year for interest.................. $ 2,619 $ 2,349 $ 2,287 $ --
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING ACTIVITIES
Liabilities incurred in connection with
the construction of storage centers............... $ 3,130 $ 973 $ 206 $ --
======== ======== ======== ========
Liabilities assumed by purchaser in connection
with the sale of real estate...................... $ 183 $ -- $ -- $ --
======== ======== ======== ========
Receivables netted against the final payment
for the purchase of a storage center.............. $ 1,328 $ -- $ -- $ --
======== ======== ======== ========
</TABLE>
See notes to combined financial statements
F-26
<PAGE> 204
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993 AND 1992 AND
PERIOD ENDED MARCH 1, 1994
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: These combined financial statements include the
accounts of the 17 publicly held limited partnerships sponsored by Shurgard
Incorporated ("Shurgard") as follows:
Shurgard Mini-Storage Limited Partnership I
Shurgard Income Properties II
Shurgard Income Properties III, a Real Estate Limited Partnership
Shurgard Income Properties IV, a Real Estate Limited Partnership
Shurgard Income Properties Five, a Real Estate Limited Partnership
Shurgard Income Properties Six, a Real Estate Limited Partnership
Shurgard Income Properties Seven, a Real Estate Limited Partnership
Shurgard Income Properties Eight, a Real Estate Limited Partnership
Shurgard Income Properties Nine, a Real Estate Limited Partnership
Shurgard Income Properties Ten, a Real Estate Limited Partnership
Shurgard Income Properties Eleven, a Real Estate Limited Partnership
Shurgard Income Properties Twelve, a Real Estate Limited Partnership
Shurgard Income Properties - Fund 14 Limited Partnership
Shurgard Growth Capital - Fund 15 Limited Partnership
Shurgard Income Properties - Fund 16 Limited Partnership
Shurgard Growth Capital - Fund 17 Limited Partnership
Shurgard Income Properties - Fund 18 Limited Partnership
Each partnership is hereinafter referred to as "Shurgard 1," "Shurgard
2," etc. and collectively as the "Partnerships."
The combined statements include the accounts of Shurgard 1 and Shurgard
5 through Shurgard 18 for each of the three years ended December 31, 1993 and
the accounts of Shurgard 2, Shurgard 3 and Shurgard 4 for each of the three
years in the period ended September 30, 1993, as these partnerships have
September 30 fiscal year ends.
The financial statements for the period ended March 1, 1994, which are
included in this report, are unaudited. In the opinion of management, all
adjustments necessary for the fair presentation of such financial statements
have been included, which adjustments consisted only of normal recurring items.
Interim results are not necessarily indicative of results for a full year.
On March 1, 1994, the Partnerships were consolidated into Shurgard
Storage Centers, Inc. ("SSCI") through a roll-up transaction approved by the
partners. Each of the Partnerships received stock in SSCI or cash for its units
of partnership interest. Such cash and stock were distributed to the partners
in March 1994, at which time the Partnerships ceased to exist. In conjunction
with this transaction the Partnerships recognized a gain on consolidation of
$48.2 million. Additionally, the Partnerships paid $5.3 million of incentive
management fees to Shurgard and incurred $12 million of costs for litigation,
hostile takeover defense and other professional fees related to the
consolidation.
All interpartnership balances and transactions have been eliminated
upon combination.
F-27
<PAGE> 205
CASH EQUIVALENTS: Cash equivalents consist of money market instruments
with maturities of 30 days or less.
STORAGE CENTERS: Storage centers, including land, buildings and
equipment, are recorded at cost. Depreciation on buildings and equipment is
recorded on a straight-line basis over their estimated useful lives, which
range from three to thirty-one years.
RENTAL REVENUE: Rental revenue is recognized as earned under accrual
accounting principles.
TAXES ON INCOME: The financial statements do not reflect a provision
for federal income taxes because such taxes are the responsibility of the
individual partners.
EARNINGS PER UNIT OF LIMITED PARTNERSHIP INTEREST: Earnings per unit of
limited partnership interest is based on earnings allocated to the limited
partners divided by the number of limited partnership units outstanding during
the year (530,607 for the years ended December 31, 1991, 1992 and 1993 and the
period ended March 1, 1994).
DISTRIBUTIONS PER UNIT OF LIMITED PARTNERSHIP INTEREST: Distributions
per unit of limited partnership interest is based on the total amount
distributed to limited partners divided by the number of limited partnership
units outstanding during the year (530,607 for the years ended December 31,
1991, 1992 and 1993 and the period ended March 1, 1994).
NOTE B -- STORAGE CENTERS
Storage centers consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1992 1993
-------- --------
<S> <C> <C>
Land ................................... $ 91,467 $ 91,868
Buildings .............................. 358,119 363,918
Equipment .............................. 12,521 13,612
-------- --------
462,107 469,398
Less accumulated depreciation .......... (80,700) (94,363)
-------- --------
381,407 375,035
Construction in progress ............... 1,087
-------- --------
$382,494 $375,035
======== ========
</TABLE>
F-28
<PAGE> 206
NOTE C -- NOTES PAYABLE
Notes payable consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1992 1993
------- -------
<S> <C> <C>
11% note, secured by real estate, payable in monthly installments of $68,608,
including principal and interest. This note was repaid on March 1, 1994 . . . . $ 5,778 $ 5,580
Adjustable note payable to a commercial bank, secured by a deed of trust on a
storage center. Payable in monthly installments of $17,434, including principal
and interest, due June 1998. Interest rate at December 31, 1993, was 5.96%. The
note was assumed by SSCI on March 1, 1994 . . . . . . . . . . . . . . . . . . . 2,339 2,270
Fixed rate mortgage notes payable, interest rates range from 9.25% to 11%, with
a weighted average rate of 10.38% at December 31, 1993. Notes were either repaid
or assumed by SSCI on March 1, 1994 . . . . . . . . . . . . . . . . . . . . . . 6,841 6,586
Variable rate mortgage notes payable, interest rates at December 31, 1993 ranged
from 5.96% to 10.69%, with a weighted average rate of 8.38%. Notes were either
repaid or assumed by SSCI on March 1, 1994 . . . . . . . . . . . . . . . . . . 7,656 7,222
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181 168
------- -------
$22,795 $21,826
======= =======
</TABLE>
NOTE D -- LINES OF CREDIT
The Partnerships had various lines of credit totaling $5,675,000,
secured by real estate, that bore interest at .5% above the prime rate (6.5%
at December 31, 1993) due monthly. The lines of credit were assumed by SSCI in
connection with the consolidation.
NOTE E -- TRANSACTIONS WITH AFFILIATES
In connection with the management of the storage centers, the
Partnerships have paid to Shurgard a property management fee of 6% of rental
revenues.
F-29
<PAGE> 207
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article 13 of the registrant's Restated Certificate of Incorporation
(the "Certificate") (Exhibit 3.1 hereto) provides that directors of the
registrant shall not be liable to the registrant or its stockholders for
monetary damages for their conduct as directors to the full extent permitted by
the Delaware General Corporation Law ("Delaware Law") as it existed at the time
the Certificate was adopted, and as it may thereafter be amended. Any
amendment to or repeal of Article 13 shall apply only to acts or omissions of
directors occurring after such amendment or repeal.
The registrant's Restated By-Laws (the "By-Laws") (Exhibit 3.2 hereto)
provide that the registrant shall indemnify and hold harmless its directors and
officers to the fullest extent permitted under Delaware Law or by any other
applicable law against all litigation expenses, judgments, fines and settlement
amounts incurred in connection with their service or status as directors and
officers. Such indemnification also extends to liabilities arising from
actions taken by directors or officers when serving at the request of the
registrant as a director, officer, employee or agent of another corporation or
of a partnership, joint venture, trust or other enterprise.
The By-Laws provide that expenses incurred by a director or an officer
in defending a civil or criminal lawsuit or proceeding arising out of actions
taken in his or her official capacity, or in certain other capacities, will be
paid by the registrant in advance of the final disposition of the matter upon
receipt of an undertaking from the director or officer to repay the sum
advanced if it is ultimately determined by final judicial decision that he or
she is not entitled to be indemnified by the registrant, if such an undertaking
is required by Delaware Law at the time of such advance.
Section 145 of Delaware Law, as currently in effect, sets forth the
indemnification rights of directors and officers of Delaware corporations.
Under such provision, a director or an officer of a corporation (i) shall be
indemnified by the corporation for all expenses of litigation or other legal
proceedings when he or she is successful on the merits or otherwise, (ii) may
be indemnified by the corporation for the expenses, judgments, fines and
amounts paid in settlement of such litigation (other than a derivative suit),
even if he or she is not successful on the merits, if he or she acted in good
faith and in a manner he or she reasonably believed to be in or not opposed to
the best interests of the corporation (and, in the case of a criminal
proceeding, had no reason to believe his or her conduct was unlawful), and
(iii) may be indemnified by the corporation for expenses of a derivative suit
(a suit by a stockholder alleging a breach by a director or an officer of a
duty owed to the corporation), even if he or she is not successful on the
merits, if he or she acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of the corporation,
provided that no such indemnification may be made in accordance with this
clause (iii) if the director or officer is adjudged liable to the corporation,
unless a court determines that, despite such adjudication but in view of all
the circumstances, he or she is fairly and reasonably entitled to
indemnification of such expenses. The indemnification described in clauses
(ii) and (iii) above shall be made only upon a determination by (A) a majority
of a quorum of disinterested directors, (B) independent legal counsel in a
written opinion, or (C) the stockholders, that indemnification is proper
because the applicable standard of conduct has been met.
The effect of the indemnification provisions contained in the By-Laws
is to require the registrant to indemnify its directors and officers under
circumstances where such indemnification would otherwise be discretionary and
to extend to the registrant's directors and officers the benefits of Delaware
Law dealing with director and officer indemnification, as well as any future
changes that might occur under Delaware Law in this area.
II-1
<PAGE> 208
The By-Laws state that the indemnification rights granted thereunder
are not exclusive of any other indemnification rights to which the director or
officer may otherwise be entitled. As permitted by Section 145(g) of the
Delaware Law, the By-Laws also authorize the registrant to purchase directors
and officers insurance for the benefit of its directors and officers,
irrespective of whether the registrant has the power to indemnify such persons
under Delaware Law. The registrant currently maintains such insurance as
allowed by these provisions.
Pursuant to the Agreement and Plan of Merger (Exhibit 2.1 hereto),
from and after the effective time of the merger, the registrant shall keep in
effect, to the extent allowed by Delaware Law, provisions contained in the
Certificate and By-Laws providing for limitation of director liability and for
indemnification of directors, officers, employees and agents at least to the
extent that such persons are entitled thereto under the Articles of
Incorporation and By-Laws of Shurgard Incorporated (and, to the extent the
Certificate and By-Laws do not provide for indemnification of directors and
officers of predecessor corporations, shall contractually assume the
indemnification obligations under the By-Laws of Shurgard Incorporated subject
to Delaware Law).
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<S> <C>
2.1 Agreement and Plan of Merger dated as of December 19, 1994 (included as
Appendix I to the Proxy Statement/Prospectus)
3.1 Amended and Restated Certificate of Incorporation of the Registrant (A)
3.2 Restated By-Laws of the Registrant (A)
4.1 Rights Agreement between the Registrant and Gemisys Corporation dated as of
March 17, 1994 (B)
5.1 Opinion of Perkins Coie as to the legality of the securities being
registered
8.1 Opinion of Perkins Coie as to certain federal income tax consequences
10.1 Advisory Agreement between Shurgard Storage Centers, Inc. and Shurgard
Incorporated dated as of March 1, 1994
10.2 Management Services Agreement between Shurgard Storage Centers, Inc. and
Shurgard Incorporated dated as of March 1, 1994
10.3* Loan Agreement among Shurgard Storage Centers, Inc. and Seattle-First
National Bank, Key Bank of Washington and West One Bank dated August 19, 1994
10.4* Amended and Restated Loan Agreement between Nomura Asset Capital Corp., as
Lender, and SSC Property Holdings, Inc., as Borrower, dated as of June 8, 1994
21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP (see page II-5)
23.2 Consent of Alex. Brown & Sons Incorporated
23.3 Consent of Perkins Coie (contained in the opinions filed as Exhibits 5.1
and 8.1 hereto)
24.1 Power of Attorney (contained on signature page)
99.1 Form of Proxy for special meeting of shareholders of the Registrant
</TABLE>
---------------
* To be filed by amendment
II-2
<PAGE> 209
(A) Incorporated by reference to exhibit filed
with the Registrant's Registration Statement
on Form S-4, Amendment No. 8 (Post-Effective
Amendment No. 4), filed with the Securities
and Exchange Commission on February 2, 1994
(B) Incorporated by reference to exhibit filed
with the Registrant's Registration Statement
on Form 8-A filed with the Securities and
Exchange Commission on March 17, 1994
(b) Schedules
Not applicable
(c) Reports, Opinions and Appraisals
Opinion of Alex. Brown & Sons Incorporated (included as Appendix II to
the Proxy Statement/Prospectus)
ITEM 22. UNDERTAKINGS.
A. (1) The undersigned registrant hereby undertakes as
follows: that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the registrant undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.
(2) The undersigned registrant hereby undertakes that
every prospectus: (i) that is filed pursuant to the paragraph immediately
preceding or (ii) that purports to meet the requirements of Section 10(a)(3) of
the Securities Act of 1933, as amended (the "Securities Act") and is used in
connection with an offering of securities subject to Rule 415 of the Securities
Act, will be filed as a part of an amendment to the Registration Statement and
will not be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
B. The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the prospectus
pursuant to Item 4, 10(b), 11, or 13 of this Form S-4, within one business day
of receipt of such request, and to send the incorporated documents by
first-class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
Registration Statement through the date of responding to the request.
C. The undersigned registrant hereby undertakes to supply by
means of a post-effective amendment all information concerning a transaction,
and the company being acquired involved therein, that was not the subject of
and included in the Registration Statement when it became effective.
D. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-3
<PAGE> 210
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Seattle, State of Washington, on the 19th day of December, 1994.
SHURGARD STORAGE CENTERS, INC.
By Harrell L. Beck
-----------------------------------
Harrell L. Beck,
President, Treasurer and
Chief Financial Officer
POWER OF ATTORNEY
Each person whose individual signature appears below hereby authorizes
and appoints Harrell L. Beck and Kristin H. Stred, and each of them, with full
power of substitution and full power to act without the other, as his true and
lawful attorney-in-fact and agent to act in his name, place and stead and to
execute in the name and on behalf of each person, individually and in each
capacity stated below, and to file, any and all amendments to this Registration
Statement, including any and all post-effective amendments with the Securities
and Exchange Commission or any regulatory authority.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed by the following persons
in the capacities indicated below on the 19th day of December, 1994.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
Harrell L. Beck President, Treasurer, Chief Financial Officer and Director
- ----------------------------- (Principal Executive Officer and Principal Financial and
Harrell L. Beck Accounting Officer)
Dan Kourkoumelis Director
- -----------------------------
Dan Kourkoumelis
Donald W. Lusk Director
- -----------------------------
Donald W. Lusk
W.J. (Jim) Smith Director
- -----------------------------
W.J. (Jim) Smith
</TABLE>
II-4
<PAGE> 211
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Shurgard
Storage Centers, Inc. on Form S-4 of our reports dated December 13, 1994,
appearing in the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Federal
Income Tax Consequences" and "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Seattle, Washington
December 19, 1994
II-5
<PAGE> 1
[PERKINS COIE LETTERHEAD]
December 19, 1994
Shurgard Storage Centers, Inc.
1201 Third Avenue, Suite 2200
Seattle, Washington 98101
Gentlemen and Ladies:
We have acted as counsel to you in connection with the proceedings for
the authorization and issuance by Shurgard Storage Centers, Inc. (the
"Company") of up to 1,400,000 shares, subject to certain adjustments (the
"Share Consideration"), of the Company's class A common stock, par value $.001
per share (the "Common Stock"), together with additional shares of Common Stock
that will be issued in the future (the "Contingent Shares") pursuant to the
terms of the Agreement and Plan of Merger dated as of December 19, 1994 (the
"Merger Agreement"), and the preparation and filing of a registration statement
on Form S-4 (the "Registration Statement") under the Securities Act of 1933, as
amended, which you are filing with the Securities and Exchange Commission with
respect to the Share Consideration and the Contingent Shares.
We have examined the Registration Statement and such documents and
records of the Company and other documents as we have deemed necessary for the
purpose of this opinion.
Based upon the foregoing, we are of the opinion that upon the
happening of the following events,
(a) due action by the shareholders of the Company and of Shurgard
Incorporated approving the Merger Agreement,
(b) the filing of the Registration Statement and any amendments
thereto and the effectiveness of the Registration Statement,
and
<PAGE> 2
(c) due execution by the Company and registration by its registrar
of the Share Consideration and the Contingent Shares, and the
issuance and sale of the Share Consideration and the
Contingent Shares as contemplated by the Registration
Statement and in accordance with the aforesaid shareholder and
governmental authorizations,
the Share Consideration and the Contingent Shares will be duly authorized,
validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, and to the reference to our firm in the Prospectus of
the Registration Statement under the heading "Legal Matters."
Very truly yours,
Perkins Coie
<PAGE> 1
DRAFT
PERKINS COIE
A LAW PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS
1201 THIRD AVENUE, 40TH FLOOR SEATTLE, WASHINGTON 98101-3099
TELEPHONE (206) 583-8908 FACSIMILE (206) 583-8500
___________, 1995
Shurgard Storage Centers, Inc.
1201 Third Ave., Suite 2200
Seattle, WA 98101
RE: MERGER OF THE MANAGEMENT COMPANY INTO THE SHURGARD REIT
Ladies and Gentlemen:
We have been asked as counsel to Shurgard Storage Centers, Inc., a
Delaware corporation (the "Shurgard REIT"), to render this opinion pursuant to
the Agreement and Plan of Merger, dated as of December __, 1994, including all
amendments relating thereto (the "Agreement"), by and among the Shurgard REIT
and Shurgard Incorporated, a Washington corporation (the "Management Company").
Capitalized terms not otherwise defined herein shall have the same meanings
given to them in the Proxy Statement/Prospectus (the "Proxy Statement") which
is part of the Registration Statement on Form S-4 of Shurgard covering the
shares of the Shurgard REIT Class A Common Stock to be issued in the Merger.
In connection with this opinion, we have examined the originals,
photocopies or certified copies of the Agreement, and all such other documents
we have deemed necessary or appropriate as a basis for the opinions hereinafter
set forth. In such examination, we have assumed the genuineness of all
signatures and the authenticity of all documents submitted to us as originals
and the conformity to the original documents of all documents submitted to us
as photocopies or certified copies. We have relied, as to matters of fact,
solely upon statements and representations by officers and representatives of
the Shurgard REIT and the Management Company, including those statements and
representations contained in that certain Shurgard REIT Officers' Certificate
dated _________ and that certain Shurgard Management Company Officers'
Certificate dated _________, as well as those statements and representations
made by Charles K. Barbo, Arthur W. Buerk, Donald B. Daniels and R. Knutzen (as
Trustee for the Barbo Trust) (collectively, the "Significant Management Company
Shareholders"), in these certain Management Company Significant Shareholder's
Certificates (such certificates collectively referred to as the
"Certificates"), and the assumptions stated herein. Without the Certificates
we would not render this opinion.
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Shurgard Storage Centers, Inc.
Page 2
In rendering this opinion, we have considered the applicable
provisions of the Internal Revenue Code of 1986, as amended to the date hereof
(the "Code"), and other U.S. federal tax statutes, the Treasury Regulations
promulgated thereunder, and administrative and judicial interpretations
thereof.
I. DESCRIPTION OF THE MERGER
Our opinion is based upon the following facts as more fully described
in the Proxy Statement. In the Merger, the Management Company will be merged
with and into the Shurgard REIT. The separate corporate existence of the
Management Company will terminate and the Shurgard REIT will be the surviving
corporation. Management Company shareholders owning 100 percent of the shares
of the Management Company Common Stock outstanding immediately prior to the
Effective Time of the Merger, other than Management Company shareholders
exercising their appraisal rights, will exchange their shares of Management
Company Common Stock for Shurgard REIT Class A Common Stock.
II. FACTUAL ASSUMPTIONS
For purposes of this opinion, we have assumed the following:
A. At the Effective Time of the Merger, the Shurgard REIT does
not own, beneficially or of record, any stock or securities of the Management
Company;
B. The Shurgard REIT Class A Common Stock to be issued to the
Management Company shareholders in the Merger and pursuant to the Agreement
will be voting stock and will not be subject to a put or call;
C. There is no plan or intention on the part of the Management
Company shareholders to sell or otherwise dispose of shares of the Shurgard
REIT Class A Common Stock received in the Merger that would reduce the
Management Company shareholders' ownership of the Shurgard REIT Class A Common
Stock to a number of shares having, in the aggregate, a value as of the
Effective Time of the Merger of less than 50 percent of the total value of the
Management Company Common Stock outstanding immediately prior to the Effective
Time of the Merger;
D. The fair market value as of the Effective Time of the Merger
of the Shurgard REIT Class A Common Stock issued in exchange for the Management
Company Common Stock will equal or exceed 50 percent of the fair market value
of the Management Company Common Stock outstanding as of the Effective Time;
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Shurgard Storage Centers, Inc.
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E. The Shurgard REIT has no plan or intention to liquidate or to
sell or otherwise dispose of any of the assets of the Management Company
acquired in the Merger, except in the ordinary course of business or pursuant
to transfers described in Section 368(a)(2)(C) of the Code, and intends to
continue after the Merger, in a substantially unchanged manner, each line of
business the Management Company conducted prior to the Merger other than those
lines of business disposed of in the Spin-off;
F. The Shurgard REIT, the Management Company the Shurgard REIT
shareholders and the Management Company shareholders will pay their respective
expenses incurred in connection with the Merger and the other transactions
contemplated by the Agreement;
G. Less than 80% of the total value of the assets of the
Management Company assets is attributable to assets held for investment within
the meaning of Section 368(a)(2)(F) of the Code and less than 50% of the total
value of the assets of the Management Company are "stock and securities" within
the meaning of section 368(a)(2)(F), including as "stock and securities" for
these purposes the Shurgard REIT Class A Common Stock and the Contingent
Partnerships;
H. The aggregate number of shares of Shurgard REIT Class A Common
Stock issued (a) as Contingent Shares under Sections 4.1(a)(ii) and 4.7 of the
Agreement and (b) as additional shares of Shurgard REIT Class A Common Stock
issued as a result of any Under-Statement pursuant to Section 4.1(d)(ii)(D) of
the Agreement shall not exceed the aggregate number of shares of Shurgard REIT
Class A Common Stock issued as Share Consideration at the Effective Time
pursuant to Section 4.1(a)(i) of the Agreement, as adjusted pursuant to Section
4.1(d) of the Agreement, excluding any additional shares of Shurgard REIT Class
A Common Stock issued as a result of an Under-Statement pursuant to Section
4.1(d)(ii)(D) of the Agreement.
I. The Merger will qualify as a merger effected pursuant to the
corporation laws of Washington, as stated in the opinion of Riddell, Williams,
Bullitt and Walkinshaw (the "Riddell Merger Opinion");
J. The accuracy of such assumptions and conditions contained in
the opinion of Perkins Coie, counsel to the Shurgard REIT dated as of ________
(the "Perkins Merger Opinion") as are necessary to support the conclusion that
the Merger qualifies as a merger effected pursuant to the corporation laws of
Delaware; and
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Shurgard Storage Centers, Inc.
Page 4
K. Such other matters set forth in the Certificates.
III. DISCUSSION
A. STATUTORY REQUIREMENTS FOR REORGANIZATION STATUS
In order for tax-free treatment to apply to the Shurgard REIT Class A
Common Stock received by shareholders of the Management Company in the Merger,
the Merger must qualify as a reorganization under section 368(a) of the Code.
1. STATUTORY MERGER
A "statutory merger or consolidation" is included within the meaning
of a "reorganization" by virtue of section 368(a)(1)(A) of the Code. Treasury
Regulations Section 1.368-2(b)(1) provides that "[i]n order to qualify as a
reorganization under Section 368(a)(1)(A) the transaction must be a merger or
consolidation effected pursuant to the corporation laws of the United States or
a State or Territory or the District of Columbia." For purposes of this
opinion, we are assuming that the Merger will be effected pursuant to the
corporation laws of Washington, as stated in the Riddell Merger Opinion, and
such assumptions and conditions contained in the Perkins Coie Merger Opinion as
are necessary to conclude that the Merger is a merger under the corporation
laws of Washington. Accordingly, we are satisfied that the Merger will satisfy
the statutory requirement of section 368(a)(1)(A) of the Code.
2. INVESTMENT COMPANIES
Section 368(a)(2)(F) of the Code provides that a Merger will not
qualify as a reorganization under Section 368(a)(1) of the Code if two or more
parties to the transaction are investment companies. Section 368(a)(2)(F)(iii)
of the Code defines an investment company to be any of (a) a regulated
investment company, (b) a real estate investment trust or (c) a corporation 50%
or more of the value of whose total assets are stock and securities and 80% or
more of the value of whose total assets are assets "held for investment."
Because it is a real estate investment company, the Shurgard REIT is an
investment company within the meaning of Section 368(a)(2)(F) of the Code.
Nevertheless, the management of the Management Company has represented that
less than 80% of the total value of the assets of the Management Company assets
is attributable to assets held for investment within the meaning of Section
368(a)(2)(F) of the Code and less than 50% of the total value of the assets of
the Management Company are "stock and securities" within the meaning of section
368(a)(2)(F) of the Code, including as "stock and securities" for these
purposes the
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Shurgard Storage Centers, Inc.
Page 5
interest of the Management Company in the Shurgard REIT Class A Common Stock
and the Contingent Partnerships. Therefore, we are satisfied that the Merger
will not contain two or more parties that are investment companies, and that no
party to the reorganization will recognize gain under this rule.
B. JUDICIAL, ADMINISTRATIVE AND REGULATORY REQUIREMENTS
In addition to the statutory requirements, the Merger must also
satisfy several judicial, administrative and regulatory requirements to qualify
as a reorganization under section 368(a) of the Code.
1. CONTINUITY OF INTEREST
First among these non-statutory requirements is the judicial
continuity of interest doctrine, which concerns itself with the character and
extent of the continuing relationship of the former shareholders of the
acquired company to the corporation acquiring their interests. While no
precise formula has been expressed for determining whether there has been
retention of the requisite interest, it seems clear that there must be a
showing: (1) that the transferor corporation or its shareholders retained a
substantial proprietary stake in the enterprise represented by a material
interest in the affairs of the transferee corporation and (2) that such
retained interest represents a substantial part of the value of the property
transferred. Southwest Natural Gas Co. v. Commissioner, 189 F.2d 332 (5th Cir.
1951), cert. denied, 342 U.S. 860 (1951). As to the nature of the
consideration, after having reviewed the material terms of the Shurgard REIT
Class A Common Stock, we are satisfied that such stock interest will constitute
a qualifying proprietary interest in the Shurgard REIT for purposes of this
requirement.
In regard to the substantiality of that interest, the continuity of
interest test has usually focused on the percentage of the total consideration
received and retained by the historic shareholders of the acquired corporation
that represents an equity interest in the acquiring corporation. In Nelson v.
Helvering, 296 U.S. 374 (1935), the Supreme Court held that requisite
continuity was found where that percentage was approximately 38 percent. This
standard is the most authoritative precedent on this issue to date. For
purposes of issuing a favorable advance ruling, the Internal Revenue Service
("IRS") imposes a more stringent standard, namely, that the stock of the
acquiring corporation used as consideration be "equal in value, as of the
effective date of the reorganization, to at least 50 percent of the value of
all the formerly outstanding stock of the acquired or transferor corporation as
of the same date." Rev. Proc. 77-37, 1977-2 C.B. 568, Section 3.02. For
purposes of this standard, stock surrendered
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Shurgard Storage Centers, Inc.
Page 6
by dissenters is to be treated as outstanding stock of the acquired corporation
on the date of the transaction. Id. We have considered the following issues
with respect to the percentage of Shurgard REIT Class A Common Stock received
and retained by the Management Company shareholders as a result of the Merger.
A. MANAGEMENT COMPANY OPTIONS. Immediately
prior to the Effective Time all of the unvested Management Company Options will
vest, enabling holders to exercise such options in exchange for Management
Company Common Stock and to then exchange their Management Company Common Stock
for Shurgard REIT Class A Commons Shares in the Merger. Under the federal
income tax laws it is unclear whether shares of the Management Company Common
Stock issued upon the exercise of options and warrants exercised after March 3,
1993 (the date the Shurgard REIT shareholders approved the formation of the
Shurgard REIT) can be considered to have been held by historic Management
Company Shareholders if the options or warrants are exercised during the period
beginning on such date and ending at the Effective Time. Therefore, in this
opinion we do not count such shares of the Shurgard REIT Class A Common Stock,
including the shares of Shurgard REIT Class A Common Stock issued prior to the
Merger under a Management Company Option that accelerated as a result of the
Merger, as being held by historic shareholders for purposes of determining
whether continuity of interest exists. Nevertheless, because only ____ shares
of Management Company Common Stock may be issued under these options, assuming
exercise of all vested options, the existence of these options should not
prevent the Merger from meeting the continuity of shareholder interest
requirement.
B. CONTINGENT SHARES. Under the Agreement, the
Shurgard REIT may issue a number of shares of Shurgard REIT Class A Common
Stock (the "Contingent Shares") to the Management Company Shareholders as
Merger consideration during each of the first 14 fiscal quarters ending after
the Effective Time. The IRS will rule that the subsequent delivery of
additional shares through contingent stock arrangements will not adversely
affect a reorganization otherwise qualifying under Section 368(a) of the Code,
including the continuity of shareholder interest requirement, provided that the
following requirements (the "Contingent Stock Guidelines") are met: (a) the
contingent stock will settle within 5 years; (b) there is a valid business
purpose for the arrangement; (c) the maximum number of contingent shares will
not exceed the number of shares issued in the initial distribution; (d) the
number of contingent shares is based upon an objective and readily
ascertainable formula; (e) the triggering event for payment of the contingent
shares is not within the control of recipient shareholders; (f) the arrangement
limits the maximum number of contingent shares that may be issued, (g) such
stock issuance is not triggered by the payment of additional tax or reduction
in tax paid as a result of an IRS audit either (i) related to the
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Shurgard Storage Centers, Inc.
Page 7
reorganization or (ii) when the reorganization involves persons related within
the meaning of Section 267(c)(4) of the Code; (h) the rights to the contingent
shares are not assignable, other than by operation of law, or, alternatively,
the right to the contingent shares is not evidenced by negotiable instruments
of any kind, and (i) such right can give rise only to the receipt of additional
stock of the corporation making the underlying distribution. See Rev. Proc.
84-42, 1981-1 C.B. 521.
The Contingent Share arrangement offered to the Management Company
shareholders meets all of the Contingent Stock Guidelines, with two exceptions.
First, the period during which Contingent Shares may be issued may extend for
between five and six years (and possibly a greater period if the parties are
unable to agree on an appraiser so that the matter is before the presiding
judge of the Superior Court of King County Washington). This contradicts
requirement (a) of the Contingent Stock Guidelines, which mandates that the
period not exceed five years. Nonetheless, the case law is considered more
lenient, and supports the use of a contingent share period in excess of five
years. See Carlberg, supra, at 77,739 (six year pay-out) and Hamrick v.
Commissioner, 43 TC 21, 23 (1964) (seven year pay-out). Furthermore, the fact
that the pay-out period could, in theory, continue indefinitely when the
matter is before a King County Superior Court judge should not change this
result. Agreement Section 4.7(d)(ii). This will occur only if the parties
are unable to agree on an appraiser, and furthermore, if it does occur, control
over the Contingent Share pay-out period will be entirely outside the control
of the parties. Such an agreement presents no opportunity for an abuse of the
five year limit. Cf. Rev. Proc. 84-42, supra at Section 2.02(b) (exercise
arrangement may exceed five years due to a "bona fide dispute as to when the
stock should be released").
Second, the Contingent Share arrangement provides for the issuance of
cash in lieu of fractional shares in contrast to requirement (i). Nevertheless,
the case law in this area is more lenient than the IRS ruling requirements.
See Carlberg v. United States, 281 F.2d 507, 60-2 USTC Paragraph 9647 at
77,741 (8th Cir. 1960) (after 10 years, shareholders who have not collected
contingent shares due will receive cash with an equivalent value). Furthermore,
the IRS has ruled favorably in reorganizations qualifying under Section 368(a)
of the Code that utilized cash in lieu of fractional shares when the cash did
not represent separately bargained for consideration. Rev. Rul. 66-635, 1966-1
C.B. 116 (cash in lieu of fractional shares did not violate "solely for voting
stock" requirement of Section 368(a)(1)(B) of Code when not separately
bargained for consideration). Each of the Management Company Officer's
Certificate and the Management Company Significant Shareholder's Certificates
contain a representation that the cash in lieu of fractional shares received
under the Agreement does not represent separately bargained for consideration.
Additionally, the amount of cash issued in lieu of functional shares of
Shurgard REIT Class A Common Stock is nominal. Accordingly,
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Shurgard Storage Centers, Inc.
Page 8
the issuance of cash in lieu of functional shares of Shurgard REIT Class A
Common Stock both at the Effective Time and with respect to the Contingent
Shares should not prevent the reorganization from qualifying under Section
368(a) of the Code. Furthermore, we believe the Contingent Shares should be
treated as Shurgard REIT Class A Common Shares issued in the Merger, and not as
"other property" under Section 356(a), and should not adversely affect the
tax-free nature of the Merger for any party thereto.
C. ESCROW SHARES. Fifteen percent of the
aggregate number of Share consideration being issued at the Effective Time of
the Merger (the "Indemnification Shares") will be deposited into an escrow
account at the Effective Time to allow the Shurgard REIT to recover from the
Indemnification Shares costs or expenses arising from certain events. The IRS
will rule that an escrow arrangement does not adversely affect a reorganization
otherwise qualifying under section 368(a) of the Code, including the continuity
of shareholder interest requirement, provided that the following requirements
are met (the "Escrow Stock Guidelines"): (a) the escrowed stock will be
released within 5 years (except when there is a bona fide dispute as to whom
the stock should be released); (b) there is a valid business purpose for the
arrangement; (c) at least 50% of the number of shares issued initially to the
shareholders (excluding shares issued under a contingent stock arrangement as
set forth above) are not subject to the arrangement; (d) the triggering event
for return of the escrow shares is not within the control of recipient
shareholders; (e) the stock subject to such arrangement appears as issued and
outstanding on the balance sheet of the issuing corporation and such stock is
legally outstanding under applicable state law; (f) all dividends paid on such
stock will be distributed currently to the exchanging shareholders; (g) all
voting rights of such stock (if any) are exercisable by or on behalf of the
shareholders or their authorized agent; (i) no shares of such stock are subject
to restrictions requiring their return to the issuing corporation because of
death, failure to continue employment, or similar restrictions; (i) the
mechanism for the calculation of the number of escrow shares to be returned is
based upon an objective and readily ascertainable formula and (j) the return of
such stock is not triggered by the payment of additional tax or reduction in
tax paid as a result of an IRS audit either (i) related to the reorganization
or (ii) when the reorganization involves persons related within the meaning of
Section 267(c)(4) of the Code. See Rev. Proc. 84-42, supra.
The escrow arrangement for the Indemnification Shares meets the Escrow
Stock Guidelines, other than requirement (j). The indemnification arrangement
periods for damages in the event that the Spin-off does not qualify under
Section 355 of the Code, or in the event that the representations and
warranties or covenants and agreements of the Management Company in the
Agreement are incorrect or untrue. Agreement Section 4.8(a) (i)-(iii).
Depending on the circumstances, this could contradict requirement (j)'s
prohibition against using escrow
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Shurgard Storage Centers, Inc.
Page 9
stock to pay an IRS audit tax liability "related to" the reorganization. For
example, the failure of the Merger to qualify as a reorganization under Section
368(a) of the Code may disqualify the qualification of the Spin-off under
Section 355 of the Code, causing Indemnification Shares to be issued to the
Shurgard REIT. Nevertheless, the purpose of the escrow arrangement is not to
guard against the characterization of the Agreement as tax-free, but instead to
protect against a number of liabilities that may arise and that are typically
covered in merger agreement's indemnification provision. Because of the bona
fide business purpose for the escrow arrangement, we conclude that the
Indemnification Shares should be treated as Shurgard REIT Class A Common Shares
issued in the Merger, and not as "other property" under Section 356, and should
not adversely affect the tax-free nature of the Merger for any party thereto.
D. RECHARACTERIZATION AS INTEREST INCOME. A
portion of the Contingent Shares issued to Management Company shareholders will
be recharacterized as interest income and taxed to the Management Company
shareholders upon their receipt thereof. Rev. Rul. 70-300, 1970-1 CB 123.
The portion of the Contingent Shares that are not so recharacterized will be
treated as Shurgard REIT Class A Common Stock issued in the Merger. Id.
Neither the portion of the Contingent Shares recharacterized as interest or the
remaining portion of the Contingent Shares will constitute "other property"
under Section 356(a) of the Code. Therefore, the interest recharacterization
should not diminish the percentage value of Shurgard REIT Class A Common Stock
deemed received by the Management Company shareholders in the Merger, and
should not adversely impact the continuity of shareholders interest
requirement.
SUMMARY OF CONTINUITY OF INTEREST ANALYSIS. Each of the management of
the Management Company and the Significant Management Company Shareholders have
represented that there is no plan or intention by the shareholders of the
Management Company who own 1 percent or more of the Management Company Common
Stock, and to the best of their knowledge, there is no plan or intention on the
part of the remaining Management Company shareholders to sell, exchange, or
otherwise dispose of a number of shares of the Shurgard REIT Class A Common
Stock received in the Merger that would reduce the Management Company
shareholders' ownership of the Shurgard REIT Class A Common Stock to a number
of shares having a value, as of the Effective Time of the Merger, of less than
50 percent of the value of all of the formerly outstanding shares of the
Management Company Common Stock as of the same date. Based on this
representation and the analysis set forth above regarding the character of the
Shurgard REIT Class A Common Stock issued in the Merger, we believe that the
continuing interests of the Management Company shareholders
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Shurgard Storage Centers, Inc.
Page 10
who receive the Shurgard REIT Class A Common Stock in the Merger should be
deemed sufficient for purposes of the continuity of shareholder interest
requirement.
2. CONTINUITY OF BUSINESS ENTERPRISE
Treasury Regulations Section 1.368-1 provides that for a
reorganization to qualify under section 368(a) it must also satisfy a so-
called "continuity of business enterprise" test. The regulation provides that
the acquiring corporation must either continue the historic business of the
acquired corporation or use a significant portion of the historic business
assets of the acquired corporation in its business. The preamble to the final
Treasury Regulations acknowledges that the exact formulation of the continuity
of business enterprise test in the regulation has been criticized and is not
supported by all of the judicial precedents that previously interpreted the
continuity of business enterprise requirement. T.D. 7745, 1981-1 C.B. 134.
Notwithstanding such equivocation, management of the Shurgard REIT has
represented that the Shurgard REIT will continue after the Merger the historic
business of the Management Company or use a significant portion of the
Management Company's historic business assets in a business of the Shurgard
REIT. It has also represented that it does not intend for the Shurgard REIT to
liquidate, sell or otherwise dispose of any of the Management Company's assets
after the Merger, except in the ordinary course of business or in transfers
described in Section 368(a)(2)(C) of the Code (transfers to wholly-owned
subsidiaries). Accordingly, we are of the opinion that the continuity of
business enterprise test will be satisfied.
3. BUSINESS PURPOSE
Judicial and regulatory authorities also require a reorganization
qualifying under section 368(a) be undertaken for a bona fide business purpose.
See Gregory v. Helvering, 293 U.S. 465 (1935); Treas. Reg. Section 1.368-1(b),
(c), -2(g). Regulations explain that "the transaction, or series of
transactions, embraced in a plan of reorganization must not only come within
the specific language of Section 368(a) of the Code, but the readjustments
involved in the exchanges or distributions must be undertaken for reasons
germane to the continuance of the business of a corporation a party to the
reorganization." Treas. Reg. Section 1.368-2(g).
Management of the Shurgard REIT and the Management Company have
represented that the Merger is being undertaken by the Shurgard REIT and the
Management Company for
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Shurgard Storage Centers, Inc.
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reasons germane to their businesses, including, but not limited to
_____________. Accordingly, we are of the opinion that the business purpose
requirement will be satisfied.
4. BUILT-IN GAIN RULES
Under Notice 88-19, 1988-1 C.B. 486 (the "Built in Gain Rules"), at
the Effective Time of the Merger the Management Company will be taxed on the
excess of (a) the fair market value of its assets at the Effective Time of the
Merger over (b) the tax basis of those assets, unless the Shurgard REIT makes
an election pursuant to the Built-in Gain Rules or applicable future
administrative rules or Treasury Regulations. The management of the Shurgard
REIT has represented that it will make this election. Accordingly, we are
satisfied Shurgard will not recognize gain under the Built in Gain Rules at the
Effective Time as a result of the Merger.
IV. OPINION
Based upon the foregoing, we render the following opinions for federal
income tax purposes:
A. The Merger will qualify as a reorganization under Section
368(a)(1) of the Code;
B. Each of the Management Company and Shurgard REIT will be a
"party to the reorganization" within the meaning of Section 368(b) of the Code;
C. The Management Company and Shurgard REIT will recognize no
gain or loss as a result of the Merger;
D. Immediately following the Effective Time, the assets of the
Management Company in the hands of the Shurgard REIT will have the same
adjusted tax basis as they had in the hands of the Management Company
immediately before the Effective Time, and
E. The holding period for each of the assets of the Management
Company in the hands of the Shurgard REIT following the Effective Time will
include the period each asset was held by the Management Company immediately
prior to the Effective Time.
* * * *
V. LIMITATIONS
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Shurgard Storage Centers, Inc.
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A. Our opinion is limited to the specific matters described above
and in the Agreement. We give no opinion with respect to other tax matters,
whether federal, state or local, that may relate to the Merger.
B. We caution that our opinion is based on the federal income tax
laws as they exist on the date hereof. It is possible that subsequent changes
in the tax law could be enacted and applied retroactively to the Merger and
that such changes could affect the opinions contained herein.
C. This opinion is furnished to you solely in connection with the
Merger and is intended for your use and may not be provided to or relied upon
by others without our express written consent. We hereby consent to the use of
our name in the Proxy Statement under the headings "RISK FACTORS--Merger as a
Taxable Event", "THE MERGER--Conditions to Consummation of the Merger--
Conditions to the Obligation of the Shurgard REIT", "FEDERAL INCOME TAX
CONSEQUENCES--Tax Treatment of the Merger" and "TAX OPINION."
Very truly yours,
<PAGE> 13
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SHURGARD REIT
OFFICER'S CERTIFICATE
The undersigned officer of Shurgard Storage Centers, Inc., a Delaware
corporation (the "Shurgard REIT"), in connection with the opinion to be
delivered by Perkins Coie pursuant to that certain Agreement and Plan of Merger
dated as of December ___, 1994, including all amendments relating thereto (the
"Agreement"), among the Management Company, a Washington corporation ("the
Management Company") and the Shurgard REIT and recognizing that said law firm
will rely on this Certificate in delivering said opinion, hereby certifies
that, to the best knowledge and belief of the management of the Shurgard REIT,
after due inquiry and investigation, the facts that relate to the proposed
merger (the "Merger") of the Management Company with and into the Shurgard REIT
pursuant to the Agreement, which facts are described in the Proxy
Statement/Prospectus that is part of the Registration Statement on Form S-4 of
the Shurgard REIT covering the shares of the Shurgard REIT Common Stock to be
issued in the Merger, are true, correct and complete in all material respects
and (ii) the undersigned further certifies as follows:
1. The fair market value of the Shurgard REIT Common Stock and
other consideration received by each Management Company shareholder will be
approximately equal to the fair market value of the Management Company Common
Stock surrendered in the exchange.
2. The Shurgard REIT has no plan or intention to reacquire any of
the Shurgard REIT Common Stock issued in the Merger.
3. The Shurgard REIT has no plan or intention to sell or
otherwise dispose of any of the assets of the Management Company acquired in
the Merger, except for dispositions made in the ordinary course of business or
transfers described in Section 368(a)(2)(C) of the Internal Revenue Code of
1986, as amended (the "Code").
4. Following the Merger, the Shurgard REIT will continue the
historic business of the Management Company or use a significant portion of the
Management Company's historic business assets in a business.
5. The Shurgard REIT will pay its respective expenses, if any,
incurred in connection with the Merger.
6. There is no intercorporate indebtedness existing between the
Management Company and the Shurgard REIT that was issued, acquired or that will
be settled at a discount.
7. No party to the reorganization other than the Shurgard REIT is
an investment company as defined in Section 368(a)(2)(F)(iii) and (iv) of the
Code;
<PAGE> 14
DRAFT
Shurgard Storage Centers, Inc.
Page 2
8. The fair market value of the assets of the Management Company
transferred to the Shurgard REIT will equal or exceed the sum of the
liabilities assumed by the Shurgard REIT plus the amount of liabilities, if
any, to which the transferred assets are subject.
9. The payment of cash in lieu of fractional shares of the
Shurgard REIT Common Stock under Sections 4.3 and 4.7(c)(iv) of the Agreement
is solely for the purpose of avoiding the expense and inconvenience to the
Shurgard REIT of issuing fractional shares and does not represent separately
bargained for consideration. The total cash consideration that will be paid in
the Merger to the Management Company shareholders instead of issuing fractional
shares of the Shurgard REIT Common Stock will not exceed one percent of the
total consideration that will be issued in the Merger to the Management Company
shareholders in exchange for their shares of the Management Company Common
Stock. The fractional share interests of each Management Company shareholder
will be aggregated, and no Management Company shareholder will receive cash (a)
under Section 4.3 of the Agreement in an amount equal to or greater than the
value of one full share of the Shurgard REIT Common Stock or (b) under Section
4.7(c)(iv) of the Agreement in an amount equal to or greater than the value of
one full share of the Shurgard REIT Common Stock.
10. None of the compensation received by any shareholder-employees
of the Management Company will be separate consideration for, or allocable to,
any of their shares of Management Company Common Stock; none of the shares of
the Shurgard REIT Common Stock received by any shareholder-employees will be
separate consideration for, or allocable to, any employment agreement; and the
compensation paid to any shareholder-employees will be for services actually
rendered and will be commensurate with amounts paid to third parties bargaining
at arm's-length for similar services.
11. The Shurgard REIT will timely make the election described in
Notice 88-19, 1988-1 C.B. 486 or applicable future administrative rules or
treasury regulations.
12. The various aspects of the Merger, including without
limitation, the arrangement for the issuance of additional shares of Shurgard
REIT Class A Common Stock set forth in Section 4.7(a) and the arrangement for
the escrow of shares of Shurgard REIT Class A Common Stock set forth in Section
4.8, are being undertaken for reasons germane to the business of the Shurgard
REIT, including but not limited to ____ _____________________.
13. The aggregate number of shares of Shurgard REIT Class A Common
Stock issued (a) as Contingent Shares under Sections 4.1(a)(ii) and 4.7 of the
Agreement and (b) as additional shares of Shurgard REIT Class A Common Stock
issued as a result of any Under-
<PAGE> 15
DRAFT
Shurgard Storage Centers, Inc.
Page 3
Statement pursuant to Section 4.1(d)(ii)(D) of the Agreement shall not exceed
the aggregate number of shares of Shurgard REIT Class A Common Stock issued as
Share Consideration at the Effective Time pursuant to Section 4.1(a)(i) of the
Agreement, as adjusted pursuant to Section 4.1(d) of the Agreement, excluding
any additional shares of Shurgard REIT Class A Common Stock issued as a result
of an Under-Statement pursuant to Section 4.1(d)(ii)(D) of the Agreement.
Date: SHURGARD STORAGE CENTERS, INC.
____________________________________
By: _______________________________
Its: _______________________________
<PAGE> 16
DRAFT
MANAGEMENT COMPANY
OFFICER'S CERTIFICATE
The undersigned officer of Shurgard Incorporated, a Washington
corporation (the "Management Company"), in connection with the opinion to be
delivered by Perkins Coie pursuant to that certain Agreement and Plan of Merger
dated as of ________ ___, ____, including all amendments relating thereto (the
"Agreement"), among Shurgard Storage Centers, Inc., a Delaware corporation (the
"Shurgard REIT") and the Management Company, and recognizing that said law firm
will rely on this Certificate in delivering said opinion, hereby certifies that
(i) to the best knowledge and belief of the management of The Management
Company, after due inquiry and investigation, the facts that relate to the
proposed merger (the "Merger") of the Management Company with and into the
Shurgard REIT pursuant to the Agreement, which facts are described in the Proxy
Statement/Prospectus that is part of the Registration Statement on Form S-4 of
the Shurgard REIT covering the shares of the Shurgard REIT Class A Common Stock
to be issued in the Merger, are true, correct and complete in all material
respects and (ii) the undersigned further certifies as follows:
1. The fair market value of the Shurgard REIT Class A Common
Stock and other consideration received by each Management Company shareholder
will be approximately equal to the fair market value of the Management Company
Common Stock surrendered in the exchange.
2. There is no plan or intention by the shareholders of the
Management Company who own 1 percent or more of the Management Company Common
Stock, and to the best of the knowledge of the management of the Management
Company, there is no plan or intention on the part of the remaining Management
Company shareholders to sell, exchange, or otherwise dispose of a number of
shares of the Shurgard REIT Class A Common Stock received in the Merger that
would reduce the Management Company shareholders' ownership of the Shurgard
REIT Class A Common Stock to a number of shares having a value, as of the
Effective Time of the Merger, of less than 50 percent of the value of all of
the formerly outstanding shares of the Management Company Common Stock as of
the same date. For purposes of this representation, shares of Management
Company Common Stock exchanged for cash or other property, surrendered by
dissenters, or exchanged for cash in lieu of fractional shares of the Shurgard
REIT Class A Common Stock will be treated as outstanding Management Company
Common Stock on the date of the Merger. Moreover, shares of Management Company
Common Stock and shares of the Shurgard REIT Class A Common Stock held by the
Management Company shareholders and otherwise sold, redeemed, or disposed of
prior or subsequent to the Merger will be considered in making this
representation. Finally, shares of Shurgard REIT Class A Common Stock
exchanged for shares of Management Company Common Stock received upon the
exercise of options of the Management Company after January 1, 1994 are ignored
for purposes of this representation.
<PAGE> 17
DRAFT
Shurgard Storage Centers, Inc.
Page 2
3. The liabilities of the Management Company assumed by the
Shurgard REIT and the liabilities to which the transferred assets of the
Management Company are subject were incurred by the Management Company in the
ordinary course of its business.
4. The Management Company will pay its respective expenses, if
any, incurred in connection with the Merger.
5. There is no intercorporate indebtedness existing between the
Management Company and the Shurgard REIT that was issued, acquired, or that
will be settled at a discount.
6. No party to the reorganization other than the Shurgard REIT is
an investment company as defined in Section 368(a)(2)(F)(iii) and (iv) of the
Internal Revenue Code of 1986, as amended (the "Code").
7. The Management Company is not under the jurisdiction of a
court in a Title 11 or similar case within the meaning of Section 368(a)(3)(A)
of the Code.
8. The fair market value of the assets of the Management Company
transferred to the Shurgard REIT will equal or exceed the sum of the
liabilities assumed by the Shurgard REIT plus the amount of liabilities, if
any, to which the transferred assets are subject.
9. The payment of cash in lieu of fractional shares of the
Shurgard REIT Class A Common Stock under Sections 4.3 and 4.7(c)(iv) of the
Agreement is solely for the purpose of avoiding the expense and inconvenience
to the Shurgard REIT of issuing fractional shares and does not represent
separately bargained for consideration. The total cash consideration that will
be paid in the Merger to the Management Company shareholders instead of issuing
fractional shares of the Shurgard REIT Class A Common Stock will not exceed 1
percent of the total consideration that will be issued in the Merger to the
Management Company shareholders in exchange for their shares of Management
Company Common Stock. The fractional share interests of each Management
Company shareholder will be aggregated, and no Management Company shareholder
will receive cash (a) under Section 4.3 of the Agreement in an amount equal to
or greater than the value of one full share of the Shurgard REIT Class A Common
Stock or (b) under Section 4.7(c)(iv) of the Agreement in an amount equal to or
greater than the value of one full share of the Shurgard REIT Class A Common
Stock .
10. None of the compensation received by any shareholder-employees
of the Management Company will be separate consideration for, or allocable to,
any of their shares of
<PAGE> 18
DRAFT
Shurgard Storage Centers, Inc.
Page 3
Management Company Common Stock; none of the shares of the Shurgard REIT Class
A Common Stock received by any shareholder-employees will be separate
consideration for, or allocable to, any employment agreement; and the
compensation paid to any shareholder-employees will be for services actually
rendered and will be commensurate with amounts paid to third parties bargaining
at arm's-length for similar services.
11. The various aspects of the Merger, including without
limitation the arrangement for the issuance of additional Shurgard REIT Class A
Common Shares set forth in Section 4.7(a) and the arrangement for the escrow of
Shurgard REIT Class A Common Shares set forth in Section 4.8, are being
undertaken for reasons germane to the business of the Management Company,
including but not limited to ________________.
12. The aggregate number of shares of Shurgard REIT Class A Common
Stock issued (a) as Contingent Shares under Sections 4.1(a)(ii) and 4.7 of the
Agreement and (b) as additional shares of Shurgard REIT Class A Common Stock
issued as a result of any Under-Statement pursuant to Section 4.1(d)(ii)(D) of
the Agreement shall not exceed the aggregate number of shares of Shurgard REIT
Class A Common Stock issued as Share Consideration at the Effective Time
pursuant to Section 4.1(a)(i) of the Agreement, as adjusted pursuant to Section
4.1(d) of the Agreement, excluding any additional shares of Shurgard REIT Class
A Common Stock issued as a result of an Under-Statement pursuant to Section
4.1(d)(ii)(D) of the Agreement.
Date: ______________________________
SHURGARD INCORPORATED
____________________________________
By: _______________________________
Its: _______________________________
<PAGE> 19
DRAFT
MANAGEMENT COMPANY SIGNIFICANT
SHAREHOLDER'S CERTIFICATE
The undersigned significant shareholder (the "Shareholder") of
Shurgard Incorporated, a Washington corporation (the "Management Company"), in
connection with the opinion to be delivered by Perkins Coie pursuant to that
certain Agreement and Plan of Merger dated as of December __, 1994, including
all amendments relating thereto (the "Agreement"), among Shurgard Storage
Centers, Inc., a Delaware corporation (the "Shurgard REIT") and the Management
Company, and recognizing that said law firm will rely on this Certificate in
delivering said opinion, hereby certifies that (i) to his best knowledge and
belief, after due inquiry and investigation, the facts that relate to the
proposed merger (the "Merger") of the Management Company with and into the
Shurgard REIT pursuant to the Agreement, which facts are described in the Proxy
Statement/Prospectus that is part of the Registration Statement on Form S-4 of
the Shurgard REIT covering the shares of the Shurgard REIT Class A Common Stock
to be issued in the Merger, are true, correct and complete in all material
respects and (ii) the Shareholder further certifies as follows:
1. The fair market value of the Shurgard REIT Class A Common
Stock and other consideration received by each Management Company shareholder
will be approximately equal to the fair market value of the Management Company
Common Stock surrendered in the exchange.
2. There is no plan or intention by the shareholders of the
Management Company who own 1 percent or more of the Management Company Common
Stock, and to the best of the knowledge of the Shareholder, there is no plan or
intention on the part of the remaining Management Company shareholders to sell,
exchange, or otherwise dispose of a number of shares of Shurgard REIT Class A
Common Stock received in the transaction that would reduce the Management
Company shareholders' ownership of the Shurgard REIT Class A Common Stock to a
number of shares having a value, as of the date of the Merger, of less than 50
percent of the value of all of the formerly outstanding shares of the
Management Company Common Stock as of the same date. For purposes of this
representation, shares of the Management Company Common Stock exchanged for
cash or other property, surrendered by dissenters, or exchanged for cash in
lieu of fractional shares of Shurgard REIT Class A Common Stock will be treated
as outstanding Management Company Common Stock on the date of the Merger.
Moreover, shares of Management Company Common Stock and shares of Shurgard REIT
Class A Common Stock held by Management Company shareholders and otherwise
sold, redeemed, or disposed of prior or subsequent to the transaction will be
considered in making this representation. Finally, shares of Shurgard REIT
Class A Common Stock exchanged for shares of Management Company Common Stock
received upon the exercise of Management Company Options after January 1, 1994
are ignored for purposes of this representation.
<PAGE> 20
DRAFT
Shurgard Storage Centers, Inc.
Page 2
3. The shareholders of the Management Company will pay their
respective expenses, if any, incurred in connection with the Merger.
4. [Charles K. Barbo only.] None of the compensation received by
the Shareholder will be separate consideration for, or allocable to, any of
his shares of Shurgard REIT Class A Common Stock; none of the shares of
Shurgard REIT Class A Common Stock received by the Shareholder will be separate
consideration for, or allocable to, his employment agreement; and the
compensation paid to the Shareholder by the Shurgard REIT will be for services
actually rendered and will be commensurate with amounts paid to third parties
bargaining at arms'-length for similar services.
Date: ______________________________
____________________________________
Charles K. Barbo
-2-
<PAGE> 1
ADVISORY AGREEMENT
BETWEEN
SHURGARD STORAGE CENTERS, INC.
AND
SHURGARD INCORPORATED
DATED MARCH 1, 1994
<PAGE> 2
CONTENTS
<TABLE>
<S> <C> <C>
SECTION 1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Accounting Principles . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 2. DUTIES OF THE ADVISOR . . . . . . . . . . . . . . . . . . . . . . . 8
2.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.2 Annual Business Plan . . . . . . . . . . . . . . . . . . . . . . . 9
2.3 Real Estate and Mortgage Investment Advice . . . . . . . . . . . . 9
2.4 General Administrative Duties . . . . . . . . . . . . . . . . . . 11
2.5 Property Management . . . . . . . . . . . . . . . . . . . . . . . 11
2.6 Short-Term Investments . . . . . . . . . . . . . . . . . . . . . . 11
2.7 Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.8 Retention of Services . . . . . . . . . . . . . . . . . . . . . . 11
2.9 Office and Personnel . . . . . . . . . . . . . . . . . . . . . . . 12
2.10 Bank Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.11 Books and Records . . . . . . . . . . . . . . . . . . . . . . . . 12
2.12 Appraisals and Reporting . . . . . . . . . . . . . . . . . . . . . 12
2.13 Reports, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.14 Financing and Securities Issuances . . . . . . . . . . . . . . . . 13
2.15 Additional Services . . . . . . . . . . . . . . . . . . . . . . . 13
2.16 REIT Qualification; Investment Company Status, Etc. . . . . . . . 13
2.17 Mortgages and Insurance . . . . . . . . . . . . . . . . . . . . . 13
2.18 Fidelity Bond . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SECTION 3. COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.1 Advisory Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
ii
<PAGE> 3
<TABLE>
<S> <C> <C>
3.2 Payment for Additional Services . . . . . . . . . . . . . . . . . 17
3.3 Expenses of the Advisor . . . . . . . . . . . . . . . . . . . . . 17
3.4 Reimbursable Expenses . . . . . . . . . . . . . . . . . . . . . . 17
3.5 Annual Operating Expense Limitation Requiring
Reimbursement by the Advisor . . . . . . . . . . . . . . . . . . . 18
3.6 Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 4. TERMINATION; TERM . . . . . . . . . . . . . . . . . . . . . . . . 19
4.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4.2 Renewal Terms . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4.3 Preservation of REIT Status . . . . . . . . . . . . . . . . . . . 20
4.4 Compensation on Termination or Non-Renewal . . . . . . . . . . . . 20
4.5 Rights of Termination Cumulative . . . . . . . . . . . . . . . . . 20
SECTION 5. ACTION UPON TERMINATION OR CANCELLATION . . . . . . . . . . . . . 20
5.1 Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
5.2 Use of Trade Name . . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 6. LIABILITY AND INDEMNIFICATION OF ADVISOR . . . . . . . . . . . . . 22
6.1 Limitation on Liability . . . . . . . . . . . . . . . . . . . . . 22
6.2 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.3 Representations, Warranties and Covenant of Company . . . . . . . 24
SECTION 7. OTHER ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . . . . 24
7.1 Advisory Services to Third Parties . . . . . . . . . . . . . . . . 24
7.2 Credit for Fees Paid Under Other Agreements . . . . . . . . . . . 25
7.3 Allocation of Investment Opportunities . . . . . . . . . . . . . . 25
7.4 Overlapping Management . . . . . . . . . . . . . . . . . . . . . . 26
</TABLE>
iii
<PAGE> 4
<TABLE>
<S> <C> <C>
SECTION 8. MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . . . . . 26
8.1 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 26
8.2 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
8.3 No Partnership or Joint Venture . . . . . . . . . . . . . . . . . 27
8.4 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
8.5 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
8.6 Policy and Financial Information . . . . . . . . . . . . . . . . . 27
8.7 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
8.8 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
8.9 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . 28
8.10 Board or Company Action . . . . . . . . . . . . . . . . . . . . . 28
8.11 Independent Director Approval . . . . . . . . . . . . . . . . . . 28
8.12 Authority to Act . . . . . . . . . . . . . . . . . . . . . . . . . 28
8.13 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
8.14 Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . . . . 29
</TABLE>
iv
<PAGE> 5
ADVISORY AGREEMENT
THIS ADVISORY AGREEMENT (the "Agreement"), dated as of March 1, 1994,
is made by and between Shurgard Storage Centers, Inc., a Delaware corporation,
for itself and its wholly owned subsidiary or subsidiaries (the "Company"), and
Shurgard Incorporated, a Washington corporation (the "Advisor");
RECITALS
WHEREAS, the Company is organized under the laws of the State of
Delaware and has filed with the Securities and Exchange Commission a
registration statement on Form S-4, as amended (the "Registration Statement"),
to register its shares of Class A Common Stock and Class B Common Stock, par
value $0.001 per share (the "Shares"), to be offered in connection with the
proposed exchange of the Shares and cash for all of the assets, subject to the
liabilities, of certain limited partnerships (the "Consolidation"), and the
Company may thereafter sell additional securities or otherwise raise additional
capital;
WHEREAS, the Company intends to qualify as a "real estate investment
trust" as defined in the Internal Revenue Code of 1986, as amended (the
"Code"), and to invest its funds in investments permitted by the terms of the
Registration Statement and its governing documents;
WHEREAS, the Company desires to avail itself of the experience,
sources of information, advice, assistance and certain facilities of or
available to the Advisor and to have the Advisor undertake the duties and
responsibilities hereinafter set forth, on behalf of and subject to the
supervision of the Board of Directors of the Company (the "Board"), as provided
in this Agreement; and
WHEREAS, the Advisor is willing to undertake to render such services,
subject to the supervision of the Board, on the terms and conditions
hereinafter set forth.
AGREEMENT
NOW, THEREFORE, on the terms and subject to the conditions herein set
forth, the parties agree as follows:
SECTION 1. DEFINITIONS
1.1 DEFINITIONS
As used in this Agreement, the following capitalized terms shall have
the meanings set forth below.
"Additional Property or Properties" means any real property or
interest therein and associated personal property owned by the Company
1
<PAGE> 6
but excluding Consolidation Properties or interests in the
Consolidation Properties acquired by the Company through the tender
offer described in the Registration Statement. The Company's interest
in such property may be indirect, such as by virtue of ownership of
units of limited partnership interest, general partnership interest or
joint venture interest. In such event, the Company shall be deemed to
have a pro rata interest in the property (based upon the property's
fair market value) owned by the entity in which the Company has an
ownership interest equal to the Company's percentage ownership in the
entity which owns the property which was acquired by the Company after
the Consolidation;
"Advisory Fee" has the meaning set forth in Section 3.l;
"Affiliate" means as to any person, (i) any other person
directly or indirectly controlling, controlled by or under common
control with such person, (ii) any other person that owns
beneficially, directly or indirectly ten percent (10%) or more of the
outstanding capital stocks shares or equity interests of such person,
or (iii) any officer, director, employee, general partner or trustee
of such person or of any other person controlling, controlled by or
under common control with such person (excluding trustees or directors
and persons serving in similar capacities who are not otherwise an
Affiliate of such person);
"Affiliated Programs" means current and future public and
private real estate entities formed or to be formed by the Advisor or
its Affiliates.
"Agreement" means this Advisory Agreement between Shurgard
Storage Centers, Inc. and Shurgard Incorporated, as amended from time
to time;
"Available Funds" shall mean, for purposes of allocating
investment opportunities among the Company and the Affiliated
Programs, the funds such entity has available to invest at such time,
determined as follows:
(i) All funds received by an entity for
investment during a calendar month (whether pursuant to an
offering of equity in the Company or an issuance of debt by
the Company) shall be deemed to have been received on the
first day of that month;
(ii) All funds received by an entity prior to the
month in which it receives sufficient funds to make the
investment shall be deemed to be received on the first day of
that month;
2
<PAGE> 7
(iii) If the investment and use of the funds by the
entity are subject to one or more contingencies (such as the
satisfaction of a minimum subscription requirement), the funds
will not be deemed to be received by the entity until the
contingency or contingencies have been satisfied;
(iv) Funds invested or committed for investment
shall not be deemed to be available funds;
(v) Funds invested or committed for investment
within a calendar month shall be deemed to be invested or
committed as of the first day of the calendar month in which
the investments or commitments are made;
(vi) The earliest funds received by an entity
shall be deemed the first invested or committed by that
entity;
(vii) If funds committed for investment are not
invested pursuant to the commitment, the funds shall be deemed
to be Available Funds when the commitment is terminated and
the funds again become available for investment;
(viii) The withdrawal of capital by the investors in
any entity shall be deemed to be a withdrawal of the last
funds received; and
(ix) Funds available under a line of credit from a
financial institution shall not be deemed to be available
funds until all conditions to the release of such funds have
been satisfied other than the entity's request to withdraw
such funds. In addition, Available Funds pursuant to a line
of credit shall be determined, at any point in time, on a
"first in, first out" basis. For example, assume the Company
obtains a $25 million line of credit in January 199X (the
"January Money"). In March 199X, the Company expends $20
million of the January Money and in May 199X restores $10
million of the line of credit (the "May Money"), resulting in
a $15 million line of credit availability. In June 199X, the
Company expends $10 million ($5 million of January Money and
$5 million of May Money). In July 199X, a $5 million
investment
3
<PAGE> 8
opportunity arises. The Company will be deemed to have $5
million of Available Funds as of May 199X.
"Average Invested Assets" for any period means the average of
the aggregate book value of the assets of the Company invested,
directly or indirectly, in equity interests in and loans secured by
real estate, before reserves for depreciation or bad debts or other
similar non-cash reserves, computed by taking the average of such
values at the end of each month during such period;
"Board" means the directors holding office under the Governing
Documents at any particular time;
"Cash Equivalent Investments" means assets of the Company
which consist of cash, interest-bearing deposits in banks, repurchase
agreements with banks and readily-marketable securities;
"Cash Flow from Operations" for any of the Company Properties
for any specified fiscal period means (i) the gross revenues received
from the Company Property's operations for such fiscal period,
excluding proceeds from one or more of the following sources: the
sale, disposition, refinancing, or condemnation of part or all of the
Company Property; payments from insurance on account of a casualty to
the Company Property other than payments from insurance on account of
business or rental interruption; security deposits paid by tenants
under leases of all or a part of the Company Property, unless
forfeited to the Company; payments on account of claims under title
insurance policies on the Company Property; and similar items or
transactions the proceeds of which under generally accepted accounting
principles are deemed attributable to capital; less (ii) the expenses
incurred, during the same period in generating such gross revenues,
excluding from such expenses all interest and principal amortization
payments by the Company, including those collateralized by the Company
Property, reserves for depreciation, depletion and amortization,
capital expenditures, and other operating expenses of the Company not
directly related to the operation of the Company Property;
"Cause" means (i) if the Advisor commits an act of fraud,
embezzlement or theft constituting a felony or an act intentionally in
breach of a duty owed to the Company which cause it material injury,
(ii) a final determination by a court of competent jurisdiction that
the Company or the Advisor, as the case may be, has committed a
material breach of this Agreement, (iii) a petition shall have been
filed against the Advisor or the Company for an involuntary proceeding
under any applicable bankruptcy, insolvency, or other similar law now
or hereafter
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in effect, and such petition shall not have been dismissed within
sixty (60) days of filing; or a court having jurisdiction shall have
appointed a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Advisor of the Company for any
substantial portion of its property, or ordered the winding up or
liquidation of its affairs; or (iv) the Advisor or the Company shall
have commenced a voluntary proceeding under any applicable bankruptcy,
insolvency, or other similar law now or hereafter in effect, or shall
have made any general assignment for the benefit of creditors, or
shall have failed generally to pay its debts as they become due;
"Code" means the Internal Revenue Code of 1986, as amended, or
any succeeding law;
"Company" means Shurgard Storage Centers, Inc., a Delaware
corporation, together with its wholly owned subsidiary or
subsidiaries.
"Company Property or Properties" means the Consolidation
Properties and the Additional Properties.
"Consolidation" has the meaning set forth in the recitals
hereto;
"Consolidation Property or Properties" means any real property
or interest therein and associated personal property owned by the
Company and acquired through the Consolidation. The Company's
interest in such property may consist of units of limited partnership
interest in one or more limited partnerships which have a direct or
indirect ownership interest in the property;
"Fair Market Value" of an Additional Property has the meaning
set forth in Section 3.1(b)(ii) and Section 3.1(b)(iii);
"Governing Documents" mean the Company's Certificate of
Incorporation and By-Laws, as amended from time to time;
"Indemnified Party" has the meaning set forth in Section
6.2(a);
"Independent Director" means a director who (i) is not
affiliated, directly or indirectly, with the Advisor, whether by
ownership of, ownership interest in, employment by, any material
business or professional relationship with, or service as an officer
or director of, the Advisor or a business entity which is an Affiliate
of such Advisor, (ii) is not serving as a general partner, trustee or
director for more than three real estate investment trusts or
partnerships organized by a Sponsor of the Company, and (iii) performs
no other services for the Company, except as director. An indirect
relationship shall include circumstances
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in which a member of the immediate family of a director has one of the
foregoing relationships with the Advisor or the Company;
"Investment Policies" at any time have the meaning given
thereto either in (i) the Governing Documents as then in effect or
(ii) a written statement adopted by the Board and delivered to the
Advisor by the Company:
"Mortgage Loans" means notes, debentures, bonds and other
evidences of indebtedness or obligations which are secured or
collateralized by interests in real property and are held by the
Company;
"Net Income" for any period means total revenues (excluding
gains from the sale of Company assets) applicable to such period, less
the expenses applicable to such period other than additions to
reserves for depreciation or bad debts or other similar non-cash
reserves;
"Operating Expenses" means the aggregate annual expenses
regarded as ordinary operating expenses in accordance with generally
accepted accounting principles (including the Advisory Fee), exclusive
of the following: (i) the cost of borrowed money; (ii) income taxes
applicable to the Company; (iii) legal, audit, accounting,
underwriting, brokerage, listing, registration and other fees,
printing, engraving and other expenses and taxes incurred in
connection with the issuance, distribution, transfer, registration or
stock exchange listing of the Company's securities; (iv) fees and
expenses paid to advisers and independent contractors, consultants,
managers and other agents employed directly by the Company or by the
Advisor at the request of the Company for the account of the Company
(other than the Advisor); (v) all expenses incurred in connection with
the acquisition and disposition of real property (including leasehold
interests) or other investment assets, and the maintenance, repair and
improvement of such property; (vi) expenses of organizing or
dissolving the Company; (vii) insurance costs incurred in connection
with the Company; (viii) noncash provisions for depreciation,
depletion and amortization; (ix) losses on the disposition of assets
and provisions for such losses; and (x) other extraordinary charges
including, without limitation, litigation costs.
"Realized Gains" with respect to any Additional Property means:
(i) with respect to any Sale of Additional
Property, the excess of the Fair Market Value of the
Additional Property (after deduction of all transaction costs
incurred by the Company in connection with such Sale,
including brokerage commissions, legal, accounting,
documentation, escrow, title policy, related travel and
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other costs) over the sum of the original purchase price and
the cost of any capital improvements to the Additional
Property by the Company, excluding any depreciation and
amortization; and
(ii) with respect to any Refinancing of Additional
Property, the net cash proceeds realized by the Company from
such Refinancing after deduction of (A) all transaction costs
incurred by the Company, including brokerage commissions,
legal, accounting, documentation, escrow, title policy,
related travel and other costs, (B) all debt of the Company
immediately prior to such Refinancing which is secured by a
mortgage on or security interest in only such Additional
Property or, in the event the Additional Property secures debt
of the Company which is also secured by other Company
Properties or assets, a portion of such debt equal to the
Additional Property's Cash Flow from Operations divided by the
aggregate Cash Flow from Operations from all Company
Properties (including the Additional Property) securing such
debt, such computations of Cash Flow from Operations to be for
the most recently completed twelve (12) full calendar months;
"Registration Statement" means the registration statement
filed on Form S-4 by the Company, and all amendments thereto
referenced in the recitals to this Agreement, registering the
Company's Shares for distribution in the Consolidation;.
"Renewal Term" has the meaning set forth in Section 4.2.
"Sale or Refinancing" means (i) any sale, exchange or other
disposition of any Company Property or interest therein, condemnation,
recovery of damage award or insurance proceeds (other than business or
rental interruption insurance proceeds and the portion of any
condemnation or damage award or insurance proceeds used to repair or
restore a Company Property) or (ii) a non-recourse refinancing of a
Company Property;
"Sponsor" means any person directly or indirectly instrumental
in organizing, wholly or in part, a real estate investment trust, or
any person who will manage or participate in the management of a real
estate investment trust, and any Affiliate of any such person, but
excluding (i) any person whose only relationship with such real estate
investment trust is that of an independent property manager whose only
compensation is
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for property management services and (ii) independent third parties
such as attorneys, accountants and underwriters whose only
compensation is for professional services;
"Total Operating Expenses" for any period means all operating
and general and administrative expenses of the Company as determined
under generally accepted accounting principles but excluding (i) the
expenses of raising capital and financing, including without
limitation financing for Additional Properties, including related
investment banking and legal fees, (ii) interest payments on all debt
of the Company, (iii) taxes, (iv) non-cash expenditures, (v) incentive
Advisory Fees paid in accordance with Section 3.1(c), and (vi) the
costs related directly to Additional Property acquisitions,
development, operation and disposition. The exclusion for costs
related directly to Company Property acquisition, development,
operation and disposition permits exclusion of expenses incurred with
respect to specific individual Company Properties but does not permit
the exclusion of operating, general and administrative expenses for
the Company's operations in general;
"Wages and Salaries" means wages, salaries and other
compensation, including so-called fringe benefits such as life,
disability, medical and health insurance pension plans, social
security taxes and workers' compensation insurance.
All capitalized terms used and not defined herein shall have the
meanings ascribed them in the Registration Statement.
1.2 ACCOUNTING PRINCIPLES
Except as otherwise provided herein, all accounting and financial
terms used herein shall be determined in accordance with generally accepted
accounting principles.
SECTION 2. DUTIES OF THE ADVISOR
2.1 GENERAL
The Advisor shall use its best efforts to perform each of the duties
set forth in this Agreement and shall have the authority to take all actions
and to execute all documents and instruments that it deems necessary or
advisable in connection with the management and operations of the Company and
the fulfillment of its duties as set forth herein, subject in each matter to
the supervision of the Board and to the Investment Policies of the Company, and
with respect to purchases, development, financing and sales of real property
and mortgage loans, to the prior approval of the Board. In the event that any
of the services to be provided by the Advisor under this Agreement are deemed
to be services which may only be provided by a registered investment advisor
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pursuant to the Investment Advisers Act of 1940, as amended, or any comparable
state law, such services shall be provided by Shurgard Realty Advisors, Inc.
("SRA"), a wholly-owned subsidiary of the Advisor which is a registered
investment advisor. In the event SRA is required to perform services for the
Company pursuant to this Section 2.1, the Advisor and SRA shall determine what
portion of the compensation to which the Advisor is entitled under this
Agreement will be paid to SRA in consideration of SRA's services to the
Company. In no event shall the Company be required to pay to the Advisor and
SRA, in the aggregate, any compensation in excess of the total compensation to
which the Advisor is entitled under this Agreement.
2.2 ANNUAL BUSINESS PLAN
The Advisor will prepare annually a business plan which incorporates a
specific business strategy, an annual operating budget, investment and
disposition objectives and capitalization and funding strategies. The plan
will set forth, among other things, the following with respect to acquisition
of Additional Properties:
(a) the targeted level of funds to be invested in Additional
Properties during the year;
(b) the source of such funds (existing available capital or
financing, equity or debt to be raised during the year, reinvestment of
proceeds from sale of existing properties or otherwise); and
(c) criteria for Additional Property acquisitions, including type
of property (self-service storage, office and business park or other), targeted
geographic locations, size of properties, proportion of existing facility
acquisitions to development properties, and pro forma return on investment.
This plan will be presented on or before December 1 of the year prior
to the year for which such plan applies (other than the initial year hereof) to
the Board for their review and approval. The plan for the initial year hereof
will be prepared and presented within two (2) months of the date of execution
hereof.
2.3 REAL ESTATE AND MORTGAGE INVESTMENT ADVICE
Consistent with the annual business plan, and subject to supervision
by the Board, the Advisor will provide acquisition, development and disposition
services to the Company, including the following:
(a) Serving as the Company's adviser and consultant in
connection with all real and personal property and mortgage loan
acquisitions and dispositions to be made by the Company and, as
requested, furnishing reports to the Company and providing research,
economic and statistical data in connection with the acquisition and
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disposition of real and personal property and mortgage loans for the
Company;
(b) Identifying, investigating and conducting due
diligence with respect to the real and personal property or interests
therein or mortgage loans which might be suitable for the Company in
view of its Investment Policies ;
(c) Identifying prospective investments for the Company
through contacts with real estate brokers, developers, owners,
operators, property managers, attorneys, accountants, financial
institutions, financial planners and others who may be acquiring, own
or have information regarding the acquisition and ownership of real
estate or mortgage loans suitable for the Company.
(d) Evaluating and assessing the market value of
prospective properties which might be suitable for the Company in view
of its Investment Policies;
(e) Advising and assisting in connection with
negotiations by or on behalf of the Company, or negotiating for and on
behalf of the Company, for the acquisition and disposition of real and
personal property or the making of mortgage loans by the Company;
(f) Engaging attorneys, land use consultants, development
and construction managers and consultants, appraisers, surveyors,
escrow agents and other consultants and professionals to assist the
Company with the acquisition, development, construction and
disposition of real and personal property or interests therein and
supervising the services rendered by such consultants and
professionals on behalf of the Company;
(g) Supervising the development, construction and
expansion of all improvements at any of the Properties by general
contractors, subcontractors and suppliers engaged by the Company; and
(h) Obtaining for or providing to the Company such
services as may be required in connection with the negotiation, making
and servicing of mortgage loans made by the Company, disbursing and
collecting the funds of the Company, and handling, prosecuting and
settling claims of the Company, including foreclosing or otherwise
enforcing mortgages and other liens securing investments.
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2.4 GENERAL ADMINISTRATIVE DUTIES
The Advisor shall perform, or supervise the performance of, the
necessary administrative functions in the day-to-day management of the Company
and its operations, including, without limitation, internal and external
financial reporting, property accounting, shareholder relations, supervision of
stock registrar and transfer services, and other necessary services.
2.5 PROPERTY MANAGEMENT
Simultaneously with the execution of this Agreement, the Company and
the Advisor are entering into a Management Services Agreement (the "MSA")
pursuant to which the Advisor will manage the day-to-day operations of the
Company Properties. In the event the MSA is terminated or not renewed pursuant
to its terms, the Advisor shall, at the Company's request, advise and assist
the Company in retaining a replacement property manager, including but not
limited to, identifying potential property managers and negotiating on behalf
of the Company the terms of any property management agreement with such
manager; provided, however, that the engagement of a replacement property
manager shall be subject to the specific requirements of Section 9 of the MSA.
2.6 SHORT-TERM INVESTMENTS
The Advisor may invest and reinvest any moneys and securities of the
Company in short-term investments pending investment in Company Properties.
Unless a specific policy is developed by the Advisor and approved by the Board,
the Advisor may invest and reinvest any monies and securities of the Company,
pending investment in Company Properties in one or more of the short-term
investments permitted by the Company's By-Laws. The Advisor shall develop and
submit such a policy within 30 days of execution hereof.
2.7 AGENCY
The Advisor shall act as agent of the Company in making, acquiring,
financing and disposing of investments, disbursing and collecting the Company's
funds, paying the debts and fulfilling the obligations of the Company,
supervising the performance of the managers of the Company Properties and
handling, prosecuting and settling any claims of or against the Company, the
Board, holders of the Company's securities or the Company's representatives or
properties.
2.8 RETENTION OF SERVICES
The Advisor shall retain for and on behalf of the Company such
services of accountants, legal counsel, appraisers, insurers, brokers, transfer
agents, registrars, developers, banks and other lenders and others as the
Advisor deems necessary or
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advisable in connection with the management and operations of the Company and
the fulfillment of the Advisor's duties as set forth herein.
2.9 OFFICE AND PERSONNEL
The Advisor shall maintain such office space, equipment and personnel,
including officers and employees of the Advisor or its Affiliates, as it deems
necessary or advisable in connection with the management and operations of the
Company and the fulfillment of the Advisor's duties as set forth herein.
2.10 BANK ACCOUNTS
The Advisor may establish one or more bank accounts in the name of the
Company or in its own name and may deposit into and disburse from such accounts
any moneys on behalf of the Company, provided that no funds in any such account
shall be commingled with funds of the Advisor, and the Advisor shall as
requested by the Board render appropriate accountings to the Board of such
deposits and disbursements.
2.11 BOOKS AND RECORDS
The Advisor shall maintain all accounting and reporting systems, books
and records of the Company, including books of account and records relating to
services performed by the Advisor, and shall make such books and records
accessible for inspection by the Board at any time during ordinary business
hours.
2.12 APPRAISALS AND REPORTING
As frequently as may be required by the Board or as the Advisor may
deem necessary or advisable, the Advisor shall prepare, or cause to be
prepared, with respect to each of the Company Properties (i) an appraisal
prepared by an independent real estate appraiser, (ii) reports and information
on Company operations and asset performance, and (iii) other information
reasonably requested by the Board.
2.13 REPORTS, ETC.
The Advisor shall prepare, or cause to be prepared, all reports
required under the Securities Exchange Act of 1934, as amended, and other
communications to the holders of the Company's securities, including without
limitation proxy solicitation materials, and all tax returns and any other
reports or other materials required to be filed with any governmental body or
agency and shall prepare, or cause to be prepared, all materials and data
necessary to complete such reports and other materials including, without
limitation, an annual audit of the Company's books of account by a nationally
recognized independent accounting firm.
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2.14 FINANCING AND SECURITIES ISSUANCES
The Advisor shall provide services to the Company in connection with
negotiations by the Company with investment banking firms, securities brokers
or dealers and other institutions or investors in connection with the sale of
securities of the Company and the securing of loans for the Company, but in no
event in such a way that the Advisor could be deemed to be acting as a dealer
or underwriter as those terms are defined in the Securities Act of 1933, as
amended and provided, further, that the Advisor shall not share in any fees
paid by the Company to third parties for such services.
2.15 ADDITIONAL SERVICES
The Advisor shall perform such additional services as from time to
time may be requested by the Board and agreed to by the Advisor, provided,
however, that nothing herein shall require the Advisor to agree to any such
request or to perform any additional services to which it has not agreed.
2.16 REIT QUALIFICATION; INVESTMENT COMPANY STATUS, ETC.
Notwithstanding anything to the contrary in this Agreement, the
Advisor shall use its best efforts to refrain from taking any action
(including, without limitation, the furnishing or rendering of services to
tenants of a property or managing or operating a property) which, in its
judgment, made in good faith and with the exercise of reasonable care, would:
(a) adversely affect the status of the Company as a "real estate investment
trust" under the Code and all rules and regulations promulgated thereunder; (b)
cause the Company to be required to register as an investment company under the
Investment Company Act of 1940, as amended; (c) cause the Company to violate
any law, rule, regulation or statement of policy of any governmental body or
agency having jurisdiction over the Company or over its securities, of which
the Advisor should reasonably be aware; or (d) otherwise not be permitted by
the Governing Documents, except if such action shall be ordered by the Board,
in which event the Advisor shall promptly notify the Board of the Advisor's
judgment that such action would be in contravention of (a) through (d) of this
Section 2.16 and shall refrain from taking such action, unless, but only to the
extent that, the Advisor receives specific written instructions from the Board
expressly ordering that the action be taken, notwithstanding such notification
by it to the Board. In such event the Advisor shall have no liability for
acting in accordance with the specific written instructions of the Board so
given.
2.17 MORTGAGES AND INSURANCE
The Advisor shall use its best efforts to (i) ascertain that any
mortgage securing any investment of the Company shall be a valid lien upon the
mortgage property according to its terms, for which the Advisor may rely on
mortgagee's policies of title insurance issued by reputable title insurance
companies, and that any insurance or guaranty issued by any person upon which
the Board relies is valid and in full force and
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effect and enforceable according to its terms, (ii) cause each Company Property
to be duly insured, to the extent coverage is available on commercially
reasonable terms, against loss or damage by fire, with extended coverage, and
against such other insurable hazards and risks as is customary and appropriate
in the circumstances, provided, however that if the Advisor determines that a
type of insurance coverage currently maintained by the Company is available,
but no longer on commercially reasonable terms, the Advisor shall so advise the
Board and act in accordance with the Board's instructions, and (iii) carry out
the policies from time to time specified in writing by the Board with regard to
the protection of Company Properties. The Advisor shall be entitled to
reasonably rely on qualified experts in performing its duties under this
Section 2.17.
2.18 FIDELITY BOND
The Advisor shall maintain a fidelity bond with a responsible surety
company in an amount approved by the Board covering all officers and employees
of the Advisor handling funds of the Company and any investment documents or
papers, which bonds shall protect against all losses of any such property from
acts of such officers and employees through theft, embezzlement, fraud and
dishonesty.
SECTION 3. COMPENSATION
3.1 ADVISORY FEE
(a) The Company shall pay the Advisor an annual Advisory Fee equal
to one-half percent (.5%) of the sum of (i) the Fair Market Value of the
Additional Properties, (ii) the original principal balance, plus accrued
interest, of any Mortgage Loans and (iii) the average daily balance of the
Company's Cash Equivalent Investments in excess of the Company's cash
equivalent investments immediately subsequent to the Consolidation, measured at
the end of each month. All payments of the annual Advisory Fee shall be
subject to adjustment at year end as provided in Section 3.5. The Advisory Fee
shall be payable monthly in arrears in such amounts indicated by the annual
operating budget approved by the majority of the Directors, as revised no more
than quarterly to reflect no material changes. The annual Advisory Fee for
1993 shall be prorated based upon the number of days remaining in 1993 after
the Consolidation is consummated.
(b) In addition to the annual Advisory Fee noted in Section
3.1(a), the Company shall pay an incentive Advisory Fee equal to (i) ten
percent (10%) of the Realized Gain with respect to any Sale of an Additional
Property, payable at the time of such Sale, reduced by the amount of any
previous payments made to the Advisor as a result of the prior Refinancing of
the Additional Property, and (ii) ten percent (10%) of the Realized Gain with
respect to any Refinancing of an Additional Property, payable at the time of
such Refinancing. Except as otherwise provided in paragraph (b)(ii) below,
such fee shall be paid to the Advisor upon receipt by the Company of the
proceeds from such Sale or Refinancing and, in the event, that such proceeds
are
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received in installments, the incentive Advisory Fees shall be paid
proportionately as the net sale or refinancing proceeds are paid to and
received by the Company.
(i) In the event that the Advisor accomplishes an
exchange transaction, which is nontaxable under the Code, with respect
to any Additional Property, the Advisor shall propose the incentive
Advisory Fee payable by the Company to the Advisor with respect to
such transaction, which fee shall be equal to a fee which a qualified
unaffiliated person could have earned on a similar transaction under
then-existing market conditions. Such fee will be paid by the Company
to the Advisor upon approval by a majority of the Independent
Directors. If an Additional Property is exchanged for another
property, for purposes of computing the incentive Advisory Fee related
to a subsequent Sale or Refinancing of the Additional Property
received in exchange for the original Additional Property, the
original cost of the new Additional Property shall be deemed to be the
same as the original cost plus the cost of any subsequent capital
improvements of the original Additional Property exchanged for such
new Additional Property; however, the incentive Advisory Fee
calculated on that basis shall be reduced by an amount equal to the
fee paid with respect to the affected Additional Property pursuant to
the first sentence of this paragraph 3.1(b) (i).
(ii) In the event that this Agreement is terminated by the
Company without Cause, or the Company elects not to renew the term of
the Advisor for reasons other than Cause, the Additional Properties
shall be deemed to be sold at a price equal to (A) their Fair Market
Value, as of the date of this Agreement's termination or expiration,
determined through the appraisal procedure set forth in this paragraph
(ii), or (B), in the event that such termination or expiration results
from the merger, consolidation, acquisition or liquidation of the
Company, an amount equal to (aa) the net aggregate consideration paid
to the Company's shareholders upon such occurrence plus the aggregate
liabilities of the Company, to the extent that such liabilities are
assumed by, or remain liabilities secured by assets transferred to,
the acquiring or surviving entity, multiplied by (bb) the Cash Flow
from Operations of the Additional Properties divided by the aggregate
Cash Flow from Operations of all Company Properties (including the
Additional Properties) for the twelve full calendar month period,
ending as of the last day of the calendar month immediately preceding
the event resulting in the Advisor's termination. If it is necessary
to appraise the value of the Additional Properties pursuant to this
paragraph (ii), such appraisal shall be conducted by an appraiser, who
is acceptable to the Company and the Advisor, selected not later than
thirty (30) days following the Advisor's termination, and the
appraiser's determination of the
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Additional Properties' Fair Market Value shall be binding upon, and
not subject to appeal by, the Company and the Advisor. No later than
sixty (60) days after the determination of any incentive Advisory Fee
due hereunder, the Company shall pay such amount in full to the
Advisor as an incentive Advisory Fee.
(iii) For purposes of computing the Advisory Fee payable
pursuant to Section 3.1(b)(i) for the Initial Term and the first four
Renewal Terms (if not earlier terminated), the "Fair Market Value" of
the Additional Properties shall equal the purchase price paid by the
Company for those Properties. Within ninety (90) days prior to the
commencement of the fifth Renewal Term, and every two years
thereafter, the Company shall cause the Additional Properties to be
appraised by an appraiser who is acceptable to the Company and the
Advisor and such appraised value shall be used as the "Fair Market
Value" for purposes of computing the Advisory Fee. For example, the
appraised value of the Additional Properties determined immediately
prior to the commencement of the fifth Renewal Term shall be used to
compute the Advisory Fee payable with respect to the fifth and sixth
Renewal Terms and the appraised value of the Additional Properties
determined immediately prior to the commencement of the seventh
Renewal Term shall be used to compute the Advisory Fee payable with
respect to the seventh and eighth Renewal Terms.
(d) Within one hundred (100) calendar days after the end of each
fiscal year of the Company, following the receipt by the Company of an
auditor's report, prepared by a nationally recognized independent accounting
firm, with respect to the Company's financial statements for such year, the
Advisor shall deliver to the Company a statement, certified by an officer of
the Advisor, setting forth the following: (i) the amount of the estimated
Advisory Fee actually paid by the Company for all months during such fiscal
year, (ii) the amount of the Advisory Fee that should have been paid for such
fiscal year, and (iii) the amount, if any, of accrued and unpaid Advisory Fees.
If the annual statement indicates an overpayment by the Company of the Advisory
Fee, such overpayment shall be offset against the next ensuing estimated
Advisory Fee to become due hereunder, or, if at any time no further Advisory
Fee can become due, the balance of any overpayment shall be paid without
interest by the Advisor within fifteen (15) calendar days after demand therefor
by the Company, such repayment to be due and payable whether or not this
Agreement is still in full force and effect. If the annual statement indicates
an underpayment by the Company of the Advisory Fee with respect to the year
covered thereby, the Company, within fifteen (15) calendar days after receipt
of the statement, shall pay to the Advisor the amount of such underpayment.
The Advisory Fee for any year shall not be recalculated on the basis of any
post-year-end adjustments to the Company's taxable income arising, directly or
indirectly, from an audit by the Internal Revenue Service.
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3.2 PAYMENT FOR ADDITIONAL SERVICES
If the Board shall request the Advisor to render services to the
Company other than those required to be rendered by the Advisor hereunder, such
additional services, if performed, shall be compensated separately on terms to
be agreed upon from time to time between the Advisor and the Company, which
terms shall not be less favorable to the Company than either (a) the terms
under which the Advisor is then performing similar services for other persons,
taking into account the full range of services and prices there for provided by
the Advisor to such other persons, or (b) the terms under which qualified
unaffiliated persons are then performing such services for comparable
organizations.
3.3 EXPENSES OF THE ADVISOR
Without regard to the amount of compensation received hereunder by the
Advisor, the Advisor shall bear the following expenses:
(a) Wages and Salaries of the Advisor's officers and
employees, except as provided in Section 3.4(b);
(b) rent and other overhead expenses of the Advisor; and
(c) travel and mailing costs pertaining to the Advisor's
performance of its duties hereunder, except for expenses described in
Section 3.4(b).
3.4 REIMBURSABLE EXPENSES
The Advisor shall pay, or cause to be paid out of the assets of the
Company, the following operating expenses of the Company and, if the Advisor
advances money for such expenses, it shall be entitled to reimbursement by the
Company therefor:
(a) travel and other out-of-pocket expenses incurred by
directors, officers and employees of the Advisor in connection with
seeking financing for the Company or closing the purchase, financing,
refinancing or sale of an Additional Property or Mortgage Loan after
the transaction has been approved by the Board, in accordance with
such procedures as the Board may establish from time to time for the
approval of such transactions, irrespective of whether the proposed
transaction is completed;
(b) costs of legal, accounting, tax, architectural,
development and construction consulting and other similar professional
services rendered for the Company by the Advisor's employees at rates
agreed upon by the Company and the Advisor, subject to change from
time to time upon agreement of the Company and the Advisor, provided
that
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such rates shall not be greater than those that would have been
charged by similarly qualified unrelated third persons performing
similar services;
(c) all other costs and expenses relating to the
Company's operations, including without limitation the costs and
expenses of acquiring, owning, protecting, maintaining and disposing
of the Company's investments, including appraisal, reporting, audit
and legal fees;
(d) all insurance costs incurred in connection with the
operation of the Company;
(e) expenses connected with payments of interest or
distributions in cash or any other form made or caused to be made by
the Board to or on account of holders of securities of the Company,
including without limitation expenses incurred in connection with any
dividend reinvestment plan;
(f) expenses connected with communications to holders of
securities of the Company and the other bookkeeping and clerical work
necessary in maintaining relations with holders of securities and in
complying with the continuous reporting and other requirements of
governmental bodies or agencies, including the cost of printing and
mailing certificates for securities and proxy solicitation materials
and reports to holders of the Company's securities;
(g) transfer agent and registrar's fees and charges; and
(h) expenses relating to any office or office facilities
maintained for the Company or the Company Properties which are
separate from the office or offices of the Advisor referenced in
Section 2.9.
3.5 ANNUAL OPERATING EXPENSE LIMITATION REQUIRING REIMBURSEMENT BY
THE ADVISOR
On or before the thirtieth (30th) day after the completion of the
annual audit of the Company's financial statements for each fiscal year, the
Advisor will refund to the Company the amount, if any, by which the Operating
Expenses of the Company for such fiscal year exceeded the greater of (i) two
percent (2%) of the Average Invested Assets of the Company for such fiscal year
or (ii) twenty-five percent (25%) of the Net Income of the Company for such
fiscal year.
In the event the Operating Expenses of the Company in any fiscal year
are less than the 2%/25% limitation set forth in the preceding paragraph (the
"Limitation") for
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<PAGE> 23
that year, the Company will pay to the Advisor the Advisory Fee reimbursed by
the Advisor to the Company in one or more prior fiscal years, provided the
aggregate of such reimbursements and Operating Expenses for the current fiscal
year shall not exceed the Limitation for such fiscal year. The Advisor's right
to repayment of previously reimbursed Advisory Fees shall be cumulative, and
the amount of previously reimbursed Advisory Fees which has not been repaid to
the Advisor shall be carried forward, in accordance herewith, to subsequent
fiscal years.
3.6 RESTRICTIONS
Except for the transactions set forth herein, the Company shall not
enter into any other transactions with the Advisor or any Affiliate thereof,
except in compliance with the restrictions contained in Section 12 of the
Company's By-Laws, as in effect on the date hereof, and by this reference such
sections are incorporated herein in their entirety.
SECTION 4. TERMINATION; TERM
4.1 TERMINATION
Notwithstanding any other provision to the contrary, this Agreement
(i) may be terminated without Cause by the Company upon sixty (60) calendar
days' written notice to the Advisor, or by the Advisor upon sixty (60) calendar
days' written notice to the Company, and (ii) may be terminated by the Company
with Cause immediately upon providing written notice to the Advisor or by the
Advisor with Cause immediately upon providing written notice to the Company.
Any determination by the Company to terminate this Agreement shall be made by
the vote of a majority of the Independent Directors. In the event of
termination of this Agreement, the Advisor will cooperate with the Company and
take all reasonable steps requested to assist the Board in making an orderly
transition of the advisory function.
4.2 RENEWAL TERMS
This Agreement shall continue in force for an initial term of one year
from the date the Consolidation is consummated (the "Initial Term"), and shall
be renewable by the Company annually, subject to a determination by a majority
of the Independent Directors that the Advisor's performance hereunder has been
satisfactory and that the compensation payable to the Advisor hereunder is
fair. Absent written notice of non-renewal as provided in this Section, this
Agreement shall be automatically renewed for successive one-year terms
("Renewal Terms") upon the expiration of the Initial Term and each Renewal
Term. Notice of non-renewal, if given, shall be given in writing by the
Company to the Advisor not less than sixty (60) calendar days before the
expiration of the Initial Term of this Agreement or sixty (60) calendar days
before the expiration of any Renewal Term thereof.
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<PAGE> 24
4.3 PRESERVATION OF REIT STATUS
In the event that the terms of this Agreement at any time shall, in
the opinion of counsel for the Company, threaten to impair the status of the
Company as a real estate investment trust or other pass-through entity in a
manner adverse to the interests of the Company's shareholders, the Company
shall propose such amendments to or substitute arrangements for this Agreement,
with prospective or retroactive effect, as in its opinion may be appropriate or
advisable to protect and preserve the status of the Company as a real estate
investment trust or other pass-through entity. If the parties cannot agree
upon the proposed amendments of this Agreement within thirty (30) days after
such proposals are made, this Agreement shall be terminated upon written notice
from the Company to the Manager.
4.4 COMPENSATION ON TERMINATION OR NON-RENEWAL
Until liquidation of the Company, in the event the Company terminates
or fails to renew this Agreement on terms as favorable as those contained in
this Agreement or hereafter in a renewal agreement, in either case other than
with Cause, the Company shall pay the Advisor all fees then accrued and unpaid
as of the year or portion thereof in which the termination occurred, and shall
also pay to Advisor within thirty (30) days of such termination or non-renewal
a termination fee equal to the Annual Fee paid to Advisor for the year
immediately preceding the year in which termination or non-renewal occurred.
4.5 RIGHTS OF TERMINATION CUMULATIVE
The rights of termination specifically provided shall be considered to
be cumulative, and shall be in addition to the rights of termination for breach
of this Agreement and all other remedies at law or in equity, including but not
limited to, specific performance, otherwise inuring to the parties by operation
of law.
SECTION 5. ACTION UPON TERMINATION OR CANCELLATION
5.1 ACCOUNTING
The Advisor shall immediately upon termination of this Agreement:
(a) pay over to the Company all moneys collected and held
for the account of the Company pursuant to this Agreement, after
deducting any accrued compensation and reimbursement for its expenses
to which it is then entitled;
(b) deliver to the Company a full accounting, including a
statement showing all payments collected by it and a statement of all
moneys held by it, covering the period following the date of the last
accounting furnished to the Company;
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<PAGE> 25
(c) refund to the Company any amounts due pursuant to
Section 3.5;
(d) deliver to the Company all property and documents of
the Company then in the custody of the Advisor; and
(e) cooperate with the Company and take all reasonable
steps requested to assist the Board in making an orderly transition of
the advisory function.
5.2 USE OF TRADE NAME
Subject to the terms of this Section 5.2, the Advisor hereby grants to
the Company the nonexclusive license to use the name, trademark and service
mark "Shurgard" and related marks, slogans, caricatures, designs and other
trade or service items as a part of the Company's name and in connection with
the Company's business. It is understood and agreed that this name shall
remain and be at all times the property of the Advisor and that the Company
shall have no right whatsoever therein except as provided for in this Section
5.2. At times during the term of this Agreement, the Advisor shall have the
right to inspect and supervise the use of such name, marks, slogans,
caricatures, designs and other trade or service items to assure the quality of
the services being rendered thereunder. Upon termination or non-renewal of
this Agreement, either by the Company or the Advisor, the Board shall (i) cause
the name of the Company to be changed to a name that does not contain the name
of the Advisor or any approximation or abbreviation thereof and that is
sufficiently dissimilar to such name as to be unlikely to cause confusion or
identification with the Advisor and (ii) cause the Company immediately to cease
doing business under the current name of the Company or any approximation or
abbreviation thereof or any name that is likely to cause confusion or
identification with the Advisor; provided, however, that the Company shall have
the right to the continued use of the "Shurgard" name, trademark, servicemark
and related items in the operation of any of the properties owned by the
Company as of the date of such termination, until the next publication date of
the Yellow Pages telephone directory which includes such properties, at which
time the Company's use of the "Shurgard" name, trademark, servicemark and
related items shall cease. It is understood and agreed that the Advisor will
use and shall be unrestricted in its use of such name, mark, slogan,
caricature, design or other trade or service item in the Advisor's other
business activities both during the term of and after the expiration or
termination of this Agreement. As consideration for the Advisor's license
granted to the Company herein, the Company shall pay the Advisor One Hundred
Dollars ($100) upon the execution of this Agreement.
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<PAGE> 26
SECTION 6. LIABILITY AND INDEMNIFICATION OF ADVISOR
6.1 LIMITATION ON LIABILITY
The Advisor shall have no responsibility other than to render the
services and take the actions described herein in good faith and with the
exercise of due care and shall not be responsible for any action of the Board
in following or declining to follow any advice or recommendation of the
Advisor. The Advisor, except by reason of its own negligence, bad faith or
misconduct, shall not be liable for any action taken, omitted or suffered to be
taken by it in good faith and believed by it to be authorized or within its
discretion or rights or powers conferred upon it by this Agreement or in
reasonable reliance upon the written opinion of counsel of recognized
expertise.
6.2 INDEMNIFICATION
(a) The Company shall reimburse, indemnify and hold harmless the
Advisor and its directors, officers, shareholders, agents and employees and
each other person or entity, if any, controlling the Advisor (an "Indemnified
Party"), to the full extent lawful, from and against any and all losses,
claims, damages or liabilities of any nature whatsoever with respect to or
arising from any acts or omissions of the Advisor in its capacity as such,
provided that the Advisor determined the course of conduct which caused the
loss or liability was in the best interests of the Company and, provided
further, that no reimbursement or indemnification shall be made with respect to
losses, claims, damages or liabilities with respect to or arising out of the
Advisor's negligence or misconduct. With respect to the satisfaction of any
indemnification of the above-mentioned persons, such indemnification shall be
made out of the assets of the Company, and no shareholder of the Company shall
have any personal liability for the payment of such amounts.
(b) Notwithstanding the indemnification provisions in Section
6.2(a), indemnification will not be allowed for any liability finally imposed
by judgment, and costs associated therewith, including attorneys' fees, arising
from or out of a violation of state or federal securities laws associated with
the offer and sale of Company shares. Indemnification will be allowed for
settlements and related expenses, including attorneys' fees, of lawsuits
alleging securities law violations, and for expenses, including attorneys'
fees, incurred in successfully defending such lawsuits, provided that one or
more of the following conditions are met: (i) there has been a successful
adjudication on the merits of each count involving alleged securities law
violations as to the Indemnified Party; (ii) such claims have been dismissed
with prejudice on the merits by a court of competent jurisdiction as to the
Indemnified Party or (iii) a court of competent jurisdiction approves the
settlement of claims against the Indemnified Party and finds that
indemnification of the settlement and related costs should be made and the
court considering the request for indemnification has been advised of the
position of the Securities and Exchange Commission and of the published
position of any state securities regulatory authority in which securities of
the Company were
22
<PAGE> 27
offered or sold as to indemnification for violations of securities laws. If
indemnification is unavailable as a result of this Section 6.2(b), the Company
shall contribute to the aggregate losses, claims, damages or liabilities to
which the Advisor or its officers, directors, agents, employees or controlling
persons may be subject in such amount as is appropriate to reflect the relative
benefits received by each of the Company and the party seeking contribution on
the one hand and the relative faults of the Company and the party seeking
contribution on the other, as well as any other relevant equitable
considerations.
(c) Promptly after receipt by an Indemnified Party of notice of
the commencement of any action, such Indemnified Party shall, if a claim in
respect thereof is to be made against the Company, notify the Company in
writing of the commencement thereof; but the omission so to notify the Company
shall not relieve it from any liability that it may have to any Indemnified
Party pursuant to Section 6.2(a) hereof, unless the failure to so notify would
itself constitute negligence or misconduct. In case any such action shall be
brought against an Indemnified Party and it shall notify the Company of the
commencement thereof, the Company shall be entitled to participate therein and,
to the extent that it shall wish, to assume the defense thereof, with counsel
satisfactory to such Indemnified Party and, after notice from the Company to
such Indemnified Party of its election so to assume the defense thereof, the
Company shall not be liable to such Indemnified Party under Section 6.2(a) for
any legal expenses of other counsel or any of the expenses, in each case
subsequently incurred by such Indemnified Party, unless (i) the Company and the
Indemnified Party shall have mutually agreed to the retention of such counsel
or, (ii) the named parties to any such proceeding (including any impleaded
parties) include both the Company and the Indemnified Party and representation
of both parties by the same counsel would be inappropriate in the reasonable
opinion of the Indemnified Party, due to actual or potential differing
interests between them.
(d) Any indemnification required hereunder to be made by the
Company shall be made promptly following the fixing of the liability, loss,
damage, cost or expense incurred or suffered by a final judgment of any court,
settlement, contract or otherwise. All reasonable expenses incurred by an
Indemnified Party in defending any action, suit or proceeding with respect to
matters as to which such Indemnified Party is entitled to or may be entitled to
indemnification shall be paid by the Company from time to time as such expenses
are incurred in advance of the final disposition of such action, suit or
proceeding. In order to receive such payments, the Indemnified Party must
agree to reimburse the Company for all reasonable expenses paid by the Company
in defending any such action, suit or proceeding against such Indemnified
Person in the event and only to the extent that it shall ultimately be
determined that such Indemnified Party is not entitled to indemnification by
the Company for such expenses under the provisions of this Agreement or
otherwise.
(e) The obligations of the Company under this Section 6.2 shall be
in addition to any liability which the Company otherwise may have.
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<PAGE> 28
6.3 REPRESENTATIONS, WARRANTIES AND COVENANT OF COMPANY
(a) The Company represents and warrants as of the date hereof that:
(i) the undersigned are duly authorized representatives
of the Company and have full authority to enter into this Agreement
and to bind the Company;
(ii) the Company is fully authorized under the applicable
laws governing the Company to enter into all of the types of
investments described in the Investment Policies;
(iii) the execution and performance of this Agreement by
the Company will not conflict with, or result in a breach of the
terms, conditions or provisions of, or constitute a default under, or
result in any violation of, any agreement or instrument to which the
Company is subject;
(iv) the terms of this Agreement are in conformity with
the applicable laws governing the Company; and
(v) the assets of the Company do not constitute "plan
assets" within the meaning of the Department of Labor plan asset
regulation published at 29 C.F.R. Section 2510.3-101.
(b) The Company shall promptly advise the Advisor in writing of
any agreements or changes in any agreements, instruments, governing law,
regulations or interpretations thereof affecting the investments of the Company
or the duties, responsibilities, liabilities or obligations of the Advisor, and
any change or any contemplated change with respect to any of the foregoing or
the operation or administration of the Company that could cause the assets of
the Company to constitute "plan assets" as defined in paragraph 6.3(a)(v).
SECTION 7. OTHER ACTIVITIES
7.1 ADVISORY SERVICES TO THIRD PARTIES
Nothing in this Agreement shall prevent the Advisor or any Affiliate
thereof from rendering advice to other investors (including other real estate
investment trusts), even if such investors are in competition with the Company
or any of the Company's Properties or from managing other investments,
including investors and investments advised, sponsored or organized by the
Advisor. The Advisor also may render such services to joint ventures and
partnerships in which the Company is a co-venturer or partner and to the other
entities in such joint ventures and partnerships. In addition, nothing in this
Agreement shall limit the right of the Advisor or any of its subsidiaries or
Affiliates to engage in any other business or to render services of any kind
24
<PAGE> 29
(including business activities competitive with those of the Company) to any
corporation, partnership or other entity. The Advisor will inform the Board of
any other advisory contracts or investments (other than purchases of marketable
securities or securities which are registered pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended) by the Advisor or its Affiliates
within thirty (30) days of execution of such contracts or the making of such
investments. When informing the Board of any advisory contracts, the Advisor
need not identify the advised entities by name, but shall provide the Board
with sufficient information to permit the Board to evaluate the services
performed or to be performed by the Advisor under such contract. The Company
will maintain the confidentiality of all information provided to the Company
pursuant to this paragraph, subject to disclosure only if required by
applicable law or compelled by appropriate legal process.
7.2 CREDIT FOR FEES PAID UNDER OTHER AGREEMENTS
To the extent the Advisor receives compensation for rendering the
services set forth or within the scope of this Agreement to a joint venture or
partnership in which the Company is a co-venturer or partner, the Company's
proportionate share of such compensation shall be deducted from the
compensation payable by the Company to the Advisor pursuant to Section 3.1
hereof. Notwithstanding the foregoing, the Advisor and its Affiliates may
receive additional compensation for performing services not within the scope of
this Agreement for the Company or a joint venture or partnership in which the
Company is a co-venturer or partner, as provided by Section 3.2 hereof.
7.3 ALLOCATION OF INVESTMENT OPPORTUNITIES
The Advisor provides advisory services similar to those provided to
the Company pursuant to this Agreement to Affiliated Programs, including
partnerships and joint ventures in which the Company may, in the future, be a
partner or co-venturer. The Advisor will continue to provide advisory services
to Affiliated Programs and others pursuant to existing advisory agreements or
may enter into advisory agreements with additional parties. While the Advisor
will use its best efforts to present to the Company suitable investments
consistent with the Company's Investment Policies, the Advisor shall not be
obligated to present to the Company any particular investment opportunity of
which it becomes aware, (i) which the Advisor is contractually obligated, by
virtue of agreements in place and in effect as of the date of this Agreement,
to present to any other parties, and (ii) which may be suitable for the
Company, except to the extent otherwise required by the terms of this Section
7.3. As a part of the Company's annual business plan proposed by the Advisor
and reviewed and approved by the Board pursuant to Section 2.2 hereof, the
Board will establish on an annual basis criteria with respect to acquisition of
Additional Properties by the Company during that year. When the Advisor
becomes aware of an investment opportunity, the Advisor shall determine whether
such opportunity meets the Company's stated investment criteria. If the
opportunity does not meet such criteria, the Advisor shall not be obligated to
present such opportunity to the Company and shall
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<PAGE> 30
be unrestricted in the right to present such opportunity to an Affiliated
Program or other party. In the event the investment opportunity does meet the
Company's acquisition criteria and such opportunity is also a suitable
investment for one or more of the Affiliated Programs pursuant to such
Affiliated Program's acquisition standards and such Affiliated Program has
Available Funds, Advisor shall offer the investment opportunity first to the
entity having sufficient Available Funds for the longest period of time. If
more than one entity has received Available Funds in the same month, the
investment opportunity shall be presented first to the entity which has the
greatest amount of Available Funds in that month. Under certain circumstances,
the Advisor may deem it more appropriate to propose that an investment suitable
for more than one entity be allocated to a joint venture in which such entities
have an interest. Such decision shall be based upon a consideration of various
factors with respect to the potential joint venturers, including their
investment portfolios, cash flow objectives, investment objectives with respect
to the investment in question, the effect of the acquisition on the
diversification of their investment portfolios, the estimated income tax
effects of the purchase on the venturers and their policies relating to
leverage in light of their other current and expected property acquisitions.
7.4 OVERLAPPING MANAGEMENT
Directors, officers, employees and agents of the Advisor or any of its
Affiliates may serve as directors, officers, employees, agents, nominees or
signatories of the Company.
SECTION 8. MISCELLANEOUS PROVISIONS
8.1 ENTIRE AGREEMENT
This Agreement constitutes the entire agreement between the parties
with respect to the subject matter thereof. Any modification or amendment of
this Agreement shall be in writing executed by each of the parties.
8.2 ASSIGNMENT
This Agreement may not be assigned by either party except in the event
of an assignment to a successor organization that takes over the property and
carries on the affairs of the assignor, provided that, following any such
assignment by the Advisor, the persons who controlled the operations of the
Advisor immediately prior thereto shall control the operations of the successor
organization, including the performance of its duties under this Agreement; and
provided, further, that this Agreement may be assigned to any one or more
wholly owned subsidiaries of the Company. Such assignment may be made in whole
or in part so that both the Company and such wholly owned subsidiary or
subsidiaries may have the full benefit of this Agreement. Such assignment may
be made and shall be effective upon notice of such assignment by the Company to
the Advisor. Any such assignment of this Agreement shall bind the assignee
hereunder in the same manner as the assignor is bound hereunder.
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<PAGE> 31
Notwithstanding the foregoing, without the Company's consent the Advisor may
assign all or any part of the compensation due it hereunder.
8.3 NO PARTNERSHIP OR JOINT VENTURE
The Company and the Advisor are not, and shall not be deemed to be,
partners or joint venturers with each other.
8.4 SEVERABILITY
If any term or provision of this Agreement or the application thereof
to any person or circumstance shall, to any extent, be invalid or
unenforceable, the remainder of this Agreement, or the application of that term
or provision to persons or circumstances other than those as to which it is
held invalid or unenforceable, shall not be affected thereby, and each term and
provision of this Agreement shall be valid and be enforced to the fullest
extent permitted by law.
8.5 SURVIVAL
The provisions of this Agreement shall survive the termination or
non-renewal of this Agreement.
8.6 POLICY AND FINANCIAL INFORMATION
The Board shall keep the Advisor informed in writing concerning the
investment and financing policies of the Company and shall promptly notify the
Advisor of any intention to make any new investments, to sell or dispose of any
existing investments or to enter into any agreement or understanding with any
third party. The Company shall furnish the Advisor a certified copy of all
financial statements, a signed copy of each report prepared by independent
public accountants, a certified copy of each amendment to the Governing
Documents and the Investment Policies and such other information with regard to
the Company's affairs as the Advisor from time to time reasonably may request.
8.7 NOTICES
Any notices and other communications to be given by any party
hereunder shall be in writing delivered at the address of the respective party
set forth on the signature page hereof, or at such other address as a party
shall have specified to the other party in writing as the address for notices
hereunder.
8.8 HEADINGS
The section headings used herein have been inserted for convenience of
reference only and shall not be considered in interpreting this Agreement.
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<PAGE> 32
8.9 GOVERNING LAW
This Agreement shall be governed by and construed in accordance with
the laws of the State of Washington, without giving effect to the principles of
conflict of laws thereof.
8.10 BOARD OR COMPANY ACTION
Whenever action on the part of the Board is contemplated in this
Agreement, unless otherwise indicated herein, action by a majority of the
Directors, including a majority of the Independent Directors, shall constitute
the action provided for herein. Whenever action on the part of the Company is
contemplated in this Agreement, such action may be taken by a duly authorized
officer of the Company pursuant to the authority granted to such officer under
the Company's Governing Documents or other corporate action.
8.11 INDEPENDENT DIRECTOR APPROVAL
Notwithstanding anything to the contrary in this Agreement, a majority
of the Independent Directors must approve the Company's annual business plan
and operating budget; all property acquisitions, developments, dispositions and
unbudgeted (non-emergency) capital expenditures in excess of Two Hundred Fifty
Thousand Dollars ($250,000) not contemplated by the annual business plan; and
all Company financings, including the issuance of public and private debt or
equity securities. In addition, to the extent that the Governing Documents
require approval of the majority of Independent Directors with respect to any
matter pertaining to this Agreement, such matter shall be submitted for such
approval and shall not be pursued until such approval is received.
8.12 AUTHORITY TO ACT
The Company shall furnish to the Advisor from time to time, upon
request of the Advisor, certified copies of appointments or designations
setting forth the names, titles and authorities of the individuals who are
authorized to act on behalf of the Company with respect to the Company
investments. The Advisor shall furnish to the Company from time to time, upon
request of the Company, certificates setting forth the names, titles and
authorities of the persons authorized to act on its behalf.
8.13 COUNTERPARTS
This Agreement may be executed in any number of counterparts and by
each of the parties hereto on separate counterparts; all such counterparts
shall together constitute but one and the same instrument.
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<PAGE> 33
8.14 ATTORNEYS' FEES
In the event of any action to enforce this Agreement, for
interpretation or construction of this Agreement or on account of any breach of
or default under this Agreement, the prevailing party in such action shall be
entitled to recover, in addition to all other relief from the other party, all
reasonable attorneys' fees incurred by the prevailing party in connection with
such action (including, but not limited to, any appeal thereof).
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<PAGE> 34
IN WITNESS WHEREOF, the Company and the Advisor have executed this
Agreement as of the day and year first above written.
COMPANY:
Address for Notice: SHURGARD STORAGE CENTERS, INC.,
a Delaware corporation
1201 Third Avenue, Suite 2200
Seattle, Washington 98101
By: Harrell Beck
--------------------------------
Harrell Beck, President
ADVISOR:
Address for Notice: SHURGARD INCORPORATED,
a Washington corporation
1201 Third Avenue, Suite 2200
Seattle, Washington 98101
By: Charles K. Barbo
--------------------------------
Charles K. Barbo, President
30
<PAGE> 1
MANAGEMENT SERVICES AGREEMENT
BETWEEN
SHURGARD STORAGE CENTERS, INC.
AND
SHURGARD INCORPORATED
DATED MARCH 1, 1994
<PAGE> 2
CONTENTS
<TABLE>
<S> <C> <C>
1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2. Scope of Employment . . . . . . . . . . . . . . . . . . . . . . . . . 4
3. Management Duty and Authority of the Manager . . . . . . . . . . . . 4
4. Restrictions upon Management Authority of the Manager . . . . . . . . 9
5. Delegation of Duty and Authority . . . . . . . . . . . . . . . . . . 10
6. Company's Cooperation . . . . . . . . . . . . . . . . . . . . . . . . 10
7. Manager's Compensation and Reimbursement . . . . . . . . . . . . . . 10
8. Term of Agreement; Termination . . . . . . . . . . . . . . . . . . . 12
9. Engagement of Manager's Employees. . . . . . . . . . . . . . . . . . 15
10. Use of Trademarks, Service Marks and Related Items . . . . . . . . . 15
11. Manager's Other Business . . . . . . . . . . . . . . . . . . . . . . 16
12. Manager as Independent Contractor . . . . . . . . . . . . . . . . . . 16
13. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
14. Environmental Compliance and Indemnification . . . . . . . . . . . . 17
15. Compliance with Applicable Use Regulations . . . . . . . . . . . . . 19
16. Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
17. Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
18. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
19. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
20. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
21. Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
22. Consents and Waivers . . . . . . . . . . . . . . . . . . . . . . . . 21
23. Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
</TABLE>
-1-
<PAGE> 3
MANAGEMENT SERVICES AGREEMENT
THIS MANAGEMENT SERVICES AGREEMENT (the "Agreement") is made and
entered into as of this 1st day of March, 1994, by and between Shurgard Storage
Centers, Inc., a Delaware corporation, for itself and its wholly owned
subsidiary or subsidiaries (the "Company"), and Shurgard Incorporated, a
Washington corporation (the "Manager").
RECITALS
WHEREAS, the Company is organized under the laws of the State of
Delaware and has filed with the Securities and Exchange Commission a
Registration Statement on Form S-4 (the "Registration Statement") to register
20,500,000 Shares of Class A Common Stock and Class B Common Stock, par value
$0.001 per share (the "Shares"), to be offered in connection with the proposed
exchange of the Shares and cash for all of the assets, subject to the
liabilities, of certain limited partnerships (the "Consolidation"), and the
Company may thereafter sell additional securities or otherwise raise additional
capital;
WHEREAS, the Company intends to qualify as a "real estate investment
trust" as defined in the Internal Revenue Code of 1986, as amended (the
"Code"), and to invest its funds in self-service storage facilities and other
commercial real estate investments as contemplated by, and permitted in, the
Company's Certificate of Incorporation and By-Laws;
WHEREAS, through the Consolidation, the Company may, either directly
or through one or more wholly owned subsidiaries, acquire up to 139
self-service storage facilities and two office and business parks (the
"Consolidation Properties") and may acquire additional real estate assets in
the future (the "Additional Properties")(the Consolidation Properties and the
Additional Properties are referred to herein collectively as the "Properties");
WHEREAS, the Manager has substantial experience in the management of
self-service storage facilities and has provided property management services
to a number of public and private real estate programs sponsored by the Manager
and its Affiliates (as defined below); and
WHEREAS, the Company desires to avail itself of the experience,
sources of information, advice, assistance and certain facilities of or
available to the Manager and to have the Manager undertake the property
management duties and responsibilities hereinafter set forth, on behalf of and
subject to the supervision of the Board of Directors of the Company (the
"Board"), as provided in this Agreement; and
WHEREAS, the Manager is willing to undertake to render such services,
subject to the supervision of the Board, on the terms and conditions
hereinafter set forth.
MANAGEMENT SERVICES AGREEMENT -1-
<PAGE> 4
AGREEMENTS
NOW, THEREFORE, in consideration of the foregoing, the mutual promises
of the parties hereto, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:
1. DEFINITIONS
As used in this Agreement, the following capitalized terms shall have
the meanings set forth below.
"Additional Properties" means any Properties acquired
by the Company after the Consolidation.
"Affiliate" of a person means (a) any other person
directly or indirectly controlling, controlled by or under common
control with such person, (b) any other person owning or controlling
10% or more of the outstanding voting securities of such person, (c)
any officer, director or partner of such person, and (d) any company
for which such person acts as an officer, director or partner.
"Agreement" means this Management Services Agreement,
as in effect from time to time.
"Asbestos-Containing Material" means any material
containing more than one percent (1%) by weight of asbestos, including
all varieties and forms of materials defined as asbestos under any
federal or state statute or regulation relating to the protection of
human health or the environment.
"Board" means the Board of Directors of the Company,
as constituted from time to time.
"Company" means Shurgard Storage Centers, Inc., a
Delaware corporation together with its wholly owned subsidiary or
subsidiaries.
"Consolidation" means the transactions described in
the Company's Registration Statement on Form S-4, filed with the
Securities and Exchange Commission, registering 20,500,000 Shares of
Class A Common Stock and Class B Common Stock, par value $.001 per
share, offered by the Company in connection with the proposed exchange
of Shares and cash for all of the assets, subject to the liabilities,
of certain limited partnerships sponsored by the Manager.
"Environmental Laws" means any and all federal,
state, and local statutes, regulations, and ordinances pertaining to
the protection of human health or the environment that are applicable
to the Property, including, without limitation, the Comprehensive
Environmental Response, Compensation and Recovery Act of
MANAGEMENT SERVICES AGREEMENT -2-
<PAGE> 5
1980, as amended, the Resource Conservation and Recovery Act of 1976,
and the Hazardous Materials Transportation Act; all regulations
pertaining thereto; and all other statutes, laws and ordinances of the
United States and of any state, county or municipality in which the
Properties or any portion thereof are located.
"Gross Revenues" means any and all revenues, however
denominated, arising from, in connection with or otherwise
attributable to the operation of the Properties and the businesses
conducted by the Company in connection therewith, including, without
limitation, fixed and percentage rentals, vending machine or
concessionaire revenues, revenues from lock and box sales, truck
rental revenues, maintenance charges, and administrative and late
fees, if any, paid by the tenants of the Properties in addition to
basic rent, parking fees, if any, records delivery and retrieval
charges, sales of space planning systems and products, storage space
consulting fees, and all money whether or not otherwise described
herein paid for the use of the Properties, or for services provided at
or in relation to the Properties, or the Company's business activities
in connection therewith, determined on an accrual basis (net of any
amounts written off by the Manager as uncollectible). Gross Revenues
shall not include proceeds of insurance (casualty or liability),
condemnation, any proceeds of any sale or financing or any other
transfer, encumbrance or conveyance of any portion of the Properties,
income earned on any accounts maintained by the Company or earned upon
any indebtedness held by the Company or any other dividend or interest
income from investment of Company assets.
"Hazardous Substance" means any and all hazardous,
toxic, infectious, or radioactive substances, wastes, or materials
listed or defined by any Environmental Law and specifically shall
include petroleum oil and its fractions, asbestos, urea formaldehyde
and radon.
"Properties" means all self-service storage
facilities, office and business parks and other commercial real estate
assets, owned by the Company.
"Property Income" means all rent and/or lease
payments, administrative fees, late payment fees and tenant security,
cleaning, damage and other deposits due to the Company from the
Properties, and any other amounts payable with respect to the leasing
thereof.
2. SCOPE OF EMPLOYMENT
Subject to the terms and conditions of this Agreement, for the term of
this Agreement as specified in Section 8, the Company employs the Manager, and
the Manager agrees, to manage each of the Properties, upon the terms and
conditions hereinafter set forth.
MANAGEMENT SERVICES AGREEMENT -3-
<PAGE> 6
3. MANAGEMENT DUTY AND AUTHORITY OF THE MANAGER
The Company grants to the Manager sole and exclusive power and
authority to manage the operation of each of the Properties subject to the
limitations contained in Sections 3 and 4. Without limiting the generality of
the foregoing, the Manager shall have the duty and the authority and power to
undertake, in the name and on behalf of the Company, any of the following
actions and shall exercise such powers and authority at the cost, expense and
risk of the Company except as otherwise specified herein:
(a) Initiate and utilize such advertising, marketing and other
promotional aids as the Manager deems necessary, advisable or appropriate in
managing the operation of the Properties;
(b) Establish leasing policies, guidelines and procedures
satisfactory to the Company and procure, negotiate and execute on behalf of the
Company all leases, rental agreements, amendments, addendums and renewals
thereof pursuant to such policies with respect to part or all of the rentable
space at the Properties;
(c) Collect from tenants of the Properties the Property Income and
deposit all such Property Income in such bank account or accounts maintained by
the Manager on behalf of the Company, in the name of the Manager or the
Company, at such bank or banks as the Manager may from time to time determine.
The Manager shall hold and segregate all tenant deposits according to
applicable law. In addition, the Manager shall not permit Company funds to be
commingled with the funds of any other person, except to the extent that such
funds may be deposited in a master fiduciary account or similar account
pursuant to which separate sub-trust accounts are established for the benefit
of various parties and provided that the Company's funds are protected from
claims by the other depositors and their creditors;
(d) Use its best efforts to terminate tenancies, evict tenants and
recover possession of rented space within the Properties and otherwise enforce
the rights of the Company as considered appropriate or necessary by the Manager
or when requested by the Company; and initiate and prosecute legal actions, in
the name of the Company or the Manager, as permitted by applicable law, to
evict tenants and recover unpaid Property Income and, when expedient, settle,
compromise and/or release such actions or suits or reinstate such tenancies.
If requested by the Company, the Company may designate or approve counsel and
control litigation of any character affecting or arising out of operations of
the Properties, subject to the rights of insurance carriers whose policies
cover part or all of the events giving rise to the litigation;
(e) Pay all expenses incurred in connection with the operation,
management and maintenance of the Properties and in connection with the
performance of any and all duties imposed upon the Manager under the terms of
this Agreement (all such expenses to be the
MANAGEMENT SERVICES AGREEMENT -4-
<PAGE> 7
responsibility of the Company except to the extent that such expenses are not
reimbursable under Section 7(c));
(f) Maintain the Properties in good condition and make such
ordinary repairs, alterations and improvements to the Properties, including the
purchase of and payment for such maintenance and repairs and all supplies and
equipment necessary therefor, as the Manager deems advisable or necessary for
the operation and maintenance of the Properties as self-service storage
facilities or as office and business parks, as the case may be, of a quality
comparable to the other properties managed by the Manager;
(g) Cause the replacement or substitution of equipment,
furnishings and other personal property at the Properties as such are damaged,
destroyed or become obsolete, including the execution of any and all contracts,
agreements and instruments incidental to such replacement and substitution;
(h) Employ and discharge when necessary such employees (including
project and associate managers) the Manager deems advisable or necessary for
the operation, management or maintenance of the Properties and the performance
of the duties imposed upon the Manager pursuant to the terms of this Agreement.
Such employees shall be hired as employees of the Manager or an Affiliate of
the Manager. The Manager shall be responsible for making of all governmental
filings and the payment of payroll and withholding taxes with respect to each
such employee. Such employment shall be at the cost of the Company except to
the extent that such costs are to be borne by the Manager, and are not subject
to reimbursement, as provided in Section 7(c);
(i) Act as the Company's agent in paying all real estate taxes and
other charges, assessments or levies imposed upon or against the Properties of
whatever kind or nature and, in its discretion or at the request of the
Company, defending on behalf of the Company any of such charges and seeking
revision of or appeal from any assessment or charge deemed improper, all such
actions in the name of the Company;
(j) Act as the Company's agent in paying all installments of
principal and interest due on any promissory notes, real estate contracts or
other instruments requiring installment payments payable by the Company (to the
extent that the Company specifically requests the Manager in writing to make
such payments, provides the Manager with sufficient information to determine
the amounts due under any and all such promissory notes, real estate contracts
or other instruments and the obligations in connection therewith, and provides
the Manager with the funds for such payments) and generally comply with the
requirements of the foregoing and the requirements of any mortgage, deed of
trust, real estate contract or other instrument securing payment of any
indebtedness incurred by the Company;
(k) Maintain such insurance as the Company deems advisable or, in
the absence of the Company's instructions, such insurance as is comparable to
the insurance the
MANAGEMENT SERVICES AGREEMENT -5-
<PAGE> 8
Manager carries from time to time on similar properties managed by it for its
own account or for the account of others, to protect the interest of the
Company and the Manager. The Manager shall include the Properties under any
blanket insurance policy carried by the Manager for other similar properties
which it manages, so long as such blanket policy is available at a reasonable
premium cost to the Company, and shall cause the Company to be an additional
insured under such blanket police unless the Company requests that additional
insurance be carried or that the Properties be insured by a different carrier,
in which event the Manager shall cause the Properties to be so insured;
(l) Maintain complete and accurate records of all transactions
relating to the Properties and make such records available for inspection by
the Company or any of its authorized representatives or agents at all
reasonable times;
(m) Use its best efforts to comply with all applicable federal,
state and local governmental laws, rules and regulations with respect to the
operation and maintenance of the Properties and where it deems appropriate, or
at the request of the Company, use its reasonable efforts to challenge, seek an
appeal concerning, protest or seek exemption from any of the foregoing;
(n) Select and contract with all vendors, suppliers, contractors,
subcontractors and other independent contractors which the Manager deems
advisable or necessary to the operation, management and maintenance of the
Properties and the performance of the duties imposed upon the Manager pursuant
to the terms of this Agreement. The terms and conditions of all such contracts
shall be determined by the Manager acting in its capacity as manager of the
Properties;
(o) Contract for gas, electricity, water, telephone and such other
services that the Manager deems advisable or necessary for the operation of the
Properties;
(p) Promptly handle complaints and requests from tenants and
notify the Company of any of the following to the extent that such have a
material impact upon the operation of any of the Properties or the income
therefrom, or which could expose the Company to any material civil or criminal
liability: any complaints made by tenants of the Properties; any notice of
violation of any governmental requirements; any defect in the Properties; any
fire or other damage to the Properties; and, in the case of any serious fire or
other serious damage to the Properties, notify immediately the Company's
casualty insurance carrier so that an insurance adjustor can view the damage
before repairs are started and complete customary loss reports in connection
with fire or other damage to the Properties;
(q) Promptly notify the Company's general liability insurance
carrier and the Company of any personal injury or property damage occurring to
or claimed by any tenant or third party on or with respect to the Properties
and promptly forward to the carrier, with copies to the Company, any summons,
subpoena or other like legal documents served upon
MANAGEMENT SERVICES AGREEMENT -6-
<PAGE> 9
the Manager relating to actual or alleged potential liability of the Company,
the Manager or the Properties for personal injury or property damage;
(r) Notify the Company of any condemnation proceedings, rezoning
or other governmental order, lawsuit or threat thereof involving the Properties
and violations relative to the leasing, use, repair and maintenance of the
Properties under governmental laws, rules, regulations, ordinances or like
provisions to the extent that any of the foregoing have or may have a material
impact upon the value or operations of a Property or the Properties in the
aggregate;
(s) Render monthly reports relating to the management and
operation of the Properties for the preceding calendar month, within thirty
(30) days following the end of the month, which will set forth individual
profit and loss statements for each Property and render a quarterly profit and
loss statement and balance sheet for the Company within forty-five (45) days
following the end of the calendar quarter;
(t) Prepare and submit to the Company an operating budget for the
promotion, operation, repair and maintenance of the Properties for each
calendar year commencing after the year in which the Consolidation is
consummated; the budget for each calendar year will be due in a timely manner
prior to the beginning of each calendar year. Such budget shall be prepared on
an accrual basis and shall include a projection of income and expenses both on
a per Property basis and in the aggregate for all Properties and a projection
of the cash available for remission to the Company during the calendar year.
The Company shall promptly review the budget submitted by the Manager and, in
any event, shall provide the Manager with its comments no later than fifteen
(15) days after receipt of the budget. In the event the Company wishes to make
changes to the budget, such changes shall be reviewed with the Manager and,
when agreed upon, shall be included in the final budget prepared for the
calendar year; provided, however, that to the extent such changes place
restrictions upon the amount that the Manager may expend on behalf of the
Company for the operation, repair and maintenance of the Properties, the
Manager shall not (i) be obligated in any way to expend its own funds for the
operation, repair and maintenance of the Properties and in the performance of
its duties hereunder (except to the extent that such expenses are not
reimbursable under Section 7(c)) and (ii) in any way be liable to the Company
for any loss, damage, claims, costs and expenses incurred by the Company as a
result of such limitations on the amount which may be expended toward the
operation, repair and maintenance of the Properties, provided that the Manager
has notified the Company reasonably in advance of the need for additional
expenditures and the Company has refused to approve such expenditures.
Furthermore, the Company and the Manager hereby acknowledge and agree that the
budget will be prepared for planning purposes and that the failure of the
Properties to perform as budgeted shall not in any way impose any additional
liability upon the Manager except for negligence or willful misconduct of the
Manager in performing its duties hereunder. In the event that a new budget is
not approved by the Company prior to the commencement of the
MANAGEMENT SERVICES AGREEMENT -7-
<PAGE> 10
calendar year to which such budget relates, the Manager shall be entitled for
all purposes to follow the terms of the last approved budget with respect to
expenses in operating the Properties, with such adjustments as the Manager
believes are necessary to preserve the value of the Properties, until a new
budget is approved by the Company;
(u) Keep or cause to be kept proper records with respect to the
management and operation of the Properties and to retain those records for
periods specified by the Company. The Company shall have the right to inspect
such records and audit, at its expense, the reports required by this Section
during business hours throughout the term of this Agreement. At the Company's
request the Manager shall provide the Company with copies of all such books and
records as it may request;
(v) Keep such control over accounting and financial matters as the
Manager deems necessary or advisable to protect the Company's assets from loss
or diminution in value due to error, negligence or willful misconduct on the
part of the Company's employees or the employees of the Manager or its
Affiliates;
(w) Upon the Company's request, transfer to the Company at any
time funds in the bank accounts maintained for the Company considered by the
Company to be in excess of an amount reasonably required by the Manager for
disbursement purposes in connection with the operation of the Properties. To
the extent that the Company requests and requires the transfer of funds from
such bank accounts so that there are not sufficient funds for the operation and
maintenance of the Properties, the Manager shall promptly notify the Company to
that effect in sufficiently reasonable advance time to allow the Company to
advance the needed funds but shall have no obligation to advance or disburse
any funds of its own for the operation and maintenance of the Properties and,
provided that the Company refuses to advance such funds after such reasonable
notice from the Manager, then any losses attendant thereto shall be the sole
responsibility of the Company;
(x) Pass on to the Company the benefits of all discounts and
rebates obtained by the Manager from third parties furnishing labor, goods and
services in connection with the operation and maintenance of the Properties;
and
(y) Take any and all such other steps and do all such other acts
and things as the Manager shall deem necessary or advisable in connection with
the operation, management and maintenance of the Properties and the performance
of its duties under this Agreement.
The Company shall be responsible for payment of all costs and expenses
incurred by the Manager in managing the Properties and providing services under
this Agreement, except to the extent that the Manager is, under Section 7(c),
required to bear such expenses and is not entitled to reimbursement. To permit
the Manager to perform its duties hereunder, the Company shall advance to the
Manager funds necessary to permit it to manage the Properties and to perform
its duties hereunder and, by the execution of this Agreement, authorizes the
Manager to withdraw funds, from time to time and in such
MANAGEMENT SERVICES AGREEMENT -8-
<PAGE> 11
amounts as the Manager deems reasonable, from the accounts maintained for and
on behalf of the Company to cover the costs incurred in performing the
Manager's duties under this Agreement. If, for any reason, sufficient funds
are not available to the Manager to permit the discharge of its duties
hereunder, the Manager shall promptly advise the Company of the lack of
necessary funds. The Manager shall not be obligated to advance any of its own
funds to perform duties hereunder which are to be funded by the Company and
shall have no liability for any liability, loss, damage, cost or expense
incurred by the Company as a result of the Company's failure to make sufficient
funds to the Manager to perform duties hereunder. However, if the Manager
advances funds for the benefit of the Company, such advances shall be
reimbursed as permitted by Section 7(c).
4. RESTRICTIONS UPON MANAGEMENT AUTHORITY OF THE MANAGER
Without the prior written consent of the Company, the Manager shall
not, and shall have no authority hereunder to:
(a) Change the general character or use of the Properties as
presently existing (except as contemplated by the Company at the time of
purchase), if such change would result in a material change in the character or
use of the Company's Properties in the aggregate;
(b) Encumber or permit any lien to encumber any of the Properties
or any portion thereof; provided, however, that nothing contained in this
paragraph shall obligate the Manager to advance any of its own funds to
discharge or remove any lien for labor, goods and services rendered by third
parties to the Company in connection with the operation and maintenance of the
Properties to the extent that such labor, goods and services have been
requested by the Company or are authorized by the Company pursuant to the terms
of this Agreement, and the removal of any such liens shall be an expense of the
Company;
(c) Incur any indebtedness for or on behalf of the Company
(excluding for these purposes any debts and obligations of the Company that may
be incurred as a result of the Manager's performing its duties under this
Agreement);
(d) Confess judgment or settle any claims against the Company in
excess of Two Hundred Fifty Thousand Dollars ($250,000) per judgment or claim,
subject to the rights of insurance carriers whose policies cover claims against
the Company to settle such claims in accordance with the terms of such
policies; and
(e) Contract for services with respect to any of the Properties
with a party which would be regarded as an Interested Party under Section 12 of
the Company's By-Laws, unless such contract has been disclosed and approved in
writing by the Company's Board of Directors as required by the By-Laws.
MANAGEMENT SERVICES AGREEMENT -9-
<PAGE> 12
5. DELEGATION OF DUTY AND AUTHORITY
The Manager may delegate any or all of its powers and authorities
under this Agreement to any person of its selection (including an Affiliate
thereof) as long as the Manager remains responsible for supervising the
performance of the duties and responsibilities so delegated and remains liable
to the Company for the performance of such duties and responsibilities to the
extent that the Manager would be liable if it itself had performed the
delegated duties and responsibilities.
6. COMPANY'S COOPERATION
The Company hereby agrees to cooperate with the Manager in the
performance of its duties and responsibilities under this Agreement and to that
end, upon the request of the Manager, to provide office space at each of the
Properties, give the Manager access to all files, books and records of the
Company relevant to the services to be rendered by the Manager under the terms
of this Agreement, and to execute all documents, instruments and agreements as
the Manager in its sole judgment deems necessary or advisable to enable it to
fulfill its duties under this Agreement.
7. MANAGER'S COMPENSATION AND REIMBURSEMENT
(a) Monthly Property Management Fee. For the Manager's management
of the Properties, the Company shall pay to the Manager a monthly property
management fee ("Monthly Fee") equal to six percent (6%) of such month's Gross
Revenues (as defined below) arising from the operation of self-service storage
facilities and five percent (5%) of such month's Gross Revenues arising from
the operation of office and business parks provided, however, that in no event
shall the amount charged for management services for each Property be less than
One Thousand Dollars ($1,000) per month. To the extent that the Manager
delegates, with the consent of the Company, responsibility for leasing,
re-leasing or other leasing-related services to an independent contractor with
respect to part or all of the Properties, the Company shall pay such
independent contractor separately for such services, and the amount of such
fees shall reduce the amount payable to the Manager hereunder. The Monthly Fee
for each calendar month during the term of this Agreement shall be paid within
ten days after the end of such month and the Manager is hereby authorized,
without any further consent of the Company, to deduct such amount from the
Property Income on or before five (5) days after the end of each month.
(b) Advertising Fee. For the Manager's services related to
advertising the Properties, the Company shall pay the Manager a monthly fee of
Seventy-Five Dollars ($75) for each Property, with such payment to be made
within ten days after the end of each calendar month. The Manager is hereby
authorized to deduct such monthly fees from the Property Income of the Company
without any further consent of the Company on or before five (5) days after the
end of each month. The Company shall, in addition, be responsible for the
payment of the actual cost to the Manager of goods and materials
MANAGEMENT SERVICES AGREEMENT -10-
<PAGE> 13
obtained from entities unaffiliated with the Manager in advertising the
Company's properties. The Manager shall pass through to the Company any
discount it obtains on printing, artwork, materials, electronic media time,
print media space or other supplier's and servicer's charges related to
advertising the Properties.
(c) Reimbursements. Except as otherwise provided in this Section
7(c), the Company shall be responsible for payment of all costs and expenses
incurred by the Manager in rendering services hereunder and such costs and
expenses shall, if possible, be paid directly by the Company. However, to the
extent that costs and expenses are incurred by the Manager or its directors,
officers, employees or agents, such costs and expenses shall be promptly
reimbursed by the Company subject to the limitations discussed below.
The Company shall not pay or reimburse the Manager or its Affiliates
for the following:
(i) for its own overhead, such as rent or depreciation,
utilities and capital improvements;
(ii) for salaries, fringe benefits, travel expenses and
other expenses incurred by or allocated to any "controlling person"
(as defined below) of the Manager or its Affiliates;
(iii) for the salaries, fringe benefits, travel expenses
and other adminsitrative expenses incurred by or allocated to any of
the Manager's personnel used to prepare the monthly property
statements for the Company's Properties and to supervise performance
of the on-site personnel hired to manage the Properties; provided,
however, that nothing contained herein shall in any way be deemed to
limit the Manager's right to reimbursement for costs and expenses
incurred in preparing financial statements for the Company or for
conducting the on-site management services required hereunder;
(iv) for the fees, if any, paid by the Manager to
unaffiliated persons for property management services, and leasing-
related services, to the extent the Manager assigns to such person or
persons management responsibilities hereunder; and
(v) to the extent the Manager provides services
hereunder, for which the Manager is entitled to reimbursement, such
reimbursement shall not exceed the amount that the Company would have
paid for comparable services in the same or comparable geographic
locations to persons having no affliation with the Company and, if and
to the extent that such reimbursements exceed such amounts, the amount
of the excess shall be borne by the Manager and shall not be
reimbursed by the Company.
MANAGEMENT SERVICES AGREEMENT -11-
<PAGE> 14
For purposes of this Section, "controlling person" includes any person
performing functions for the Manager or its Affiliates such as the Chairman or
a member of the Board of Directors, executive management or senior management;
or holding a five percent (5%) or more equity interest in the Manager or its
Affiliates; or having the power to direct or cause the direction of the Manager
or its Affiliates whether through the ownership of voting securities, by
contract or otherwise. The foregoing restrictions shall not restrict the
Company from reimbursing the Manager for legal expenses passed through to the
Company whether or not members of the Manager's in-house legal staff might be
deemed to be "controlling persons" as long as such persons are acting in their
capacity as a legal counsel in providing services for an behalf of the Company.
If and to the extent reimbursements hereunder are for personnel providing
services not only to the Company but also to other parties, such reimbursements
shall be limited to the pro rata cost of such personnel, including an
allocation for the direct costs (as if such personnel were part-time employees
of the Company), all based on the amount of time such personnel spend on the
Company's business or affairs. Such allocations shall be established in
accordance with such procedures as the Manager may reasonably establish.
Neither the Manager nor an Affiliate thereof shall be entitled to
retain any reimbursement for services performed for the Company unless, within
the scope of the annual audit of its financial statements, its independent
certified public accountants verify the allocation of such costs to the
Company. The method of verification shall provide (i) a review of the time
records of individual employees whose services are to be reimbursed in whole or
part by the Company, or a review of such other methods of allocation as may be
reasonably established by the Manager, and (ii) a review of the specific nature
of the work performed by each such employee. The methods of verification shall
be in accordance with generally accepted auditing standards and shall
accordingly include such tests of the accounting records and such other
auditing procedures as the independent certified public accountants consider
appropriate in the circumstances. The additional costs of such verification
shall be itemized by the independent certified public accountants and shall be
reimbursed by the Company in accordance with this Section.
8. TERM OF AGREEMENT; TERMINATION
(a) This Agreement shall continue in force for an initial term of
five (5) years from the date the Consolidation is consummated (the "Initial
Term"). Absent written notice of non-renewal as provided in this Section, this
Agreement shall be automatically renewed for successive three (3)-year terms
("Renewal Terms") upon the expiration of the Initial Term and each Renewal
Term. Notice of non-renewal, if given, shall be given in writing not less than
sixty (60) calendar days before the expiration of the Initial Term of this
Agreement or sixty (60) calendar days before the expiration of any Renewal Term
thereof.
MANAGEMENT SERVICES AGREEMENT -12-
<PAGE> 15
(b) Either party may terminate this Agreement in the event of a
default by the other party.
The following shall constitute a default of this Agreement by the
Manager:
(i) The Manager shall fail to perform any of its
obligations under this Agreement, and such failure has a material
adverse effect on the Company, within thirty (30) days after notice
from the Company of the need for such performance or, if a longer
period is reasonably required for such performance, if the Manager has
not commenced to cure such default within the above-mentioned thirty
(30)-day period and thereafter continuously and diligently prosecuted
the same to completion; or
(ii) (A) The Manager shall make an assignment for the
benefit of its creditors, (B) admit in writing its inability to pay
its debts as they become due, (C) commence in any court, pursuant to
any statute of the United States or of any state, any voluntary
bankruptcy, reorganization, composition, extension, arrangement or
insolvency proceeding, (D) have filed against it in any court pursuant
to any statute of the United States or of any state, any bankruptcy,
reorganization, composition, extension, arrangement or insolvency
proceeding, and such court shall enter an order for relief, after the
institution thereof, or (E) have suffered or permitted a receiver,
trustee, liquidator or similar officer to be appointed to administer
and/or liquidate all or substantially all of its assets, and such
appointment shall not be vacated or set aside within sixty (60) days
after the appointment of such receiver, trustee, liquidator or similar
officer.
The following shall constitute a default of this Agreement by the
Company:
(i) The Company shall fail to perform any of its
obligations under this Agreement, and such failure has a material
adverse effect upon the Manager, within thirty (30) days after notice
from the Manager of the need for such performance, or if a longer
period is reasonably required for such performance, if the Company has
not commenced to cure such default within the above-mentioned thirty
(30)-day period and thereafter continuously and diligently prosecuted
the same to completion;
(ii) The Company shall commit any act of fraud,
intentional misrepresentation, gross negligence or misconduct in
connection with the performance of its duties under this Agreement; or
(iii) (A) The Company shall make an assignment for the
benefit of its creditors, (B) admit in writing its inability to pay
its debts as they become due, (C) commence in any court, pursuant to
any statute of the United States or of any state, any voluntary
bankruptcy, reorganization, composition, extension,
MANAGEMENT SERVICES AGREEMENT -13-
<PAGE> 16
arrangement or insolvency proceeding, (D) have filed against it in any
court pursuant to any statute of the United States or of any state,
any bankruptcy, reorganization, composition, extension, arrangement or
insolvency proceeding, and such court shall enter an order for relief,
after the institution thereof, or (E) have suffered or permitted a
receiver, trustee, liquidator or similar officer to be appointed to
administer and/or liquidate all or substantially all of its assets,
and such appointment shall not be vacated or set aside within sixty
(60) days after the appointment of such receiver, trustee, liquidator
or similar officer.
In the event of a default hereunder, in addition to the right to
terminate this Agreement as set forth in Section 8(b) hereof, the non-
defaulting party should have against the defaulting party all rights at law and
in equity, including specific performance.
(c) In addition, the Company may terminate this Agreement without
cause upon not less than sixty (60) calendar days notice.
(d) At the time that this Agreement expires, the parties shall
cause a final accounting to be made of all transactions theretofore completed.
Any amount then owing to the Manager, whether for reimbursement of expenses or
on account of its fees hereunder (except as otherwise provided in this
Agreement) shall be paid promptly to the Manager.
(e) Upon expiration of this Agreement as provided herein, the
Manager shall surrender to the Company custody and possession of the
Properties, as well as the books and records of the Company or relating to the
operations of the Properties, remove all signs that it may have placed on the
Properties indicating that it is the manager (subject to the terms of Section
10 dealing with signs including the name "Shurgard") and repair any damage
resulting therefrom; and for a period of thirty (30) days after such expiration
make itself available to consult with and advise the Company regarding the
operation and maintenance of the Properties. All personal property (including
but not limited to capital equipment, hardware, trade and nontrade fixtures,
materials and supplies) acquired pursuant to the Agreement and paid for by the
Company (either directly or by reimbursement to the Manager) shall be the
property of the Company and shall remain in the Properties at the expiration or
termination of the Agreement, unless the Company shall request the Manager to
remove said property.
9. ENGAGEMENT OF MANAGER'S EMPLOYEES.
The Manager is in the business of managing properties for affiliated
and unaffiliated property owners. As a services business, one of the Manager's
most valuable resources is its employees who have been extensively trained by
the Manager, have access to the Manager's written manuals, procedures and
systems, and possess confidential information regarding the Manager's business
objectives, procedures, business plan, trade secrets and other non-public
information critical to the Company's success. The Company acknowledges that
the Manager, in entering into this Agreement, is relying upon the
MANAGEMENT SERVICES AGREEMENT -14-
<PAGE> 17
Company's undertaking contained in this Section 9. Accordingly, the Company
covenants that it will not, during the term of this Agreement and for a period
of twelve (12) months after its termination or expiration, seek to hire, employ
or otherwise engage any of the Manager's current employees without the
Manager's prior written consent.
10. USE OF TRADEMARKS, SERVICE MARKS AND RELATED ITEMS
Subject to the terms of this Section 10, the Manager hereby grants to
the Company the non-exclusive license to use the name, trademark and service
mark "Shurgard" and related marks, slogans, caricatures, designs and other
trade or service items in the rental and operation of the Properties. It is
understood and agreed that this name and all such marks, slogans, caricatures,
designs and other trade or service items shall remain and be at all times the
property of the Manager and its Affiliates, and that, except during the term
hereof, the Company shall have no right whatsoever therein. At times during
the term of this Agreement, the Manager shall have the right to inspect and
supervise the use of such name, marks, slogans, caricatures, designs and other
trade or service items to assure the quality of the services being rendered
thereunder. Upon termination of this Agreement, all such use by and for the
benefit of the Company of any such name, mark, slogan, caricature, design or
other trade or service item in connection with the Properties shall, in any
event, be terminated and any sign bearing any of the foregoing shall, at the
Company's expense, be removed from view and no longer used by the Company;
provided, however, that the Company shall have the right to the continued use
of the "Shurgard" name, trademark, service mark and related items in the
operation of any of the Properties which, as of the termination of the
Agreement, were being managed by the Manager, until the next publication date
of the Yellow Pages telephone directory which includes the Properties, at which
time the Company's use of the "Shurgard" name, trademark, service mark and
related items shall cease. It is understood and agreed that the Manager will
use and shall be unrestricted by this Agreement in its use of such name, mark,
slogan, caricature, design or other trade or service item in the management and
operation of other properties both during the term of and after the expiration
or termination of this Agreement. As consideration for the Manager's license
granted to the Company herein, the Company shall pay the Manager One Hundred
Dollars ($100) upon the execution of this Agreement.
11. MANAGER'S OTHER BUSINESS
The Company acknowledges that the Manager is in the business of
managing commercial real estate facilities, both for its own account and for
the account of others. The Company hereby expressly acknowledges and agrees
that the Manager and its Affiliates may continue to engage in such activities,
may manage facilities other than those presently managed by it or them (whether
or not such other facilities may be in direct or indirect competition with the
facilities owned by the Company) and may in the future engage in other business
or businesses which may compete directly or indirectly with the
MANAGEMENT SERVICES AGREEMENT -15-
<PAGE> 18
activities of the Company. The activities described in this Section 11 shall
not in any way be regarded as a breach of any representation, warranty,
covenant or duty of the Manager.
12. MANAGER AS INDEPENDENT CONTRACTOR
In the performance of its duties and obligations under this Agreement,
the Manager shall be an independent contractor with respect to the Company.
Nothing contained herein shall be construed as making the parties hereto
partners or joint venturers and, except as otherwise expressly provided herein,
construed to make the Manager an agent or employee of the Company.
13. INDEMNIFICATION
Neither the Manager, any Affiliate or any director, officer
shareholder, agent employee of the Manager or any Affiliate or person or
entity, if any, controlling the Manager or Affiliate performing services under
this Agreement on behalf of the Company shall be liable, responsible or
accountable in damages or otherwise to the Company or any of its shareholders
for any act or omission by any such person performed in good faith pursuant to
the authority granted to such person by this Agreement, or in accordance with
its provisions, and in a manner reasonably believed by such person to be within
the scope of the authority granted to such person, provided that such act or
omission did not constitute fraud, misconduct, bad faith or negligence. The
Company shall indemnify and hold harmless the Manager, any Affiliate of the
Manager or any director, officer shareholder, agent employee of the Manager or
any Affiliate or person or entity, if any, controlling the Manager or Affiliate
performing services on behalf of the Company hereunder against any liability,
loss, damage, cost or expense incurred by them on behalf of the Company or in
furtherance of the Company's interests without relieving any such person of
liability for fraud, misconduct, bad faith or negligence. With respect to the
satisfaction of any indemnification of the above-mentioned persons, no
shareholder of the Company shall have any personal liability for the payment of
such amounts. All reasonable expenses incurred by the Manager or any
Affiliates or any director, officer shareholder, agent employee of the Manager
or any Affiliate or person or entity, if any, controlling the Manager or
Affiliate performing services under this Agreement in defending any action,
suit or proceeding with respect to matters as to which such person is entitled
to or may be entitled to indemnification shall be paid by the Company in
advance of the final disposition of such action, suit or proceeding. The
person receiving such payment agrees to reimburse the Company for all
reasonable expenses paid by the Company in defending any such action, suit or
proceeding against such person in the event and only to the extent that it
shall ultimately be determined that such person is not entitled to
indemnification by the Company for such expenses under the provisions of this
Agreement or otherwise.
MANAGEMENT SERVICES AGREEMENT -16-
<PAGE> 19
14. ENVIRONMENTAL COMPLIANCE AND INDEMNIFICATION
(a) Representations and Warranties. The Company represents and
warrants as follows:
(i) Hazardous Substances. Except as set forth in Exhibit
A, the Company has no knowledge or reason to know that any Hazardous
Substance (a) is or has been used, treated, stored, disposed of,
released, spilled, generated, manufactured, or otherwise handled on
the Properties, or transported to or from the Properties; (b) has been
spilled, released, intruded, leached or disposed of from the
Properties onto property adjacent to the Properties; or (c) has
otherwise come to be located on or under the Properties.
(ii) Compliance With Environmental Laws. To the best of
its knowledge following its inquiries, the Properties and all
operations conducted on the Properties are and will continue to be in
full compliance with all applicable Environmental Laws. The
Properties shall be operated in full compliance with such laws from
and after the date the Company acquires title thereto.
(iii) No Liens. No liens have been placed on the
Properties under any Environmental Laws and the Company has no
knowledge of any threatened or impending liens under any Environmental
Laws.
(iv) No Notice. The Company has not received any notice
and is not aware of any administrative or judicial investigations,
proceedings, or actions with respect to violations, alleged or proven,
of Environmental Laws by the Company or by any tenants or predecessors
of the Company, or otherwise involving the Properties or the
operations conducted on the Properties.
(v) No Asbestos-Containing Material. Except as set forth
in Exhibit A, to the best of its knowledge following its inquiries, no
Asbestos-Containing Material is present in any of the improvements on
the Properties or is otherwise located on the Properties. The
Properties and all operations conducted on the Properties are in
compliance with all federal and state statutes and regulations
relating to asbestos.
(vi) No Underground Storage Tanks. Except as set forth in
Exhibit A, no underground storage tanks, whether in use or closed, are
located on or under the Properties.
(b) Prohibited Activities. The Company shall not engage in or
permit any tenant or other person to engage in any activity or conduct on the
Properties that would cause, or could reasonably be expected to cause, any of
the representations set forth in Section 14(a) of this Agreement to cease to be
true, correct, and complete.
MANAGEMENT SERVICES AGREEMENT -17-
<PAGE> 20
(c) Notice. The Manager shall immediately notify the Company upon
becoming aware of any of the following, and shall immediately provide the
Company with copies of any notices received with respect to:
(i) Spill, Release, or Disposal: Any spill, release, or
disposal of a Hazardous Substance on, under, or adjacent to the
Properties.
(ii) Notice of Violation: Any notice or communication
from a governmental agency or any other person directed to the
Company, any tenant of the Properties, or any other person relating
to: (i) Hazardous Substances on, under, or adjacent to the
Properties; or (ii) any violation of any Environmental Laws.
(iii) Change in Circumstances: Any fact or change in
circumstances that would or reasonably could be expected to cause any
of the representations and warranties set forth in Section 14(a) of
this Agreement to cease to be true for any time.
(iv) Threat to Value of Security: Any matter relating to
Hazardous Substances or Environmental Laws that would give a
reasonably prudent person reason to be concerned that the value of any
of the Properties may be reduced or threatened.
(d) Corrective Actions. The Company hereby directs the Manager to
immediately cause any Hazardous Substance spilled, released, intruded, vented,
leached or disposed of on or in any of the Properties or any improvements
thereto to be collected, stored, treated and removed from the Properties in
accordance with all Environmental Laws; to immediately repair and restore the
Property; and to pay from Company funds all of the costs thereof.
(e) Indemnification. The Company shall indemnify and hold
harmless the Manager, its directors, officers, employees, agents, successors
and assigns, and their directors, officers, employees and agents from and
against (a) all costs of any repair, cleanup, and detoxification of the
Properties and the preparation and implementation of any closure, remedial or
other plans required by any Environmental Laws or any governmental authority;
(b) all liability, costs, damages, and claims suffered or incurred by the
Manager as a result of any damage to the Properties, damage to any other
property, or any injury or death to any person or persons caused by the
Company's or the Properties' failure to comply with any Environmental Laws; (c)
all liabilities to any governmental authorities, including and without
limitation, the removal of any liens against the Properties, as a result of the
violation of any Environmental Laws; and (d) all actual and consequential
damages incurred by the Manager as a result of the failure of the Company or
the Properties to comply with any Environmental Laws and which are not
otherwise expressly excluded from this Agreement. This indemnification shall
extend to any loss or liability incurred by
MANAGEMENT SERVICES AGREEMENT -18-
<PAGE> 21
the Manager as a result of any violation of any Environmental Laws or the
presence of any Hazardous Substance on or about the Properties.
(f) Survivability. The obligations of Company under this Section
14 shall survive the termination of the Manager or the expiration of this
Agreement.
15. COMPLIANCE WITH APPLICABLE USE REGULATIONS
The Company shall be responsible for making available to the Manager,
from time to time, funds as may be necessary to bring the Properties into
compliance with, and to maintain the necessary level of compliance with respect
to, applicable public access, fire and safety, building code and other federal,
state and local laws, regulations, ordinances, and orders with respect to the
use and occupancy of the Properties, including but not limited to compliance
with the requirements of the Americans with Disabilities Act of 1990, and
rules, regulations and order issued pursuant thereto (collectively, the
"Applicable Use Regulations"). By the execution of this Agreement, the Manager
is hereby authorized to withdraw funds from such account or accounts as may be
maintained for the benefit of the Company to ensure that the Properties are
brought into compliance with the Applicable Use Regulation, and to continue
such compliance throughout the Company's ownership of such Properties, in order
to permit the continued operation of the Properties without the violation of
Applicable Use Regulations and without exposing the Manager to any liability
for noncompliance. The Company shall indemnify and hold harmless the Manager
and its directors, officers, agents and employees from and against any and all
losses, claims, damages or liabilities of any nature whatsoever with respect to
or arising from the Company's failure to make funds available to bring the
Properties into strict compliance with, and to maintain such compliance with
respect to, the Applicable Use Regulations.
16. ASSIGNMENT
Neither this Agreement nor any right or obligation hereunder shall be
assignable by the Company and any attempt to do so shall be void ab initio,
provided, however, that this Agreement may be assigned to any one or more
wholly owned subsidiaries of the Company. Such assignment may be made in whole
or in part so that both the Company and such wholly owned subsidiary or
subsidiaries may have the full benefit of this Agreement. Such assignment may
be made and shall be effective upon notice of such assignment by the Company to
the Manager. Without the prior consent of the Company, the Manager shall have
the right to assign this Agreement to an Affiliate or a wholly or majority
owned subsidiary or to any legal entity which has, by merger, consolidation,
purchase or otherwise, acquired substantially all of the Manager's assets,
stock or other evidence of equity interest and continued the Manager's business
in substantially the same manner as then existing as a manager of self- service
storage facilities and other real estate investments; provided, however, that
no such assignment shall be effective unless the assignee shall expressly
assume the obligations of the Manager hereunder. In addition, the
MANAGEMENT SERVICES AGREEMENT -19-
<PAGE> 22
Manager shall have the right to assign all or a portion of its rights and
obligations hereunder to a third party in the event the Manager deems such
assignment reasonably necessary to preserve the status of the Company as a
"real estate investment trust" under the Internal Revenue Code of 1986, as
amended. Except as provided in this Section 16, the Manager may not assign its
rights hereunder without the prior consent of the Company and any attempt to do
so shall be void ab initio. Nothing in this Section 16 shall prohibit the
Manager from delegating certain of its responsibilities under this Agreement
pursuant to Section 5 hereof.
17. HEADINGS
The headings contained herein are for convenience of reference only
and are not intended to define, limit or describe the scope or intent of any
provision of this Agreement.
18. GOVERNING LAW
The validity of this Agreement, the construction of its terms and the
interpretation of the rights and duties of the parties shall be governed by the
laws of the State of Delaware.
19. NOTICES
Any notice required or permitted herein to be given shall be given in
writing and shall be personally delivered or mailed, first-class postage
prepaid, to the respective addresses of the parties set forth below their
signatures on the signature page hereof, or to such other address as any party
may give to the other in writing. Such notice shall be deemed effective, if
personally delivered, upon receipt by the addressee or, if mailed, upon the
third business day after deposit of such notice into United States first class
mail, or if sent by overnight courier, one day after delivery to such courier.
20. SEVERABILITY
Should any term or provision hereof be deemed invalid, void or
unenforceable either in its entirety or in a particular application, the
remainder of this Agreement shall nonetheless remain in full force and effect
and, if the subject term or provision is deemed to be invalid, void or
unenforceable only with respect to a particular application, such term or
provision shall remain in full force and effect with respect to all other
applications. The parties recognize that broad discretionary authority has
been granted by the Company to the Manager in the management of the Properties
or in rendering the other services required hereunder and it is their intent
that such authority be fully exercisable by the Manager within the limitations
imposed by this Agreement and applicable law. If, however, any court of
competent jurisdiction should render a final judgment that the authority
granted to the Manager herein exceeds the bounds of permissible delegation
under applicable law, the parties agree that this Agreement shall be deemed
amended,
MANAGEMENT SERVICES AGREEMENT -20-
<PAGE> 23
modified and reformed to the extent necessary to reduce the scope of authority
delegated by the Company to the Manager so as to limit such authority to that
permissible under applicable law as evidenced by the written legal opinion of
counsel to the Manager reasonably satisfactory to the Company. The parties
agree that in no event shall any determination that the discretion and
authority granted to the Manager hereunder exceeds permissible bounds result in
this Agreement's being declared or adjudged invalid, void or unenforceable in
its entirety; rather, the parties request that any court examining such issue
employ great latitude in reforming this Agreement so as to make the same, as
reformed, valid and enforceable.
21. SUCCESSORS
This Agreement shall be binding upon and inure to the benefit of the
respective parties hereto and their permitted assigns and successors in
interest.
22. CONSENTS AND WAIVERS
No consent or waiver, express or implied, by either party hereto to or
of any breach or default by the other party in the performance by the other of
its obligations hereunder shall be valid unless in writing, and no such consent
or waiver shall be deemed or construed to be a consent or waiver to or of any
other breach or default in the performance by such other party of the same or
any other obligations of such party hereunder. Failure on the part of either
party to complain of any act or failure to act of the other party or to declare
the other party in default, irrespective of how long such failure continues,
shall not constitute a waiver by such party of its rights hereunder. The
granting of any consent or approval in any one instance by or on behalf of the
Company shall not be construed to waive or limit the need for such consent or
approval in any other subsequent instance.
23. ATTORNEYS' FEES
In the event of any action to enforce this Agreement for
interpretation or construction of the Agreement or on account of any breach of
or default under this Agreement, the prevailing party in such action shall be
entitled to recover, in addition to all other relief from the other party, all
reasonable attorneys' fees incurred by the prevailing party in connection with
such action (including, but not limited to, any appeal thereof).
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
MANAGEMENT SERVICES AGREEMENT -21-
<PAGE> 24
COMPANY:
SHURGARD STORAGE CENTERS, INC.,
a Delaware corporation
By Harrell Beck
--------------------------------
Harrell Beck, President
Address: 1201 Third Avenue -
Suite 2200
Seattle, Washington 98101
MANAGER:
SHURGARD INCORPORATED,
a Washington corporation
By Charles K. Barbo
--------------------------------
Charles K. Barbo, President
Address: 1201 Third Avenue - Suite 2200
Seattle, Washington 98101
MANAGEMENT SERVICES AGREEMENT -22-
<PAGE> 1
Exhibit 21.1
Subsidiaries of the Registrant:
<TABLE>
<S> <C>
(i) SSC Property Holdings, Inc.;
(ii) SSC Acquisitions, Inc.; and
(iii) SSC Benelux, Inc.
</TABLE>
<PAGE> 1
CONSENT OF INDEPENDENT FINANCIAL ADVISORS
We consent to the use in this Registration Statement of Shurgard
Storage Centers, Inc. on Form S-4 of our Fairness Opinion dated December 19,
1994, and to the references to our firm in the Registration Statement.
ALEX. BROWN & SONS INCORPORATED
Seattle, Washington
December 19, 1994
<PAGE> 1
[FRONT OF PROXY CARD]
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SHURGARD STORAGE CENTERS, INC.
------------
PROXY FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD MARCH 2, 1995
------------
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Harrell L. Beck and Kristin H. Stred,
and each of them, as Proxies with full power of substitution and hereby
authorizes them to represent and to vote as designated below all the shares of
Class A Common Stock, par value $.001 per share (the "Class A Common Stock") of
Shurgard Storage Centers, Inc. (the "Shurgard REIT") held of record by the
undersigned on January [20], 1995 at the Special Meeting of Shareholders to be
held on March 2, 1995 or any adjournment or postponement thereof as follows:
To approve the merger of Shurgard Incorporated with and into the
Shurgard REIT (the "Merger") pursuant to an Agreement and Plan of Merger dated
as of December 19, 1994.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE MERGER.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(CONTINUED ON REVERSE SIDE)
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[BACK OF PROXY CARD]
- --------------------------------------------------------------------------------
In their discretion, the Proxies are authorized to vote upon such
other business as may properly be brought before the meeting or any adjournment
or postponement thereof. This Proxy, when properly executed, will be voted in
the manner directed herein by the undersigned. IF NO DIRECTION IS MADE, THIS
PROXY WILL BE VOTED FOR THE PROPOSITION ON THE REVERSE SIDE.
The undersigned acknowledges receipt from the Shurgard REIT prior to
the execution of this Proxy of a Notice of Special Meeting of Shareholders and
a Proxy Statement/Prospectus dated February [ ], 1995.
Please sign below exactly as your name
appears on your stock certificate.
When shares are held jointly, each
person must sign. When signing as
attorney, executor, administrator,
trustee or guardian, please give full
title as such. An authorized person
should sign on behalf of corporations,
partnerships and associations and give
his or her title.
Dated: _________________________, 1995
______________________________________
Signature
______________________________________
Signature if held jointly
YOUR VOTE IS IMPORTANT, PROMPT RETURN OF THIS PROXY CARD WILL
HELP SAVE THE EXPENSE OF ADDITIONAL SOLICITATION EFFORTS.
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