<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MAY 3, 1995)
4,500,000 SHARES
[LOGO]
SHURGARD STORAGE CENTERS, INC.
COMMON STOCK
------------------
Shurgard Storage Centers, Inc. (the "Company" or "Shurgard") is a fully
integrated, self-administered and self-managed real estate investment trust
("REIT") that develops, acquires, owns and manages self storage centers. The
Company is one of the three largest operators of self storage centers in the
United States and through its predecessors has been in the self storage business
since 1972. The Company owns and operates, as of May 15, 1995, directly and
through its wholly owned subsidiaries and joint ventures, 173 operating self
storage properties, containing approximately 11.4 million net rentable square
feet, which are located in 22 major metropolitan areas in 19 states. As a result
of the merger with Shurgard Incorporated (the "Management Company") that was
consummated on March 24, 1995 (the "Merger"), the Company also manages 73 self
storage centers, containing approximately 4.1 million net rentable square feet,
under the Shurgard name, of which 47 are owned by affiliates and 26 are owned by
nonaffiliates. See "Business and Properties."
All the shares of Common Stock offered hereby are being sold by the Company.
Since the Company began operations, the Company has paid regular quarterly
dividends to holders of its outstanding shares of Common Stock. The Common Stock
is listed on the New York Stock Exchange (the "NYSE") under the symbol "SHU." On
June 7, 1995, the last reported sales price of the Common Stock on the NYSE was
$23 3/8 per share. The Common Stock offered hereby is the Company's Class A
Common Stock, par value $.001 per share.
The shares of Common Stock are subject to certain restrictions on ownership
designed to preserve the Company's status as a REIT for federal income tax
purposes. See "Description of Common Stock and Class B Common Stock" in the
accompanying Prospectus.
--------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE S-12 FOR CERTAIN FACTORS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT RELATES.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
Per Share................................... $23.00 $1.265 $21.735
Total(3).................................... $103,500,000 $5,692,500 $97,807,500
<FN>
(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $560,000.
(3) The Company has granted the Underwriters an option to purchase up to an
additional 675,000 shares of Common Stock to cover over-allotments. If all
such shares are purchased, the total Price to Public, Underwriting Discount
and Proceeds to Company will be $119,025,000, $6,546,375 and $112,478,625,
respectively. See "Underwriting."
</TABLE>
--------------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION
TO THE CONTRARY IS UNLAWFUL.
--------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued, delivered to and accepted by the
Underwriters, subject to approval of certain legal matters by counsel for the
Underwriters and certain other conditions. The Underwriters reserve the right to
withdraw, cancel or modify such offer and to reject orders in whole or in part.
It is expected that delivery of the shares of Common Stock will be made in New
York, New York on or about June 13, 1995.
--------------------------
MERRILL LYNCH & CO.
ALEX. BROWN & SONS
INCORPORATED
DEAN WITTER REYNOLDS INC.
PRUDENTIAL SECURITIES INCORPORATED
SMITH BARNEY INC.
------------------
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS JUNE 7, 1995.
<PAGE>
[GRAPHICS]
Map of the continental United States showing Shurgard's corporate headquarters
and regional offices and properties that Shurgard owns and manages.
Does not show properties in Brussels,
Belgium.
--------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SHARES AT
LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
--------------------------
THERE ARE RESTRICTIONS ON THE OFFER AND SALE OF THE SHARES OF COMMON STOCK
OFFERED HEREBY IN THE UNITED KINGDOM. ALL APPLICABLE PROVISIONS OF THE FINANCIAL
SERVICES ACT 1986 AND THE COMPANIES ACT 1985 WITH RESPECT TO ANYTHING DONE BY
ANY PERSON IN RELATION TO THE SHARES OF COMMON STOCK IN, FROM OR OTHERWISE
INVOLVING THE UNITED KINGDOM MUST BE COMPLIED WITH.
S-2
<PAGE>
[GRAPHICS]
Photograph of a woman in a Shurgard uniform with four separate photographs:
three of Shurgard self storage centers located in Chicago, Illinois, Salem,
Oregon and Milwaukie, Oregon, and one of packing and storage supplies.
<PAGE>
[GRAPHICS]
Photograph of a man in a Shurgard uniform with four separate photographs: three
of Shurgard self storage centers in Seattle, Washington, Atlanta, Georgia, and
Renton, Washington and one of Shurgard's security system.
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS OR INCORPORATED HEREIN AND THEREIN BY REFERENCE. UNLESS
OTHERWISE INDICATED, THE INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT
ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED. UNLESS
THE CONTEXT OTHERWISE REQUIRES, ALL REFERENCES IN THIS PROSPECTUS SUPPLEMENT TO
"SHURGARD" OR THE "COMPANY" REFER TO SHURGARD STORAGE CENTERS, INC. AND ITS
SUBSIDIARIES ON A CONSOLIDATED BASIS. THE COMPANY'S SELF STORAGE CENTERS ARE
ALSO REFERRED TO HEREIN AS "STORES."
THE COMPANY
Shurgard Storage Centers, Inc. is a fully integrated, self-administered and
self-managed REIT that develops, acquires, owns and manages self storage
centers. The Company is one of the three largest operators of self storage
centers in the United States and through its predecessors has been in the self
storage business since 1972. Shurgard's strategy is to be the national leader in
storage products and services by offering high-quality, conveniently located and
secure self storage and a high level of customer service. This strategy enables
the Company to position itself as a premium-priced storage provider in its
target markets. The Company seeks to own and operate self storage centers that
are located in major metropolitan areas along retail and high-traffic corridors.
The Company builds, on most newly developed stores, a distinctive "lighthouse"
office to distinguish itself from competitors and to increase customer awareness
of the Shurgard brand.
The Company's growth strategies are designed to maximize shareholder value
by increasing funds from operations through (i) internal growth through
increases in revenue and operating efficiencies at its existing stores and (ii)
external growth through the development of new self storage properties and the
acquisition of additional self storage properties. The Company believes that the
experience of its management team in operating, developing and acquiring self
storage properties and its access to capital markets strongly contribute to its
ability to execute these strategies.
The Company expects to fund future development and acquisitions through a
portion of the net proceeds of this offering, additional indebtedness, future
offerings of equity securities and retained cash flow. Upon application of the
net proceeds from this offering to pay down indebtedness outstanding under the
two revolving credit facilities, the Company expects to have outstanding
borrowings equal to approximately 20% of the Company's total market
capitalization, based on $132.4 million indebtedness outstanding and the
assumptions set forth under "Use of Proceeds."
The Company owns and operates, as of May 15, 1995, directly and through its
wholly owned subsidiaries and joint ventures, 173 operating self storage
properties, containing approximately 11.4 million net rentable square feet,
which are located in 22 major metropolitan areas in 19 states. As a result of
the Merger described below, the Company also manages 73 self storage centers,
containing approximately 4.1 million net rentable square feet, under the
Shurgard name, of which 47 are owned by affiliates and 26 are owned by
nonaffiliates. The Company developed 64 of its owned or managed stores. In
addition, the Company owns two business parks and a commercial building, and
also manages three business parks for two affiliated owners and one unaffiliated
owner. For the quarter ended March 31, 1995, the Company's owned stores had a
weighted average net rentable square foot occupancy rate of 87% and a weighted
average rent per net rentable square foot of $8.60.
The Company employed approximately 600 persons as of April 30, 1995. The
Company is headquartered in Seattle, Washington, with regional offices in
Phoenix, Arizona, Atlanta, Georgia, and Bellevue, Washington.
RECENT DEVELOPMENTS
When the Company began operations on March 1, 1994, the Shurgard portfolio
consisted of 140 properties (including 137 self storage properties). On May 15,
1995, the Company's portfolio consists
S-3
<PAGE>
of 176 owned properties (including 173 self storage properties), 76 managed
properties (including 73 self storage properties), and seven sites acquired to
develop additional stores. Some of the developments contributing to this growth
are outlined below.
MERGER OF THE MANAGEMENT COMPANY. In order to create a fully integrated
company and more closely align the interests of management with the
shareholders, the Management Company merged with Shurgard on March 24, 1995.
Pursuant to the Agreement and Plan of Merger dated December 19, 1994 (the
"Merger Agreement"), the outstanding shares of the Management Company common
stock (the "Management Company Common Stock") were converted into 1,266,705
newly issued shares of Common Stock, subject to certain adjustments. The
Management Company shareholders may receive additional shares of Common Stock
over the next five years as consideration for certain partnership interests held
by the Management Company that were not valued at the time of the Merger.
LISTING OF COMMON STOCK ON THE NYSE. The Common Stock was authorized for
listing on the NYSE under the symbol "SHU" on April 27, 1995, and commenced
trading on the NYSE on May 5, 1995. From March 28, 1994 through May 4, 1995, the
Common Stock traded on the Nasdaq National Market ("Nasdaq") under the symbol
"SHUR."
ACQUISITION OF EVERGREEN PROPERTIES. On May 12, 1995, Shurgard purchased
all of the outstanding partnership interests in Shurgard Evergreen Limited
Partnership (the "Evergreen Partnership") from a wholly owned subsidiary of the
State Investment Board of the State of Washington (the "Evergreen Acquisition").
The Evergreen Partnership was formed in 1990, and had developed and owns seven
storage centers directly. Through a joint venture, it owns an interest in three
additional stores. Three of the stores are located in the Atlanta, Georgia area,
three are located in the Portland, Oregon area, and one each is located near
Philadelphia, Pennsylvania, Phoenix, Arizona, San Antonio, Texas, and Seattle,
Washington. As of April 30, 1995, the stores had 631,000 net rentable square
feet, with a weighted average occupancy rate of 81%, based on net rentable
square feet. The purchase price for the Evergreen Acquisition was $35.5 million.
ACQUISITION OF 20 STORAGE CENTERS. On September 1, 1994, Shurgard purchased
20 self storage centers that were previously operated under the Colonial name
("Colonial"), representing an aggregate of approximately 732,000 net rentable
square feet, for $34 million. The acquisition provides the Company with
significant market penetration in the Raleigh, North Carolina market and expands
its penetration in the Washington, D.C. and Virginia areas. For the quarter
ended March 31, 1995, the Colonial properties had a weighted average occupancy
rate of approximately 89%, based on net rentable square feet, at a weighted
average rent per net rentable square foot of approximately $7.76, and their
average age is approximately eight years.
INVESTMENT IN TENNESSEE JOINT VENTURES. The Company is party to an
agreement with Freeman Management Corporation ("FMC"), a Tennessee-based
property development company, for the joint acquisition and development of self
storage properties in Tennessee and Kentucky. To date, the Company has entered
into three joint ventures with three partnerships affiliated with FMC for the
development of three self storage centers in the Nashville, Tennessee area that
will contain in the aggregate approximately 182,400 net rentable square feet.
The Company's joint venture interest in the three stores, the Hermitage store,
the Medical Center store and the Franklin store, is 50%, 67% and 91.2%,
respectively. The Company has invested $2.2 million and is committed to invest
up to an additional $1.5 million in the three joint ventures. The Hermitage
store and the Medical Center store opened on March 1, 1995 and April 19, 1995,
respectively, and the Franklin store is expected to open in late 1995.
INVESTMENT IN PARTICIPATING MORTGAGES. On December 14, 1994, Shurgard
closed two participating mortgage loans (the "Participating Mortgage Loans"),
totaling $11.3 million, which are secured by four self storage properties
located in the Fairfax, Virginia area, containing approximately 206,700 net
rentable square feet of storage space and approximately 28,300 net rentable
square feet of office/ warehouse space. Shurgard also agreed to advance, under
certain conditions, up to an additional $1.7 million to fund the future
construction of additional improvements at one of the properties and
S-4
<PAGE>
repairs and maintenance on the properties. The Participating Mortgage Loans bear
interest at 8% per annum. In addition, Shurgard is entitled to receive
additional interest equal to 50% of annual distributions from cash flow plus
additional interest upon the sale or refinancing of the properties or upon
maturity of the loan, in each case based on capital appreciation. In addition,
the Company has been granted options to acquire each of the properties at
established purchase prices, which options generally become exercisable on
January 1, 2000 and extend for the balance of the original loan terms. The
Company will continue to manage the properties during the terms of the loans.
INVESTMENT IN BENELUX STORAGE OPERATIONS. For the past two years, Shurgard
has explored expansion opportunities in Europe. Based on its research, the
Company determined that the demographic characteristics and relatively
undeveloped state of the self storage industry make investments in Europe
attractive. The Company decided to make its initial European investment in
Brussels, Belgium, based in part on the mobility of its population. With a
European partner, it formed a Belgian entity ("Benelux SCS"), which will
develop, own and operate self storage properties in the region of Europe
encompassing Belgium, the Netherlands and Luxembourg. The Company has invested
approximately $3.3 million and committed to invest up to an additional $3.2
million in Benelux SCS. The Company currently directs the business affairs of
Benelux SCS through the Company's control of a majority of the seats on Benelux
SCS's Board of Directors. In 1995, Benelux SCS commenced construction on two
stores, which will contain approximately 82,400 net rentable square feet, in the
Brussels metropolitan area.
ADDITIONAL DEVELOPMENTS AND ACQUISITIONS. In addition to the developments
discussed above, the Company has continued in 1995 to acquire selectively
development parcels and self storage centers in its target markets. New
developments are under construction in Atlanta, Georgia and Houston, Dallas and
Plano, Texas, that will contain an aggregate of approximately 318,000 net
rentable square feet of storage space. The Company has also acquired existing
self storage properties in Oak Forest, Illinois, Taylor, Michigan, and Puyallup,
Washington with a total of approximately 173,000 net rentable square feet of
storage space.
BUSINESS STRATEGY
Shurgard implements its strategy of being a national leader in storage
products and services by (i) emphasizing customer service and satisfaction, (ii)
maintaining a portfolio of convenient and secure stores, (iii) optimizing
revenue through efficient rent pricing and collection policies, (iv) pursuing
ongoing market research and Company marketing programs, and (v) integrating its
property management systems and procedures, partly through the installation of
sophisticated management information systems. Shurgard believes the key to the
success of its business strategy is the quality of its employees' interaction
with customers. Accordingly, the Company focuses on employee training programs
that emphasize a team-oriented approach to customer service.
INTERNAL GROWTH STRATEGY
Shurgard's internal growth strategy is to increase cash flow by achieving
the highest rental rate structure consistent with strong occupancy rates,
containing costs, and undertaking expansion of its existing stores. By
implementing these strategies, same store revenue for the 140 properties
originally owned by the Company increased an average of 7.7% per year from $57.4
million to $77.1 million and net operating income ("NOI," which the Company
defines as rental revenue less operating expense and real estate taxes)
increased an average of 8.2% per year from $34.5 million to $47.3 million for
the four years ended December 31, 1994. This growth in revenue was primarily
achieved through weighted average occupancy per net rentable square foot
increases from 79% to 89% and weighted average rent per net rentable square foot
increases from $7.16 to $8.25 for the Company's self storage properties for the
years ended December 31, 1990 and December 31, 1994, respectively. The growth in
NOI was the result of the increase in revenue and maintaining operating margins
for the years ended
S-5
<PAGE>
December 31, 1990 and December 31, 1994. See "Risk Factors -- General Real
Estate Investment Risks and Self Storage Industry Risks -- Limited Potential for
Occupancy Gains" and "-- Competition."
EXTERNAL GROWTH STRATEGY
The Company's external growth strategy is to develop new, high-quality self
storage properties and to selectively acquire additional self storage properties
that meet or can be upgraded to the Company's standards. In general, the Company
plans to develop or acquire new properties (i) primarily in its existing markets
and (ii) in new markets that create economies of scale with its current network
of stores. The Company favors development or acquisition of self storage
properties in major metropolitan markets, located near retail or high-traffic
corridors, usually with significant road frontage to increase visibility. The
Company seeks to own at least 15 stores in each of its target markets in order
to realize operating and marketing efficiencies and increase brand awareness.
The Company believes that the experience of its management team in developing
and acquiring self storage properties strengthens its ability to pursue its
external growth strategy. The Company has up to $100 million available pursuant
to two revolving credit facilities. Upon completion of this offering and
application of the net proceeds therefrom, the Company will have up to
approximately $100 million available pursuant to these two revolving credit
facilities. See "Use of Proceeds."
THE PROPERTIES
The Company owns and operates, as of May 15, 1995, directly and through its
wholly owned subsidiaries and joint ventures, 176 properties (including 173 self
storage properties) located in 22 major metropolitan areas in 19 states. The
Company's self storage properties are designed to offer accessible storage space
for personal and business uses. Individuals typically rent individual units in
self storage properties for storage of personal belongings such as furniture,
appliances, motor vehicles, boats and other household and recreational goods.
Businesses typically rent space for storage of business property such as
equipment, seasonal goods, records and fixtures. The Company believes that it is
desirable to have commercial customers because they tend to rent larger units,
stay for longer terms, are more reliable payors and are less sensitive to price
increases. Accordingly, the Company has marketing programs that target
commercial users. The Company estimates that commercial users account for
approximately 35% to 40% of its total occupancy, which is substantially higher
than the industry average of 23%.
The Company's self storage properties are divided into a number of
self-enclosed rental units that generally range in size from 25 to 360 square
feet. Many properties have uncovered storage outside the buildings for parking
motor vehicles, boats, campers and other similar items suitable for outside
storage. Approximately 20% of the properties owned by the Company include
climate-controlled storage units for which the Company usually charges rents at
substantial premiums.
Customers of self storage properties are generally responsible for
delivering and retrieving their goods. Generally, customers can access leased
space directly by automobile or truck, but some properties, in particular the
multistory buildings, have separate loading docks and elevators available for
delivery and retrieval of stored goods. Customers generally have access to their
unit without additional charge during normal business hours and control access
to such space through the use of padlocks. The Company offers truck rentals at a
majority of its properties for added convenience to its customers and to
differentiate itself from most of its competitors. The Company believes it is
the largest leasing agent of Ryder trucks in the United States, based on the
number of truck rental locations. In addition to truck rentals, the Company
sells locks, boxes and packing and storage materials at its stores.
S-6
<PAGE>
The leasing, maintenance and operation of the Company's stores are the
responsibility of store managers. The property'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, video and intercom
surveillance devices, property fencing and lighting.
Although the Company's stores range considerably in size, most properties
consist of one or more single-story buildings that are located on a site of 1.5
to 5 acres. The smallest store has approximately 25,000 net rentable square
feet, while the largest store has approximately 300,000 net rentable square
feet.
The following table sets forth same store information regarding weighted
average occupancy per net rentable square foot and weighted average rent per net
rentable square foot for the 137 self storage properties originally owned by the
Company for the years ended December 31, 1993 and December 31, 1994 and for the
quarter ended March 31, 1995.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE OCCUPANCY WEIGHTED AVERAGE RENT
---------------------------------
NUMBER OF ----------------------------------------- MARCH 31,
STATE STORES 1993 1994 MARCH 31, 1995 1993 1994 1995
- --------------- ------------- ----- ----- --------------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Arizona 7 97% 91% 82% $ 6.26 $ 7.50 $ 8.62
California 17 88 86 84 8.85 9.28 9.74
Colorado 5 96 91 88 6.30 7.01 7.20
Florida 4 83 85 82 7.67 7.70 8.08
Illinois 9 91 95 92 7.47 7.64 8.07
Michigan 13 87 91 89 6.08 6.66 7.17
New York 5 80 87 90 14.34 14.63 15.36
Oregon 6 89 93 93 6.82 7.22 7.45
Texas 24 79 87 83 7.41 7.63 8.03
Virginia 10 90 89 86 9.40 9.94 10.17
Washington 24 88 88 87 7.58 7.79 7.98
Other 13 89 91 85 7.95 8.48 8.88
</TABLE>
The following table sets forth same store information regarding aggregate
weighted average occupancy per net rentable square foot and weighted average
rent per net rentable square foot for the 137 self storage properties originally
owned by the Company for the years ended December 31, 1990 through December 31,
1994 and for the quarter ended March 31, 1995.
<TABLE>
<CAPTION>
MARCH 31,
1990(1) 1991(1) 1992(1) 1993(2) 1994(2) 1995(2)
------- ------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Weighted average occupancy.................................. 79% 82% 86% 87% 89% 86%
Weighted average rent....................................... $7.16 $7.35 $7.68 $7.84 $8.25 $8.66
<FN>
- ------------------------
(1) Calculated as a simple average for the 17 partnerships that comprised the
Predecessor (as defined in "-- Summary Financial Information").
(2) Calculated as the weighted average of the original 137 self storage
properties owned by the Company.
</TABLE>
LEASING OF PROPERTIES. Storage units are usually rented on a month-to-month
basis. The average rental stay for a tenant is approximately 1.5 years. This
average is comprised of the rental periods of business tenants, who tend to stay
in rented units for longer periods (approximately 2 to 3 years), and those of
residential customers, who tend to stay in rented units for shorter periods
(approximately six months to a year). Rental income from leased space
constitutes the primary revenue from such properties, but additional revenue is
received from incidental services rendered at the properties, such as lock and
box sales and truck rentals. Rental rates vary substantially depending on the
size of the storage space and the property location and quality of the property.
S-7
<PAGE>
THE OFFERING
All the shares of Common Stock offered hereby are being sold by the Company.
None of the Company's shareholders is selling any shares of Common Stock in this
offering.
<TABLE>
<S> <C>
Shares of Common Stock Offered............... 4,500,000 shares
Shares of Common Stock and Class B Common
Stock Outstanding After This Offering....... 22,750,592 shares
Use of Proceeds.............................. To pay down amounts drawn under the Company's
revolving credit facilities, to finance
acquisitions, to fund development of
properties and for general corporate
purposes. See "Use of Proceeds."
NYSE Symbol.................................. "SHU"
</TABLE>
DISTRIBUTION POLICY
Distributions are paid to the Company's shareholders from time to time when
declared by the Company's Board of Directors, in accordance with certain
policies. The Company intends to distribute to its shareholders each year at
least 95% of its REIT Taxable Income (as defined in "Distribution Policy") so
that the Company will be eligible for tax treatment as a REIT. See "Distribution
Policy."
The Company's Board of Directors has declared a distribution of $0.46 per
share of Common Stock, payable July 31, 1995 to shareholders of record on June
2, 1995, for the quarter ended June 30, 1995. PURCHASERS OF THE SHARES OF COMMON
STOCK BEING OFFERED HEREBY WILL NOT RECEIVE THIS DISTRIBUTION IN RESPECT OF THE
SHARES OF COMMON STOCK BEING OFFERED HEREBY. The Company paid a distribution of
$0.46 per share of Common Stock for the quarter ended March 31, 1995. Under the
Company's current definition of funds from operations, this distribution
represents approximately 88% of the Company's funds from operations for this
period. See footnote 4 to "-- Summary Financial Information." The Company paid a
distribution of $0.44 per share of Common Stock for the quarter ended December
31, 1994. There can be no assurance that the current level of distributions will
be maintained by the Company.
In connection with the Merger, the Company acquired the accumulated earnings
and profits of the Management Company (the "Acquired Earnings"). The Company is
required to make distributions sufficient to eliminate the Acquired Earnings
prior to December 31, 1995. The amount of distributions will depend on the
amount of current and undistributed historical accumulated earnings and profits
of the Company and the amount of the Acquired Earnings. The Company is exploring
its alternatives with respect to making distributions sufficient to eliminate
the Acquired Earnings. See "Certain Federal Income Tax Considerations --
Overview of REIT Qualification Rules -- Distribution of Acquired Earnings" in
the Prospectus.
S-8
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following table sets forth summary financial information for the Company
and the 17 publicly held real estate limited partnerships (collectively, the
"Predecessor") that were acquired by the Company on March 1, 1994 (the
"Consolidation") as of and for the year ended December 31, 1992 on a historical
basis. The summary adjusted financial information for the Predecessor as of and
for the year ended December 31, 1993 has been adjusted for certain nonrecurring
transactions related to the Consolidation. The summary adjusted combined
financial information for the Company as of and for the year ended December 31,
1994 includes the Predecessor's operations from January 1, 1994 to March 1,
1994, adjusted for certain nonrecurring transactions related to the
Consolidation, combined with the Company's operations from March 1, 1994 to
December 31, 1994.
Also set forth below is summary pro forma financial information for the
Company as of and for the three months ended March 31, 1995, and the summary pro
forma adjusted combined financial information for the Company for the three
months ended March 31, 1994 and for the year ended December 31, 1994. The
summary pro forma financial information has been prepared as if the following
transactions had been consummated on January 1, 1994: (i) the Consolidation,
(ii) the Nomura Mortgage (as defined in "Business and Properties -- Capital
Strategy"), (iii) the acquisition of the Colonial properties, (iv) the
Participating Mortgage Loans, (v) the Merger, (vi) the Evergreen Acquisition,
and (vii) this offering and the application of the net proceeds therefrom. The
summary pro forma adjusted combined financial information for the three months
ended March 31, 1994 and for the year ended December 31, 1994 also reflects the
adjustments described above with respect to the summary adjusted combined
financial information for the Company as of and for the year ended December 31,
1994. See "Business and Properties -- Recent Developments" and "Use of
Proceeds." For further discussion of the impact of these transactions, see
"Discussion of Financial and Operating Results."
The summary pro forma financial information and summary pro forma adjusted
combined financial information are not necessarily indicative of what the
Company's actual results of operations or financial position would have been for
the periods or as of the dates indicated, nor does it purport to represent the
results of operations or financial position for future periods. The summary
financial information should be read in conjunction with the historical
financial statements and notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" of the Company and the
Predecessor included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1994 (the "1994 Form 10-K") and the Company's Quarterly
Report on Form 10-Q for the three months ended March 31, 1995 (the "1995 Form
10-Q"). The summary financial information should also be read in conjunction
with "Discussion of Financial and Operating Results."
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<TABLE>
<CAPTION>
PRO PRO FORMA ADJUSTED ADJUSTED HISTORICAL
FORMA ADJUSTED COMBINED COMBINED PREDECESSOR PREDECESSOR
-------- ---------------------- --------- ----------- -----------
THREE MONTHS ENDED
MARCH 31, YEAR ENDED YEAR ENDED DECEMBER 31,
------------------ DECEMBER 31, -------------------------------------
1995 1994 (1) 1994 (1) 1994 (1) 1993 (2) 1992
-------- -------- ------------ --------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION AND NUMBER OF PROPERTIES)
<S> <C> <C> <C> <C> <C> <C>
OPERATING INFORMATION:
Rental revenue........................ $22,576 $21,145 $88,865 $79,045 $72,217 $66,994
Property management revenue........... 907 753 3,624
Revenue from other real estate
investments.......................... 340 287 1,257 244 129 111
-------- -------- ------------ --------- ----------- -----------
Total revenue....................... 23,823 22,185 93,746 79,289 72,346 67,105
-------- -------- ------------ --------- ----------- -----------
Operating expense..................... 6,479 6,059 24,970 23,539 21,574 19,731
Depreciation and amortization......... 4,380 4,234 16,985 13,763 13,923 13,557
Real estate taxes..................... 1,921 1,935 7,636 7,010 7,066 7,067
General, administrative and other..... 1,454 1,301 5,562 3,734 2,390 2,359
-------- -------- ------------ --------- ----------- -----------
Total expenses...................... 14,234 13,529 55,153 48,046 44,953 42,714
-------- -------- ------------ --------- ----------- -----------
Income from operations................ 9,589 8,656 38,593 31,243 27,393 24,391
-------- -------- ------------ --------- ----------- -----------
Interest and other income, net........ 500 491 1,993 933 590 11
Interest expense...................... (2,763) (2,752) (11,006) (9,592) (2,288) (2,347)
Minority interest in joint venture.... (89) (73) (321)
-------- -------- ------------ --------- ----------- -----------
Net income before extraordinary item.. 7,237 6,322 29,259 22,584 25,695 22,055
Extraordinary item -- loss on
retirement of debt................... (1,180)
-------- -------- ------------ --------- ----------- -----------
Net income............................ $7,237 $6,322 $29,259 $21,404 $25,695 $22,055
-------- -------- ------------ --------- ----------- -----------
-------- -------- ------------ --------- ----------- -----------
Net income per share.................. $ 0.32 $0.28 $1.29
-------- -------- ------------
-------- -------- ------------
Weighted average number of shares
outstanding (3)...................... 22,751 22,751 22,751
OTHER INFORMATION:
Funds from operations (4)............. $11,365 $10,285 $45,166 $35,709 $39,246 $35,876
-------- -------- ------------ --------- ----------- -----------
-------- -------- ------------ --------- ----------- -----------
Number of properties (end of period):
Owned properties.................... 174 172 172 160 140 140
Managed (5)......................... 77 78 78
-------- -------- ------------ --------- ----------- -----------
Total............................. 251 250 250 160 140 140
-------- -------- ------------ --------- ----------- -----------
-------- -------- ------------ --------- ----------- -----------
Net rentable square feet (end of
period):
Owned............................... 11,500 11,400 11,400 10,700 10,000 10,000
Managed (5)......................... 4,300 4,300 4,300
-------- -------- ------------ --------- ----------- -----------
Total............................. 15,800 15,700 15,700 10,700 10,000 10,000
-------- -------- ------------ --------- ----------- -----------
-------- -------- ------------ --------- ----------- -----------
BALANCE SHEET INFORMATION:
Storage centers, before accumulated
depreciation......................... $513,545 $462,780 $469,398 $463,194
Total assets.......................... 587,258 494,590 396,767 400,182
Notes payable......................... 132,392 125,137 21,826 22,795
Total liabilities..................... 154,217 177,745 35,194 32,388
Shareholders' equity.................. 433,041 316,845 361,573 367,794
<FN>
- ------------------------------
(1) Adjusted combined operating information for the year ended December 31, 1994 combines the Predecessor's
historical operations from January 1, 1994 to March 1, 1994 and the Company's historical operations from March
1, 1994 to December 31, 1994, adjusted to eliminate certain nonrecurring items related to the Consolidation.
The following table reconciles net income for the Company and the Predecessor as shown on the historical
audited financial statements included in the 1994 Form 10-K to the 1994 historical combined net income shown
above (in thousands):
Predecessor net income (January 1, 1994 to March 1, 1994) per 1994 Form 10-K....... $34,286
Company net income (March 1, 1994 to December 31, 1994) per 1994 Form 10-K......... 17,821
Eliminations:
Gain on Consolidation............................................................ (48,223)
Incentive management fees........................................................ 5,340
Litigation, hostile takeover defense and consolidation expenses.................. 12,180
--------
1994 combined net income........................................................... $21,404
--------
--------
In addition to the pro forma adjustments described in "Discussion of
Financial and Operating Results -- Pro Forma Adjusted Combined Year Ended
December 31, 1994 -- Impact of Recent Transactions," the pro forma adjusted
combined operating information as of and for the three months ended March
31, 1994 and for the year ended December 31, 1994 has been adjusted to
eliminate the nonrecurring items related to the Consolidation, as discussed
above.
</TABLE>
S-10
<PAGE>
<TABLE>
<S> <C>
(2) The Predecessor's historical net income as reported in the 1994 Form 10-K
for the year ended December 31, 1993 has been adjusted to eliminate
litigation, hostile takeover defense and consolidation expenses totaling
$7,411,000, as such are nonrecurring items related to the Consolidation.
(3) Pro forma weighted average number of shares outstanding of 22,750,592 is
based on the assumption that the Company issued and sold 4,500,000 shares
on January 1, 1994 in connection with this offering, and that such shares
and the 1,266,705 new shares issued in connection with the Merger were
outstanding for the entire period. Pro forma weighted average number of
shares outstanding includes both Common Stock and Class B Common Stock (as
defined in "Security Ownership of Certain Beneficial Owners and
Management"). Per share information is not given for periods prior to the
Consolidation as the Predecessor entities were formed as limited
partnerships and, as such, the capital structure consisted of units of
partnership interest.
(4) Funds from operations ("FFO") is used by many financial analysts in
evaluating REITs. The Company has historically defined FFO as net income
before extraordinary items (calculated in accordance with generally
accepted accounting principles ("GAAP")), plus depreciation and
amortization, plus or minus certain nonrecurring revenue and expenses. The
Company has changed its definition of FFO in accordance with the
recommendations of NAREIT (the REIT industry assocation) to exclude
amortization of financing costs. Accordingly, the Company now calculates
FFO as net income before extraordinary items (calculated in accordance with
GAAP), plus depreciation and amortization relating to real estate
activities, plus or minus certain nonrecurring revenue and expenses. The
following table reconciles net income to FFO for the period indicated (in
thousands):
PRO PRO FORMA ADJUSTED ADJUSTED ADJUSTED HISTORICAL
FORMA COMBINED COMBINED PREDECESSOR PREDECESSOR
-------- ---------------------- ---------- ----------- -----------
THREE MONTHS ENDED
MARCH 31, YEAR ENDED YEAR ENDED DECEMBER 31,
------------------ DECEMBER 31, -------------------------------------
1995 1994 1994 1994 1993 1992
-------- -------- ------------ ---------- ----------- -----------
Net income, as presented above..... $7,237 $6,322 $29,259 $21,404 $25,695 $22,055
Depreciation and amortization
related to real estate
activities........................ 4,128 3,963 15,907 13,125 13,868 13,515
Other.............................. 1,180 (317) 306
-------- -------- ------------ ---------- ----------- -----------
FFO, as presented above.......... $11,365 $10,285 $45,166 $35,709 $39,246 $35,876
-------- -------- ------------ ---------- ----------- -----------
-------- -------- ------------ ---------- ----------- -----------
The effect on pro forma FFO excluding amortization of financing costs, as
recommended by NAREIT, for the three months ended March 31, 1995 and the effect
on pro forma adjusted combined FFO for the three months ended March 31, 1994 and
for the year ended December 31, 1994 was $280,000, $280,000 and $1.12 million,
respectively. The effect of this change on adjusted combined FFO for the year
ended December 31, 1994, adjusted FFO for the year ended December 31, 1993 and
historical FFO for the year ended December 31, 1992, was $638,000, $55,000 and
$42,000, respectively.
FFO should not be considered as an alternative to net income (determined in
accordance with GAAP), as an indication of the Company's financial performance
or cash from operating activities (determined in accordance with GAAP) or as a
measure of liquidity, nor is it necessarily indicative of sufficient cash flow
to fund all of the Company's needs.
(5) Before the Merger, the Company did not manage any properties. Properties
reflected as managed by the Company in the pro forma columns were previously
managed by the Management Company.
</TABLE>
S-11
<PAGE>
RISK FACTORS
In evaluating the Common Stock, investors should consider the following
factors, in addition to other matters set forth or incorporated in this
Prospectus Supplement.
GENERAL REAL ESTATE INVESTMENT RISKS AND SELF STORAGE INDUSTRY RISKS
GENERAL RISKS RELATING TO REAL ESTATE OWNERSHIP AND OPERATION OF SELF
STORAGE CENTERS. An investment in the Company is subject to the risks incident
to the ownership of real estate-related assets and the operation of self storage
centers. These risks include the fact that real estate investments are generally
illiquid, which may impact the Company's ability to vary its portfolio in
response to changes in economic and other conditions, as well as the risks
normally associated with changes in general national economic or local market
conditions, competition for tenants, changes in market rental rates and the
impact of environmental protection laws and changes in tax, real estate and
zoning laws.
RISKS OF REAL ESTATE DEVELOPMENT. The Company 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 risks in addition to those involved in the ownership and
operation of established properties, including the risks that construction may
not be completed on schedule, resulting in increased construction and other
costs, and that properties may not be leased on profitable terms or in
accordance with scheduled lease-up plans. In addition, to develop properties,
the Company must engage appropriate contractors or subcontractors or both to
construct the properties, and problems may arise in connection with such
engagements, thereby increasing the cost of the construction and resulting in
delays in completion. If any of the above were to occur to a material extent,
the Company's ability to make expected distributions to shareholders could be
adversely affected.
INVESTMENTS IN OTHER COMMERCIAL REAL ESTATE. Although the Company invests
primarily in self storage properties, it may also invest in other commercial
real estate if such investments are specifically approved by the Company's Board
of Directors. The Company has no present plans to make any such investments. The
authority of the Company's Board of Directors to make such investments permits
the Company flexibility in selecting appropriate investments, and in adjusting
to changes in the marketplace, without requiring amendments to the Company's
Amended By-Laws (the "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 Company 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 Company's funds from operations and its
ability to make expected distributions to shareholders.
INDIRECT INVESTMENTS. The Company 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 Company. Under the By-Laws, a number of
conditions must be satisfied before such investments are permitted, including,
among others, the requirement that the joint investment not jeopardize the
Company's eligibility to be taxed as a REIT or result in the Company's becoming
an investment company under the Investment Company Act of 1940, as amended. If
the Company makes such investments, these investments will expose the Company to
certain risks not present had the Company invested directly in the real estate.
These risks include, among others, the risk that the Company may not have
control over the legal entity that has title to the real estate, the possibility
that the Company may invest in an enterprise that has liabilities that are not
disclosed at the time of the investment, and the possibility that the Company's
investments would be illiquid and not readily accepted as collateral by the
Company's lenders. Each of these risks might reduce the Company's cash flow, or
impair its ability to borrow funds, which ultimately could adversely affect the
Company's ability to meet debt service obligations and make expected
distributions to shareholders.
S-12
<PAGE>
LIMITED ASSET DIVERSIFICATION. The Company intends to limit its investments
primarily to self storage properties. The success of an investment in the
Company will depend in large measure on the profitability of such businesses and
real estate investments. The Company 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.
DEBT FINANCING OBLIGATIONS. The Company is authorized to incur Indebtedness
up to a maximum of the lesser of 50% of its Total Assets and 300% of its
Adjusted Net Worth (as such terms are defined in "Policies Regarding Investment
and Certain Other Activities"). Such limitations, which are contained in the
By-Laws, may not be amended without shareholder approval, although the Board of
Directors has proposed to the Company's shareholders that amendments to these
By-Law provisions be permitted by a majority of the Company's Board without a
shareholder vote. See "Policies Regarding Investment and Certain Other
Activities -- Amendments to the By-Laws." As of March 31, 1995, the Company's
Indebtedness (as such term is defined in "Policies Regarding Investment and
Certain Other Activities") was approximately 33% of its Total Assets and
approximately 52% of its Adjusted Net Worth. Upon consummation of this offering
and application of the net proceeds therefrom, the Company expects to have
outstanding secured indebtedness of approximately $132.4 million. The Company is
subject to the risks normally associated with debt financing, including the risk
that its cash flow from operations will be insufficient to meet required
payments of principal and interest, 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, or at all, and in that event
the risk that secured lenders may foreclose on their collateral. Furthermore, if
prevailing interest rates or other factors at the time of refinancing (such as
the reluctance of lenders to make commercial real estate loans) result in higher
interest rates upon refinancing, the interest expense relating to such
refinanced indebtedness would increase. If any of the foregoing risks should
occur, it could adversely affect the Company's cash flow and the amount of
distributions it can make to its shareholders. See "Policies Regarding
Investment and Certain Other Activities -- Financing Policies."
COMPETITION. Competition exists in every market in which the Company's
stores are located. The Company competes with, among others, national, regional
and numerous local self storage operators and developers. Such competition may
adversely affect the occupancy levels and the rental revenues of the Company's
stores, which could adversely affect the Company's funds from operations and its
ability to meet debt service obligations and make expected distributions to
shareholders. The Company believes that the primary competition for potential
customers of any of the Company's self storage stores comes from other self
storage properties within a three-to-five-mile radius of that store. The Company
does not seek to be the lowest-price self storage provider. Some of the
Company's competitors may have more resources than the Company. Entry into the
self storage business through acquisition of existing properties is relatively
easy for persons or institutions with the required initial capital. Competition
may be accelerated by any increase in availability of funds for investment in
real estate. Decreases in interest rates tend to increase the availability of
funds and therefore can increase the growth of competition. Due to recent
increases in plans for development of self storage properties, the Company
anticipates that increased available storage space may reduce occupancy levels
per storage property within the industry in 1996 or 1997 and further intensify
competition among storage providers for available tenants. The extent to which
the Company is affected by competition will depend in significant part on local
market conditions.
LIMITED POTENTIAL FOR OCCUPANCY GAINS. Although relatively low increases in
storage supply and continued increases in industry demand have driven
substantial occupancy gains over the last several years, the Company believes
that significant future occupancy gains will be difficult to obtain. The
Company's management anticipates that future increases in revenue from self
storage centers currently owned by the Company will be primarily the result of
rental rate increases. To the extent that the existing properties continue to
operate profitably, this will likely stimulate further development and result in
greater competition between the newly developed and existing properties.
S-13
<PAGE>
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 may
impose liability without regard to whether the owner or operator knew of, or
caused, the release of such hazardous substances. Although the Company has
received a Phase I environmental assessment report for each of the properties
that it owns, it has not received such a report for many of the properties that
it manages, where the Company might be considered the operator. The purpose of
each such report was to identify, as of the date of that report, potential
sources of contamination of the property and to assess the status of
environmental regulatory compliance. In addition, for some of the properties
that it owns, the Company has received Phase II environmental assessment reports
consisting of further soil testing, subsurface-water sampling, asbestos
inspections or other investigations deemed appropriate by an independent
environmental consultant. The presence of hazardous substances on a property may
adversely affect the owner's ability to sell such property or to borrow using
such property as collateral, and it may cause the owner or manager of the
property to incur substantial remediation costs. In addition to claims for
cleanup costs, the presence of hazardous substances on a property could result
in the owner or manager incurring substantial liabilities as a result of a claim
by a private party for personal injury or a claim by an adjacent property owner
for property damage. There can be no assurance that any environmental
assessments undertaken by the Company with respect to the properties that it
owns and certain properties that it manages have revealed all potential
environmental liabilities, that any prior owner or operator of the properties
did not create any material environmental condition not known to the Company, or
that an environmental condition does not otherwise exist as to any one or more
of the properties that could have material adverse effect on the Company's
financial condition or results of operations. In addition, there can be no
assurance that (i) future laws, ordinances or regulations will not impose any
material environmental liability, (ii) the current environmental conditions of
the Company's owned or managed properties will not be affected by the condition
of properties in the vicinity of such properties (such as the presence of
leaking underground storage tanks) or by third parties unrelated to the Company,
or (iii) tenants will not violate their leases by introducing hazardous or toxic
substances into the Company's owned or managed properties that could expose the
Company to liability under federal or state environmental laws. See "Business
and Properties -- Regulation -- Environmental Regulations."
COST OF COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT AND FIRE AND SAFETY
REGULATIONS. All of the Company'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 might require, among other things, 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 Company is
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
Company's properties. Compliance with such requirements may require the Company
to make substantial capital expenditures, which expenditures would reduce the
money otherwise available for distribution to shareholders.
RISKS ASSOCIATED WITH MANAGEMENT OF PROPERTIES. The Company manages 76
properties (including 73 self storage properties), of which 49 are owned by
affiliates and 27 are owned by nonaffiliates, under contracts that generally
provide that the Company may be terminated with or without cause on 60 days'
notice. If such terminations were to occur, the Company would lose management
fee income and, in addition, would experience decreased economies of scale in
advertising, management and other overhead.
S-14
<PAGE>
PROPERTY TAXES. Each of the Company's properties is subject to real
property taxes. The real property taxes on these properties and any other
properties that the Company develops or acquires in the future may increase as
property tax rates change and as such properties are assessed or reassessed by
tax authorities.
RISKS RELATING TO QUALIFICATION AND OPERATION AS A REIT
FAILURE TO QUALIFY AS A REIT. The Company intends to elect to be, and
operate as, a REIT under the Internal Revenue Code of 1986, as amended (the
"Code"), commencing with its taxable year ended December 31, 1994. As a REIT,
the Company will be entitled to a deduction when calculating its taxable income
for dividends paid to its shareholders. For the Company to qualify as a REIT,
however, certain detailed technical requirements must be met (including certain
income, asset and stock ownership tests). Although the Company intends to
operate so that it will continue to qualify as a REIT, the highly complex nature
of the rules governing REITs, the ongoing importance of factual determinations
and the possibility of future changes in the Company's circumstances preclude
any assurance that the Company will so qualify in any year. For any taxable year
that the Company 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 Company and distributions to
shareholders would be substantially reduced because of the Company's increased
tax liability. Furthermore, to the extent that distributions had been made in
anticipation of the Company's qualification as a REIT, the Company might be
required to borrow additional funds or to liquidate certain of its investments
in order to pay the applicable tax. Should the Company's qualification as a REIT
terminate, the Company may not be able to elect to be treated as a REIT for the
subsequent five-year period. See "Certain Federal Income Tax Considerations --
Failure of the Company to Qualify as a REIT" in the Prospectus.
EFFECT OF DISTRIBUTION REQUIREMENTS. To maintain its status as a REIT for
federal income tax purposes, the Company generally is required each year to
distribute to its shareholders at least 95% of its taxable income. In addition,
the Company is subject to a 4% nondeductible excise tax on the amount, if any,
by which certain distributions paid by it with respect to any calendar year are
less than the sum of 85% of its ordinary income for such calendar year, 95% of
its capital gain net income for the calendar year and any amount of such income
that was not distributed in prior years. The Company may be required, under
certain circumstances, to accrue as income for tax purposes interest, rent and
other items treated as earned for tax purposes but not yet received. In
addition, the Company may be required not to accrue as expenses for tax purposes
certain items that actually have been paid. It is also possible that the Company
could realize income, such as income from cancellation of indebtedness, that is
not accompanied by cash proceeds. In any such event, the Company could have
taxable income in excess of cash available for distribution. In such
circumstances, the Company could be required to borrow money or liquidate
investments on unfavorable terms in order to meet the distribution requirement
applicable to a REIT. See "Certain Federal Income Tax Considerations -- Overview
of REIT Qualification Rules -- Annual Distribution Requirements" in the
Prospectus.
As a result of the Merger, the accumulated earnings and profits of the
Management Company carried over to the Company. Notwithstanding the 95% of
taxable income distribution test described above, the Company must distribute
all of these acquired accumulated earnings and profits on or before December 31,
1995 to retain its REIT status. Accordingly, the Company will be required to
accurately determine the amount of Acquired Earnings and to increase its
distributions to its shareholders in 1995 as necessary to eliminate these
earnings and profits. The Company has requested that Deloitte & Touche LLP
("D&T") perform certain agreed-upon procedures relating to the Company's
determination of accumulated earnings and profits of the Management Company as
of March 24, 1995 (the date of the Merger) for the purpose of this distribution
requirement. D&T's procedures will be based on the Company's tax returns as
filed with the Internal Revenue Service (the "IRS") and other assumptions and
qualifications to be set forth in their report. 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 Company's
shareholders. In the event the IRS subsequently determines that
S-15
<PAGE>
the Company failed to distribute all the acquired accumulated earnings and
profits, the Company would lose its REIT qualification for the year of the
Merger and, perhaps, for subsequent years. See "Certain Federal Income Tax
Considerations -- Overview of REIT Qualification Rules -- Distribution of
Acquired Earnings" in the Prospectus.
RESTRICTIONS ON TRANSFERS OF CAPITAL STOCK; EXCESS STOCK. For the Company
to qualify as a REIT, among other things, not more than 50% in value of the
Company's stock may be held, actually or constructively, by five or fewer
individuals during the last half of a taxable year, and such capital stock must
be beneficially owned by 100 or more persons during at least 355 days of a
taxable year of 12 months or during a proportionate part of a shorter taxable
year. To ensure that the Company remains qualified as a REIT, the Company's
Restated Certificate of Incorporation (the "Certificate of Incorporation"),
subject to certain exceptions, provides that the Company may prevent the
transfer and/or call for the redemption of shares of the Company's stock if more
than 50% of the outstanding shares would be owned, actually or constructively,
by five or fewer persons (defined to include individuals, corporations,
partnerships, joint ventures and similar entities) or if one person would own,
actually or constructively, more than 9.8% of the total outstanding shares (or
such higher percentage as may be determined by the Company's Board of
Directors). In addition, the Company may prevent such transfer and/or call for
such redemption of such shares if the Company's Board of Directors determines in
good faith that the shares have or may become concentrated to the extent that
may prevent the Company from qualifying as a REIT. If, despite these
restrictions, any person acquires shares of Common Stock in excess of 9.8% of
the total outstanding shares (or such higher percentage as may be determined by
the Company's Board of Directors), the shares most recently acquired will be
automatically exchanged for an equal number of nondividend-paying and nonvoting
shares of Excess Stock. See "Restrictions on Transfers of Capital Stock; Excess
Stock" in the Prospectus.
OTHER GENERAL RISKS
DEPENDENCE ON KEY PERSONNEL. The Company is dependent on the efforts of its
directors and executive officers. See "Management of the Company." The loss of
the services of its key employees could have an adverse effect on the Company's
operations. There can be no assurance that the Company would be able to recruit
additional personnel with equivalent experience in the self storage industry.
EFFECT OF MARKET INTEREST RATES ON PRICE OF COMMON STOCK. One of the
factors that influences the price of the Common Stock in public trading markets
is the annual yield from distributions by the Company on the price paid for the
Common Stock as compared to yields on other financial instruments. Thus, an
increase in market interest rates will result in higher yields on other
financial instruments, which could adversely affect the market price of the
Common Stock.
S-16
<PAGE>
THE COMPANY
Shurgard Storage Centers, Inc. is a fully integrated, self-administered and
self-managed REIT that develops, acquires, owns and manages self storage
centers. The Company is one of the three largest operators of self storage
centers in the United States and through its predecessors has been in the self
storage business since 1972. Shurgard's strategy is to be the national leader in
storage products and services by offering high-quality, conveniently located and
secure self storage and a high level of customer service. This strategy enables
the Company to position itself as a premium-priced storage provider in its
target markets. The Company seeks to own and operate self storage centers that
are located in major metropolitan areas along retail and high-traffic corridors.
The Company builds, on most newly developed stores, a distinctive "lighthouse"
office to distinguish itself from its competitors and to increase customer
awareness of the Shurgard brand.
The Company's growth strategies are designed to maximize shareholder value
by increasing funds from operations through (i) internal growth through
increases in revenue and operating efficiencies at its existing stores and (ii)
external growth through the development of new self storage properties and the
acquisition of additional self storage properties. The Company believes that the
experience of its management team in operating, developing and acquiring self
storage properties and its access to capital markets strongly contribute to its
ability to execute these strategies.
The Company expects to fund future development and acquisitions through a
portion of the net proceeds of this offering, additional indebtedness, future
offerings of equity securities and retained cash flow. Upon application of the
net proceeds from this offering to pay down indebtedness outstanding under the
two revolving credit facilities, the Company expects to have outstanding
borrowings equal to approximately 20% of the Company's total market
capitalization, based on $132.4 million indebtedness outstanding and the
assumptions set forth under "Use of Proceeds."
The Company owns and operates, as of May 15, 1995, directly and through its
wholly owned subsidiaries and joint ventures, 173 operating self storage
properties, containing approximately 11.4 million net rentable square feet,
which are located in 22 major metropolitan areas in 19 states. As a result of
the Merger, the Company also manages 73 self storage centers, containing
approximately 4.1 million net rentable square feet, under the Shurgard name, of
which 47 are owned by affiliates and 26 are owned by nonaffiliates. The Company
developed 64 of its owned or managed stores. In addition, the Company owns two
business parks and a commercial building, and also manages three business parks
for two affiliated owners and one unaffiliated owner. For the quarter ended
March 31, 1995, the Company's owned stores had a weighted average net rentable
square foot occupancy rate of 87% and a weighted average rent per net rentable
square foot of $8.60.
The Company employed approximately 600 persons as of April 30, 1995. The
Company is headquartered in Seattle, Washington, with regional offices in
Phoenix, Arizona, Atlanta, Georgia, and Bellevue, Washington. The Company is a
Delaware corporation incorporated on July 23, 1993. The Company's executive
offices are located at 1201 Third Avenue, Suite 2200, Seattle, Washington 98101,
and its telephone number is (206) 624-8100.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock offered
hereby net of the underwriting discount and offering expenses is estimated to be
approximately $97.2 million ($111.9 million if the Underwriters' over-allotment
option to purchase 675,000 additional shares of Common Stock is exercised in
full). The net proceeds will be used to pay down approximately $89.0 million of
the outstanding borrowings under the Company's two revolving credit facilities,
to finance acquisitions, to fund development of properties and for general
corporate purposes. See "Capitalization." The first revolving credit facility
bears interest at a rate per annum of either the lender's prime rate or LIBOR
plus 200 basis points and matures on August 18, 1996. The second revolving
credit facility bears interest at a rate per annum of either LIBOR plus 175
basis points or the prime rate of Citibank, N.A. minus 50 basis points, requires
a draw fee of 25 basis points of the amount drawn, and matures on December 30,
1996. See "Business and Properties -- Recent Developments" and "-- Capital
Strategy."
S-17
<PAGE>
DISTRIBUTION POLICY
Distributions are paid to the Company's shareholders from time to time when
declared by the Company's Board of Directors, in accordance with certain
policies described below. The Company intends to distribute to its shareholders
each year at least 95% of its REIT Taxable Income so that the Company will be
eligible for tax treatment as a REIT.
Generally speaking, "REIT Taxable Income" includes taxable income from
operations (net of depreciation deductions), but excludes gains from the sale of
properties and deductions for distributions paid. In addition, the Company
intends to distribute cash flow sheltered by depreciation deductions if such
amounts are not needed for working capital reserves, developments, acquisitions,
debt payments and capital improvements. As discussed below, in 1995, the Company
will make distributions in excess of its REIT Taxable Income to eliminate any
Acquired Earnings. Management does not expect to distribute net cash receipts
from sales or refinancings of assets, but instead intends to retain such funds
to make new investments or for other corporate purposes, except as required to
maintain its qualification as a REIT.
The Company is required to distribute its REIT Taxable Income without regard
for, or reduction of, principal payments made on account of the Company's
Indebtedness because principal payments do not reduce the Company's REIT Taxable
Income. To the extent the Company is obligated to make substantial principal
payments in any year, such payments might make it difficult or impossible for
the Company to satisfy its obligation of distributing 95% of its REIT Taxable
Income.
The Company's Board of Directors has declared a distribution of $0.46 per
share of Common Stock, payable July 31, 1995 to shareholders of record on June
2, 1995, for the quarter ended June 30, 1995. PURCHASERS OF THE SHARES OF COMMON
STOCK BEING OFFERED HEREBY WILL NOT RECEIVE THIS DISTRIBUTION IN RESPECT OF THE
SHARES OF COMMON STOCK BEING OFFERED HEREBY. The Company paid a distribution of
$0.46 per share of Common Stock for the quarter ended March 31, 1995. Under the
Company's current definition of funds from operations, this distribution
represents approximately 88% of the Company's funds from operations for this
period. See footnote 4 to "Prospectus Supplement Summary -- Summary Financial
Information." The Company paid a distribution of $0.44 per share of Common Stock
for the quarter ended December 31, 1994. There can be no assurance that the
current level of distributions will be maintained by the Company.
In connection with the Merger, the Company is required to make distributions
sufficient to eliminate the Acquired Earnings prior to December 31, 1995. The
amount of distributions will depend on the amount of current and undistributed
historical accumulated earnings and profits of the Company and the amount of the
Acquired Earnings. The Company is exploring its alternatives with respect to
making distributions sufficient to eliminate the Acquired Earnings. See "Certain
Federal Income Tax Considerations -- Overview of REIT Qualification Rules --
Distribution of Acquired Earnings" in the Prospectus.
S-18
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1995, the pro forma capitalization of the Company as of March 31, 1995,
prepared as if the Evergreen Acquisition and the related borrowing of $40.0
million (including $4.5 million which is being used for development and
acquisition activities unrelated to the Evergreen Acquisition) under the
Company's lines of credit, which occurred on May 12, 1995, had been consummated
on March 31, 1995, and the pro forma capitalization of the Company as of March
31, 1995 (prepared in the same manner), as adjusted to give effect to the
issuance and sale of the Common Stock offered hereby and the application of the
net proceeds therefrom to reduce the amount outstanding under the Company's
lines of credit. See "Use of Proceeds." This information should be read in
conjunction with the summary financial information presented elsewhere in this
Prospectus Supplement, the consolidated financial statements and notes thereto
incorporated by reference into the accompanying Prospectus and "Discussion of
Financial and Operating Results."
<TABLE>
<CAPTION>
MARCH 31, 1995
-------------------------------------
PRO FORMA
HISTORICAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER
SHARE DATA)
<S> <C> <C> <C>
Lines of credit....................................................... $ 49,000 $ 89,000 $ --
Notes payable......................................................... 132,392 132,392 132,392
Common Stock, $.001 par value; 120,000,000 shares authorized;
18,095,988 shares issued and outstanding (22,595,988 shares as
adjusted)............................................................ 346,315 346,315 443,563
Class B Common Stock, $.001 par value; 500,000 shares authorized;
154,604 shares issued and outstanding................................ 2,916 2,916 2,916
Loans to shareholders................................................. (4,002) (4,002) (4,002)
Cumulative net income................................................. 23,175 23,175 23,175
Cumulative distributions.............................................. (32,610) (32,610) (32,610)
----------- ----------- -----------
Total capitalization.............................................. $ 517,186 $ 557,186 $ 565,434
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
S-19
<PAGE>
PRICE RANGE OF COMMON STOCK AND DISTRIBUTION HISTORY
On May 5, 1995, the Company began trading on the NYSE under the symbol
"SHU." On June 7, 1995, the most recent available date before printing this
Prospectus Supplement, the last reported sales price per share of Common Stock
on the NYSE was $23.38. Before May 5, 1995, the Common Stock was quoted on
Nasdaq under the symbol "SHUR."
The table below sets forth for the fiscal periods indicated the high and low
sale prices per share of Common Stock, as reported in published financial
sources, and distributions declared.
<TABLE>
<CAPTION>
PRICE PER SHARE OF
COMMON STOCK
-------------------- DISTRIBUTIONS
HIGH LOW DECLARED(1)
--------- --------- --------------
<S> <C> <C> <C>
1994
First Quarter (beginning March 28, 1994)................................... $ 24.25 $ 21.50 $ .14(2)
Second Quarter............................................................. 24.25 21.00 .44
Third Quarter.............................................................. 23.25 20.44 .44
Fourth Quarter............................................................. 23.00 17.75 .44
1995
First Quarter.............................................................. 24.00 19.50 .46
Second Quarter (through June 7, 1995)(3)................................... 24.38 22.38 .46
<FN>
- ------------------------
(1) Distributions declared by the Company's Board of Directors based on
financial results for the quarter specified.
(2) The first quarter distribution reflects one month of operations after the
Consolidation.
(3) The high and low sales prices per share of Common Stock were $24.00 and
$22.75, respectively, during the period from April 1, 1995 through May 4,
1995, when the Common Stock was quoted on Nasdaq. The high and low sales
prices per share of Common Stock were $24.375 and $22.375, respectively,
during the period from May 5, 1995, the date of commencement of trading of
the Common Stock on the NYSE, through June 7, 1995.
</TABLE>
The Company' Board of Directors has declared a distribution of $0.46 per
share of Common Stock, payable July 31, 1995 to shareholders of record on June
2, 1995, for the quarter ended June 30, 1995. PURCHASERS OF THE SHARES OF COMMON
STOCK BEING OFFERED HEREBY WILL NOT RECEIVE THIS DISTRIBUTION IN RESPECT OF THE
SHARES OF COMMON STOCK BEING OFFERED HEREBY.
S-20
<PAGE>
DISCUSSION OF FINANCIAL AND OPERATING RESULTS
The following is a discussion of the Company's financial and operating
results for the periods included in the discussion in "Prospectus Supplement
Summary -- Summary Financial Information." Also see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in the 1994
Form 10-K and in the 1995 Form 10-Q.
PRO FORMA ADJUSTED COMBINED YEAR ENDED DECEMBER 31, 1994 -- IMPACT OF RECENT
TRANSACTIONS
The Company's pro forma financial information for the year ended December
31, 1994 differs from combined historical operations for the same period because
such pro forma information has been prepared as if the following transactions
had been consummated on January 1, 1994: (i) the Consolidation, (ii) the Nomura
Mortgage, (iii) the acquisition of the Colonial properties, (iv) the
Participating Mortgage Loans, (v) the Merger, (vi) the Evergreen Acquisition,
and (vii) this offering and the application of the net proceeds therefrom. See
"Business and Properties -- Recent Developments" and "-- Capital Strategy" and
"Use of Proceeds." The pro forma adjusted combined operating information has
also been adjusted to eliminate the nonrecurring items related to the
Consolidation. The following is an overview of these transactions and their
effect on the Company and its 1994 pro forma financial information
THE CONSOLIDATION. The Consolidation was finalized on March 1, 1994. The
transaction, which was accounted for as a purchase, was effected through the
issuance of the Company's Common Stock and Class B Common Stock and borrowings
under a variable rate term loan. Pro forma financial information has been
adjusted to reflect the actual operating results of the stores included in the
Consolidation for the first two months of 1994.
THE NOMURA MORTGAGE. In June 1994, the Company refinanced its variable rate
term loan and certain other notes payable assumed in the Consolidation with a
$122.6 million, seven-year, 8.28% fixed-rate term loan that requires payments of
interest only until maturity in 2001. Interest expense for 1994 has been
adjusted to reflect the higher interest rate on the fixed-rate loan.
THE COLONIAL PROPERTIES ACQUISITION. On September 1, 1994, Shurgard
purchased the Colonial properties, which provide the Company with significant
market penetration in the Raleigh, North Carolina market and expand its
penetration in the Washington, D.C. and Virginia areas. This $34 million
purchase was funded through a $30 million draw on the Company's line of credit,
a $1 million note to the seller and cash from operations. Pro forma financial
information has been adjusted to reflect the actual revenue of these properties
and the Company's expense structure for the first eight months of 1994. On a pro
forma basis, these properties provided revenue of $5.8 million for the 12 months
ended December 31, 1994.
THE PARTICIPATING MORTGAGE LOANS. On December 14, 1994, the Company paid
approximately $11.3 million and committed an additional $1.7 million for
investment in two 10-year Participating Mortgage Loans that are secured by
storage centers and office/warehouse space. The Participating Mortgage Loans
bear interest at 8% per annum. In addition, Shurgard is entitled to receive
additional interest equal to 50% of annual distributions from cash flow plus
additional interest upon the sale or refinancing of the properties or upon
maturity of the loan, in each case based on capital appreciation. These
investments were funded through a draw on the Company's line of credit. Pro
forma financial information has been adjusted to reflect the additional $1.0
million of interest income based on the properties' actual 1994 operating
results.
THE MERGER. On March 24, 1995, the Company merged with the Management
Company and became self-administered and self-managed. The Merger, which was
accounted for as a purchase, was funded by the issuance to the shareholders of
the Management Company of 1,266,705 newly issued shares of Common Stock, subject
to certain adjustments. The Management Company shareholders may receive
additional shares over the next five years as consideration for certain
partnership interests held by the Management Company that were not valued at the
time of the Merger. Pro forma operating information has been adjusted to reflect
the actual operating results of the Management
S-21
<PAGE>
Company as if the Merger had occurred on January 1, 1994. All corresponding
intercompany elimination entries have been made. Additionally, all per share
amounts have been adjusted to reflect the issuance of the 1,266,705 newly issued
shares.
THE EVERGREEN ACQUISITION. On May 12, 1995, the Company purchased for $35.5
million all of the outstanding partnership interests in the Evergreen
Partnership. The purchase was funded by a draw on the Company's line of credit,
which will be partially repaid with the net proceeds from this offering. See
"Use of Proceeds." The pro forma financial information has been adjusted to
reflect the actual operating results of the stores owned by the Evergreen
Partnership for the periods presented. The Evergreen Partnership directly owns
seven storage centers that were developed by the Management Company and, through
a joint venture with public pension funds, owns an interest in three additional
centers. Revenue, net income and FFO in the pro forma financial information for
the year ended December 31, 1994 reflect the operating results for the Evergreen
properties, including the lease-up of several development properties. During
1994, six of the seven properties were in lease-up. The average occupancy per
net rentable square foot for these seven properties rose from 61% at January 1,
1994 to 82% at April 30, 1995, as compared to the weighted average occupancy per
net rentable square foot for the Company's other properties, which was 87% at
April 30, 1995. Based on its experience, the Company believes the Evergreen
properties' performance will continue to improve until the properties'
occupancies stabilize. The weighted average rent per net rentable square foot
for the seven properties rose 7% from $9.82 per net rentable square foot for the
year ended December 31, 1994 to $10.53 per net rentable square foot for the
month of April 1995. No adjustment has been made to the pro forma financial
information to reflect current rates and occupancies in "Prospectus Supplement
Summary -- Summary Financial Information." If pro forma FFO for the year ended
December 31, 1994 and for the three months ended March 31, 1995 and 1994 had
been adjusted to reflect the actual occupancy and rental rates at April 30, 1995
for the Evergreen properties, the pro forma FFO for such periods would have
increased by $664,000, $55,000 and $350,000, respectively.
THE OFFERING. This offering contemplates the receipt by the Company of
$97.2 million in net proceeds that are assumed to be used primarily to reduce
the Company's lines of credit. Interest income, interest expense and per share
information have been adjusted to reflect the issuance of the additional
4,500,000 shares. See "Use of Proceeds."
PRO FORMA ADJUSTED COMBINED THREE MONTHS ENDED MARCH 31, 1995 COMPARED TO PRO
FORMA ADJUSTED COMBINED THREE MONTHS ENDED MARCH 31, 1994
The Company's pro forma adjusted combined financial information for the
three months ended March 31, 1994 has been prepared as if the Consolidation, the
Nomura Mortgage, the acquisition of the Colonial properties, the Participating
Mortgage Loans, the Merger, the Evergreen Acquisition and this offering and the
application of the net proceeds therefrom had been consummated on January 1,
1994 and reflects the combined operations of the Company and the Predecessor for
such period adjusted as described in footnote 1 to "Prospectus Supplement
Summary -- Summary Financial Information." Additionally, the pro forma financial
information for the three months ended March 31, 1995 represents historical
results adjusted only to reflect the Merger, the Evergreen Acquisition and this
offering and the application of the net proceeds therefrom as described under
"-- Pro Forma Adjusted Combined Year Ended December 31, 1994 -- Impact of Recent
Transactions," as all other transactions are reflected in the historical
results.
Revenue for the three months ended March 31, 1995 rose 7%, or $1.6 million,
compared to the three months ended March 31, 1994. The Company's original
portfolio of assets experienced an increase in revenue of approximately 7%, or
$1.1 million, for this period primarily as the result of a 6% increase in
weighted average rental rates and stable occupancies. Revenue for the Evergreen
properties rose approximately $309,000 as the result of a 16% increase in
weighted average rental rates and a 9% increase in weighted average occupancy,
due in large part to the fact that six out of the ten properties (including the
three properties owned through the joint venture) are development projects still
in lease-up. Revenue relating to the Management Company, including the Daly
City, California
S-22
<PAGE>
store it previously owned, rose approximately $181,000, reflecting the addition
of new storage centers under management (not owned by the Company) and revenue
increases at the previously managed centers.
Total expenses for the first quarter of 1995 rose 5%, or $705,000, over the
first quarter of 1994. Approximately $420,000 of this change reflects an
increase in operating expense. This increase is primarily attributable to (i)
timing of bonus payments, (ii) additional costs relating to the national call
center, and (iii) higher property insurance premiums. Additionally, depreciation
and amortization rose $146,000 due to the depreciation of capital improvements
made during 1994.
NOI (which the Company defines as rental revenue less operating expense and
real estate taxes) for the three months ended March 31, 1995 rose 8%, or $1.0
million, over the same period in 1994. This reflects a 55%, or $250,000,
improvement in NOI for the Evergreen properties, as well as a 7%, or $750,000,
improvement on the balance of the Company's portfolio. These improvements are
also reflected in FFO for the three months ended March 31, 1995, which rose 10%,
or $1.0 million, over the same period in 1994.
Net income for the first quarter of 1995 rose 14%, or $900,000, over the
first quarter of 1994. This increase is attributable to the continued
strengthening of rental rates and improved efficiencies in the Company's
property management operations.
ADJUSTED COMBINED YEAR ENDED DECEMBER 31, 1994 COMPARED TO ADJUSTED YEAR ENDED
DECEMBER 31, 1993
The adjusted combined operations of the Company for the year ended December
31, 1994 includes the Predecessor's operations from January 1, 1994 through
February 28, 1994, adjusted for certain nonrecurring transactions (see footnote
1 to "Prospectus Supplement Summary -- Summary Financial Information"), combined
with the Company's operations from March 1, 1994 to December 31, 1994. The
historical operating information for the year ended December 31, 1993 represents
the Predecessor's operations. The Predecessor's financial statements for the
year ended December 31, 1993 and the period from January 1, 1994 to March 1,
1994 have been adjusted to exclude the gain on the Consolidation, incentive
management fees, and litigation, hostile takeover defense and transaction
expenses relating the Consolidation. See footnote 2 to "Prospectus Supplement
Summary -- Summary Financial Information."
Rental revenue for the year ended December 31, 1994 (including two months of
Predecessor operations from January 1, 1994 to March 1, 1994) rose 9.5%, or $6.8
million, compared to the same period in 1993 for the Predecessor. Approximately
$1.9 million, or 28%, of this increase relates to the Colonial properties
acquisition. Revenue for stores acquired in the Consolidation rose 6.7%, or $4.9
million, which represents the remaining 72% of the increase, as a result of
improvements in both occupancy and rental rates. Occupancy for these stores rose
from 87% in 1993 to 89% in 1994, while weighted average rental rates per net
rentable square foot rose 5% over the same period from $7.84 in 1993 to $8.25 in
1994.
Income from operations rose 14%, or $3.9 million, after a 7% increase in
expenses. Expense increases include a $1.0 million increase in expenses
resulting from the addition of the Colonial properties. Additionally, general
and administrative expenses from January 1, 1994 to March 1, 1994 for the
Predecessor included certain expenses relating to the liquidation of the
partnerships included in the Consolidation, including audit, tax and legal fees.
State taxes for the Predecessor were also high for the first two months of 1994
due to the tax gains resulting from the sale of assets.
The Company's debt at December 31, 1994 is $141.1 million higher than the
Predecessor's debt at December 31, 1993. This additional debt is also reflected
in the Company's interest expense and earnings for the year ended December 31,
1994. Approximately $97.0 million of this other debt relates to the
Consolidation and $42.0 million relates to subsequent acquisitions or
investments.
S-23
<PAGE>
Historical NOI rose 11%, or $4.9 million, from 1993 to 1994. Historical
combined FFO for 1994 is not comparable to the Predecessor's historical FFO due
to the changes in the capitalization structure that occurred as a result of the
Consolidation on March 1, 1994.
ADJUSTED YEAR ENDED DECEMBER 31, 1993 COMPARED TO HISTORICAL YEAR ENDED DECEMBER
31, 1992
Financial information for the years ended December 31, 1992 and 1993
represent the Predecessor's operating results. The Predecessor's financial
information for the year ended December 31, 1993 excludes litigation, hostile
takeover defense and transaction expenses relating to the Consolidation. See
footnote 2 to "Prospectus Supplement Summary -- Summary Financial Information."
Predecessor rental revenue for the year ended December 31, 1993 rose 8%, or
$5.2 million, compared to the same period in 1992 due to rising rental rates and
occupancies. Weighted average rental rates increased 2% from $7.68 per net
rentable square foot for 1992 to $7.84 per net rentable square foot for 1993.
The average occupancy for the same stores rose from 86% for the year ended 1992
to 87% for the year ended 1993.
Income from operations rose 12%, or $3.0 million, after a 5% increase in
expenses. Expense increases include a 9% rise in operating expense resulting
from increases in personnel and utilities.
Historical NOI rose 8%, or $3.4 million, and FFO rose 9%, or $3.4 million,
from 1992 to 1993.
CAPITAL EXPENDITURES
The Company prepares an annual capital expenditure budget for each owned or
managed property. At the present time, the Company believes its existing stores
have been properly maintained and there are no material deferred capital
maintenance obligations. It is the Company's policy to capitalize all costs
exceeding a minimum of $1,000 incurred for existing stores if the related
improvements add to the store's revenue-generating capabilities or lengthen the
property's useful life.
The Company believes its nonrevenue-generating capital expenditures, which
it anticipates funding with operating cash flow, include exterior refurbishment
and replacement of roofs and pavement. The Company's current budget for 1995 for
these capital expenditures is $1.8 million, or $0.17 per net rentable square
foot. Additionally, in 1994 and 1993 these capital expenditures on the Company's
original portfolio of stores were $1.5 million and $1.8 million, respectively.
In addition, the Company incurs additional capital expenditures that it believes
generate additional revenue, including build-outs of existing properties, unit
mix conversions and the addition of climate control to storage units.
S-24
<PAGE>
BUSINESS AND PROPERTIES
HISTORY OF THE COMPANY
Shurgard began operations as a REIT through the consolidation on March 1,
1994 of 17 publicly held real estate limited partnerships that were sponsored by
the Management Company. The Company became self-administered and self-managed
through the Merger with the Management Company in March 1995. As a result of the
Merger, the Company internalized the expertise and experience of the Management
Company's personnel that cover all aspects of the self storage industry.
The Management Company was incorporated in 1972 by Charles K. Barbo, the
Company's Chairman, President and Chief Executive Officer, and a partner to
sponsor and operate real estate investments. From its formation until the
Merger, the Management Company was involved in the organization of 20 public
partnerships, which raised in aggregate approximately $600 million from
approximately 80,600 investors with the objective of investing in the ownership
and operation of self storage properties. The majority of these public
partnerships were consolidated into the Company in the Consolidation. During the
past 22 years, the Company's personnel have gained extensive expertise in the
development and refinement of operational systems and procedures to enhance the
value of self storage investments, skills which have now been incorporated into
the Company. Today, Shurgard is an independent, fully integrated real estate
operating company, with in-house expertise covering all aspects of the self
storage industry, including real estate development, acquisition and
disposition, project design and consulting, full-service property management
capabilities, marketing, personnel management, legal, accounting and finance.
RECENT DEVELOPMENTS
When the Company began operations on March 1, 1994, the Shurgard portfolio
consisted of 140 properties (including 137 self storage properties). On May 15,
1995, the Company's portfolio consists of 176 owned properties (including 173
self storage properties), 76 managed properties (including 73 self storage
properties), and seven sites acquired to develop additional stores. Some of the
developments contributing to this growth are outlined below.
MERGER OF THE MANAGEMENT COMPANY. In order to create a fully integrated
company and more closely align the interests of management with shareholders,
the Management Company merged with Shurgard on March 24, 1995. Pursuant to the
Merger Agreement, the outstanding shares of the Management Company Common Stock
were converted into 1,266,705 newly issued shares of Common Stock, subject to
certain adjustments. The Management Company shareholders may receive additional
shares over the next five years as consideration for certain partnership
interests held by the Management Company that were not valued at the time of the
Merger.
LISTING OF COMMON STOCK ON THE NYSE. The Common Stock was authorized for
listing on the NYSE under the symbol "SHU" on April 27, 1995, and commenced
trading on the NYSE on May 5, 1995. From March 28, 1994 through May 4, 1995, the
Common Stock traded on Nasdaq under the symbol "SHUR."
ACQUISITION OF EVERGREEN PROPERTIES. On May 12, 1995, Shurgard purchased
all of the outstanding partnership interests in the Evergreen Partnership from a
wholly owned subsidiary of the State Investment Board of the State of
Washington. The Evergreen Partnership was formed in 1990, and had developed and
owns seven self storage centers directly. Through a joint venture, it owns an
interest in three additional stores. Three of the stores are located in the
Atlanta, Georgia area, three are located in the Portland, Oregon area, and one
each is located near Philadelphia, Pennsylvania, Phoenix, Arizona, San Antonio,
Texas, and Seattle, Washington. As of April 30, 1995, the centers had 631,000
net rentable square feet, with a weighted average occupancy rate of 81%, based
on net rentable square feet. The purchase price for the Evergreen Acquisition
was $35.5 million.
ACQUISITION OF 20 STORAGE CENTERS. On September 1, 1994, Shurgard purchased
20 self storage centers that were previously operated under the Colonial name,
representing an aggregate of approximately 732,000 net rentable square feet, for
$34 million. The acquisition provides the Company with
S-25
<PAGE>
significant market penetration in the Raleigh, North Carolina market and expands
its penetration in the Washington, D.C. and Virginia areas. For the quarter
ended March 31, 1995, the Colonial properties had a weighted average occupancy
rate of approximately 89%, based on net rentable square feet, at a weighted
average rent per net rentable square foot of approximately $7.76, and their
average age is approximately eight years.
INVESTMENT IN TENNESSEE JOINT VENTURES. The Company is party to an
agreement with FMC for the joint acquisition and development of self storage
properties in Tennessee and Kentucky. To date, the Company has entered into
three joint ventures with three partnerships affiliated with FMC for the
development of three self storage stores in the Nashville, Tennessee area that
will contain in the aggregate approximately 182,400 net rentable square feet.
The Company's joint venture interest in the three stores, the Hermitage store,
the Medical Center store and the Franklin store, is 50%, 67% and 91.2%,
respectively. The Company has invested $2.2 million and is committed to invest
up to an additional $1.5 million in the three joint ventures. The Hermitage
store and the Medical Center store opened on March 1, 1995 and April 19, 1995,
respectively, and the Franklin store is expected to open in late 1995.
INVESTMENT IN PARTICIPATING MORTGAGES. On December 14, 1994, Shurgard
closed the Participating Mortgage Loans, totaling $11.3 million, which are
secured by four self storage properties located in the Fairfax, Virginia area,
containing approximately 206,700 net rentable square feet of storage space and
approximately 28,300 net rentable square feet of office/warehouse space.
Shurgard also agreed to advance, under certain conditions, up to an additional
$1.7 million to fund the future construction of additional improvements at one
of the properties and repairs and maintenance on the properties. The
Participating Mortgage Loans bear interest at 8% per annum. In addition,
Shurgard is entitled to receive additional interest equal to 50% of annual
distributions from cash flow plus additional interest upon the sale or
refinancing of the properties or upon maturity of the loan, in each case based
on capital appreciation. In addition, the Company has been granted options to
acquire each of the properties at established purchase prices, which options
generally become exercisable on January 1, 2000 and extend for the balance of
the original loan terms. The Company will continue to manage the properties
during the terms of the loans.
INVESTMENT IN BENELUX STORAGE OPERATIONS. For the past two years, Shurgard
has explored expansion opportunities in Europe. Based on its research, the
Company determined that the demographic characteristics and relatively
undeveloped state of the self storage industry make investments in Europe
attractive. The Company decided to make its initial European investment in
Brussels, Belgium, based in part on the mobility of its population. With a
European partner, it formed Benelux SCS, which will develop, own and operate
self storage properties in the region of Europe encompassing Belgium, the
Netherlands and Luxembourg. The Company has invested approximately $3.3 million
and committed to invest up to an additional $3.2 million in Benelux SCS. The
Company currently directs the business affairs of Benelux SCS through the
Company's control of a majority of the seats on Benelux SCS's Board of
Directors. In 1995, Benelux SCS commenced construction on two stores, which will
contain approximately 82,400 net rentable square feet, in the Brussels
metropolitan area.
ADDITIONAL DEVELOPMENTS AND ACQUISITIONS. In addition to the developments
discussed above, the Company has continued in 1995 to acquire selectively
development parcels and self storage centers in its target markets. New
developments are under construction in Atlanta, Georgia and Houston, Dallas and
Plano, Texas, that will contain an aggregate of approximately 318,000 net
rentable square feet of storage space. The Company has also acquired existing
self storage properties in Oak Forest, Illinois, Taylor, Michigan, and Puyallup,
Washington with a total of approximately 173,000 net rentable square feet of
storage space.
BUSINESS STRATEGY
Shurgard implements its strategy of being a national leader in storage
products and services through its customer satisfaction emphasis, convenient and
secure stores, rent pricing policy and marketing and market research.
S-26
<PAGE>
COMMITMENT TO CUSTOMER SERVICE AND SATISFACTION
The Company's goal is to achieve a high level of customer satisfaction, and
it views the quality of its customers' interaction with its employees as
critical to its long-term success. Through its emphasis on training, personnel
development and decentralized decision-making, the Company believes it attracts
and retains well-qualified, highly motivated employees committed to providing
superior levels of customer service. To ensure that every Company employee
understands storage from the customer's perspective, every new employee,
including those in management and administration, are required to learn how to
serve customers on site at a Company storage center. The Company offers a "100%
Customer Satisfaction Guarantee," which provides that if a customer is
dissatisfied with any aspect of his or her storage experience during the first
30 days of rental, on site employees are authorized to refund the customer's
rent or offer one month's free rent.
EMPLOYEE SELECTION AND TRAINING. The Company uses a combination of
interviews and personality profile tests to hire employees who are
customer-service oriented, many of whom have extensive retail, hospitality or
sales experience. New employees are then trained to serve storage customers'
needs in a timely, efficient and courteous manner. The Company's training
program is additionally designed to provide employees with the self storage
management skills necessary for responsive, decentralized decision-making at the
store level, guided by the Company's mission statement and values. Stores
managers are trained and authorized to make substantially all pricing decisions
and other significant decisions relating to customers at their stores. The
Company believes that its decentralized management system enables it to quickly
respond to customer needs and changes in the self storage market. The Company
also conducts an extensive telephone skills program to train its employees to
elicit and respond to customers' needs and close rental sales. Each store is
called frequently by representatives of the Company, and feedback is provided to
help employees build their telephone skills.
TEAM MANAGEMENT AND ORGANIZATION. A team of several store employees, led by
a team leader, is responsible for managing approximately three to six stores
within a market area. The teams are responsible for training the new members of
the team, participating in performance evaluations and making a majority of
staffing decisions. The team leader is also part of a market management team
that is responsible for a particular metropolitan market area. The market
management team is led by a market manager, who is responsible for meeting
operational objectives and targeting potential acquisition and development
opportunities in the Company's markets through the development of a
comprehensive market expansion plan. See "-- Growth Strategies -- External
Growth Strategy." Operating Vice Presidents oversee and coach the market
management teams to help maximize the Company's growth opportunities.
EMPLOYEE INCENTIVES, RECOGNITION AND COMPENSATION. The Company has designed
its compensation programs to attract and retain career-oriented employees and
motivate and reward employees for achieving quality service. In addition to
competitive base pay, the Company's store employees receive annual vacation, and
health, disability and life insurance, and have the ability to participate in
the Shurgard Employees Retirement Savings Plan and Trust, which combines a
tax-advantaged savings plan with annual discretionary grants of Common Stock
based on Company profitability. The Company also rewards employees through two
cash bonus plans based on Company profitability. The market bonus plan
compensates store employees semiannually based on the increase in net operating
income for the market serviced by those employees over the same period of the
prior year. In addition, store employees share in the Company-wide annual bonus
plan, which rewards all employees based on the Company's cash flow compared to
internal targets. Store employees are also paid a monthly commission on Ryder
truck rentals from the stores at which they work. The Company believes that its
employee incentives and training are conducive to the long-term retention of its
employees, which enables employees to better develop skills that contribute to
customer service.
S-27
<PAGE>
CONVENIENT AND SECURE STORES
The Company's stores are located for easy access, offer a range of premium
storage products and services for customer convenience, emphasize security and
are well maintained. The Company believes that its strategy of offering
high-quality, convenient stores strengthens the brand image of Shurgard,
attracts customers and enables the Company to maintain premium rents.
STORE LOCATION AND HOURS. The Company's stores are generally located in
major metropolitan areas along retail and high-traffic corridors for easy
customer access, and usually have significant road frontage for high visibility.
Customers can access their individual units generally between 6 a.m. and 9 p.m.
ONE-STOP CONVENIENCE. The Company's stores offer a range of storage
products and ancillary services, generally including sales of supplies such as
packing and storage materials, locks and boxes, as well as property insurance
referrals, moving company referrals, and other services such as Ryder truck
rentals (through a third-party rental company), to conveniently and efficiently
address customers' storage needs. The Company believes it is the largest leasing
agent of Ryder trucks in the United States, based on the number of truck rental
locations. In addition, the Company's stores generally offer premium features
such as computer-controlled access and electronic security systems. Many of its
stores offer climate-controlled storage units.
PROPERTY SECURITY. A variety of measures are used at the Company's stores
as appropriate to enhance security. Such measures may include, among others, on
site personnel, electronic devices such as intrusion and fire alarms, access
controls, video and intercom surveillance devices, perimeter beams, fencing and
lighting. Customers are assigned a designated personal identification number for
use in connection with a computerized gate access system. Each access is
computer-logged. In addition, the Company has developed and plans to continue to
develop a proprietary package of security controls, including software, video
and interactive communication.
CAPITAL EXPENDITURES AND MAINTENANCE. The Company budgets for a level of
capital expenditures consistent with its commitment to maintaining attractive,
well-maintained and secure self storage centers. This commitment contributes to
the Company's ability to pursue a premium-pricing strategy. In addition, capital
expenditures to ensure uniform color scheme and signage among the Company's
properties strengthen the brand image of Shurgard.
RENT PRICING POLICY
The Company seeks to maximize revenues by adjusting rents to match demand
more flexibly and more quickly than its competitors. Store managers evaluate
their store's rental rates, based on unit demand, unit availability and
competitors' rental rates. The Company trains its store managers in revenue
optimization and empowers them to adjust marginal rental rates based on their
"on the ground" analysis of demand and availability at their particular store.
In addition, the use of month-to-month leases, combined with customer turnover,
allows rents to be quickly adjusted to match current demand in a flexible
manner, unlike apartments, which must generally set rents in a uniform manner.
MARKETING AND MARKET RESEARCH
The Company employs various means to increase its share of the self storage
market. It places prominent advertisements in the Yellow Pages and seeks to
promote customer awareness of its stores through highly visible store locations,
site signage and architectural features. The Company locates its stores along
retail and high-traffic corridors, usually with significant road frontage to
increase visibility. The Company builds, on all newly developed stores, a
distinctive "lighthouse" office to distinguish itself from competitors and to
increase customer awareness of the Shurgard brand.
Primary marketing emphasis is placed on providing managers with telephone
sales skills to elicit customer needs and close rental sales. The Company also
has a national call center to field overflow calls from individual properties.
Employees at the national call center are able to market and sell a rental at
the Company store nearest to the caller.
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<PAGE>
The Company has sophisticated market research skills, and maintains an
extensive market research database on its primary markets that permits it to
closely track occupancy levels, rental rates and other operational data
regarding self storage properties within these markets. Telephone surveys are
conducted by the national call center to gather information on the Company's
competitors to update the Company's marketing database. The Company also has
conducted focus group research and utilizes customer comment cards to identify
the primary considerations in customers' self storage choices so that the
Company can better address them.
PROPERTY MANAGEMENT SYSTEMS/MANAGEMENT INFORMATION SYSTEMS
The Company has integrated property management systems and procedures for
marketing, advertising, leasing, operations, maintenance and security of
properties and the management of on site personnel. The Company's computerized
management information system links the Company's corporate office with each
store. The Company has developed and begun installing proprietary software that
expedites internal auditing, financial statement and budget preparations, and
manages detailed information with respect to tenant mix, demographics, occupancy
levels, rental rates, revenue optimization, payroll, other expenses and other
information relating to each store. The Company's corporate office can exchange
information with the stores via computer on a daily basis. Management believes
that the Company's new information systems will be adequate to support the
Company's owned properties and significant growth.
COLLECTIONS
Rents are paid in advance on a monthly basis. The Company imposes
substantial late fees for delinquent payment of rent beginning 10 days after the
due date in most markets. Favorable state laws permit relatively rapid
foreclosure on nonpaying tenants without court order to pay past-due charges.
Prior to foreclosing on a unit, the on site property manager will mail a notice
alerting the tenant to the late rental payment and generally will telephone the
tenant. Upon nonpayment of rent, the tenant's access code is invalidated and the
Company may place a lock on the tenant's storage unit. The actual time typically
required to foreclose on a nonpaying tenant and to sell and remove his or her
goods is between 45 and 75 days after default in the states in which the
Company's owned properties are located.
OTHER ACTIVITIES
The Company also manages, under the Shurgard name, self storage properties
owned by others that meet the Company's quality standards. Management of such
properties enables the Company to spread the cost of overhead over a greater
number of properties. Additionally, it enables the Company to expand its
presence in the markets in which it operates and to offer customers a broader
geographic selection of self storage properties to suit their needs. Management
fees earned by the Company are not qualifying income for REIT qualification
purposes. Accordingly, the Company closely monitors the level of these
activities to ensure the Company's continued qualification as a REIT.
GROWTH STRATEGIES
The Company's growth strategies are designed to maximize shareholder value
by increasing funds from operations through (i) internal growth through
increases in revenues and operating efficiencies at its existing stores and (ii)
external growth through the development of new self storage properties and the
acquisition of additional self storage properties. The Company believes that the
experience of its management team in operating, developing and acquiring self
storage properties and its access to capital markets strongly contribute to its
ability to execute these strategies.
INTERNAL GROWTH STRATEGY
Shurgard's internal growth strategy is to increase cash flow by achieving
the highest rental rate structure consistent with strong occupancy rates,
containing costs, and undertaking expansion of its existing stores. By
implementing these strategies, same store revenue for the 140 properties
originally owned by the Company increased an average of 7.7% per year from $57.4
million to $77.1 million and NOI increased an average of 8.2% per year from
$34.5 million to $47.3 million for the four years ended
S-29
<PAGE>
December 31, 1994. This growth in revenue was primarily achieved through
weighted average occupancy per net rentable square foot increases from 79% to
89% and weighted average rent per net rentable square foot increases from $7.16
to $8.25 for the Company's self storage properties for the years ended December
31, 1990 and December 31, 1994, respectively. The growth in NOI was the result
of the increase in revenue and maintaining operating margins for the years ended
December 31, 1990 and December 31, 1994. See "Risk Factors -- General Real
Estate Investment Risks and Self Storage Industry Risks -- Limited Potential for
Occupancy Gains" and "-- Competition."
- OPTIMIZE RENTS. The Company seeks to increase its revenue by achieving
the highest rental rate structure for its stores, consistent with strong
levels of occupancy, through the use of teams of store employees who are
trained and authorized to set rental rates and make rental rate changes
based on their analysis of demand and availability at a particular store.
The Company encourages decentralized decisions by store managers to change
marginal rental rates in order to ensure a fast, flexible response to
changing market dynamics. Store managers evaluate their property's rental
rates on a periodic basis, based on unit demand, unit availability and
competitors' rental rates, and can quickly change marginal rental rates to
ensure that revenues are optimized.
- COST CONTAINMENT AND IMPROVED OPERATING LEVERAGE. The Company maximizes
cash flow by carefully containing operating expenses. For example, the
Company aggressively appealed its real estate tax assessments, which has
resulted in a cumulative reduction in accrued property taxes in excess of
$1.5 million over the last three years. In addition, as the Company
increases the number of properties in its targeted markets, it achieves
larger economies of scale and lessens the impact of corporate overhead
expense. The Company believes that its management and operational
procedures, which can be implemented over a large number of properties,
enable it to add new properties with little additional overhead expense.
- STRATEGIC BUILD-OUTS. The Company seeks to maximize revenues by building
out additional rentable storage space at suitable stores. The Company
receives high incremental returns on investments to build out additional
rental units, either through on site expansion or acquisition of property
adjacent to existing stores, because resulting revenue increases are
achieved with little increase in fixed operating costs.
- ADDRESSING CUSTOMER NEEDS IN ADDITIONAL WAYS. Shurgard has begun a
Company-wide research and development program to identify customer storage
needs and uses, and to engage in pilot programs for meeting those needs.
EXTERNAL GROWTH STRATEGY
The Company's external growth strategy is to develop new, high-quality self
storage properties and to selectively acquire additional self storage properties
that meet or can be upgraded to the Company's standards. In general, the Company
plans to develop or acquire new properties (i) primarily in its existing markets
and (ii) in new markets that create economies of scale with its current network
of stores. The Company seeks to own at least 15 stores in each of its target
markets in order to realize operating and marketing efficiencies and increase
brand awareness. The Company believes that the experience of its management team
in developing and acquiring self storage properties strengthens its ability to
pursue its external growth strategy.
The Company favors development or acquisition of self storage properties in
major metropolitan markets, located near retail or high-traffic corridors,
usually with significant road frontage to increase visibility. The Company
relies on its local market management teams to target areas in which to develop
and acquire new stores. The Company has developed comprehensive market expansion
plans for each of its target markets, and uses the plans as the basis for
selecting new store locations and acquisition targets. The market expansion
plans utilize a demographic analysis of an area along with an evaluation of
competitors' locations, rates and product quality to determine the optimum
number
S-30
<PAGE>
and location of new stores. The Company utilizes its staff of real estate
specialists in four offices around the nation to develop and acquire new stores
in the markets presenting the best business opportunities.
The Company has up to $100 million available pursuant to two revolving
credit facilities. Upon completion of this offering and application of the net
proceeds therefrom, the Company will have up to approximately $100 million
available pursuant to these two revolving credit facilities. See "Use of
Proceeds."
DEVELOPMENT. The Company believes that several factors favor its
development strategy:
- DEVELOPMENT EXPERTISE. The Company has substantial construction
management and architectural experience that was acquired through the
Management Company's development of over 64 properties over the past 22
years. Since 1972, the Company (or its predecessors) have maintained an
internal development staff, which currently employs 19 development
professionals. The in-house development staff oversees construction and
architectural design performed by third parties to ensure cost-effective,
quality development of self storage properties.
- STRATEGIC SITE SELECTION TO MAXIMIZE REVENUES. To obtain the best store
locations, the Company targets sites for development in urban areas and
up-scale retail areas that often require rezoning and other complex
development measures. The Company believes that the difficulties of
developing storage properties in such in-fill areas may discourage
competitors from locating nearby and, as a result, enable the Company to
operate in areas that are underserved. This in turn enables the Company to
charge higher rental rates.
- INCREASED COMPETITION FOR ACQUISITIONS. Recently, increased competition
for acquisitions of high-quality properties has decreased the pool of
favorably priced acquisition targets in many of the Company's markets. In
these markets, management believes that returns from development are
generally more favorable than those from acquisitions, and make attractive
a strategy of developing new self storage centers in the markets in which
the Company currently operates. The Company may also pursue opportunities
for developments in new markets.
- POSITIVE SUPPLY AND DEMAND CHARACTERISTICS. Funding for the construction
of new self storage properties (especially from traditional sources such
as savings and loan associations) has been relatively scarce in recent
years, while demand for storage space has continued to increase. The
Company believes that the scarcity of capital, combined with existing high
construction costs, may have lessened competition for suitable property
development sites and may have caused construction of new properties in
the self storage industry to remain relatively modest.The Company intends
to capitalize on its access to capital to pursue development of new
storage properties under these conditions.
- FOCUS ON QUALITY AND BRAND IMAGE DEVELOPMENT. Development of its own self
storage properties provides the Company with greater control to ensure
excellent construction and consistent building design that is inviting to
customers. The Company's focus on quality and consistency will enable it
to further strengthen awareness of the Shurgard brand, obtain repeat
business, maintain premium prices and differentiate itself from its
competitors.
It has been the Company's experience that a self storage property has a
break-even point of 35% to 40% occupancy, meaning that it must be approximately
35% to 40% occupied (on the basis of net rentable square feet) 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 time frame, the Company will not normally expect a
development property to generate positive cash flow during the first six to nine
months after opening a store.
ACQUISITIONS. The Company believes that there are also several factors that
favor its strategy of selectively acquiring high-quality properties that will
provide a strategic advantage to the Company:
S-31
<PAGE>
- FRAGMENTED INDUSTRY OWNERSHIP. The Company believes that there are
approximately 23,000 self storage centers throughout the United States.
Based on information in the November 1994 issue of MINI-STORAGE MESSENGER,
the Company believes that the three largest operators of self storage
centers (including the Company) manage approximately 2,000 centers, or
approximately 9% of all centers. Management believes that the Company's
access to capital and operating efficiencies due to economies of scale
enable the Company to capitalize on this fragmentation by acquiring
properties from smaller operators which cannot obtain refinancing or
compete as efficiently as larger self storage operators.
- INCREASING ECONOMIES OF SCALE. Additional acquisitions allow the Company
to spread overhead and certain management, marketing and advertising costs
over a greater number of revenue-producing assets. As a result, the
Company can achieve increasing economies of scale with each new property
acquired.
- THOROUGH INVESTIGATION. The Company completes a thorough analysis of each
property that it intends to acquire, including, but not limited to, a
review of capital expenditures that will be required for the property to
meet the Company's standards and, at a minimum, a Phase I environmental
assessment report.
CAPITAL STRATEGY
The Company expects to fund future development and acquisitions through
additional indebtedness, future offerings of equity securities and retained cash
flow.
Upon application of a portion of the net proceeds from this offering to pay
down indebtedness outstanding under the two revolving credit facilities, the
Company expects to have outstanding borrowings equal to approximately 20% of the
Company's total market capitalization, based on $132.4 million indebtedness
outstanding and the assumptions set forth under "Use of Proceeds." This
indebtedness will consist of (i) $122.6 million of indebtedness, secured by
certain real estate assets, that bears interest at a fixed rate per annum of
8.28%, matures on June 2, 2001, and requires monthly payments of interest only
until maturity (the "Nomura Mortgage"), (ii) a $7.3 million nonrecourse mortgage
note payable, secured by the Company's storage center in Daly City, California,
that bears interest at 8% per annum and requires quarterly additional interest
payments equal to 90% of net cash flow as defined in the related loan agreement,
and matures on January 1, 2004, (iii) a mortgage note payable in the amount of
approximately $1.5 million secured by the Company's storage center in
Bellingham, Washington, that requires monthly principal and interest payments of
$13,441, bears interest at 10.25% per annum, and matures in April 2001, and (iv)
a $1.0 million promissory note, secured by a standby letter of credit, that
accrues interest at the rate of 6% per annum and requires an annual installment
payment of $500,000 on each of September 1, 1995 and September 1, 1996.
The Company has access to two revolving credit facilities to fund
development and acquisitions. The net proceeds from this offering will be used
to pay down approximately $89.0 million outstanding under these facilities. The
first revolving credit facility is for indebtedness of up to $50 million,
secured by certain real estate assets, that bears interest at a rate per annum
of either the lender's prime rate or LIBOR plus 200 basis points and matures on
August 18, 1996. The second revolving credit facility is for indebtedness of up
to $50 million, secured by certain real estate assets, that bears interest at a
rate per annum of either LIBOR plus 175 basis points or the prime rate of
Citibank, N.A. minus 50 basis points, requires a draw fee of 25 basis points of
the amount drawn, and matures on December 30, 1996. As of March 31, 1995, the
weighted average interest rate per annum on outstanding lines of credit was 8.4%
and the total amount drawn under the two lines was $49.0 million. The actual
amount available under each of the two revolving credit facilities is a function
of the quarterly income performance of the properties securing the respective
credit facility and the quarterly debt service payments for such facility.
S-32
<PAGE>
The Company 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
Company anticipates refinancing outstanding debt upon maturity through long-term
debt or equity or some combination thereof.
Under the By-Laws, subject to certain exceptions, the Company may not incur
debt if, after giving effect to such borrowing, its Indebtedness would exceed
50% of its Total Assets or 300% of its Adjusted Net Worth. As of March 31, 1995,
the Company's Indebtedness was approximately 33% of its Total Assets and
approximately 52% of its Adjusted Net Worth. On a pro forma basis assuming the
offering of Common Stock contemplated hereby and application of the net proceeds
therefrom, the Company's Indebtedness would have been less than 22% of Total
Assets and 30% of Adjusted Net Worth. See "Policies Regarding Investment and
Certain Other Activities -- Financing Policies."
THE PROPERTIES
The Company owns and operates, as of May 15, 1995, directly and through its
wholly owned subsidiaries and joint ventures, 176 properties (including 173 self
storage properties) located in 22 major metropolitan areas in 19 states. The
Company's self storage properties are designed to offer accessible storage space
for personal and business uses. Individuals typically rent individual units in
self storage properties for storage of personal belongings such as furniture,
appliances, motor vehicles, boats and other household and recreational goods.
Businesses typically rent space for storage of business property such as
equipment, seasonal goods, records and fixtures. The Company believes that it is
desirable to have commercial customers because they tend to rent larger units,
stay for longer terms, are more reliable payors and are less sensitive to price
increases. Accordingly, the Company has marketing programs that target
commercial users. The Company estimates that commercial users account for
approximately 35% to 40% of its total occupancy, which is substantially higher
than the industry average of 23%.
The Company's self storage properties are divided into a number of
self-enclosed rental units that generally range in size from 25 to 360 square
feet. Many properties have uncovered storage outside the buildings for parking
motor vehicles, boats, campers and other similar items suitable for outside
storage. Approximately 20% of the properties owned by the Company include
climate-controlled storage units for which the Company usually charges rents at
substantial premiums.
Customers of self storage properties are generally responsible for
delivering and retrieving their goods. Generally, customers can access leased
space directly by automobile or truck, but some properties, in particular the
multistory buildings, have separate loading docks and elevators available for
delivery and retrieval of stored goods. Customers generally have access to their
unit without additional charge during normal business hours and control access
to such space through the use of padlocks. The Company offers truck rentals at a
majority of its properties for added convenience to its customers and to
differentiate itself from most of its competitors. The Company believes it is
the largest leasing agent of Ryder trucks in the United States, based on the
number of truck rental locations. In addition to truck rentals, the Company
sells locks, boxes and packing and storage materials at its stores.
The leasing, maintenance and operation of the Company's stores are the
responsibility of store managers. The property'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, video and intercom
surveillance devices, property fencing and lighting.
Although the Company's stores range considerably in size, most properties
consist of one or more single-story buildings that are located on a site of 1.5
to 5 acres. The smallest store has approximately 25,000 net rentable square
feet, while the largest store has approximately 300,000 net rentable square
feet. The properties generally 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
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<PAGE>
generally constructed with metal studs and partitions or other construction
materials that are secure but readily movable. The parking areas and driveways
are generally paved with asphalt or cement. All stores have fencing,
floodlights, sliding or swinging gates and certain additional security devices
mentioned above. See "-- Business Strategy -- Convenient and Secure Stores --
Property Security."
The following table provides property-by-property information regarding
location, the year developed or acquired (by the Company or by the Predecessor,
as the case may be), year built, approximate net rentable square feet and
acreage of each of the self storage properties and business parks owned by the
Company as of May 15, 1995. The Company owns additional undeveloped properties
not reflected in the table.
<TABLE>
<CAPTION>
APPROXIMATE
OWNED YEAR NET RENTABLE
PROPERTY NAME PROPERTY LOCATION SINCE BUILT SQUARE FEET ACREAGE
- ------------------------------------- --------------------------- ---------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Kalamazoo Kalamazoo, MI 1980 1980 43,000 3.0
Vancouver Mall Vancouver, WA 1980 1982 46,000 3.3
West Seattle Seattle, WA 1980 1981 48,000 3.4
Bellingham Bellingham, WA 1981 1981 73,000 5.7
Everett Everett, WA 1981 1978 64,000 4.2
Highland Hill Tacoma, WA 1981 1982 60,000 3.9
Troy East Troy, MI 1981 1975/77 79,000 4.8
Alsip Alsip, IL 1982 1980 66,000 4.6
Dolton Calumet City, IL 1982 1979 64,000 3.0
Lombard Lombard, IL 1982 1980 52,000 3.1
Rolling Meadows Rolling Meadows, IL 1982 1980 60,000 4.5
Schaumburg Schaumburg, IL 1982 1980 71,000 4.3
Grand Rapids Grand Rapids, MI 1983 1978 46,000 3.2
Lansing Lansing, MI 1983 1978/79 41,000 2.5
Salem Salem, OR 1983 1979/81 67,000 3.8
Seattle Seattle, WA 1983 1979 79,000 4.5
Southfield Southfield, MI 1983 1976 77,000 4.3
Troy West Troy, MI 1983 1979 88,000 5.2
Bellevue East and West (1) Bellevue, WA 1984 1975 165,000 10.8
Edmonds Edmonds, WA 1984 1974/75 120,000 6.5
Factoria Bellevue, WA 1984 1984 57,000 3.8
Federal Way Federal Way, WA 1984 1975 134,000 5.7
Fife (2) Tacoma, WA 1984 1977 64,000 3.9
North Spokane Spokane, WA 1984 1976 76,000 4.1
Renton Renton, WA 1984 1979/89 80,000 4.5
Tamarac Denver, CO 1984 1977 25,000 1.9
Tempe Tempe, AZ 1984 1976 54,000 3.0
Thornton Denver, CO 1984 1984 41,000 2.4
Totem Lake Kirkland, WA 1984 1978 61,000 2.6
Windermere Littleton, CO 1984 1977/79 83,000 5.3
Woodinville Woodinville, WA 1984 1982/84 70,000 3.5
Gladstone Gladstone, OR 1984/85 1981/89 48,000 3.2
Beaverton Beaverton, OR 1985 1974 26,000 2.0
Bedford Bedford, TX 1985 1984 69,000 2.7
Bellefontaine St. Louis, MO 1985 1979 45,000 4.9
Bridgeview Bridgeview, IL 1985 1983 75,000 4.1
Burien Seattle, WA 1985 1974 92,000 5.3
Colton Colton, CA 1985 1984 73,000 3.8
Hayward Hayward, CA 1985 1983 48,000 2.8
Hill Country Village San Antonio, TX 1985 1982 79,000 4.0
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
OWNED YEAR NET RENTABLE
PROPERTY NAME PROPERTY LOCATION SINCE BUILT SQUARE FEET ACREAGE
- ------------------------------------- --------------------------- ---------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Irving Irving, TX 1985 1975/84 78,000 4.2
Issaquah Issaquah, WA 1985 1986 56,000 4.7
N.W. Houston Houston, TX 1985 1979/83 104,000 4.9
Oakland Park Ft. Lauderdale, FL 1985 1974/78 292,000 13.4
Phoenix Phoenix, AZ 1985 1984 77,000 2.7
Plymouth Canton Township, MI 1985 1979 75,000 5.3
San Antonio NE San Antonio, TX 1985 1982 74,000 3.6
Scottsdale Scottsdale, AZ 1985 1976/85 47,000 3.0
Sea-Tac Seattle, WA 1985 1979 60,000 3.0
Southcenter Renton, WA 1985 1979 67,000 4.1
Union City Hayward, CA 1985 1985 42,000 2.9
Scottsdale North Scottsdale, AZ 1985/87 1985 112,000 4.1
Walled Lake Walled Lake, MI 1985/89 1984 68,000 4.3
Newport News S. Newport News, VA 1985/92 1985 60,000 3.9
Airport Philadelphia, PA 1986 1985 101,000 6.7
Arlington Arlington, TX 1986 1984 57,000 2.7
Aurora North Seattle, WA 1986 1978 58,000 1.6
B Y Gold Brooklyn, NY 1986 1940 108,000 0.4
B Y Utica Brooklyn, NY 1986 1964 71,000 1.1
B Y Van Dam Long Island City, NY 1986 1925 63,000 0.5
B Y Yonkers Yonkers, NY 1986 1928 102,000 1.6
Chandler Chandler, AZ 1986 1986 69,000 4.0
Clinton Clinton, MD 1986 1985 31,000 2.0
College Park Indianapolis, IN 1986 1984 70,000 6.0
Downtown Seattle (3) Seattle, WA 1986 1912 28,000 0.3
East Lynnwood Lynnwood, WA 1986 1978 80,000 3.8
El Cajon El Cajon, CA 1986 1977 127,000 6.0
El Cerrito Richmond, CA 1986 1987 62,000 1.5
Fairfax Fairfax, VA 1986 1980 62,000 5.6
Glendale Indianapolis, IN 1986 1985 60,000 5.6
Kearney-Balboa San Diego, CA 1986 1984 94,000 2.3
La Habra La Habra, CA 1986 1979/91 97,000 7.1
Lakewood Golden, CO 1986 1985 67,000 2.7
Lisle Lisle, IL 1986 1976/86 52,000 3.4
MacArthur Blvd. Irving, TX 1986 1984 63,000 7.2
North Austin Austin, TX 1986 1982 76,000 5.9
Palo Alto Palo Alto, CA 1986 1987 49,000 1.4
Roswell Roswell, GA 1986 1986 57,000 3.8
Santa Ana Santa Ana, CA 1986 1975/86 168,000 8.1
Seminole Seminole, FL 1986 1984/85 61,000 2.7
Sunnyvale Sunnyvale, CA 1986 1974/75 122,000 6.5
Thousand Oaks San Antonio, TX 1986 1987 53,000 2.9
West Chester (4) West Chester, PA 1986 1980 87,000 7.0
Westheimer Houston, TX 1986 1977 73,000 3.7
Westwood Santa Monica, CA 1986 1988 38,000 0.3
Willowbrook Willowbrook, IL 1986 1979/82 44,000 3.3
B Y Northern Long Island City, NY 1987 1940 78,000 1.9
Capitol Hill (5) Seattle, WA 1987 1988 76,000 0.7
Cook Road Houston, TX 1987 1986 61,000 3.0
Euless Blvd. Hurst, TX 1987 1974 68,000 4.7
</TABLE>
S-35
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
OWNED YEAR NET RENTABLE
PROPERTY NAME PROPERTY LOCATION SINCE BUILT SQUARE FEET ACREAGE
- ------------------------------------- --------------------------- ---------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Falls Church Falls Church, VA 1987 1988 93,000 1.5
Fontana Sierra Fontana, CA 1987 1980/85 84,000 3.6
Fredricksburg San Antonio, TX 1987 1978/82 82,000 4.5
Interbay Seattle, WA 1987 1988 80,000 0.4
King City Tigard, OR 1987 1986 84,000 4.9
Mesa Mesa, AZ 1987 1985 103,000 4.8
Military Trail West Palm Beach, FL 1987 1981 124,000 9.4
Mountain View Mountain View, CA 1987 1986 29,000 0.7
Northglenn Northglenn, CO 1987 1979 75,000 5.5
Old Bridge Matawan, NJ 1987 1987 78,000 6.1
Olive Innerbelt St. Louis, MO 1987 1952/86 94,000 2.5
Phoenix East Phoenix, AZ 1987 1984 66,000 2.0
S. San Francisco San Francisco, CA 1987 1985 57,000 2.1
Smokey Point Arlington, WA 1987 1984/87 34,000 2.2
Solana Beach (4) Solana Beach, CA 1987 1984 95,000 4.5
South Tacoma Tacoma, WA 1987 1975 46,000 3.1
Suitland Suitland, MD 1987 1985 44,000 2.7
West Palm Beach West Palm Beach, FL 1987 1975 163,000 11.8
Tacoma Interstate (2) Tacoma, WA 87/88/91 1979/81 128,000 12.2
Ann Arbor Ann Arbor, MI 1988 1977 62,000 3.9
Bandera Road San Antonio, TX 1988 1981 76,000 3.6
Bayside Virginia Beach, VA 1988 1984 28,000 1.7
Blanco Road San Antonio, TX 1988 1989/91 66,000 3.6
Brentwood Brentwood, MO 1988 1977 53,000 3.4
Canton (6) Canton, MI 1988 1986 58,000 3.3
Crofton Gambrills, MD 1988 1985 40,000 2.1
Culver City Los Angeles, CA 1988 1989 76,000 1.4
Federal Houston, TX 1988 1988 55,000 3.4
Fraser (6) Fraser, MI 1988 1985 73,000 5.2
Herndon Herndon, VA 1988 1985 39,000 3.0
Hillside Hillside, IL 1988 1988 65,000 5.3
Huntington Beach Huntington Beach, CA 1988 1986 91,000 3.3
Imperial Valley Houston, TX 1988 1987 54,000 3.1
Kingwood Kingwood, TX 1988 1988 54,000 3.3
Laurel Laurel, MD 1988 1984 30,000 2.0
Livonia (6) Livonia, MI 1988 1985 67,000 4.8
Manassas East Manassas, VA 1988 1984 35,000 2.0
Manassas West Manassas, VA 1988 1985 35,000 1.5
North Richmond Richmond, VA 1988 1984 37,000 2.6
Portland Portland, OR 1988 1988 49,000 2.1
Sugarland Sugarland, TX 1988 1987 55,000 3.0
Warren (6) Warren, MI 1988 1985 68,000 4.6
Woodlands Houston, TX 1988 1988 64,000 3.8
Beltline Rd. Irving, TX 1989 1985/86 89,000 6.3
Denny Road Beaverton, OR 1989 1988 65,000 6.2
Greenbriar Houston, TX 1989 1988 60,000 1.8
Kempsville Virginia Beach, VA 1989 1985 33,000 2.0
Medical Center Houston, TX 1989 1989 57,000 2.6
Virginia Beach Virginia Beach, VA 1989 1985 36,000 2.3
Hillcroft (4) Houston, TX 1991 1988 59,000 3.4
</TABLE>
S-36
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
OWNED YEAR NET RENTABLE
PROPERTY NAME PROPERTY LOCATION SINCE BUILT SQUARE FEET ACREAGE
- ------------------------------------- --------------------------- ---------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Briggs Chaney Silver Spring, MD 1994 1987 28,000 2.0
Capital Blvd Raleigh, NC 1994 1984 35,000 2.1
Cary Cary, NC 1994 1984 62,000 4.7
Cedar Road Chesapeake, VA 1994 1989 36,000 2.1
Charlottesville Charlottesville, VA 1994 1984 32,000 2.1
Crater Road Petersburg, VA 1994 1987 36,000 3.8
Dale City Dale City, VA 1994 1986 31,000 1.6
Frederick Frederick, MD 1994 1987 32,000 1.7
Gainesville Gainesville, VA 1994 1988 31,000 2.0
Gaithersburg Gaithersburg, MD 1994 1986 57,000 5.4
Garner Garner, NC 1994 1987 28,000 3.1
Germantown Germantown, MD 1994 1988 45,000 1.9
Glenwood Raleigh, NC 1994 1983 31,000 1.9
Holland Road Virginia Beach, VA 1994 1985 34,000 3.9
Jeff Davis Hwy Richmond, VA 1994 1990 35,000 5.2
Laskin Road Virginia Beach, VA 1994 1984 39,000 2.5
Morrisville Morrisville, NC 1994 1988 40,000 3.3
Oxon Hill Ft. Washington, MD 1994 1987 28,000 1.3
Princess Anne Road Virginia Beach, VA 1994 1985 40,000 2.2
Temple Avenue Petersburg, VA 1994 1989 34,000 4.0
Daly City Daly City, CA 1995 1989 96,000 5.2
Hermitage (7) Nashville, TN 1995 1995 68,000 19.0
Taylor Taylor, MI 1995 1980 66,000 4.2
Oak Forest Orland Park, IL 1995 1991 63,000 3.9
Medical Center (8) Nashville, TN 1994 1995 60,000 2.3
Ansley Park Atlanta, GA 1995 1991 69,000 1.4
Brookhaven Atlanta, GA 1995 1992 66,000 2.0
Decatur Atlanta, GA 1995 1992 63,000 2.5
Oregon City Portland, OR 1995 1992 57,000 3.2
Edgmont Philadelphia, PA 1995 1992 64,000 5.5
Barbur Boulevard Portland, OR 1995 1993 67,000 2.8
Liberty Road Salem, OR 1995 1993 54,000 4.4
Warner (9) Mesa, AZ 1995 1985 62,000 3.1
Universal City (9) San Antonio, TX 1995 1985 77,000 5.1
Lake City (9) Seattle, WA 1995 1987 51,000 1.1
South Hill Seattle, WA 1995 1980 44,000 2.8
<FN>
- ------------------------
(1) Bellevue East and Bellevue West are now operated as one property.
(2) Property is a business park.
(3) Property is a commercial building.
(4) The Company does not have fee title, but has a long-term lease, with
respect to the land on which property is located.
(5) The Company owns a 90% interest in this property.
(6) The Company owns a 30% interest in this property.
(7) The Company owns a 50% interest in this property.
(8) The Company owns a 67% interest this property.
(9) The Company owns a 59.5% interest in this property.
</TABLE>
S-37
<PAGE>
The following table sets forth same store information regarding weighted
average occupancy per net rentable square foot and weighted average rent per net
rentable square foot for the 137 self storage properties originally owned by the
Company for the years ended December 31, 1993 and December 31, 1994 and for the
quarter ended March 31, 1995.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE WEIGHTED AVERAGE RENT
NUMBER OCCUPANCY ---------------------------------
OF ----------------------------------------- MARCH 31,
STATE STORES 1993 1994 MARCH 31, 1995 1993 1994 1995
- -------------- --------------- ----- ----------- --------------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Arizona 7 97% 91% 82% $ 6.26 $ 7.50 $ 8.62
California 17 88 86 84 8.85 9.28 9.74
Colorado 5 96 91 88 6.30 7.01 7.20
Florida 4 83 85 82 7.67 7.70 8.08
Illinois 9 91 95 92 7.47 7.64 8.07
Michigan 13 87 91 89 6.08 6.66 7.17
New York 5 80 87 90 14.34 14.63 15.36
Oregon 6 89 93 93 6.82 7.22 7.45
Texas 24 79 87 83 7.41 7.63 8.03
Virginia 10 90 89 86 9.40 9.94 10.17
Washington 24 88 88 87 7.58 7.79 7.98
Other 13 89 91 85 7.95 8.48 8.88
</TABLE>
The following table sets forth same store information regarding aggregate
weighted average occupancy per net rentable square foot and weighted average
rent per net rentable square foot for the 137 self storage properties originally
owned by the Company for the years ended December 31, 1990 through December 31,
1994 and for the quarter ended March 31, 1995.
<TABLE>
<CAPTION>
MARCH 31,
1990(1) 1991(1) 1992(1) 1993(2) 1994(2) 1995(2)
------- ------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Weighted average occupancy......... 79% 82% 86% 87% 89% 86%
Weighted average rent.............. $7.16 $7.35 $7.68 $7.84 $8.25 $8.66
<FN>
- ------------------------
(1) Calculated as a simple average for the 17 partnerships that comprised the
Predecessor.
(2) Calculated as the weighted average of the original 137 self storage
properties owned by the Company.
</TABLE>
LEASING OF PROPERTIES. Storage units are usually rented on a month-to-month
basis. The average rental stay for a tenant is approximately 1.5 years. This
average is comprised of the rental periods of business tenants, who tend to stay
in rented units for longer periods (approximately 2 to 3 years), and those of
residential customers, who tend to stay in rented units for shorter periods
(approximately six months to a year). Rental income from leased space
constitutes the primary revenue from such properties, but additional revenue is
received from incidental services rendered at the properties, such as lock and
box sales and truck rentals. Rental rates vary substantially depending on the
size of the storage space and the property location and quality of the property.
S-38
<PAGE>
OTHER PROPERTIES. The Company owns two business parks, both of which are
located near Tacoma, Washington. The business parks were built in 1977 and 1979
and contain an aggregate of approximately 192,000 net rentable square feet. The
Company also manages three business parks for two affiliated owners and one
unaffiliated owner. In addition, the Company owns a property in downtown
Seattle, Washington that is leased to a records storage company affiliated with
the Company's management on terms approved by the Company's disinterested
directors.
THE SELF STORAGE INDUSTRY
The self storage industry serves an important function in the commercial and
residential real estate markets. Self storage properties were first developed in
the early 1960s in the southwestern United States 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 housing (resulting in smaller
houses), 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 properties were
built throughout the United States. Generally, such properties were constructed
along major thoroughfares that 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 into
self storage properties.
The expertise required to successfully develop, acquire, own and manage self
storage properties has significantly increased in recent years as
competitiveness and complexity within the industry have grown. Experience and
technical ability in the areas of real estate development, acquisition,
disposition, project design, management, marketing and finance, among others,
are required to take full advantage of real estate investments in self storage
properties.
The Company believes, based on the experience of its management, that the
self storage industry is characterized by:
- FRAGMENTED OWNERSHIP. The self storage industry is highly fragmented,
with properties owned and operated by individuals, small businesses,
institutional investors, REITs and syndicated partnerships. The Company
believes that there are approximately 23,000 self storage centers
throughout the United States. Based on information in the November 1994
issue of MINI-STORAGE MESSENGER, the Company believes that the three
largest operators of self storage centers (including the Company) manage
approximately 2,000 centers, or approximately 9% of all centers. Based on
the aggregate amount of net rentable square feet owned or under
management, the Company is the second largest operator of self storage
centers in the United States.
- ECONOMIES OF SCALE. Similar successful and tested management, training
and operational techniques can be implemented efficiently at hundreds of
self storage properties throughout the United States with only modest
adjustments to accommodate market and regional differences. Substantial
economies of scale can yield significant efficiencies for operators that
manage large numbers of self storage properties.
- HIGH GROSS MARGINS. As compared to the apartment industry, the self
storage industry enjoys high gross operating margins. It has been the
Company's experience that a self storage property has a break-even point
of 35% to 40% occupancy, meaning that it must be approximately 35% to 40%
occupied (on the basis of net rentable square feet) in order for gross
receipts from operations to equal or exceed normal operating expenses
(exclusive of debt service payments associated with the property).
S-39
<PAGE>
- LOW LEVELS OF PRICE SENSITIVITY. The Company believes that existing
customers of a self storage center have a low level of sensitivity to
incremental price increases due to the time and, in certain cases, moving
costs required to move goods out of self storage. Accordingly, self
storage operators may make frequent incremental increases in rents with
little effect on existing customer base.
- INCREASING CUSTOMER DEMAND. The demand for self storage has expanded due
to several factors, including greater population growth and mobility, the
increasing cost of housing (resulting in smaller houses), cost-cutting
measures by businesses, greater customer awareness and an increased range
of products offered by self storage operators. In addition, businesses
have begun to utilize self storage properties to release retail or office
space for more productive use. The Company anticipates that demand for
self storage will continue to expand in view of existing high construction
costs and the continuing need for low-cost storage. Although the number of
users has increased, relatively low market penetration in many markets
provides opportunities for further growth.
- RELATIVE STABILITY OF DEMAND. Demand for self storage products and
services has remained relatively consistent during past economic
downturns. The Company believes that several factors primarily contribute
to the relative stability: the varied nature of the uses of self storage,
the ability to lease in smaller increments than those of other commercial
and residential space, and the effect of economic change itself, whether
positive or negative, which causes people to make decisions to use
storage. The varied uses of self storage include residential movers
(including those moving into smaller homes during recessionary times and
larger homes in prosperous times), long-term storage of boats and
recreational vehicles, and business uses for inventory, excess furnishings
due to downsizings, and offsite records storage in growth times.
Typical customers of a self storage property include individuals, ranging
from homeowners to college students, and commercial users, such as sales
representatives and distributors, who require frequent access, to business
owners requiring seasonal storage. According to industry sources, business users
account for approximately 23% of self storage customers, and the Company
believes business use to be a growing segment of demand in the industry. A
single customer rarely occupies more than 1% to 2% of the net rentable area in
any particular store.
Capital expenditures are generally less for self storage properties as
compared to other types of commercial real estate due to the properties'
structural simplicity and durable materials and the lack of tenant improvement
demands. Primary capital expenditures include periodic expenditures for
replacing roofs and pavement, as well as improvements such as expansions and
unit reconfigurations. Expense items include repairing asphalt, doors, fences
and masonry walls, maintaining landscaping, and repairing damage caused by
customer vehicles. Minimal maintenance is required within a storage unit between
customers.
COMPETITION
Competition exists in every market in which the Company's stores are
located. The Company competes with, among others, national, regional and
numerous local self storage operators and developers. The primary factors on
which competition is based are location, rental rates, security, suitability of
the property's design to prospective tenants' needs and the manner in which the
property is operated and marketed. The Company believes that the primary
competition for potential customers of any of the Company's self storage stores
comes from other self storage properties within a three-to-five-mile radius of
that store. The Company has established itself within its markets as a
high-quality operator that emphasizes customer service and security. The Company
does not seek to be the lowest-price self storage provider. Some of the
Company's competitors may have more resources than the Company.
S-40
<PAGE>
Entry into the self storage business through acquisition of existing
properties is relatively easy for persons or institutions with the required
initial capital. Competition may be accelerated by any increase in availability
of funds for investment in real estate. Decreases in interest rates tend to
increase the availability of funds and therefore can increase the growth of
competition. Due to recent increases in plans for development of self storage
properties, the Company anticipates that increased available storage space may
reduce occupancy levels per storage property within the industry in 1996 or 1997
and further intensify competition among storage providers for available tenants.
The extent to which the Company is affected by competition will depend in
significant part on local market conditions.
REGULATION
ENVIRONMENTAL REGULATIONS
The Company is subject to federal, state and local environmental regulations
that apply to the ownership, management and development of real property,
including regulations affecting both construction activities and the operation
of self storage properties.
In developing properties and constructing improvements, the Company utilizes
environmental consultants and/or governmental data to determine whether there
are any floodplains, wetlands or environmentally sensitive areas that are part
of the property to be developed. If any such areas are identified, development
and construction are planned in conformance with federal and local environmental
and land-use requirements.
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 may impose liability without regard to whether the owner or operator knew
of, or caused, the release of such hazardous substances. Liability could be
created by prior uses of the property or by the unauthorized actions of tenants.
The presence of hazardous substances on a property may adversely affect the
owner's ability to sell such property or to borrow using such property as
collateral, and may cause the owner or manager of the property to incur
substantial remediation costs. In addition to claims for cleanup costs, the
presence of hazardous substances on a property could result in the owner or
manager incurring substantial liabilities as a result of a claim by a private
party for personal injury or a claim by an adjacent property owner for property
damage.
The Company has not been notified by any governmental authority of any
current material environmental noncompliance, claim or liability in connection
with any of the properties it owns or manages. The Company has not been notified
of a current material claim for personal injury, property damage or response
cost recovery by a private party in connection with any of the properties
regarding environmental conditions. The Company has received a Phase I
environmental assessment report prepared by an independent environmental
consultant for each of the properties that it owns. The purpose of each such
report was to identify, to the extent reasonably possible and based on
reasonably available information, any existing and potential conditions
resulting from hazardous or toxic substances, including petroleum products and
asbestos, at such properties. Phase I environmental assessments generally
include: (i) a review of available maps, aerial photographs and past and present
uses of the site; (ii) limited inquiries of federal, state and local agencies
having jurisdiction over certain environmental matters; and (iii) an inspection
of appropriate public records. Phase I environmental assessments also generally
include an on site visual inspection of the property to determine evidence of
past or present on site waste disposal, visible surface contamination, potential
sources of soil and groundwater contamination, above-surface and underground
storage tanks, drums, barrels and other storage containers, current waste
streams and management practices, potential asbestos-containing materials, and
polychlorinated biphenyl transformers. In addition, as part of a Phase I
environmental assessment, abutting properties and nearby sources of potential
contamination generally are identified from a review of governmental records and
evaluated for potential impact to the property, to the extent reasonably
possible. The Company has received Phase II environmental assessment reports
S-41
<PAGE>
prepared by independent environmental consultants for some of the properties
that it owns. Phase II environmental assessments can include soil testing,
ground-water sampling, asbestos inspections and other investigations deemed
appropriate by the environmental consultants, usually based on the Phase I
findings. There can be no assurance, however, that any Phase I or Phase II
environmental assessment report on the Company's properties identified all
significant environmental problems, that no additional liabilities exist or that
future contamination might not occur. The Company has not received a Phase I
environmental assessment report for many of the properties that it manages on
behalf of third-party owners.
The Company has recently been advised of the presence of groundwater
contamination underlying one of its properties in St. Louis, Missouri. The
Company is currently investigating this matter, but the source and extent of
this contamination and any potential liability related thereto are unknown at
this time. Except as set forth in the foregoing sentence, the Company is not
aware of any environmental condition with respect to the properties that it owns
or manages that could have a material adverse effect on the Company's financial
condition or results of operations. There can be no assurance, however, that any
environmental assessments undertaken with respect to the properties have
revealed all potential environmental liabilities, that any prior owner or
operator of the properties did not create any material environmental condition
not known to the Company, or that an environmental condition does not otherwise
exist as to any one or more of the properties that could have a material adverse
effect on the Company's financial condition or results of operation. In
addition, there can be no assurance that (i) future laws, ordinances or
regulations will not impose any material environmental liability, (ii) the
current environmental condition of the Company's owned or managed properties
will not be affected by the condition of properties in the vicinity of such
properties (such as the presence of leaking underground storage tanks) or by
third parties unrelated to the Company, or (iii) tenants will not violate their
leases by introducing hazardous or toxic substances into the Company's owned or
managed properties that could expose the Company to liability under federal or
state environmental laws.
AMERICANS WITH DISABILITIES ACT; FIRE AND SAFETY REGULATIONS
Under the ADA, all public accommodations are required to meet certain
federal requirements relating to physical access and use by disabled persons.
Compliance might require, among other things, removal of access barriers. A
determination that the Company is not in compliance with the ADA could result in
the imposition of fines, injunctive relief, damages or attorneys' fees. If the
Company were required to make modifications to comply with the ADA, the
Company's ability to make expected distributions to its shareholders could be
adversely affected; however, management believes that such effect would not be
material. In addition, the Company is 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 Company's properties. Compliance with such requirements
may require the Company to make substantial capital expenditures, which
expenditures would reduce the money otherwise available for distribution to
shareholders.
INSURANCE
Management believes that its self storage properties are covered by adequate
fire, flood, wind, earthquake and property insurance provided by reputable
companies and with commercially reasonable deductibles and limits. The Company
maintains comprehensive liability insurance coverage with respect to the self
storage properties that it owns or manages with policy specifications, limits
and deductibles customarily carried for similar properties. The Company or its
predecessors have obtained existing title insurance insuring fee title to the
properties that the Company owns in an aggregate amount that the Company
believes to be adequate.
S-42
<PAGE>
EMPLOYEES
As of April 30, 1995, the Company employed approximately 600 persons. None
of the Company's employees is covered by a collective bargaining agreement. The
Company believes that its relations with its employees are good.
LEGAL PROCEEDINGS
There is no material litigation currently pending or, to the Company's
knowledge, threatened against the Company.
POLICIES REGARDING INVESTMENT AND CERTAIN OTHER ACTIVITIES
The following is a discussion of the Company's policies with respect to
investment, financing, conflict of interest and certain other activities. The
policies with respect to these activities have been determined by the Company's
Board of Directors and are reflected in part in the By-Laws. Certain of these
policies and related restrictions that are contained in the By-Laws currently
may not be amended or revised without the approval of the holders of a majority
of the outstanding Common Stock. Otherwise, they may be amended or changed from
time to time at the discretion of the Board of Directors without a vote of the
shareholders.
The Board of Directors has approved, and recommended to the shareholders for
approval at the Company's 1995 annual meeting of shareholders, an amendment to
Section 16 of the By-Laws to permit the Board of Directors to amend the By-Laws
without action by the shareholders, although the shareholders would retain the
right to amend or alter the By-Laws at any time. In addition, the Board of
Directors has approved amendments to the By-Laws affecting certain of the
policies described below (the "Proposed Amendments"), that will become effective
upon shareholder approval of the amendment to Section 16 of the By-Laws. If the
amendment to Section 16 of the By-Laws is approved by the shareholders, the
policies described below may in the future be amended or changed at the
discretion of the Board of Directors. The Proposed Amendments are discussed in
relation to certain of the policies discussed below and are summarized under "--
Amendments to the By-Laws."
In the following discussion, the term "Total Assets" means the amount of
total assets of the Company as determined in accordance with generally accepted
accounting principles, consistently applied, plus all depreciation and
amortization (or, in the alternative, the appraised value of the Company's
assets determined in accordance with guidelines established by the Board of
Directors, consistently applied); the term "Adjusted Net Worth" means the Total
Assets (determined in accordance with generally accepted accounting principles),
less reasonable reserves and less total liabilities; and the term "Indebtedness"
means indebtedness for borrowed money incurred by the Company and its
subsidiaries.
INVESTMENT POLICIES
The Company's investment objectives are to develop, acquire and own
income-producing self storage properties. Its policies, in part reflected in the
By-Laws, contemplate (i) direct ownership of self storage properties, (ii)
indirect participation in such properties through investments in corporations,
business trusts, general partnerships, limited partnerships, joint ventures and
other legal entities, (iii) mortgage loans secured by self storage properties,
and (iv) development and acquisition of unimproved property or the acquisition
and conversion of existing structures. See "Business and Properties -- Growth
Strategies."
Although the Company has pursued its investment objectives primarily through
the direct development, acquisition and ownership of self storage properties, it
has recently made limited investments in participating mortgage loans, in joint
ventures relating to three properties in Tennessee and in Benelux SCS, through
which it proposes to develop, own and operate self storage centers in the
Benelux countries. See "Business and Properties -- Recent Developments." The
Company expects to continue making similar investments. The Company does not
currently invest in securities of other REITs or other widely held entities, and
does not have any intention of doing so.
S-43
<PAGE>
Currently, the By-Laws require that the Company obtain a third-party
appraisal of the underlying real property securing mortgage loans, although the
Board of Directors is entitled to rely on a variety of accepted methods,
including appraisals, in valuing real properties for direct acquisition. One of
the Proposed Amendments would permit the Board of Directors to use the same
valuation standards in considering mortgage loans as it presently applies in the
direct acquisition of property. The By-Laws also limit mortgage loans to 25% of
the Company's Total Assets; at March 31, 1995, mortgage loans represented 2.0%
of Total Assets. No change is contemplated in this percentage limitation.
The By-Laws permit the Company to invest in office and business parks and
other commercial real estate if the Board of Directors makes certain findings
and the investments do not affect the Company's REIT qualification. With the
exception of two business parks and a commercial property acquired by the
Company in the Consolidation and office space ancillary to the Participating
Mortgage Loans, since the Company began operations on March 1, 1994, the Company
has not made, and has no present plans to make, any such investments.
FINANCING POLICIES
Under the By-Laws, subject to certain exceptions, the Company may not incur
debt if, after giving effect to such borrowing, its Indebtedness would exceed
50% of its Total Assets or 300% of its Adjusted Net Worth. As of March 31, 1995,
the Company's Indebtedness was approximately 33% of its Total Assets and
approximately 52% of its Adjusted Net Worth. On a pro forma basis assuming the
offering of Common Stock contemplated hereby and application of the net proceeds
therefrom, the Company's Indebtedness would have been less than 22% of Total
Assets and 30% of Adjusted Net Worth. The Proposed Amendments do not change
these limitations, although the amendment to Section 16 of the By-Laws, if
approved by the shareholders, will permit the Board of Directors to adjust these
limits in the future without shareholder action. The Board of Directors,
however, does not presently contemplate any change.
Indebtedness incurred by the Company may be in the form of purchase money
obligations to the sellers of properties, publicly or privately placed debt
instruments, or financing from banks, institutional investors or other lenders,
any of which indebtedness may be unsecured or may be secured by mortgages or
other interests in the property owned by the Company or its subsidiaries. Such
indebtedness may be recourse to all or any part of the assets of the Company, or
may be limited to the particular property to which the indebtedness relates. The
proceeds from any borrowings by the Company may be used for refinancing existing
indebtedness, for financing development and acquisition of stores, for the
payment of dividends and for working capital. The Company's existing borrowings
and credit facilities are described under "Business and Properties -- Capital
Strategy."
If the Board of Directors determines to raise additional equity capital, the
Board has the authority, generally without shareholder approval, to issue
additional Common Stock, preferred stock or other capital stock of the Company
in any manner (and on such terms and for such consideration) as it deems
appropriate, including in exchange for property. Existing shareholders have no
preemptive right to purchase shares issued in any offering, and any such
offering might cause a dilution of a shareholder's investment in the Company.
CONFLICT OF INTEREST POLICIES
The Company's Board of Directors and its officers are subject to certain
provisions of Delaware law which are designed to eliminate or minimize the
effects of certain potential conflicts of interest. In addition, the By-Laws
contain certain provisions designed to address potential conflicts of interest
through certain substantive limitations and specific procedures.
The By-Laws presently include provisions that, with respect to purchases of
property from an interested party, (i) require that the purchase price of such
property be no greater than the cost of the selling party unless the directors
have determined that there is substantial justification for such excess and such
excess is not unreasonable in amount and (ii) prohibit the Company from
acquiring such property if the purchase price to be paid is in excess of its
fair market value as determined by an
S-44
<PAGE>
independent appraiser. The Proposed Amendments delete both provisions because
the Board of Directors believes that they are unnecessary in light of other
requirements of the By-Laws that require the independent directors to find that
the terms of the transaction are fair and reasonable in any event and in light
of well-established principles of corporate governance under Delaware corporate
law.
In addition, the By-Laws provide that any transaction between the Company
and an interested party must be fully disclosed to the Board of Directors, and
that a majority of the directors not otherwise interested in the transaction
(including a majority of independent directors) must make a determination that
such transaction is fair, competitive and commercially reasonable and on terms
and conditions not less favorable to the Company than those available from
unaffiliated third parties. No change is currently contemplated in this
provision.
AMENDMENTS TO THE BY-LAWS
Currently, Section 16 of the By-Laws provides that a number of provisions
may be amended only with the approval of a majority of the outstanding shares of
each class of stock entitled to vote. These provisions include provisions that
relate to (i) the calling of shareholders meetings by independent directors,
(ii) written statements required to be delivered to shareholders in connection
with distributions, (iii) the requirement that a majority of the Board of
Directors be comprised of independent directors, (iv) transfers of shares that
jeopardize the status of the Company as a REIT, and (v) certain investment
policies and restrictions, including those described above. The proposed
amendment to Section 16 would permit amendment of these provisions of the
By-Laws by a majority vote of the Company's Board of Directors without a
shareholder vote. Other provisions of the By-Laws currently may be amended by a
majority of the directors without the vote or consent of the Company's
shareholders. The By-Laws were adopted in anticipation of the Consolidation and
at a time when the Company was externally managed by the Management Company. The
Company believes that the requirement of a shareholder vote is no longer
appropriate in view of the Merger and the protection afforded by Delaware
corporate law and believes that the additional flexibility will be in the best
interests of the Company and its shareholders.
Except for the Proposed Amendments and the proposed amendment to Section 16
that is being submitted to the shareholders, the Company does not presently have
any plans to change the policies currently subject to shareholder approval. The
Proposed Amendments also amend the By-Laws to: (i) remove certain specific
restrictions on purchases of property from interested parties, as described
above, (ii) delete the requirement that the value of underlying property
securing mortgage loans be established only by independent appraisal, as
described above, (iii) delete specific restrictions on employee stock option
plans, in view of the general practice of submitting such plans for shareholder
approval, and (iv) remove specific requirements relating to the timing and
content of the annual report to shareholders, in view of the federal proxy
rules. The amendments to the By-Laws also delete a number of provisions relating
to the Management Company, as they are no longer relevant following the Merger.
S-45
<PAGE>
MANAGEMENT OF THE COMPANY
<TABLE>
<CAPTION>
NAME AGE POSITIONS AND OFFICES WITH THE COMPANY
- ---------------------- --- -------------------------------------------------------------------------
<S> <C> <C>
Charles K. Barbo 54 Chairman of the Board, President and Chief Executive Officer
Harrell L. Beck 38 Director, Senior Vice President, Chief Financial Officer and Treasurer
Dan Kourkoumelis 44 Director
Donald W. Lusk 67 Director
Wendell J. Smith 62 Director
David K. Grant 41 Executive Vice President, Director of Real Estate Investment
Michael Rowe 38 Executive Vice President, Director of Operations
Kristin H. Stred 36 Senior Vice President, General Counsel and Secretary
</TABLE>
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 Shurgard
Incorporated, which was organized in 1972 to provide property management
services for self storage facilities and other real estate and commercial
ventures. Prior to the Merger, he served as Chairman of the Board and President
of the Management Company. Upon the consummation of the Merger, he was named
Chairman of the Board, President and Chief Executive Officer of the Company
pursuant to the Merger Agreement. Mr. Barbo is a graduate of the Owner/President
Management Program of Harvard Business School, has 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 has served as a director of the Company and as its Chief
Financial Officer and Treasurer since July 1993. Prior to the Merger, Mr. Beck
also served as the Company's President. He was named Senior Vice President of
the Company upon the closing of the Merger. Mr. Beck also served as the Chief
Financial Officer and Treasurer 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. Prior to
joining the Management Company, Mr. Beck was a manager with Touche Ross & Co.,
where he was employed for approximately six years, during which time he provided
services primarily to clients in the real estate and aerospace industries. 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.
DAN KOURKOUMELIS has served as a director of the Company since March 1994.
He 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, Washington area. Mr. Kourkoumelis
joined QFC in 1967 and has since held a variety of positions. 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 has served as a director of the Company since March 1994. He
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 the United States and Canada. From 1974 to 1991, 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 a director of G.T. Development Corporation. He has
previously served as a director of Robert E. Bayley Construction Company,
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.
S-46
<PAGE>
WENDELL J. SMITH has served as a director of the Company since March 1994.
Mr. Smith is also currently a director of Franchise Finance Corporation of
America. He has previously served on the Western and National Advisory Boards
for FNMA and the Advisory Board of the Center for Real Estate Research at the
University of California. He 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 billion 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.
DAVID K. GRANT has served as the Company's Executive Vice President and
Director of Real Estate Investment since July 1993. Mr. Grant joined the
Management Company in November 1985 as Director of Real Estate Investment and
continued to serve in that capacity until the Merger. He also served as an
Executive Vice President of the Management Company. Mr. Grant was previously a
manager with Touche Ross & Co., where he was employed for approximately 10
years, during which time he provided financial consulting, accounting and
auditing services primarily to clients in the real estate, construction and
engineering industries. Mr. Grant has a Bachelor of Arts degree in Business
Administration and a Bachelor of Science degree in Accounting, both from
Washington State University.
MICHAEL ROWE has served as the Company's Executive Vice President and
Director of Operations since July 1993. Prior to the Merger, he served as 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. He became Controller of the Management Company in 1982 and Vice
President and Treasurer in 1983. In 1987, Mr. Rowe was named Director of Storage
Operations of the Management Company. Mr. Rowe has a Bachelor of Arts degree in
Business Administration from Washington State University.
KRISTIN H. STRED has served as the Company's General Counsel and Secretary
since July 1993. She was named Senior Vice President of the Company upon the
closing of the Merger. Ms. Stred joined the Management Company in July 1992 and
until the Merger served 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 Law
Department Section of the Washington State Bar Association.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 24, 1995, certain information
with respect to the beneficial ownership of shares of Common Stock and Class B
common stock, par value $.001 per share (the "Class B Common Stock"), by (i)
each director of the Company, (ii) certain of the Company's executive officers,
(iii) each person (or group of affiliated persons) who is known by the Company
to own beneficially more than 5% of either the Common Stock or the Class B
Common Stock, and (iv) all directors and executive officers of the Company as a
group. Except as otherwise noted, the Company
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<PAGE>
believes that the beneficial owners of the shares of Common Stock and Class B
Common Stock listed below, based on information furnished by such owners, have
sole voting and investment power with respect to such shares.
<TABLE>
<CAPTION>
COMMON STOCK CLASS B COMMON STOCK
----------------------------------------------- ------------------------------
AMOUNT AND NATURE PERCENT OF PERCENT OF AMOUNT AND NATURE
OF BENEFICIAL CLASS BEFORE CLASS AFTER OF BENEFICIAL PERCENT OF
NAME OF BENEFICIAL OWNER OWNERSHIP OFFERING OFFERING OWNERSHIP CLASS
- ------------------------------ ----------------- ------------ ------------ ----------------- ----------
<S> <C> <C> <C> <C> <C>
Charles K. Barbo.............. 612,810(1)(2) 3.4% 2.7% 76,529(3) 49.5%
1201 Third Avenue, Suite 2200
Seattle, WA 98101
Arthur W. Buerk............... 354,868(1) 1.9% 1.6% 76,529(3) 49.5%
3831 49th N.E.
Seattle, WA 98105
Michael Rowe.................. 68,888(1)(4) * *
David K. Grant................ 53,010(1)(5) * *
Harrell L. Beck............... 18,698(1)(6) * *
Kristin H. Stred.............. 6,533(1)(7) * *
Dan Kourkoumelis.............. -- -- --
Donald W. Lusk................ 200 * *
Wendell J. Smith.............. 300 * *
All directors and executive
officers as a group (8
persons)...................... 760,439(1) 4.2% 3.4% 76,529(3) 49.5%
<FN>
- ------------------------
* Less than one percent.
(1) Includes shares of Common Stock issued to Management Company shareholders
at the closing of the Merger. See "Business and Properties -- Recent
Developments -- Merger of the Management Company."
(2) Includes 2,669 shares held for Mr. Barbo's individual account under the
Company's Employees Retirement Savings Plan and Trust.
(3) Class B Common Stock entitled each of Messrs. Barbo and Buerk to a loan in
an amount necessary to satisfy his general partner capital obligations
resulting from the Consolidation. Class B Common Stock is convertible into
Common Stock at a one-to-one ratio upon repayment of the loan.
(4) Includes 400 shares issuable on exercise of stock options currently
exercisable or exercisable within 60 days and 2,499 shares held for Mr.
Rowe's individual account under the Company's Employees Retirement Savings
Plan and Trust.
(5) Includes 400 shares issuable on exercise of stock options currently
exercisable or exercisable within 60 days and 1,963 shares held for Mr.
Grant's individual account under the Company's Employees Retirement Savings
Plan and Trust.
(6) Includes 400 shares issuable on exercise of stock options currently
exercisable or exercisable within 60 days and 1,805 shares held for Mr.
Beck's individual account under the Company's Employees Retirement Savings
Plan and Trust.
(7) Includes 400 shares issuable on exercise of stock options currently
exercisable or exercisable within 60 days.
</TABLE>
S-48
<PAGE>
CLASSIFIED BOARD OF DIRECTORS
The Board of Directors has approved, and recommended to the shareholders for
approval at the Company's annual meeting of shareholders to be held on July 26,
1995, an amendment to the Certificate of Incorporation that would divide the
Board of Directors into three classes, as nearly equal in size as possible.
Except during an initial phase-in period, the term of office of the directors of
each class will expire at the third annual shareholders meeting after their
election. The proposal is intended to provide continuity and stability to the
Company's management, and will also have the effect of making it more difficult
to change the composition of the Board of Directors and therefore may have
potential antitakeover effects. If the proposal is approved by the shareholders,
the term of Mr. Kourkoumelis will expire at the annual shareholders meeting in
1996, the terms of Messrs. Beck and Smith will expire at the annual shareholders
meeting in 1997 and the terms of Messrs. Barbo and Lusk will expire at the
annual shareholders meeting in 1998. If the proposal is not approved by the
shareholders, the term of each of the directors will expire at the annual
shareholders meeting in 1996.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
TO HOLDERS OF COMMON STOCK
GENERAL
The following summary of certain federal income tax considerations to
holders of Common Stock is based on current law, is for general information
only, and is not tax advice. The tax treatment of a holder of Common Stock will
vary depending on his or her particular situation, and this discussion does not
purport to deal with all aspects of federal income taxation that may be relevant
to particular shareholders in light of their personal investment or tax
circumstances, or to certain types of shareholders (including insurance
companies, financial institutions or broker-dealers, tax-exempt organizations,
foreign corporations and persons who are not citizens or residents of the United
States, except to the extent discussed under "-- Taxation of Tax-Exempt
Shareholders" and "-- Federal Income Taxation of Foreign Shareholders") subject
to special treatment under federal income tax laws.
This discussion does not address any aspects of federal income taxation to
the Company relating to its election to be taxed as a REIT. A summary of certain
federal income tax considerations to the Company is provided in the accompanying
Prospectus.
EACH INVESTOR SHOULD REFER TO THE PROSPECTUS FOR A SUMMARY OF THE FEDERAL
INCOME TAX CONSIDERATIONS TO THE COMPANY OF ITS REIT ELECTION. EACH INVESTOR IS
ADVISED TO CONSULT HIS OR HER OWN TAX ADVISOR REGARDING THE TAX CONSEQUENCES TO
HIM OR HER OF THE ACQUISITION, OWNERSHIP AND SALE OF THE COMMON STOCK, INCLUDING
THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH
ACQUISITION, OWNERSHIP AND SALE AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF TAXABLE U.S. SHAREHOLDERS
As used herein, the term "U.S. Shareholder" means a holder of shares of
Common Stock who (for U.S. federal income tax purposes) (i) is a citizen or
resident of the United States, (ii) is a corporation, partnership or other
entity created or organized in or under the laws of the United States or of any
political subdivision thereof, or (iii) is an estate or trust the income of
which is subject to U.S. federal income taxation regardless of its source.
As long as the Company qualifies as a REIT, distributions made by the
Company out of its current or accumulated earnings and profits (and not
designated as capital gain dividends) will constitute dividends taxable to its
taxable U.S. Shareholders as ordinary income. Such distributions will not be
eligible for the dividends-received deduction in the case of U.S. Shareholders
that are corporations. Distributions made by the Company that are properly
designated by the Company as capital gain dividends will be taxable to a U.S.
Shareholder as long-term capital gains (to the extent that they do not exceed
the Company's actual net capital gain for the taxable year) without regard to
the period for which the U.S. Shareholder has held his or her shares of stock.
U.S. Shareholders that are corporations may, however, be required to treat up to
20% of certain capital gain dividends as ordinary income.
S-49
<PAGE>
To the extent that the Company makes distributions (not designated as
capital gain dividends) in excess of its current and accumulated earnings and
profits, such distributions will be treated first as a tax-free return of
capital to each U.S. Shareholder, reducing the adjusted basis that such U.S.
Shareholder has in his or her shares of stock for tax purposes by the amount of
such distribution (but not below zero), with distributions in excess of a U.S.
Shareholder's adjusted basis in his or her shares taxable as capital gains
(provided that the shares have been held as a capital asset). Dividends declared
by the Company in October, November or December of any year and payable to a
shareholder of record on a specified date in any such month shall be treated as
both paid by the Company and received by the shareholder on December 31 of such
year, provided that the dividend is actually paid by the Company on or before
January 31 of the following calendar year. Shareholders may not include in their
own income tax returns any net operating losses or capital losses of the
Company.
Distributions made by the Company and gain arising from the sale or exchange
by a U.S. Shareholder of shares of Common Stock will not be treated as passive
activity income, and, as a result, U.S. Shareholders generally will not be able
to apply any "passive losses" against such income or gain. Distributions made by
the Company (to the extent they do not constitute a return of capital) generally
will be treated as investment income for purposes of computing the investment
interest limitation. Gain arising from the sale or other disposition of Common
Stock, however, will not be treated as investment income unless the U.S.
Shareholder elects to reduce the amount of such U.S. Shareholder's total net
capital gain eligible for the 28% maximum capital gains rate by the amount of
such gain with respect to the shares.
Upon any sale or other disposition of shares of Common Stock, a U.S.
Shareholder will recognize gain or loss for federal income tax purposes in an
amount equal to the difference between (i) the amount of cash and the fair
market value of any property received on such sale or other disposition and (ii)
the holder's adjusted basis in the shares for tax purposes. Such gain or loss
will be capital gain or loss if the shares have been held by the U.S.
Shareholder as a capital asset, and will be long-term gain or loss if the shares
have been held for more than one year. In general, any loss recognized by a U.S.
Shareholder on the sale or other disposition of shares of the Company that have
been held for six months or less (after applying certain holding period rules)
will be treated as a long-term capital loss, to the extent of distributions
received by such U.S. Shareholder from the Company that were required to be
treated as long-term capital gains.
BACKUP WITHHOLDING
The Company will report to its U.S. Shareholders and the IRS the amount of
dividends paid during each calendar year, and the amount of tax withheld, if
any. Under the backup withholding rules, a shareholder may be subject to backup
withholding at the rate of 31% with respect to dividends paid unless such holder
(i) is a corporation or comes within certain other exempt categories and, when
required, demonstrates this fact or (ii) provides a taxpayer identification
number, certifies as to no loss of exemption from backup withholding, and
otherwise complies with applicable requirements of the backup withholding rules.
A U.S. Shareholder that does not provide the Company with his or her correct
taxpayer identification number may also be subject to penalties imposed by the
IRS. Any amount paid as backup withholding will be creditable against the
shareholder's income tax liability. In addition, the Company may be required to
withhold a portion of capital gain distributions to any shareholders who fail to
certify their nonforeign status to the Company. See "-- Federal Income Taxation
of Foreign Shareholders."
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Generally, a tax-exempt investor that is exempt from tax on its investment
income, such as an individual retirement account ("IRA") or a 401(k) plan, that
holds the Common Stock as an investment will not be subject to tax on dividends
paid by the Company. However, if such tax-exempt investor is treated as having
purchased its Common Stock with borrowed funds, some or all of its dividends
will be subject to tax. In addition, under some circumstances certain pension
plans (including 401(k) plans, but not including IRAs and government pension
plans) that own more than 10% (by
S-50
<PAGE>
value) of the Company's outstanding stock, including preferred stock, could be
subject to tax on a portion of their dividends even if their stock is held for
investment and is not treated as acquired with borrowed funds. The ownership
limit provisions on Company stock, however, should prevent this result in most
cases.
FEDERAL INCOME TAXATION OF FOREIGN SHAREHOLDERS
OVERVIEW. The rules governing U.S. income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships and foreign trusts and
estates (collectively, "Non-U.S. Shareholders") are complex and the following
discussion is intended only as a summary of these rules. Prospective Non-U.S.
Shareholders should consult with their own tax advisors to determine the impact
of federal, state and local income tax laws on an investment in the Company,
including any reporting requirements.
In general, a Non-U.S. Shareholder will be subject to the same U.S. federal
income tax rules and rates that apply to a U.S. Shareholder if its investment in
the Company is "effectively connected" with the Non-U.S. Shareholder's conduct
of a trade or business in the United States. A corporate Non-U.S. Shareholder
that receives income that is (or is treated as) effectively connected with a
U.S. trade or business also may be subject to the branch profits tax at a 30%
rate (or such lower rate as may be specified by an applicable income tax treaty)
under Section 884 of the Code, which tax is payable in addition to regular U.S.
federal corporate income tax. The following discussion will apply to a Non-U.S.
Shareholder whose investment in the Company is not so effectively connected.
A distribution by the Company that is neither attributable to gain from the
sale or exchange by the Company of "United States Real Property Interests"
("USRPIs") nor designated by the Company as a capital gain dividend will be
treated as an ordinary income dividend to the extent that it is made out of
current or accumulated earnings and profits of the Company. Generally, an
ordinary income dividend made to a Non-U.S. Shareholder will be subject to a
U.S. federal withholding tax equal to 30% of the gross amount of the dividend.
This tax may be reduced by an applicable tax treaty between the United States
and the country in which the Non-U.S. Shareholder resides. A distribution in
excess of the Company's earnings and profits will be treated first as a
nontaxable return of capital that will reduce a Non-U.S. Shareholder's basis in
its stock. Any excess is then treated as a gain from the disposition of the
Company's shares, the tax treatment of which is described below.
Distributions by the Company that are attributable to gain from the sale or
exchange by the Company of USRPIs may be taxed to the Non-U.S. Shareholder in
the United States under the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). FIRPTA generally applies to gains realized by foreign persons upon
the sale or exchange of USRPIs, which includes real property situated in the
United States and stock of any U.S. company that has a significant proportion of
U.S. real property comprising its total business assets (e.g., 50% or more).
Under FIRPTA, gains on sales of USRPIs are taxed to a Non-U.S. Shareholder as if
the distributions were gains effectively connected with a U.S. trade or business
even if the Non-U.S. Shareholder is not in fact engaged in a U.S. trade or
business. Accordingly, if the Company distributes capital gains to which FIRPTA
applies, a Non-U.S. Shareholder will be taxed at the same capital gain rates
that apply to U.S. Shareholders (subject to any applicable alternative minimum
tax and special alternative minimum tax in the case of a nonresident alien
individual). Distributions subject to FIRPTA also may be subject to a 30% branch
profits tax when made to a foreign corporate shareholder that is not entitled to
certain treaty protections. Income tax treaties can preclude imposition of the
branch profits tax or reduce the applicable tax rate.
The Company generally will be required to withhold from distributions to
Non-U.S. Shareholders and remit to the IRS (i) 35% of capital gain dividends
(or, if greater, 35% of the amount of any distributions that could be designated
as capital gain dividends) and (ii) 30% (or lower treaty rate) of ordinary
dividends paid out of earnings and profits. If the Company designates prior
distributions as capital gain dividends, the Company need not make payment of
the 35% withholding requirement; however, subsequent distributions, up to the
amount of such prior distributions, will be treated as capital gain dividends
for withholding purposes. A distribution in excess of the Company's earnings
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<PAGE>
and profits may be subject to a 30% withholding tax on ordinary dividends if at
the time of the distribution it cannot be determined whether the distribution
will be in an amount in excess of the Company's current or accumulated earnings
and profits. If the amount of tax withheld by the Company with respect to a
distribution to a Non-U.S. Shareholder exceeds the Non-U.S. Shareholder's U.S.
federal tax liability with respect to such distribution, the Non-U.S.
Shareholder may file for a refund of such excess from the IRS.
A sale of Company stock by a Non-U.S. Shareholder generally will not be
subject to U.S. federal income taxation unless the stock sold constitutes a
USRPI. Similarly, ordinary income dividends in excess of earnings and profits
and basis will not be subject to U.S. federal taxation if the stock with respect
to which the dividend is paid does not constitute a USRPI. The Common Stock will
not constitute a USRPI if (i) the Company is a "domestically controlled REIT" or
(ii) the stock is "regularly traded" on an established securities market (such
as Nasdaq or the NYSE) and the shareholder owns less than 5% of the stock. A
domestically controlled REIT is a REIT in which at all times during a specified
testing period less than 50% in value of its shares is held directly or
indirectly by Non-U.S. Shareholders. It is currently anticipated that the
Company will be a domestically controlled REIT and, therefore, that gain on the
sale of its stock will not be subject to taxation under FIRPTA. However, because
the stock will be publicly traded, there can be no assurance that the Company is
or will continue to be a domestically controlled REIT.
If, notwithstanding the above, gain on a sale of the Company's stock is
taxable under FIRPTA, a Non-U.S. Shareholder would generally be subject to the
same tax treatment discussed above with respect to capital gain dividends, with
the exception that the requirement that the Company withhold 35% of the capital
gain dividends will not apply. Instead, the purchaser of stock would be required
to withhold 10% of the gross proceeds and remit this amount to the IRS.
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING. Backup withholding tax
(which generally is a withholding tax imposed at the rate of 31% on certain
payments to persons that fail to furnish certain information under the United
States information reporting requirements) and information reporting will
generally not apply to distributions paid to Non-U.S. Shareholders outside the
United States that are treated as (i) dividends subject to the 30% (or lower
treaty rate) withholding tax discussed above, (ii) capital gains dividends, or
(iii) distributions attributable to gain from the sale or exchange by the
Company of USRPIs. Generally, backup withholding and information reporting will
not apply to a payment of stock sale proceeds by or through a foreign office of
a foreign broker. Information reporting (but not backup withholding) will apply,
however, to a payment of stock sale proceeds by a foreign office of a broker
that (a) is a United States person, (b) derives 50% or more of its gross income
for certain periods from the conduct of a trade or business in the United
States, or (c) is a "controlled foreign corporation" (generally, a foreign
corporation controlled by U.S. Shareholders) for United States tax purposes,
unless the broker has documentary evidence that the holder is a Non-U.S.
Shareholder and certain other conditions are met, or the shareholder otherwise
establishes an exemption. Payment to or through a United States office of a
broker of the stock sale proceeds is subject to both backup withholding and
information reporting unless the shareholder certifies under penalties of
perjury that the shareholder is a Non-U.S. Shareholder, or otherwise establishes
an exemption. A Non-U.S. Shareholder may obtain a refund of any amounts withheld
under the backup withholding rules by filing the appropriate claim for refund
with the IRS.
The backup withholding and information reporting rules are under review by
the United States Treasury and their application to the Company's stock could be
changed prospectively by future Treasury regulations.
STATE AND LOCAL TAXES
Holders of Common Stock may be subject to various state or local taxes in
other jurisdictions in which shareholders reside or own property or other
interests. Such tax treatment of the shareholders in states having taxing
jurisdiction over them may differ from the federal income tax treatment
described in this summary. Consequently, each shareholder should consult his or
her tax advisor as to the tax consequences of the Common Stock under the
respective state laws applicable to him or her.
S-52
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"Underwriting Agreement"), the Company has agreed to sell to each of the
Underwriters named below, and each of the Underwriters, for whom Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Alex. Brown & Sons Incorporated, Dean
Witter Reynolds Inc., Prudential Securities Incorporated and Smith Barney Inc.
are acting as representatives (the "Representatives"), has severally agreed to
purchase the number of shares of Common Stock set forth opposite its name below.
Under the Underwriting Agreement, the Underwriters are committed to purchase all
of such shares of Common Stock if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ------------------------------------------------------------------------------------------- -----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................................................... 576,000
Alex. Brown & Sons Incorporated............................................................ 576,000
Dean Witter Reynolds Inc................................................................... 576,000
Prudential Securities Incorporated......................................................... 576,000
Smith Barney Inc........................................................................... 576,000
Bear, Stearns & Co. Inc.................................................................... 80,000
Dillon, Read & Co. Inc..................................................................... 80,000
A.G. Edwards & Sons, Inc................................................................... 80,000
Montgomery Securities...................................................................... 80,000
Oppenheimer & Co., Inc..................................................................... 80,000
PaineWebber Incorporated................................................................... 80,000
Robertson, Stephens & Company, L.P......................................................... 80,000
J.C. Bradford & Co......................................................................... 40,000
Cowen & Company............................................................................ 40,000
Dain Bosworth Incorporated................................................................. 40,000
First Albany Corporation................................................................... 40,000
Furman Selz Incorporated................................................................... 40,000
Gruntal & Co., Incorporated................................................................ 40,000
Interstate/Johnson Lane Corporation........................................................ 40,000
Janney Montgomery Scott Inc................................................................ 40,000
Edward D. Jones & Co....................................................................... 40,000
Kemper Securities, Inc..................................................................... 40,000
Legg Mason Wood Walker, Incorporated....................................................... 40,000
McDonald & Company Securities, Inc......................................................... 40,000
Morgan Keegan & Company, Inc............................................................... 40,000
Piper Jaffray Inc.......................................................................... 40,000
Ragen MacKenzie Incorporated............................................................... 40,000
Rauscher Pierce Refsnes, Inc............................................................... 40,000
Raymond James & Associates, Inc............................................................ 40,000
The Robinson-Humphrey Company, Inc......................................................... 40,000
Stifel, Nicolaus & Company, Incorporated................................................... 40,000
Sutro & Co. Incorporated................................................................... 40,000
Tucker Anthony Incorporated................................................................ 40,000
Wheat, First Securities, Inc............................................................... 40,000
Anderson & Strudwick, Incorporated......................................................... 20,000
Branch, Cabell and Company................................................................. 20,000
Commonwealth Associates.................................................................... 20,000
Equitable Securities Corporation........................................................... 20,000
Johnston, Lemon & Co. Incorporated......................................................... 20,000
John G. Kinnard and Company Incorporated................................................... 20,000
</TABLE>
S-53
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ------------------------------------------------------------------------------------------- -----------
Luther, Smith & Small Inc.................................................................. 20,000
<S> <C>
Roney & Co................................................................................. 20,000
Scott & Stringfellow, Inc.................................................................. 20,000
-----------
Total........................................................................... 4,500,000
-----------
-----------
</TABLE>
The Representatives have advised the Company that they propose initially to
offer the shares of Common Stock to the public at the public offering price set
forth on the cover page of this Prospectus Supplement, and to certain dealers at
such price less a concession not in excess of $.74 per share of Common Stock.
The Underwriters may allow, and such dealers may reallow, a discount not in
excess of $.10 per share of Common Stock on sales to certain other dealers.
After the offering, the public offering price, concession and discount may be
changed.
The Company has granted the Underwriters an option exercisable for 30 days
after the date hereof to purchase up to 675,000 additional shares of Common
Stock to cover over-allotments, if any, at the public offering price, less the
underwriting discount set forth on the cover page of this Prospectus Supplement.
If the Underwriters exercise this option, each of the Underwriters will have a
firm commitment, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares of Common Stock to be
purchased by it shown in the foregoing table bears to the number of shares of
Common Stock initially offered hereby.
In the Underwriting Agreement, the Company has agreed to indemnify the
several Underwriters against certain civil liabilities, including liabilities
under the Securities Act of 1933, as amended, or to contribute to payments the
Underwriters may be required to make in respect thereof.
Certain directors and officers of the Company have agreed, with certain
exceptions, not to offer, sell, contract to sell or otherwise dispose of any
shares of Common Stock, and the Company has agreed not to offer, sell, contract
to sell or otherwise dispose of any shares of Common Stock or other capital
stock or securities convertible into or exchangeable for, or any rights to
acquire, shares of Common Stock for a period of 90 days after the closing of
this offering without the prior written consent of Merrill Lynch, Pierce, Fenner
& Smith Incorporated.
LEGAL MATTERS
The legality of the shares of Common Stock to be issued in connection with
this offering is being passed upon for the Company by Perkins Coie, Seattle,
Washington. Certain legal matters relating to this offering are being passed
upon for the Underwriters by Latham & Watkins, Costa Mesa, California.
S-54
<PAGE>
PROSPECTUS
SHURGARD STORAGE CENTERS, INC.
$200,000,000
DEBT SECURITIES, PREFERRED STOCK AND COMMON STOCK
Shurgard Storage Centers, Inc. (the "Company") may from time to time offer
in one or more series (i) its debt securities (the "Debt Securities"), (ii)
shares of its preferred stock, par value $.001 per share (the "Preferred
Stock"), or (iii) shares of its Class A Common Stock, par value $.001 per share
(the "Common Stock"), with an aggregate public offering price of up to
$200,000,000 on terms to be determined at the time of offering. The Debt
Securities, the Preferred Stock and the Common Stock (collectively, the
"Securities") may be offered, separately or together, in separate series, in
amounts, at prices and on terms to be set forth in one or more supplements to
this Prospectus (each, a "Prospectus Supplement").
The specific terms of the Securities in respect of which this Prospectus is
being delivered will be set forth in the applicable Prospectus Supplement and
will include, where applicable: (i) in the case of Debt Securities, the specific
title, aggregate principal amount, currency, form (which may be registered or
bearer, or certificated or global), authorized denominations, maturity, rate (or
manner of calculation thereof) and time of payment of interest, terms for
redemption at the Company's option or repayment at the holder's option, terms
for sinking fund payments, terms for conversion into Preferred Stock or Common
Stock, covenants and any initial public offering price; (ii) in the case of
Preferred Stock, the specific designation and stated value, any dividend,
liquidation, redemption, conversion, voting and other rights, and any initial
public offering price; and (iii) in the case of Common Stock, any initial public
offering price. In addition, such specific terms may include limitations on
actual or constructive ownership and restrictions on transfer of the Securities,
in each case as may be appropriate to preserve the status of the Company as a
real estate investment trust ("REIT") for federal income tax purposes. See
"Restrictions on Transfers of Capital Stock; Excess Stock."
The applicable Prospectus Supplement will also contain information, where
applicable, about certain United States federal income tax considerations
relating to, and any listing on a securities exchange of, the Securities covered
by such Prospectus Supplement.
The Securities may be offered directly, through agents designated from time
to time by the Company, or to or through underwriters or dealers. If any agents
or underwriters are involved in the sale of any of the Securities, their names,
and any applicable purchase price, fee, commission or discount arrangement
between or among them, will be set forth, or will be calculable from the
information set forth, in the applicable Prospectus Supplement. See "Plan of
Distribution." No Securities may be sold without delivery of the applicable
Prospectus Supplement describing the method and terms of the offering of such
series of Securities.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
------------------------
The date of this Prospectus is May 3, 1995.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The registration
statement on Form S-3 (of which this Prospectus is a part) (the "Registration
Statement"), the exhibits and schedules forming a part thereof and the reports,
proxy statements and other information filed by the Company with the Commission
in accordance with the Exchange Act can be inspected and copied at the
Commission's Public Reference Section, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the following regional offices of the Commission: Seven World
Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can
be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, the
Common Stock is quoted on the Nasdaq National Market ("Nasdaq") and similar
information concerning the Company can be inspected and copied at the offices of
Nasdaq, 1735 K Street, N.W., Washington, D.C. 20006. The Company's Common Stock
has been approved for listing on the New York Stock Exchange (the "NYSE")
commencing May 5, 1995, and similar information concerning the Company can be
inspected and copied at the offices of the NYSE, 20 Broad Street, New York, New
York 10005 after that time.
The Company has filed with the Commission the Registration Statement under
the Securities Act of 1933, as amended (the "Securities Act"), with respect to
the Securities. This Prospectus does not contain all the information set forth
in the Registration Statement, certain portions of which have been omitted as
permitted by the Commission's rules and regulations. Statements contained in
this Prospectus as to the contents of any contract or other document are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference and the
exhibits and schedules thereto. For further information regarding the Company
and the Securities, reference is hereby made to the Registration Statement and
such exhibits and schedules, which may be obtained from the Commission at its
principal office in Washington, D.C. upon payment of the fees prescribed by the
Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below have been filed by the Company under the Exchange
Act with the Commission and are incorporated herein by reference:
a. Annual Report on Form 10-K for the fiscal year ended December 31, 1994;
b. Description of the Common Stock contained in the Company's Registration
Statement on Form 8-A, as amended, dated April 19, 1995;
c. Description of the Preferred Share Purchase Rights contained in the
Company's Registration Statement on Form 8-A, as amended, dated April 19,
1995; and
d. Current Report on Form 8-K dated April 24, 1995.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 and
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of the Securities shall be deemed to be
incorporated by reference in this Prospectus and to be part hereof from the date
of filing such documents.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
(or in the applicable Prospectus Supplement) or in any other subsequently filed
document that also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
Copies of all documents that are incorporated herein by reference (not
including the exhibits to such documents, unless such exhibits are specifically
incorporated by reference into the information that this Prospectus
incorporates) will be provided without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon written or oral
request. Requests should be directed to the Secretary of the Company, 1201 Third
Avenue, Suite 2200, Seattle, Washington, 98101 (telephone number: (206) 624-8100
ext. 434).
2
<PAGE>
THE COMPANY
Shurgard Storage Centers, Inc. (the "Company") is a fully integrated,
self-administered and self-managed real estate investment trust ("REIT") that
develops, acquires, owns and manages self storage centers. The Company's self
storage centers offer low-cost, easily accessible storage space for personal and
business uses. The Company is one of the three largest operators of self storage
centers in the United States. The Company owns and operates, as of March 31,
1995, directly and through its wholly owned subsidiaries and joint ventures, 160
self storage centers, containing approximately 10.7 million net rentable square
feet, which are located in 22 major metropolitan areas in 19 states. As a result
of the merger (the "Merger") with Shurgard Incorporated (the "Management
Company") described below, the Company also manages 84 self storage centers for
affiliates and nonaffiliates. In addition, the Company owns two business parks
and a commercial building. As of December 31, 1994 the Company's owned self
storage centers had a weighted average annual net rentable square foot occupancy
rate of 89% and a weighted average rent per net rentable square foot of $8.25.
The Company began operations as a REIT through the consolidation on March 1,
1994 of 17 publicly held real estate limited partnerships (the "Consolidation")
that were sponsored by the Management Company. On March 24, 1995, the Management
Company merged with and into the Company pursuant to an Agreement and Plan of
Merger dated December 19, 1994, and the Company became self-administered and
self-managed. Through the Merger, the Company internalized the expertise and
experience of the Management Company's personnel that cover all aspects of the
self-storage industry.
The Company is a Delaware corporation incorporated on July 23, 1993. The
Company's executive offices are located at 1201 Third Avenue, Suite 2200,
Seattle, Washington 98101, and the telephone number is (206) 624-8100.
USE OF PROCEEDS
Unless otherwise described in the applicable Prospectus Supplement, the
Company intends to use the net proceeds from the sale of the Securities for
general corporate purposes, which will include the development and acquisition
of additional properties and other acquisition transactions, the expansion and
improvement of certain properties in the Company's portfolio, and the repayment
of indebtedness.
RATIOS OF EARNINGS TO FIXED CHARGES
The following table sets forth ratios of earnings to fixed charges for the
periods shown. The ratio shown for the year ended December 31, 1994 is for the
Company. Ratios shown for the years ended December 31, 1993, 1992, 1991 and 1990
are derived from combined historical financial information of the 17 publicly
held real estate limited partnerships that were included in the Consolidation
("Predecessor").
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -------------------------------------------------------
PREDECESSOR COMPANY
- ------------------------------------------ -----------
1990 1991 1992 1993 1994
- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C>
7.69x 8.93x 10.23x 8.80x 2.95x
</TABLE>
The ratios of earnings to fixed charges were computed by dividing earnings
by fixed charges. For this purpose, earnings consist of net income before
extraordinary items plus fixed charges. Fixed charges consist of interest
expense (including interest costs capitalized) and the amortization of debt
issuance costs. To date, the Company has not issued any Preferred Stock;
therefore, the ratios of earnings to combined fixed charges and preferred share
dividends are the same as the ratios presented above.
3
<PAGE>
DESCRIPTION OF DEBT SECURITIES
GENERAL
The Debt Securities will be direct obligations of the Company, which may be
secured or unsecured, and which may be senior or subordinated indebtedness of
the Company. The Debt Securities may be issued under one or more indentures,
each dated as of a date before the issuance of the Debt Securities to which it
relates and in the form that has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part, subject to such amendments or
supplements as may be adopted from time to time. Each such indenture
(collectively, the "Indenture") will be entered into between the Company and a
trustee (the "Trustee"), which may be the same Trustee. The Indenture will be
subject to, and governed by, the Trust Indenture Act of 1939, as amended. The
statements made hereunder relating to the Indenture and the Debt Securities are
summaries of the anticipated provisions thereof, do not purport to be complete
and are subject to, and are qualified in their entirety by reference to, all
provisions of the Indenture and such Debt Securities. Capitalized terms used but
not defined herein shall have the respective meanings set forth in the
Indenture.
TERMS
The particular terms of the Debt Securities offered by a Prospectus
Supplement will be described in the particular Prospectus Supplement, along with
any applicable modifications of or additions to the general terms of the Debt
Securities as described herein and in the applicable Indenture and any
applicable federal income tax considerations. Accordingly, for a description of
the terms of any series of Debt Securities, reference must be made to both the
Prospectus Supplement relating thereto and the description of the Debt
Securities set forth in this Prospectus.
Except as set forth in any Prospectus Supplement, the Debt Securities may be
issued without limits as to aggregate principal amount, in one or more series,
in each case as established from time to time by the Company's Board of
Directors or as set forth in the applicable Indenture or one or more indentures
supplemental to the Indenture. All Debt Securities of one series need not be
issued at the same time and, unless otherwise provided, a series may be
reopened, without the consent of the holders of the Debt Securities of such
series, for issuances of additional Debt Securities of such series.
Each Indenture will provide that the Company may, but need not, designate
more than one Trustee thereunder, each with respect to one or more series of
Debt Securities. Any Trustee under an Indenture may resign or be removed with
respect to one or more series of Debt Securities, and a successor Trustee may be
appointed to act with respect to such series. If two or more persons are acting
as Trustee with respect to different series of Debt Securities, each such
Trustee shall be a Trustee of a trust under the applicable Indenture separate
and apart from the trust administered by any other Trustee and, except as
otherwise indicated herein, any action described herein to be taken by a Trustee
may be taken by each such Trustee with respect to, and only with respect to, the
one or more series of Debt Securities for which it is Trustee under the
applicable Indenture.
The following summaries set forth certain general terms and provisions of
the Indenture and the Debt Securities. The Prospectus Supplement relating to the
series of Debt Securities being offered will contain further terms of such Debt
Securities, including the following specific terms:
(1) the title of such Debt Securities;
(2) the aggregate principal amount of such Debt Securities and any limit on such
aggregate principal amount;
(3) the price (expressed as a percentage of the principal amount thereof) at
which such Debt Securities will be issued and, if other than the principal
amount thereof, the portion of the principal amount thereof payable upon
declaration of acceleration of the maturity thereof, or (if applicable) the
portion of the principal amount of such Debt Securities that is convertible
into Common Stock or Preferred Stock, or the method by which any such
portion shall be determined;
4
<PAGE>
(4) if convertible, the terms on which such Debt Securities are convertible,
including the initial conversion price or rate and conversion period and, in
connection with the preservation of the Company's status as a REIT, any
applicable limitations on the ownership or transferability of the Common
Stock or the Preferred Stock into which such Debt Securities are
convertible;
(5) the date or dates, or the method for determining such date or dates, on
which the principal of such Debt Securities will be payable;
(6) the rate or rates (which may be fixed or variable), or the method by which
such rate or rates shall be determined, at which such Debt Securities will
bear interest, if any;
(7) the date or dates, or the method for determining such date or dates, from
which any interest will accrue, the dates upon which any such interest will
be payable, the record dates for payment of such interest, or the method by
which any such dates shall be determined, the persons to whom such interest
shall be payable, and the basis upon which interest shall be calculated if
other than that of a 360-day year of twelve 30-day months;
(8) the place or places where the principal of (and premium, if any) and
interest, if any, on such Debt Securities will be payable, where such Debt
Securities may be surrendered for conversion or registration of transfer or
exchange and where notices or demands to or upon the Company in respect of
such Debt Securities and the Indenture may be served;
(9) the period or periods, if any, within which, the price or prices at which
and the terms and conditions upon which such Debt Securities may be
redeemed, as a whole or in part, at the Company's option;
(10) the obligation, if any, of the Company to redeem, repay or purchase such
Debt Securities pursuant to any sinking fund or analogous provision or at
the option of a holder thereof, and the period or periods within which, the
price or prices at which and the terms and conditions upon which such Debt
Securities will be redeemed, repaid or purchased, as a whole or in part,
pursuant to such obligation;
(11) if other than U.S. dollars, the currency or currencies in which such Debt
Securities are denominated and payable, which may be a foreign currency or
units of two or more foreign currencies or a composite currency or
currencies, and the terms and conditions relating thereto;
(12) whether the amount of payments of principal of (and premium, if any) or
interest, if any, on such Debt Securities may be determined with reference
to an index, formula or other method (which index, formula or method may,
but need not, be based on a currency, currencies, currency unit or units or
composite currency or currencies) and the manner in which such amounts shall
be determined;
(13) whether such Debt Securities will be issued in certificated and/or
book-entry form, and, if so, the identity of the depositary for such Debt
Securities;
(14) whether such Debt Securities will be in registered or bearer form and, if
in registered form, the denominations thereof if other than $1,000 and any
integral multiple thereof and, if in bearer form, the denominations thereof
and terms and conditions relating thereto;
(15) the applicability, if any, of the defeasance and covenant defeasance
provisions described herein or set forth in the applicable Indenture, or any
modification thereof;
(16) any deletions from, modifications of or additions to the events of default
or covenants of the Company, to the extent different from those described
herein or in the applicable Indenture with respect to such Debt Securities,
and any change in the right of any Trustee or any of the holders to declare
the principal amount of any such Debt Securities due and payable;
5
<PAGE>
(17) whether and under what circumstances the Company will pay any Additional
Amounts on such Debt Securities in respect of any tax, assessment or
governmental charge and, if so, whether the Company will have the option to
redeem such Debt Securities in lieu of making such payment;
(18) the subordination provisions, if any, relating to such Debt Securities;
(19) the provisions, if any, relating to any security provided for such Debt
Securities; and
(20) any other terms of such Debt Securities not inconsistent with the
provisions of the applicable Indenture.
If so provided in the applicable Prospectus Supplement, the Debt Securities
may be issued at a discount below their principal amount and provide for less
than the entire principal amount thereof to be payable upon declaration of
acceleration of the maturity thereof ("Original Issue Discount Securities"). In
such cases, any special U.S. federal income tax, accounting and other
considerations applicable to Original Issue Discount Securities will be
described in the applicable Prospectus Supplement.
Except as may be set forth in any Prospectus Supplement, the Debt Securities
will not contain any provisions that would limit the Company's ability to incur
indebtedness or that would afford holders of Debt Securities protection in the
event of a highly leveraged or similar transaction involving the Company or in
the event of a change of control. Restrictions on ownership and transfers of the
Common Stock, the Company's Class B Common Stock and Preferred Stock are,
however, designed to preserve the Company's status as a REIT and, therefore, may
act to prevent or hinder a change of control. See "Restrictions on Transfers of
Capital Stock; Excess Stock." In addition, the Company's Restated By-Laws (the
"By-Laws") provide that, subject to certain exceptions, the Company may not
incur debt if after giving effect to such borrowing, its indebtedness for
borrowed funds would exceed 50% of its total assets (as defined in the By-Laws)
or 300% of its adjusted net worth (as defined in the By-Laws). Reference is made
to the applicable Prospectus Supplement for information with respect to any
deletions from, modifications of or additions to the events of default or
covenants of the Company that are described below, including any addition of a
covenant or other provision providing event risk or similar protection.
DENOMINATIONS, INTEREST, REGISTRATION AND TRANSFER
Unless otherwise described in the applicable Prospectus Supplement, the Debt
Securities of any series will be issuable in denominations of $1,000 and
integral multiples thereof.
Unless otherwise described in the applicable Prospectus Supplement, the
principal of (and applicable premium, if any) and interest on any series of Debt
Securities will be payable at the applicable Trustee's corporate trust office,
the address of which will be set forth in the applicable Prospectus Supplement;
PROVIDED, HOWEVER, that, at the Company's option, payment of interest may be
made by check mailed to the address of the person entitled thereto as it appears
in the applicable register for such Debt Securities or by wire transfer of funds
to such person at an account maintained within the United States.
Subject to certain limitations imposed on Debt Securities issued in
book-entry form, the Debt Securities of any series will be exchangeable for any
authorized denomination of other Debt Securities of the same series and of a
like aggregate principal amount and tenor upon surrender of such Debt Securities
at the applicable Trustee's corporate trust office or at the office of any
transfer agent designated by the Company for such purpose. In addition, subject
to certain limitations imposed on Debt Securities issued in book-entry form, the
Debt Securities of any series may be surrendered for conversion or registration
of transfer thereof at the applicable Trustee's corporate trust office or at the
office of any transfer agent designated by the Company for such purpose. Every
Debt Security surrendered for conversion, registration of transfer or exchange
shall be duly endorsed or accompanied by a written instrument of transfer and
the person requesting such transfer must provide evidence of title and identity
satisfactory to the applicable Trustee or transfer agent. No service charge will
be made for any registration of transfer or exchange of any Debt Securities, but
the
6
<PAGE>
Company may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith. If the applicable
Prospectus Supplement refers to any transfer agent (in addition to the
applicable Trustee) initially designated by the Company with respect to any
series of Debt Securities, the Company may at any time rescind the designation
of any such transfer agent or approve a change in the location through which any
such transfer agent acts, except that the Company will be required to maintain a
transfer agent in each place of payment for such series. The Company may at any
time designate additional transfer agents with respect to any series of Debt
Securities.
Neither the Company nor any Trustee shall be required to (a) issue, register
the transfer of or exchange Debt Securities of any series during a period
beginning at the opening of business 15 days before the day of mailing of notice
of redemption of any Debt Securities of that series that may be selected for
redemption and ending at the close of business on the day of mailing the
relevant notice of redemption; (b) register the transfer of or exchange any Debt
Security, or portion thereof, so selected for redemption, in whole or in part,
except the unredeemed portion of any Debt Security being redeemed in part; or
(c) issue, register the transfer of or exchange any Debt Security that has been
surrendered for repayment at the holder's option, except the portion, if any, of
such Debt Security not to be so repaid.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Indenture will provide that the Company may, with or without the consent
of the holders of any outstanding Debt Securities, consolidate with, or sell,
lease or convey all or substantially all of its assets to, or merge with or
into, any other entity, provided that (a) either the Company shall be the
continuing entity, or the successor entity (if other than the Company) formed by
or resulting from any such consolidation or merger or which shall have received
the transfer of such assets shall expressly assume the Company's obligation to
pay the principal of (and premium, if any) and interest on all the Debt
Securities and the due and punctual performance and observance of all the
covenants and conditions contained in the Indenture; (b) immediately after
giving effect to such transaction and treating any indebtedness that becomes an
obligation of the Company or any subsidiary as a result thereof as having been
incurred by the Company or such subsidiary at the time of such transaction, no
event of default under the Indenture, and no event that, after notice or the
lapse of time, or both, would become such an event of default, shall have
occurred and be continuing; and (c) an officers' certificate and legal opinion
covering such conditions shall be delivered to each Trustee.
CERTAIN COVENANTS
EXISTENCE. Except as permitted under "-- Merger, Consolidation or Sale of
Assets," the Indenture will require the Company to do or cause to be done all
things necessary to preserve and keep in full force and effect its corporate
existence, rights (by certificate of incorporation, by-laws and statute) and
franchises; PROVIDED, HOWEVER, that the Company shall not be required to
preserve any right or franchise if its Board of Directors determines that the
preservation thereof is no longer desirable in the conduct of its business.
MAINTENANCE OF PROPERTIES. The Indenture will require the Company to cause
all of its material properties used or useful in the conduct of its business or
the business of any subsidiary to be maintained and kept in good condition,
repair and working order and supplied with all necessary equipment and to cause
to be made all necessary repairs, renewals, replacements, betterments and
improvements thereof, all as in the Company's judgment may be necessary so that
the business carried on or in connection therewith may be properly and
advantageously conducted at all times; PROVIDED, HOWEVER, that the Company and
its subsidiaries shall not be prevented from selling or otherwise disposing of
their properties for value in the ordinary course of business.
INSURANCE. The Indenture will require the Company to, and to cause each of
its subsidiaries to, keep in force upon all of its properties and operations
policies of insurance carried with responsible companies in such amounts and
covering all such risks as shall be customary in the industry in accordance with
prevailing market conditions and availability.
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PAYMENT OF TAXES AND OTHER CLAIMS. The Indenture will require the Company
to pay or discharge or cause to be paid or discharged, before the same shall
become delinquent, (a) all taxes, assessments and governmental charges levied or
imposed on it or any subsidiary or on the income, profits or property of the
Company or any subsidiary and (b) all lawful claims for labor, materials and
supplies that, if unpaid, might by law become a lien upon the property of the
Company or any subsidiary; PROVIDED, HOWEVER, that the Company shall not be
required to pay or discharge or cause to be paid or discharged any such tax,
assessment, charge or claim the amount, applicability or validity of which is
being contested in good faith.
PROVISION OF FINANCIAL INFORMATION. Whether or not the Company is subject
to Section 13 or 15(d) of the Exchange Act, the Indenture will require the
Company, within 15 days after each of the respective dates by which the Company
would have been required to file annual reports, quarterly reports and other
documents with the Commission if the Company were so subject, (a) to transmit by
mail to all holders of Debt Securities, as their names and addresses appear in
the applicable register for such Debt Securities, without cost to such holders,
copies of the annual reports, quarterly reports and other documents that the
Company would have been required to file with the Commission pursuant to Section
13 or 15(d) of the Exchange Act if the Company were subject to such Sections,
(b) to file with the Trustee copies of the annual reports, quarterly reports and
other documents that the Company would have been required to file with the
Commission pursuant to Section 13 or 15(d) of the Exchange Act if the Company
were subject to such Sections, and (c) to supply, promptly upon written request
and payment of the reasonable cost of duplication and delivery, copies of such
documents to any prospective holder of Debt Securities.
ADDITIONAL COVENANTS. Any additional covenants of the Company with respect
to any of the series of Debt Securities will be set forth in the Prospectus
Supplement relating thereto.
EVENTS OF DEFAULT, NOTICE AND WAIVER
Unless otherwise provided in the applicable Indenture, each Indenture will
provide that the following events are "events of default" with respect to any
series of Debt Securities issued thereunder: (a) default for 30 days in the
payment of any installment of interest on any Debt Security of such series; (b)
default in the payment of the principal of (or premium, if any, on) any Debt
Security of such series at its maturity; (c) default in making any sinking fund
payment as required for any Debt Security of such series; (d) default in the
performance of any other covenant of the Company contained in the Indenture
(other than a covenant added to the Indenture solely for the benefit of a series
of Debt Securities issued thereunder other than such series), continued for 60
days after written notice as provided in the applicable Indenture; (e) a default
under any bond, debenture, note or other evidence of indebtedness for money
borrowed by the Company or any of its subsidiaries (including obligations under
leases required to be capitalized on the balance sheet of the lessee under
generally accepted accounting principles, but not including any indebtedness or
obligations for which recourse is limited to property purchased) in an aggregate
principal amount in excess of $10,000,000 or under any mortgage, indenture or
instrument under which there may be issued or by which there may be secured or
evidenced any indebtedness for money borrowed by the Company or any of its
subsidiaries (including such leases, but not including such indebtedness or
obligations for which recourse is limited to property purchased) in an aggregate
principal amount in excess of $10,000,000, whether such indebtedness now exists
or shall hereafter be created, which default shall have resulted in such
indebtedness becoming or being declared due and payable prior to the date on
which it would otherwise have become due and payable or such obligations being
accelerated, without such acceleration having been rescinded or annulled; (f)
certain events of bankruptcy, insolvency or reorganization, or court appointment
of a receiver, liquidator or trustee of the Company or any Significant
Subsidiary of the Company; and (g) any other Event of Default provided with
respect to a particular series of Debt Securities. The term "Significant
Subsidiary" has the meaning ascribed to such term in Regulation S-X promulgated
under the Securities Act.
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If an event of default under any Indenture with respect to Debt Securities
of any series at the time outstanding occurs and is continuing, then in every
such case the applicable Trustee or the holders of not less than 25% in
principal amount of the outstanding Debt Securities of that series may declare
the principal amount (or, if the Debt Securities of that series are Original
Issue Discount Securities or indexed securities, such portion of the principal
amount as may be specified in the terms thereof) of all the Debt Securities of
that series to be due and payable immediately by written notice thereof to the
Company (and to the applicable Trustee if given by the holders). However, at any
time after such a declaration of acceleration with respect to Debt Securities of
such series (or of all Debt Securities then outstanding under the Indenture, as
the case may be) has been made, but before a judgment or decree for payment of
the money due has been obtained by the applicable Trustee, the holders of not
less than a majority of the principal amount of the outstanding Debt Securities
of such series (or of all Debt Securities then outstanding under the Indenture,
as the case may be) may rescind and annul such declaration and its consequences
if (a) the Company shall have deposited with the applicable Trustee all required
payments of the principal of (and premium, if any) and interest on the Debt
Securities of such series (or of all Debt Securities then outstanding under the
Indenture, as the case may be), plus certain fees, expenses, disbursements and
advances of the applicable Trustee and (b) all events of default, other than the
nonpayment of accelerated principal (or specified portion thereof), with respect
to Debt Securities of such series (or of all Debt Securities then outstanding
under the Indenture, as the case may be) have been cured or waived as provided
in the Indenture. The Indenture will also provide that the holders of not less
than a majority in principal amount of the outstanding Debt Securities of any
series (or of all Debt Securities then outstanding under the Indenture, as the
case may be) may waive any past default with respect to such series and its
consequences, except a default (y) in the payment of the principal of (or
premium, if any) or interest on any Debt Security of such series or (z) in
respect of a covenant or provision contained in the Indenture that cannot be
modified or amended without the consent of the holder of each outstanding Debt
Security affected thereby.
The Indenture will require each Trustee to give notice to the holders of
Debt Securities within 90 days of a default under the Indenture unless such
default shall have been cured or waived; PROVIDED, HOWEVER, that such Trustee
may withhold notice to the holders of any series of Debt Securities of any
default with respect to such series (except a default in the payment of the
principal of (or premium, if any) or interest on any Debt Security of such
series or in the payment of any sinking fund installment in respect of any Debt
Security of such series) if specified responsible officers of the Trustee
consider such withholding to be in such holders' interest.
The Indenture will provide that no holders of Debt Securities of any series
may institute any proceedings, judicial or otherwise, with respect to the
Indenture or for any remedy thereunder, except in the case of failure of the
Trustee, for 60 days, to act after it has received a written request to
institute proceedings in respect of an event of default from the holders of not
less than 25% in principal amount of the outstanding Debt Securities of such
series, as well as an offer of indemnity reasonably satisfactory to it. This
provision will not prevent, however, any holder of Debt Securities from
instituting suit for the enforcement of payment of the principal of (and
premium, if any) and interest on such Debt Securities at the respective due
dates thereof.
The Indenture will provide that, subject to provisions in such Indenture
relating to its duties in case of default, the Trustee is under no obligation to
exercise any of its rights or powers under the Indenture at the request or
direction of any holders of any series of Debt Securities then outstanding under
the Indenture, unless such holders shall have offered to the Trustee reasonable
security or indemnity. The holders of not less than a majority in principal
amount of the outstanding Debt Securities of any series (or of all Debt
Securities then outstanding under the Indenture, as the case may be) shall have
the right to direct the time, method and place of conducting any proceeding for
any remedy available to the Trustee, or of exercising any trust or power
conferred upon the Trustee. The Trustee may, however, refuse to follow any
direction that is in conflict with any law or the Indenture that may involve the
Trustee in personal liability or that may be unduly prejudicial to the holders
of Debt Securities of such series not joining therein.
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Within 120 days after the close of each fiscal year, the Company will be
required to deliver to the Trustee a certificate, signed by one of several
specified officers, stating whether or not such officer has knowledge of any
default under the Indenture and, if so, specifying each such default and the
nature and status thereof.
MODIFICATION OF THE INDENTURE
Modifications and amendments of any Indenture will be permitted only with
the consent of the holders of not less than a majority in principal amount of
all outstanding Debt Securities issued under such Indenture affected by such
modification or amendment; PROVIDED, HOWEVER, that no such modification or
amendment may, without the consent of the holder of each Debt Security affected
thereby, (a) change the stated maturity of the principal of, or any installment
of interest (or premium, if any) on, any such Debt Security; (b) reduce the
principal amount of, or the rate or amount of interest on, or any premium
payable on redemption of, any such Debt Security, or reduce the amount of
principal of an Original Issue Discount Security that would be due and payable
upon declaration of acceleration of the maturity thereof or would be provable in
bankruptcy, or adversely affect any right of repayment of the holder of any such
Debt Security; (c) change the place of payment, or the coin or currency, for
payment of principal of (and premium, if any), or interest on any such Debt
Security; (d) impair the right to institute suit for the enforcement of any
payment on or with respect to any such Debt Security; (e) reduce the
above-stated percentage of outstanding Debt Securities of any series necessary
to modify or amend the Indenture, to waive compliance with certain provisions
thereof or certain defaults and consequences thereunder or to reduce the quorum
or voting requirements set forth in the Indenture; or (f) modify any of the
foregoing provisions or any of the provisions relating to the waiver of certain
past defaults or certain covenants, except to increase the required percentage
to effect such action or to provide that certain other provisions may not be
modified or waived without the consent of the holder of such Debt Security.
The holders of a majority in aggregate principal amount of outstanding Debt
Securities of each series may, on behalf of all holders of Debt Securities of
that series waive, insofar as that series is concerned, compliance by the
Company with certain restrictive covenants in the applicable Indenture.
Modifications and amendments of the Indenture will be permitted to be made
by the Company and the Trustee without the consent of any holder of Debt
Securities for any of the following purposes: (a) to evidence the succession of
another person to the Company as obligor under the Indenture; (b) to add to the
covenants of the Company for the benefit of the holders of all or any series of
Debt Securities or to surrender any right or power conferred upon the Company in
the Indenture; (c) to add events of default for the benefit of the holders of
all or any series of Debt Securities; (d) to add or change any provisions of the
Indenture to facilitate the issuance of, or to liberalize certain terms of, Debt
Securities in bearer form, or to permit or facilitate the issuance of Debt
Securities in uncertificated form, PROVIDED that such action shall not adversely
affect the interests of the holders of the Debt Securities of any series in any
material respect; (e) to change or eliminate any provisions of the Indenture,
PROVIDED that any such change or elimination shall become effective only when
there are no Debt Securities outstanding of any series created prior thereto
that are entitled to the benefit of such provision; (f) to secure the Debt
Securities; (g) to establish the form or terms of Debt Securities of any series,
including the provisions and procedures, if applicable, for the conversion of
such Debt Securities into Common Stock or Preferred Stock; (h) to provide for
the acceptance of appointment by a successor Trustee or facilitate the
administration of the trusts under the Indenture by more than one Trustee; (i)
to cure any ambiguity, defect or inconsistency in the Indenture; PROVIDED,
HOWEVER, that such action shall not adversely affect the interests of holders of
Debt Securities of any series in any material respect; or (j) to supplement any
of the provisions of the Indenture to the extent necessary to permit or
facilitate defeasance and discharge of any series of such Debt Securities,
PROVIDED, HOWEVER, that such action shall not adversely affect the interests of
the holders of the Debt Securities of any series in any material respect.
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The Indenture will provide that in determining whether the holders of the
requisite principal amount of outstanding Debt Securities of a series have given
any request, demand, authorization, direction, notice, consent or waiver
thereunder or whether a quorum is present at a meeting of holders of Debt
Securities, (a) the principal amount of an Original Issue Discount Security that
shall be deemed to be outstanding shall be the amount of the principal thereof
that would be due and payable as of the date of such determination upon
declaration of acceleration of the maturity thereof, (b) the principal amount of
any Debt Security denominated in a foreign currency that shall be deemed
outstanding shall be the U.S. dollar equivalent, determined on the issue date
for such Debt Security, of the principal amount (or, in the case of an Original
Issue Discount Security, the U.S. dollar equivalent on the issue date of such
Debt Security of the amount determined as provided in (a) above), (c) the
principal amount of an indexed security that shall be deemed outstanding shall
be the principal face amount of such indexed security at original issuance,
unless otherwise provided with respect to such indexed security in the
applicable Indenture, and (d) Debt Securities owned by the Company or any other
obligor upon the Debt Securities or any affiliate of the Company or of such
other obligor shall be disregarded.
The Indenture will contain provisions for convening meetings of the holders
of Debt Securities of a series. A meeting may be permitted to be called at any
time by the Trustee, and also, upon request, by the Company or the holders of at
least 10% in principal amount of the outstanding Debt Securities of such series,
in any such case upon notice given as provided in the Indenture. Except for any
consent that must be given by the holder of each Debt Security affected by
certain modifications and amendments of the Indenture, any resolution presented
at a meeting or adjourned meeting duly reconvened at which a quorum is present
may be adopted by the affirmative vote of the holders of a majority in principal
amount of the outstanding Debt Securities of that series; PROVIDED, HOWEVER,
that, except as referred to above, any resolution with respect to any request,
demand, authorization, direction, notice, consent, waiver or other action that
may be made, given or taken by the holders of a specified percentage, which is
less than a majority, in principal amount of the outstanding Debt Securities of
a series may be adopted at a meeting or adjourned meeting duly reconvened at
which a quorum is present by the affirmative vote of the holders of such
specified percentage in principal amount of the outstanding Debt Securities of
that series. Any resolution passed or decision taken at any meeting of holders
of Debt Securities of any series duly held in accordance with the Indenture will
be binding on all holders of Debt Securities of that series. The quorum at any
meeting called to adopt a resolution, and at any reconvened meeting, will be
persons holding or representing a majority in principal amount of the
outstanding Debt Securities of a series; PROVIDED, HOWEVER, that if any action
is to be taken at such meeting with respect to a consent or waiver that may be
given by the holders of not less than a specified percentage in principal amount
of the outstanding Debt Securities of a series, the persons holding or
representing such specified percentage in principal amount of the outstanding
Debt Securities of such series will constitute a quorum.
Notwithstanding the foregoing provisions, the Indenture will provide that if
any action is to be taken at a meeting of holders of Debt Securities of any
series with respect to any request, demand, authorization, direction, notice,
consent, waiver or other action that the Indenture expressly provides may be
made, given or taken by the holders of a specified percentage in principal
amount of all outstanding Debt Securities affected thereby, or of the holders of
such series and one or more additional series: (a) there shall be no minimum
quorum requirement for such meeting and (b) the principal amount of the
outstanding Debt Securities of such series that vote in favor of such request,
demand, authorization, direction, notice, consent, waiver or other action shall
be taken into account in determining whether such request, demand,
authorization, direction, notice, consent, waiver or other action has been made,
given or taken under the Indenture.
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
Unless otherwise indicated in the applicable Prospectus Supplement, the
Company will be permitted, at its option, to discharge certain obligations to
holders of any series of Debt Securities that have not already been delivered to
the applicable Trustee for cancellation and that either have become
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due and payable or will become due and payable within one year (or scheduled for
redemption within one year) by irrevocably depositing with the applicable
Trustee, in trust, funds in such currency or currencies, currency unit or units
or composite currency or currencies in which such Debt Securities are payable in
an amount sufficient to pay the entire indebtedness on such Debt Securities in
respect of principal (and premium, if any) and interest to the date of such
deposit (if such Debt Securities have become due and payable) or to the stated
maturity or redemption date, as the case may be.
The Indenture will provide that, unless otherwise indicated in the
applicable Prospectus Supplement, the Company may elect either to (a) defease
and be discharged from any and all obligations with respect to any series of
Debt Securities (except for the obligation to pay additional amounts, if any,
upon the occurrence of certain events of tax, assessment or governmental charge
with respect to payments on such Debt Securities and the obligations to register
the transfer or exchange of such Debt Securities, to replace temporary or
mutilated, destroyed, lost or stolen Debt Securities, to maintain an office or
agency in respect of such Debt Securities and to hold money for payment in
trust) ("defeasance") or (b) be released from its obligations with respect to
such Debt Securities under the applicable Indenture (being the restrictions
described under "-- Certain Covenants") or, if provided in the applicable
Prospectus Supplement, its obligations with respect to any other covenant, and
any omission to comply with such obligations, shall not constitute a default or
an event of default with respect to such Debt Securities ("covenant
defeasance"), in either case upon the irrevocable deposit by the Company with
the applicable Trustee, in trust, of an amount, in such currency or currencies,
currency unit or units or composite currency or currencies in which such Debt
Securities are payable at stated maturity, or Government Obligations (as defined
below), or both, applicable to such Debt Securities that through the scheduled
payment of principal and interest in accordance with their terms will provide
money in an amount sufficient to pay the principal of (and premium, if any) and
interest on such Debt Securities, and any mandatory sinking fund or analogous
payments thereon, on the scheduled due dates therefor.
Such a trust may only be established if, among other things, the Company has
delivered to the applicable Trustee an opinion of counsel (as specified in the
applicable Indenture) to the effect that the holders of such Debt Securities
will not recognize income, gain or loss for U.S. federal income tax purposes as
a result of such defeasance or covenant defeasance and will be subject to U.S.
federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such defeasance or covenant defeasance had not
occurred, and such opinion of counsel, in the case of defeasance, must refer to
and be based on a ruling of the Internal Revenue Service (the "IRS") or a change
in applicable U.S. federal income tax law occurring after the date of the
Indenture. In the event of such defeasance, the holders of such Debt Securities
would thereafter be able to look only to such trust fund for payment of
principal (and premium, if any) and interest.
"Government Obligations" means securities that are (a) direct obligations of
the United States of America or the government which issued the foreign currency
in which the Debt Securities of a particular series are payable, for the payment
of which its full faith and credit is pledged, or (b) obligations of a person
controlled or supervised by and acting as an agency or instrumentality of the
United States of America or such government which issued the foreign currency in
which the Debt Securities of such series are payable, the payment of which is
unconditionally guaranteed as a full faith and credit obligation by the United
States of America or such other government, which, in either case, are not
callable or redeemable at the option of the issuer thereof, and shall also
include a depository receipt issued by a bank or trust company as custodian with
respect to any such Government Obligation or a specific payment of interest on
or principal of any such Government Obligation held by such custodian for the
account of the holder of a depository receipt; PROVIDED, HOWEVER, that (except
as required by law) such custodian is not authorized to make any deduction from
the amount payable to the holder of such depository receipt from any amount
received by the custodian in respect of the Government Obligation or the
specific payment of interest on or principal of the Government Obligation
evidenced by such depository receipt.
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Unless otherwise provided in the applicable Prospectus Supplement, if after
the Company has deposited funds and/or Government Obligations to effect
defeasance or covenant defeasance with respect to Debt Securities of any series,
(a) the holder of a Debt Security of such series is entitled to, and does, elect
pursuant to the applicable Indenture or the terms of such Debt Security to
receive payment in a currency, currency unit or composite currency other than
that in which such deposit has been made in respect of such Debt Security or (b)
a Conversion Event (as defined below) occurs in respect of the currency,
currency unit or composite currency in which such deposit has been made, the
indebtedness represented by such Debt Security will be deemed to have been, and
will be, fully discharged and satisfied through the payment of the principal of
(and premium, if any) and interest on such Debt Security as they become due out
of the proceeds yielded by converting the amount so deposited in respect of such
Debt Security into the currency, currency unit or composite currency in which
such Debt Security becomes payable as a result of such election or such
cessation of usage based on the applicable market exchange rate. "Conversion
Event" means the cessation of use of (i) a currency, currency unit or composite
currency both by the government of the country which issued such currency and
for the settlement of transactions by a central bank or other public institution
of or within the international banking community, (ii) the ECU both within the
European Monetary System and for the settlement of transactions by public
institutions of or within the European Communities, or (iii) any currency unit
or composite currency other than the ECU for the purposes for which it was
established. Unless otherwise provided in the applicable Prospectus Supplement,
all payments of principal of (and premium, if any) and interest on any Debt
Security that is payable in a foreign currency that ceases to be used by its
government of issuance shall be made in U.S. dollars.
In the event the Company effects covenant defeasance with respect to any
Debt Securities and such Debt Securities are declared due and payable because of
the occurrence of any event of default other than the event of default described
in clause (d) under "-- Events of Default, Notice and Waiver" with respect to
the specified sections of the applicable Indenture (which sections would no
longer be applicable to such Debt Securities) or clause (g) thereunder with
respect to any other covenant as to which there has been covenant defeasance,
the amount in such currency, currency unit or composite currency in which such
Debt Securities are payable, and Government Obligations on deposit with the
applicable Trustee, will be sufficient to pay amounts due on such Debt
Securities at the time of their stated maturity, but may not be sufficient to
pay amounts due on such Debt Securities at the time of the acceleration
resulting from such event of default. The Company would, however, remain liable
to make payment of such amounts due at the time of acceleration.
The applicable Prospectus Supplement may further describe the provisions, if
any, permitting such defeasance or covenant defeasance, including any
modifications to the provisions described above, with respect to the Debt
Securities of or within a particular series.
CONVERSION RIGHTS
The terms and conditions, if any, upon which the Debt Securities are
convertible into Common Stock or Preferred Stock will be set forth in the
applicable Prospectus Supplement relating thereto. Such terms will include
whether such Debt Securities are convertible into Common Stock or Preferred
Stock, the conversion price (or manner of calculation thereof), the conversion
period, provisions as to whether conversion will be at the option of the holders
or the Company, the events requiring an adjustment of the conversion price and
provisions affecting conversion in the event of the redemption of such Debt
Securities and any restrictions on conversion, including restrictions directed
at maintaining the Company's REIT status.
PAYMENT
Unless otherwise specified in the applicable Prospectus Supplement, the
principal of (and applicable premium, if any) and interest on any series of Debt
Securities will be payable at the Trustee's corporate trust office, the address
of which will be stated in the applicable Prospectus Supplement; PROVIDED,
HOWEVER, that, at the Company's option, payment of interest may be made by check
mailed to
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the address of the person entitled thereto as it appears in the applicable
register for such Debt Securities or by wire transfer of funds to such person at
an account maintained within the United States.
All amounts paid by the Company to a paying agent or a Trustee for the
payment of the principal of or any premium or interest on any Debt Security that
remain unclaimed at the end of two years after such principal, premium or
interest has become due and payable will be repaid to the Company, and the
holder of such Debt Security thereafter may look only to the Company for payment
thereof.
GLOBAL SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more global securities (the "Global Securities") that will be
deposited with, or on behalf of, a depositary identified in the applicable
Prospectus Supplement relating to such series. Global Securities may be issued
in either registered or bearer form and in either temporary or permanent form.
The specific terms of the depositary arrangement with respect to a series of
Debt Securities will be described in the applicable Prospectus Supplement
relating to such series.
DESCRIPTION OF COMMON STOCK AND CLASS B COMMON STOCK
The Company has authority to issue 120,000,000 shares of Common Stock, par
value $.001 per share and 500,000 shares of Class B Common Stock, par value
$.001 per share (the "Class B Common Stock"). At April 14, 1995, the Company had
outstanding 18,095,988 shares of Common Stock and 154,604 shares of Class B
Common Stock.
GENERAL
The following description of the Common Stock sets forth certain general
terms and provisions of the Common Stock to which any Prospectus Supplement may
relate, including a Prospectus Supplement providing that the Common Stock will
be issuable upon conversion of Debt Securities or Preferred Stock. The
statements below describing the Common Stock are in all respects subject to and
qualified in their entirety by reference to the applicable provisions of the
Company's Restated Certificate of Incorporation (the "Certificate of
Incorporation") and By-Laws.
TERMS
Subject to the preferential rights of any other shares or series of stock,
holders of Common Stock will be entitled to receive dividends when, as and if
declared by the Company's Board of Directors out of funds legally available
therefor. Payment and declaration of dividends on the Common Stock and purchases
of shares thereof by the Company will be subject to certain restrictions if the
Company fails to pay dividends on the Preferred Stock. See "Description of
Preferred Stock." Upon any liquidation, dissolution or winding up of the
Company, holders of Common Stock (together with holders of Class B Common Stock)
will be entitled to share equally and ratably in any assets available for
distribution to them, after payment or provision for payment of the debts and
other liabilities of the Company and the preferential amounts owing with respect
to any outstanding Preferred Stock. The Common Stock will possess ordinary
voting rights for the election of directors and in respect of other corporate
matters, each share entitling the holder thereof to one vote. Holders of Common
Stock will not have cumulative voting rights in the election of directors, which
means that holders of more than 50% of all the shares of the Company's Common
Stock and Class B Common Stock voting for the election of directors can elect
all the directors if they choose to do so and the holders of the remaining
shares cannot elect any directors. Holders of shares of Common Stock will not
have preemptive rights, which means they have no right to acquire any additional
shares of Common Stock that may be issued by the Company at a subsequent date.
All shares of Common Stock now outstanding are, and additional shares of Common
Stock offered will be when issued, fully paid and nonassessable, and no shares
of Common Stock are or will be subject to preemptive or similar rights.
The Class B Common Stock has rights substantially similar to those of the
Common Stock. Each holder of Class B Common Stock was entitled to a loan from
the Company in an amount necessary to
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satisfy the holder's general partner capital obligation to certain partnerships
that were acquired by the Company 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 Common Stock.
Class B Common Stock is not publicly traded but is transferable upon its release
from the pledge.
RESTRICTIONS ON OWNERSHIP
For the Company to qualify as a REIT under the Internal Revenue Code of
1986, as amended (the "Code"), not more than 50% in value of its outstanding
capital stock may be owned, actually or constructively, by five or fewer
individuals (defined in the Code to include certain entities) during the last
half of a taxable year. To assist the Company in meeting this requirement, the
Company may take certain actions to limit the beneficial ownership, actually or
constructively, by a single person or entity of the Company's outstanding equity
securities. See "Restrictions on Transfers of Capital Stock; Excess Stock."
TRANSFER AGENT
The registrar and transfer agent for the Common Stock and Class B Common
Stock is Gemisys Corporation.
SHAREHOLDER RIGHTS PLAN
Pursuant to the Rights Agreement dated as of March 17, 1994, between the
Company and Gemisys Corporation, as Rights Agent (the "Rights Agreement"),
holders of shares of the Common Stock and the Class B Common Stock have certain
rights to purchase shares of the Company's Series A Junior Participating
Preferred Stock (the "Junior Preferred Shares") exercisable only in certain
circumstances (the "Rights"). The Rights, which are represented by certificates
for the Common Stock and the Class B Common Stock, trade together with the
Common Stock and the Class B Common Stock until a Distribution Date (as defined
below). Each Right, when it becomes exercisable as described below, will entitle
the registered holder to purchase one one-hundredth of a Junior Preferred Share
at $65 per one one-hundredth of a Junior Preferred Share (subject to adjustment,
the "Purchase Price").
Until the earlier to occur of (a) 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
Common Stock and Class B Common Stock and (b) 10 business days (or such later
date as may be determined by action of the Company's Board of Directors 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
Common Stock and Class B Common Stock (the earlier of such dates, the
"Distribution Date"), the Rights will be evidenced, with respect to any of the
Common Stock and the Class B Common Stock certificates outstanding as of March
25, 1994 (the "Rights Record Date"), by such Common Stock and Class B 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 Common Stock or Class B Common Stock. Until the Distribution Date
(or earlier redemption or expiration of the Rights), new Common Stock or Class B
Common Stock certificates issued after the Rights Record Date upon transfer or
new issuance of Common Stock or Class B 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 Common Stock or Class B Common Stock outstanding as of the
Rights 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 Common Stock or the Class B Common Stock represented by such
certificate. As soon as
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practicable following the Distribution Date, separate certificates evidencing
the Rights ("Right Certificates") will be mailed to holders of record of the
Common Stock and the Class B 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, unless such date is extended or unless the Rights are
earlier redeemed or exchanged by the Company, in each case as described below.
The Purchase Price payable and the number of Junior Preferred Shares or
other securities or property issuable upon exercise of the Rights are subject to
adjustment from time to time to prevent dilution (a) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the Junior
Preferred Shares, (b) upon the grant to holders of the Junior Preferred Shares
of certain rights or warrants to subscribe for or purchase Junior Preferred
Shares at a price, or securities convertible into Junior Preferred Shares with a
conversion price, less than the then-current market price of the Junior
Preferred Shares, or (c) upon the distribution to holders of the Junior
Preferred Shares of evidences of indebtedness or assets (excluding regular
periodic cash dividends paid out of earnings or retained earnings or dividends
payable in Junior 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
Junior Preferred Share issuable upon exercise of each Right is also subject to
adjustment in the event of a stock split of the Common Stock or the Class B
Common Stock or a dividend on the Common Stock or the Class B Common Stock
payable in Common Stock or subdivisions, consolidations or combinations of the
Common Stock or the Class B Common Stock occurring, in any such case, prior to
the Distribution Date.
Junior Preferred Shares purchasable upon exercise of the Rights will be
redeemable only in accordance with the redemption provisions discussed under
"Restrictions on Transfers of Capital Stock; Excess Stock." Each holder of
Junior 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 Common Stock or Class B
Common Stock. In the event of liquidation, the holders of Junior 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 Common Stock or Class B Common Stock. Each
Junior Preferred Share will have 100 votes, voting together with the Common
Stock and the Class B Common Stock. Finally, in the event of any merger,
consolidation or other transaction in which shares of Common Stock and Class B
Common Stock are exchanged, each Junior Preferred Share will be entitled to
receive 100 times the amount received per share of Common Stock and Class B
Common Stock. These rights are protected by customary antidilution provisions.
Because of the nature of the Junior Preferred Shares' dividend, liquidation
and voting rights, the value of the one one-hundredth interest in a Junior
Preferred Share purchasable upon exercise of each Right should approximate the
value of one share of 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 Common Stock or Class B Common Stock having a market
value, as of the date of exercise, of two times the exercise price of the Right.
If the Company 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.
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At any time after any person or group becomes an Acquiring Person and prior
to the acquisition by such person or group of 50% or more of the outstanding
Common Stock and Class B Common Stock, the Company's Board of Directors 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 Common
Stock or Class B Common Stock, or one one-hundredth of a Junior Preferred Share
(or of a share of a class or series of the Company'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 Junior Preferred Shares will be issued (other
than fractions that are integral multiples of one one-hundredth of a Junior
Preferred Share, which may, at the Company's election, be evidenced by
depositary receipts) and, in lieu thereof, an adjustment in cash will be made
based on the market price of the Junior Preferred Shares on the last trading day
prior to the date of exercise.
At any time prior to any person or group becoming an Acquiring Person, the
Company's Board of Directors 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 Company's Board of Directors 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 Company's Board of Directors
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 (a)
the sum of .001% and the largest percentage of the outstanding Common Stock and
Class B Common Stock then known to the Company to be beneficially owned by any
person or group of affiliated persons and (b) 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 Company, 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 Company
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 Company's Board of Directors since the Company's Board of
Directors may, at its option, at any time prior to any person or group becoming
an Acquiring Person, redeem all, but not less than all, the then-outstanding
Rights at the Redemption Price.
DESCRIPTION OF PREFERRED STOCK
The Company is authorized to issue 40,000,000 shares of Preferred Stock, par
value $.001 per share, of which no shares were outstanding as of April 14, 1995.
The Company has designated 2,800,000 shares of the Preferred Stock as the Junior
Preferred Shares issuable in connection with the Rights Agreement discussed
under "Description of Common Stock and Class B Common Stock -- Shareholder
Rights Plan."
GENERAL
The following description of the Preferred Stock sets forth certain general
terms and provisions of the Preferred Stock to which any Prospectus Supplement
may relate. The statements below describing the Preferred Stock are in all
respects subject to and qualified in their entirety by reference to the
applicable provisions of the Certificate of Incorporation (including the
applicable Certificate of Designations) and By-Laws.
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Shares of Preferred Stock may be issued from time to time in one or more
series as authorized by the Company's Board of Directors. Subject to limitations
prescribed by the Delaware General Corporation Law and the Certificate of
Incorporation, the Company's Board of Directors is authorized to fix the number
of shares constituting each series of Preferred Stock and the designations and
powers, preferences and relative, participating, optional or other special
rights and qualifications, limitations or restrictions thereof, including such
provisions as may be desired concerning voting, redemption, dividends,
dissolution or the distribution of assets, conversion or exchange, and such
other subjects or matters as may be fixed by resolution by the Board of
Directors or a duly authorized committee thereof. The Preferred Stock will, when
issued, be fully paid and nonassessable and will have no preemptive rights.
Reference is made to the Prospectus Supplement relating to the Preferred
Stock offered thereby for specific terms, including:
(1) the title and stated value of such Preferred Stock;
(2) the number of shares of such Preferred Stock offered, the liquidation
preference per share and the offering price of such Preferred Stock;
(3) the dividend rate(s), period(s) and/or payment date(s) or method(s) of
calculation thereof applicable to such Preferred Stock;
(4) whether such Preferred Stock is cumulative or not and, if cumulative, the
date from which dividends on such Preferred Stock shall accumulate;
(5) the procedures for any auction and remarketing, if any, for such Preferred
Stock;
(6) the provision for a sinking fund, if any, for such Preferred Stock;
(7) any voting rights of such Preferred Stock;
(8) the provision for redemption, if applicable, of such Preferred Stock;
(9) any listing of such Preferred Stock on any securities exchange;
(10) the terms and conditions, if applicable, upon which such Preferred Stock
will be convertible into Common Stock, including the conversion price (or
manner of calculation thereof);
(11) a discussion of federal income tax considerations applicable to such
Preferred Stock;
(12) any limitations on actual, beneficial or constructive ownership and
restrictions on transfer, in each case as may be appropriate to preserve the
Company's REIT status;
(13) the relative ranking and preferences of such Preferred Stock as to dividend
rights and rights upon liquidation, dissolution or winding up of the affairs
of the Company;
(14) any limitations on issuance of any series of Preferred Stock ranking senior
to or on a parity with such series of Preferred Stock as to dividend rights
and rights upon liquidation, dissolution or winding up of the affairs of the
Company; and
(15) any other specific terms, preferences, rights, limitations or restrictions
of such Preferred Stock.
RANK
Unless otherwise specified in the applicable Prospectus Supplement, the
Preferred Stock will, with respect to dividend rights and rights upon
liquidation, dissolution or winding up of the affairs of the Company, rank (a)
senior to all classes or series of Common Stock, Class B Common Stock and Excess
Stock of the Company, to the Junior Preferred Shares and to all equity
securities ranking junior to such Preferred Stock with respect to dividend
rights or rights upon liquidation, dissolution or winding up of the Company; (b)
on a parity with all equity securities issued by the Company the terms of which
specifically provide that such equity securities rank on a parity with the
Preferred Stock with respect to dividend rights or rights upon liquidation,
dissolution or winding up of the affairs of the
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Company; and (c) junior to all equity securities issued by the Company the terms
of which specifically provide that such equity securities rank senior to the
Preferred Stock with respect to dividend rights or rights upon liquidation,
dissolution or winding up of the affairs of the Company. As used in the
Certificate of Incorporation for these purposes, the term "equity securities"
does not include convertible debt securities.
DIVIDENDS
Holders of shares of the Preferred Stock of each series shall be entitled to
receive, when, as and if declared by the Company's Board of Directors, out of
the Company's assets legally available for payment, cash dividends at such rates
and on such dates as will be set forth in the applicable Prospectus Supplement.
Each such dividend shall be payable to holders of record as they appear on the
Company's stock transfer books on such record dates as shall be fixed by the
Company's Board of Directors.
Dividends on any series of Preferred Stock may be cumulative or
noncumulative, as provided in the applicable Prospectus Supplement. Dividends,
if cumulative, will be cumulative from and after the date set forth in the
applicable Prospectus Supplement. If the Company's Board of Directors fails to
declare a dividend payable on a dividend payment date on any series of Preferred
Stock for which dividends are noncumulative, then the holders of such series of
Preferred Stock will have no right to receive a dividend in respect of the
dividend period ending on such dividend payment date, and the Company will have
no obligation to pay the dividend accrued for such period, whether or not
dividends on such series are declared payable on any future dividend payment
date.
If any shares of Preferred Stock of any series are outstanding, no full
dividends shall be declared or paid or set apart for payment on the Preferred
Stock of any other series ranking, as to dividends, on a parity with or junior
to the Preferred Stock of such series for any period unless (a) if such series
of Preferred Stock has a cumulative dividend, full cumulative dividends have
been or contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof is set apart for such payment on the Preferred Stock of
such series for all past dividend periods and the then current dividend period
or (b) if such series of Preferred Stock does not have a cumulative dividend,
full dividends for the then current dividend period have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof is set apart for such payment on the Preferred Stock of such
series. When dividends are not paid in full (or a sum sufficient for such full
payment is not so set apart) upon the shares of Preferred Stock of any series
and the shares of any other series of Preferred Stock ranking on a parity as to
dividends with the Preferred Stock of such series, all dividends declared on
shares of Preferred Stock of such series and any other series of Preferred Stock
ranking on a parity as to dividends of such Preferred Stock shall be declared
pro rata so that the amount of dividends declared per share on the Preferred
Stock of such series and such other series of Preferred Stock shall in all cases
bear to each other the same ratio that accrued dividends per share on the shares
of Preferred Stock of such series (which shall not include any accumulation in
respect of unpaid dividends for prior dividend periods if such Preferred Stock
does not have a cumulative dividend) and such other series of Preferred Stock
bear to each other. No interest, or sum of money in lieu of interest, shall be
payable in respect of any dividend payment or payments on Preferred Stock of
such series that may be in arrears.
Except as provided in the immediately preceding paragraph, unless (a) if
such series of Preferred Stock has a cumulative dividend, full cumulative
dividends on the Preferred Stock of such series have been or contemporaneously
are declared and paid or declared and a sum sufficient for the payment thereof
is set apart for payment for all past dividend periods and the then current
dividend period and (b) if such series of Preferred Stock does not have a
cumulative dividend, full dividends on the Preferred Stock of such series have
been or contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof is set apart for payment for the then current dividend
period, no dividends (other than in the Common Stock, the Class B Common Stock
or other capital stock of
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the Company ranking junior to the Preferred Stock of such series as to dividends
and upon liquidation) shall be declared or paid or set aside for payment nor
shall any other distribution be declared or made on the Common Stock, the Class
B Common Stock or any other capital stock of the Company ranking junior to or on
a parity with the Preferred Stock of such series as to dividends or upon
liquidation, nor shall the Common Stock, the Class B Common Stock or any other
capital stock of the Company ranking junior to or on a parity with the Preferred
Stock of such series as to dividends or upon liquidation be redeemed, purchased
or otherwise acquired for any consideration (or any amounts be paid to or made
available for a sinking fund for the redemption of any shares of any such stock)
by the Company (except by conversion into or exchange for other capital stock of
the Company ranking junior to the Preferred Stock of such series as to dividends
and upon liquidation).
Any dividend payment made on shares of a series of Preferred Stock shall
first be credited against the earliest accrued but unpaid dividend due with
respect to shares of such series that remains payable.
REDEMPTION
If so provided in the applicable Prospectus Supplement, the shares of
Preferred Stock will be subject to mandatory redemption or redemption at the
Company's option, as a whole or in part, in each case on the terms, at the times
and at the redemption prices set forth in such Prospectus Supplement.
The Prospectus Supplement relating to a series of Preferred Stock that is
subject to mandatory redemption will specify the number of shares of such
Preferred Stock that shall be redeemed by the Company in each year commencing
after a date to be specified, at a redemption price per share to be specified,
together with an amount equal to all accumulated and unpaid dividends thereon
(which shall not, if such Preferred Stock does not have a cumulative dividend,
include any accumulation in respect of unpaid dividends for prior dividend
periods) to the date of redemption. The redemption price may be payable in cash
or other property, as specified in the applicable Prospectus Supplement. If the
redemption price for Preferred Stock of any series is payable only from the net
proceeds of the issuance of capital stock of the Company, the terms of such
Preferred Stock may provide that, if no such capital stock shall have been
issued or to the extent the net proceeds from any issuance are insufficient to
pay in full the aggregate redemption price then due, such Preferred Stock shall
automatically and mandatorily be converted into shares of the applicable capital
stock of the Company pursuant to conversion provisions specified in the
applicable Prospectus Supplement.
Notwithstanding the foregoing, unless (a) if such series of Preferred Stock
has a cumulative dividend, full cumulative dividends on all shares of such
series of Preferred Stock have been or contemporaneously are declared and paid
or declared and a sum sufficient for the payment thereof is set apart for
payment for all past dividend periods and the then current dividend period and
(b) if such series of Preferred Stock does not have a cumulative dividend, full
dividends on the Preferred Stock of such series have been or contemporaneously
are declared and paid or declared and a sum sufficient for the payment thereof
is set apart for payment for the then current dividend period, no shares of such
series of Preferred Stock shall be redeemed unless all outstanding shares of
Preferred Stock of such series are simultaneously redeemed; PROVIDED, HOWEVER,
that the foregoing shall not prevent the purchase or acquisition of shares of
Preferred Stock of such series to preserve the Company's REIT status or pursuant
to a purchase or exchange offer made on the same terms to holders of all
outstanding shares of Preferred Stock of such series. In addition, unless (i) if
such series of Preferred Stock has a cumulative dividend, full cumulative
dividends on all outstanding shares of such series of Preferred Stock have been
or contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof is set apart for payment for all past dividend periods and
the then current dividend period and (ii) if such series of Preferred Stock does
not have a cumulative dividend, full dividends on the Preferred Stock of such
series have been or contemporaneously are declared and paid or declared and a
sum sufficient for the payment thereof is set apart for payment for the then
current dividend period, the Company shall not purchase or otherwise acquire
directly or indirectly any shares of
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Preferred Stock of such series (except by conversion into or exchange for
capital stock of the Company ranking junior to the Preferred Stock of such
series as to dividends and upon liquidation); PROVIDED, HOWEVER, that the
foregoing shall not prevent the purchase or acquisition of shares of Preferred
Stock of such series to preserve the Company's REIT status or pursuant to a
purchase or exchange offer made on the same terms to holders of all outstanding
shares of Preferred Stock of such series.
If fewer than all the outstanding shares of Preferred Stock of any series
are to be redeemed, the number of shares to be redeemed will be determined by
the Company and such shares may be redeemed pro rata from the holders of record
of such shares in proportion to the number of such shares held by such holders
(with adjustments to avoid redemption of fractional shares) or any other
equitable method determined by the Company that will not result in the issuance
of any Excess Stock.
Notice of redemption will be mailed at least 30, but not more than 60, days
before the redemption date to each holder of record of a share of Preferred
Stock of any series to be redeemed at the address shown on the Company's stock
transfer books. Each notice shall state: (a) the redemption date; (b) the number
of shares and series of the Preferred Stock to be redeemed; (c) the redemption
price; (d) the place or places where certificates for such Preferred Stock are
to be surrendered for payment of the redemption price; (e) that dividends on the
shares to be redeemed will cease to accumulate on such redemption date; and (f)
the date on which the holder's conversion rights, if any, as to such shares
shall terminate. If fewer than all the shares of Preferred Stock of any series
are to be redeemed, the notice mailed to each such holder thereof shall also
specify the number of shares of Preferred Stock to be redeemed from each such
holder and, upon redemption, a new certificate shall be issued representing the
unredeemed shares without cost to the holder thereof. If notice of redemption of
any shares of Preferred Stock has been given and if the funds necessary for such
redemption have been set aside by the Company in trust for the benefit of the
holders of any shares of Preferred Stock so called for redemption, then from and
after the redemption date dividends will cease to accrue on such shares of
Preferred Stock, such shares of Preferred Stock shall no longer be deemed
outstanding and all rights of the holders of such shares will terminate, except
the right to receive the redemption price. In order to facilitate the redemption
of shares of Preferred Stock of any series, the Board of Directors may fix a
record date for the determination of shares of such series of Preferred Stock to
be redeemed.
Subject to applicable law and the limitation on purchases when dividends on
a series of Preferred Stock are in arrears, the Company may, at any time and
from time to time, purchase any shares of such series of Preferred Stock in the
open market, by tender or by private agreement.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Company, then, before any distribution or payment shall be
made to the holders of the Common Stock, the Class B Common Stock or any other
class or series of capital stock of the Company ranking junior to any series of
the Preferred Stock in the distribution of assets upon any liquidation,
dissolution or winding up of the affairs of the Company, the holders of such
series of Preferred Stock shall be entitled to receive out of assets of the
Company legally available for distribution to shareholders liquidating
distributions in the amount of the liquidation preference per share (set forth
in the applicable Prospectus Supplement), plus an amount equal to all dividends
accrued and unpaid thereon (which shall not include any accumulation in respect
of unpaid dividends for prior dividend periods if such Preferred Stock does not
have a cumulative dividend). After payment of the full amount of the liquidating
distributions to which they are entitled, the holders of Preferred Stock will
have no right or claim to any of the remaining assets of the Company. If, upon
any such voluntary or involuntary liquidation, dissolution or winding up, the
legally available assets of the Company are insufficient to pay the amount of
the liquidating distributions on all outstanding shares of any series of
Preferred Stock and the corresponding amounts payable on all shares of other
classes or series of capital stock of the Company ranking on a parity with such
series of Preferred Stock in the distribution of assets upon liquidation,
dissolution or winding up, then the holders of such series of Preferred Stock
and all other such classes or series of capital stock shall share ratably in any
such distribution of assets in proportion to the full liquidating distributions
to which they would otherwise be respectively entitled.
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If liquidating distributions shall have been made in full to all holders of
any series of Preferred Stock, the remaining assets of the Company shall be
distributed among the holders of any other classes or series of capital stock
ranking junior to such series of Preferred Stock upon liquidation, dissolution
or winding up, according to their respective rights and preferences and in each
case according to their respective number of shares. For such purposes, the
consolidation or merger of the Company with or into any other entity, or the
sale, lease, transfer or conveyance of all or substantially all of the Company's
property or business, shall not be deemed to constitute a liquidation,
dissolution or winding up of the affairs of the Company.
VOTING RIGHTS
Holders of the Preferred Stock will not have any voting rights, except as
set forth below or as otherwise from time to time required by law or as
indicated in the applicable Prospectus Supplement.
Unless provided otherwise for any series of Preferred Stock, so long as any
shares of Preferred Stock of a series remain outstanding, the Company shall not,
without the affirmative vote or consent of the holders of at least a majority of
the shares of such series of Preferred Stock outstanding at the time, given in
person or by proxy, either in writing or at a meeting (such series voting
separately as a class), (a) authorize or create, or increase the authorized or
issued amount of, any class or series of capital stock ranking prior to such
series of Preferred Stock with respect to payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up or reclassify
any authorized capital stock of the Company into any such shares, or create,
authorize or issue any obligation or security convertible into or evidencing the
right to purchase any such shares; or (b) amend, alter or repeal the provisions
of the Certificate of Incorporation or the Certificate of Designations for such
series of Preferred Stock, whether by merger, consolidation or otherwise, so as
to materially and adversely affect any right, preference, privilege or voting
power of such series of Preferred Stock or the holders thereof; PROVIDED,
HOWEVER, that any increase in the amount of the authorized Preferred Stock or
the creation or issuance of any other series of Preferred Stock, or any increase
in the amount of authorized shares of such series or any other series of
Preferred Stock, in each case ranking on a parity with or junior to the
Preferred Stock of such series with respect to payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up, shall not be
deemed to materially and adversely affect such rights, preferences, privileges
or voting powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of such series of Preferred Stock shall have
been redeemed or called for redemption upon proper notice and sufficient funds
shall have been deposited in trust to effect such redemption.
Under Delaware law, notwithstanding anything to the contrary set forth
above, holders of each series of Preferred Stock will be entitled to vote as a
class upon a proposed amendment to the Certificate of Incorporation, whether or
not entitled to vote thereon by the Certificate of Incorporation, if the
amendment would increase or decrease the aggregate number of authorized shares
of such series, increase or decrease the par value of the shares of such series,
or alter or change the powers, preferences or special rights of the shares of
such series so as to affect them adversely.
CONVERSION RIGHTS
The terms and conditions, if any, upon which shares of any series of
Preferred Stock are convertible into Common Stock will be set forth in the
applicable Prospectus Supplement relating thereto. Such terms will include the
number of shares of Common Stock into which the Preferred Stock is convertible,
the conversion price (or manner of calculation thereof), the conversion period,
provisions as to whether conversion will be at the option of the holders of the
Preferred Stock or the Company, the events requiring an adjustment of the
conversion price and provisions affecting conversion in the event of the
redemption of such Preferred Stock.
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RESTRICTIONS ON OWNERSHIP
For the Company to qualify as a REIT under the Code, not more than 50% in
value of its outstanding capital stock may be owned, actually or constructively,
by five or fewer individuals (defined in the Code to include certain entities)
during the last half of a taxable year. To assist the Company in meeting this
requirement, the Company may take certain actions to limit the beneficial
ownership, actually or constructively, by a single person or entity of the
Company's outstanding equity securities. See "Restrictions on Transfers of
Capital Stock; Excess Stock."
TRANSFER AGENT
The transfer agent and registrar for any series of Preferred Stock will be
set forth in the applicable Prospectus Supplement.
RESTRICTIONS ON TRANSFERS OF CAPITAL STOCK; EXCESS STOCK
For the Company to qualify as a REIT under the Code, among other things, not
more than 50% in value of its outstanding capital stock may be owned, actually
or constructively, by five or fewer individuals (defined in the Code to include
certain entities) during the last half of a taxable year, and such capital stock
must be beneficially owned by 100 or more persons during at least 355 days of a
taxable year of 12 months or during a proportionate part of a shorter taxable
year. To ensure that the Company remains qualified as a REIT, the Certificate of
Incorporation, subject to certain exceptions, provides that the Company may
prevent the transfer and/or call for redemption of shares of the Company
(whether Common Stock, Class B Common Stock or Preferred Stock) if more than 50%
of the outstanding shares would be owned, actually or constructively, by five or
fewer persons (defined to include individuals, corporations, partnerships, joint
ventures and similar entities) or if one person would own, actually or
constructively, more than 9.8% of the total outstanding shares (or such higher
percentage as may be determined by the Company's Board of Directors (the
"Ownership Limit")). In addition, the Company may prevent such transfers and/or
call for redemption of such shares if the Company's Board of Directors
determines in good faith that the shares have or may become concentrated to the
extent that may prevent the Company from qualifying as a REIT. See "Certain
Federal Income Tax Considerations -- Overview of REIT Qualification Rules --
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 Company's Board of Directors in
writing for approval. The Company's Board will grant such request unless it
determines in good faith that the acquisition or ownership of such shares would
jeopardize the Company'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 give written notice to the Company 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 Company's Board of Directors to evaluate
or to protect against any adverse effect of the transfer. Notwithstanding the
foregoing, the Company's Board of Directors is not required to grant a request
to adjust the Ownership Limit if the Company's Board of Directors believes,
based on advice of legal counsel, that the granting of such request would cause
the Company's Board of Directors to breach its fiduciary duties to the
shareholders of the Company.
If, despite the restrictions noted above, any person acquires shares of the
Company's Common Stock and Class B Common Stock in excess of the Ownership Limit
(applying certain constructive ownership provisions), the shares most recently
acquired by such person in excess of the Ownership Limit will be automatically
exchanged for an equal number of shares of Excess Stock. The Company is
authorized to issue 160,000,000 shares of Excess Stock, par value $.001 per
share. Pursuant to the Company's Certificate of Incorporation, shares of Excess
Stock have the following characteristics: (a) owners of Excess Stock are not
entitled to exercise voting rights with respect to the Excess Stock; (b) Excess
Stock shall not be deemed outstanding for purposes of determining a quorum at
any annual or special meeting of shareholders; and (c) Excess Stock will not be
entitled to any dividends or other
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distributions. Any person who becomes an owner of Excess Stock is obligated to
immediately give the Company 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 Company or its designee for a period of 120
days from the later of (i) the date of the transfer that created the Excess
Stock if the Company has actual notice that such transfer created the Excess
Stock and (ii) the date on which the Company's Board of Directors determines in
good faith that the transfer creating the Excess Stock has occurred. The Company
has the right during such time period to accept the deemed offer or, in the
Board of Directors' discretion, the Company may acquire and sell, or cause the
owner to sell, the Excess Stock. The price for the Excess Stock will be the
lesser of (y) 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
Company or its designee acquires the Excess Stock or, if no such price is
available, as determined in good faith by the Company's Board of Directors and
(z) 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 Company's
Board of Directors. Upon such transfer or sale, the Excess Stock will
automatically convert to 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 Common Stock
for the period during which the shares were Excess Stock.
All certificates of Common Stock and Class B Common Stock, any other series
of the Company's Common Stock or Class B Common Stock and any class or series of
Preferred Stock will bear a legend referring to the restrictions described
above. All persons who own a specified percentage (or more) of the outstanding
capital stock of the Company must file an affidavit with the Company containing
information regarding their ownership of stock as set forth in the Treasury
Regulations. Under current Treasury Regulations, the percentage is set between
.5% and 5%, depending on the number of record holders of capital stock. In
addition, each shareholder shall upon demand be required to disclose to the
Company in writing such information with respect to the direct, indirect and
constructive ownership of shares of capital stock of the Company as the Board of
Directors deems necessary to comply with the provisions of the Code applicable
to a REIT, to comply with the requirements of any taxing authority or
governmental agency or to determine any such compliance.
This ownership limitation may have the effect of precluding acquisition of
control of the Company by a third party unless the Board of Directors determines
that maintenance of REIT status is no longer in the best interests of the
Company.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following summary of certain federal income tax considerations to the
Company is based on current law, is for general information only, and is not tax
advice. The tax treatment of a holder of any of the Securities will vary
depending on the terms of the specific Securities acquired by such holder, as
well as his or her particular situation. This discussion does not attempt to
address any aspects of federal income taxation relating to holders of
Securities. Certain federal income tax considerations relevant to a holder of
Securities will be provided in the Prospectus Supplement relating thereto.
EACH INVESTOR IS ADVISED TO CONSULT THE APPLICABLE PROSPECTUS SUPPLEMENT, AS
WELL AS HIS OR HER OWN TAX ADVISOR, REGARDING THE TAX CONSEQUENCES TO HIM OR HER
OF THE ACQUISITION, OWNERSHIP AND SALE OF THE OFFERED SECURITIES, INCLUDING THE
FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH ACQUISITION,
OWNERSHIP AND SALE AND OF POTENTIAL CHANGES IN APPLICABLE LAWS.
QUALIFICATION OF THE COMPANY AS A REIT; OPINION OF COUNSEL
The Company intends to elect to be taxed as a REIT under Sections 856
through 860 of the Code, commencing with its fiscal year ended December 31,
1994. The election to be taxed as a REIT will
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continue until it is revoked or otherwise terminated. The most important
consequence to the Company of being treated as a REIT for federal income tax
purposes is that it will not be subject to federal corporate income taxes on net
income that is currently distributed to its shareholders. This treatment
substantially eliminates the "double taxation" (at the corporate and shareholder
levels) that typically results when a corporation earns income and distributes
that income to shareholders in the form of a dividend. Accordingly, if the
Company at any time fails to qualify as a REIT, the Company will be taxed on its
distributed income, thereby reducing the amount of cash available for
distribution to its shareholders.
In the opinion of Perkins Coie, counsel to the Company, commencing with the
taxable year ended December 31, 1994, the Company has been organized in
conformity with the requirements for qualification as a REIT and its proposed
method of operation will enable it to continue to meet the requirements for
qualification and taxation as a REIT under the Code. This opinion is based on
various assumptions and is conditioned upon the representations of the Company
as to factual matters. Moreover, continued qualification and taxation as a REIT
will depend on the Company's ability to satisfy on a continuing basis certain
distribution levels, diversity of stock ownership and various qualification
tests imposed by the Code as summarized below. While the Company intends to
operate so that it will continue to qualify as a REIT, given the highly complex
nature of the rules governing REITs, the ongoing importance of factual
determinations, and the possibility of future changes in the circumstances of
the Company, no assurance can be given by counsel or the Company that the
Company will so qualify for any particular year. Perkins Coie will not review
compliance with these tests on a continuing basis, and has not undertaken to
update its opinion subsequent to the date hereof.
TAXATION OF THE COMPANY AS A REIT
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal income tax on net income that is currently distributed to its
shareholders. The Company may, however, be subject to certain federal taxes
based on the amount of its distributions or its inability to meet certain REIT
qualification requirements. These taxes are the following:
TAX ON UNDISTRIBUTED INCOME. First, if the Company does not distribute all
of its net taxable income, including any net capital gain, the Company would be
taxed at regular corporate rates on the undistributed income or gains.
TAX ON PROHIBITED TRANSACTIONS. Second, if the Company has net income from
certain prohibited transactions, including sales or dispositions of property
held primarily for sale to customers in the ordinary course of business, such
net income would be subject to a 100% confiscatory tax.
TAX ON FAILURE TO MEET GROSS INCOME REQUIREMENTS. Third, if the Company
should fail to meet either the 75% or 95% gross income test as described below
but still qualify for REIT status because, among other requirements, it was able
to show that such failure was due to reasonable cause, it will be subject to a
100% tax on an amount equal to (a) the gross income attributable to the greater
of the amount, if any, by which the Company failed either the 75% or the 95%
gross income test, multiplied by (b) a fraction intended to reflect the
Company's profitability.
TAX ON FAILURE TO MEET DISTRIBUTION REQUIREMENTS. Fourth, if the Company
should fail to distribute during each calendar year at least the sum of (a) 85%
of its REIT ordinary income for such year, (b) 95% of its REIT capital gain net
income for such year, and (c) any undistributed taxable income from prior
periods, the Company would be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed.
TAX ON BUILT-IN GAIN. Fifth, if during the 10-year period (the "Recognition
Period") beginning on the date that the Management Company merged with and into
the Company, the Company recognizes gain on the disposition of any asset
acquired by the Company from the Management Company, then to the extent of the
excess of (a) the fair market value of such asset as of the beginning
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of such Recognition Period over (b) the Company's adjusted basis in such asset
as of the beginning of such Recognition Period, such gain will be subject to tax
at the highest regular corporate rate pursuant to IRS regulations that have not
yet been promulgated.
ALTERNATIVE MINIMUM TAX. Sixth, the Company may be subject to alternative
minimum tax on certain items of tax preference.
TAX ON FORECLOSURE PROPERTY. Seventh, if the Company has (a) net income
from the sale or other disposition of foreclosure property that is held
primarily for sale to customers in the ordinary course of business or (b) other
nonqualifying income from foreclosure property, it will be subject to tax at the
highest corporate rate on such income.
OVERVIEW OF REIT QUALIFICATION RULES
The following summarizes the basic requirements for REIT status:
(a) The Company must be a corporation, trust or association that is managed
by one or more trustees or directors.
(b) The Company's stock or beneficial interests must be transferable and
held by more than 100 shareholders, and no more than 50% of the value of the
Company's stock may be held, actually or constructively, by five or fewer
individuals.
(c) Generally, 75% (by value) of the Company's investments must be in real
estate, mortgages secured by real estate, cash or government securities.
(d) The Company must meet three gross income tests:
(i) First, at least 75% of the gross income must be derived from
specific real estate sources;
(ii) Second, 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) Third, 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.
(e) The Company must distribute to its shareholders in each taxable year an
amount at least equal to 95% of the Company's "REIT taxable income" (which is
generally equivalent to taxable ordinary income and is defined below).
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 Company in its operations, noting areas of
uncertainty that perhaps could lead to adverse consequences to the Company and
its shareholders.
SHARE OWNERSHIP. The Company's shares of stock are fully transferable, with
the exception of certain shares that are subject to contractual transfer
restrictions. Furthermore, the Company has more than 100 shareholders and its
Certificate of Incorporation provides, to decrease the possibility that the
Company will ever be closely held, that no individual, corporation or
partnership is permitted to actually or constructively acquire more than 9.8% of
the number of outstanding shares of Common Stock. The Ownership Limit may be
adjusted, however, by the Company's Board of Directors in certain circumstances.
Shares acquired in excess of the Ownership Limit may be redeemed by the Company.
In addition, the Certificate of Incorporation provides that shares acquired in
excess of the Ownership Limit will automatically convert into nondividend-paying
and nonvoting shares of Excess Stock. Contractual or securities law restrictions
on transferability should be disregarded for purposes of determining the
transferability of REIT shares. The ownership and transfer restrictions
pertaining generally to a particular issue of Preferred Stock will be described
in the Prospectus Supplement relating to such issue.
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NATURE OF ASSETS. On the last day of each calendar quarter, at least 75% of
the value of the Company's total assets must consist of (a) real estate assets
(including interests in real property and mortgages on loans secured by real
property), (b) cash and cash items (including receivables), and (c) government
securities (collectively, the "real estate assets"). In addition, no more than
25% of the value of the Company's assets may consist of securities (other than
government securities). Finally, except for certain "qualified REIT
subsidiaries," as described below, the securities of any issuer, other than the
United States government, may not represent more than 5% of the value of the
Company's total assets or 10% of the outstanding voting securities of any one
issuer.
While, as noted above, a REIT cannot own more than 10% of the outstanding
voting securities of any single 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 Company currently has three wholly
owned corporate subsidiaries that were formed and owned at all times during
their existence by the Company. These corporations should be treated as
"qualified REIT subsidiaries" and should not adversely affect the Company's
qualification as a REIT.
The Company owns interests in partnerships that directly or indirectly own
and operate self-storage facilities. The Company, 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 these partnerships attributable to such interests. For
these purposes, the Company'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 remain the same in the Company's hands for
these purposes. Accordingly, to the extent the partnership receives qualified
real estate rentals and holds real property, a proportionate share of such
qualified income and assets, based on the Company's capital interest in the
partnerships, will be treated as qualified rental income and real estate assets
of the Company for purposes of determining its REIT characterization. It is
expected that substantially all the properties of the partnerships will
constitute real estate assets and generate qualified rental income for these
REIT qualification purposes.
In several partnerships, the Company is entitled to a percentage of profits
in excess of its percentage of total capital contributed to the partnership.
Regulatory authority does not specifically address this situation and, based on
existing authority, the treatment of these profit interests when applying these
gross income and asset rules is uncertain. For example, based on the existing
rules, if the amount of net income allocated to a REIT based on a profit
interest in a partnership is in excess of its capital interest in the
partnership's 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
Company acquired these interests for valuable consideration in connection with
the Merger and at a time when the partnership assets may have some appreciated
capital value, the Company may be treated as having a capital percentage in the
partnerships at the time of the Merger. 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 Company and the real estate
treated as owned by the Company attributable to its interest in these
partnerships may be disregarded when applying these gross income and asset
requirements.
This treatment for partnerships is conditioned on the treatment of these
entities as partnerships for federal income tax purposes (as opposed to
associations taxable as corporations). If any of the partnerships is treated as
an association, it would be taxable as a corporation. In such situation, if the
Company's ownership in any of the partnerships exceeded 10% of the partnership's
voting interests or the value of such interest exceeded 5% of the value of the
Company's assets, the Company would cease to qualify as a REIT. Furthermore, in
such a situation, distributions from any of the partnerships to the Company
would be treated as dividends, which are not taken into account in satisfying
the 75%
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gross income test described below and which could therefore make it more
difficult for the Company to qualify as a REIT for the taxable year in which
such distribution was received. In addition, in such a situation, the interest
in any of the partnerships held by the Company would not qualify as "real estate
assets," which could make it more difficult for the Company to meet the 75%
asset test described above. Finally, in such a situation, the Company would not
be able to deduct its share of any losses generated by the partnerships in
computing its taxable income. The Company believes that each of the partnerships
will be taxed for tax purposes as a partnership (and not as an association
taxable as a corporation). However, there can be no assurance that the IRS may
not successfully challenge the tax status of any of the partnerships.
INCOME TESTS. To maintain its qualification as a REIT, the Company 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 REIT's gross
income (excluding gross income from prohibited transactions) for each taxable
year must be derived from such real property investments, and from dividends,
interest and gain from the sale or disposition of stock or securities, or from
any combination of the foregoing. Third, 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 Company 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 Company, or an owner
of 10% or more of the Company, actually 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 Company 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 Company does not anticipate receiving rents in excess of a de
minimis amount from Related-Party Tenants. Furthermore, the Company 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 Company
must not operate or manage the property or furnish or render services to tenants
unless the Company furnishes or renders such services through an independent
contractor from whom the Company derives no revenue. The Company need not
utilize an independent contractor to the extent that services provided by the
Company 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 Company has obtained a private letter ruling from the IRS ruling
that the management services provided by the Company for its own properties will
not cause the rents received by the Company to be treated as other than "rents
from real property." The ruling is based on a description of those management
services to be performed by the Company in connection with its own properties,
including maintenance, repair, lease administration and accounting and security.
The ruling also considers certain ancillary services to be directly
performed by the Company such as truck rentals and inventory sales. The ruling
provides that such services do not otherwise adversely affect the
characterization of the rental income received by the Company. Nonetheless,
income from
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truck rentals and certain other ancillary services does not qualify under these
gross income tests ("Nonqualifying Income"). In addition, the fees,
consideration and certain reimbursements that the Company receives for
performing management and administrative services with respect to properties
that are not owned entirely by the Company will also be treated as Nonqualifying
Income.
As of the date of this Prospectus, the Company anticipates that it will
generate Nonqualifying Income of between approximately 4.1% and 4.3% in 1995 and
between approximately 4.5% and 4.7% in 1996 based on its historical and budgeted
revenues and assuming no substantial change in its current operations.
The Company intends to monitor the percentage of Nonqualifying Income and
reduce the percentage of Nonqualifying Income if necessary. Because the income
tests are based on a percentage of total gross income, increases in qualifying
rents will reduce the percentage of Nonqualifying Income. For example, the
Company may acquire real estate assets that would generate additional qualifying
income, thereby lowering the percentage of total Nonqualifying Income. Increases
in other Nonqualifying Income may similarly affect these calculations. Reference
is made to the applicable Prospectus Supplement for a current discussion, if
any, relating to the amount of Nonqualifying Income expected to be generated by
the Company.
If the Company 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 Company's failure to meet such
test was due to reasonable cause and not willful neglect and the Company
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.
ANNUAL DISTRIBUTION REQUIREMENTS. Each year, the Company must have a
deduction for dividends paid (determined under Section 561 of the Code) to its
shareholders in an amount equal to (a) 95% of the sum of (i) its "REIT taxable
income" as defined below, (ii) any net income from foreclosure property less the
tax on such income, minus (b) any "excess noncash 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.
It is possible that the Company, from time to time, may not have sufficient
cash or other liquid assets to meet the 95% distribution requirement due to
timing differences between (a) the actual receipt of income and the actual
payment of deductible expenses and (b) the inclusion of such income and
deduction of such expenses in arriving at taxable income of the Company.
Furthermore, substantial principal payments on Company indebtedness, which has
the effect of lowering the amount of distributable cash without an offsetting
deduction to Company taxable income, may adversely affect the Company's ability
to meet this distribution requirement. In the event that such timing differences
or reduction to distributable cash occurs, in order to meet the 95% distribution
requirement, the Company may find it necessary to arrange for short-term, or
possible long-term, borrowings or to pay dividends in the form of taxable stock
dividends.
Under certain circumstances, the Company may be able to rectify a failure to
meet the distribution requirement for a year by paying "deficiency dividends" to
shareholders in a later year that may
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be included in the Company's deduction for dividends paid for the earlier year.
Thus, the Company may be able to avoid being taxed on amounts distributed as
deficiency dividends; however, the Company will be required to pay to the IRS
interest based on the amount of any deduction taken for deficiency dividends.
DISTRIBUTION OF ACQUIRED EARNINGS. In addition to the above annual
distribution requirements, 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. As a result of the Merger in March
1995, the Company is treated as having acquired the Management Company's
accumulated earnings and profits and must, therefore, distribute these earnings
and profits prior to the close of 1995. Failure to do so would result in loss of
the Company's REIT status. See "-- Failure of the Company to Qualify as a REIT."
The amount of the Management Company's accumulated earnings and profits
acquired by the Company (the "Acquired Earnings") will be determined, in part,
through an earnings and profits study based on the Management Company's
corporate tax returns as filed for the years beginning on the Management
Company's date of incorporation through the date of the Merger. Furthermore, as
a result of the Management Company's spin off of InterMation, Inc.
("InterMation") prior to the Merger, a portion of the Management Company's
consolidated earnings and profits have been allocated to InterMation based on
the relative fair market values of the two separate corporations at the time of
the spin-off. The valuation of these two corporations will be based on the share
consideration paid by the Company for the Management Company in the Merger
(exclusive of contingent consideration) and an independent valuation of
InterMation.
As of the date of this Prospectus the Company estimates that the amount of
the Acquired Earnings is between $4,500,000 and $5,500,000, depending on the
relative values of InterMation assumed for allocating such accumulated earnings
and profits in connection with the spin-off. This estimate is based on, among
other things, (i) a reduction in the accumulated earnings and profits of the
Management Company resulting from the exercise of stock options and the payment
of cash bonuses to pay taxes associated with such exercise during 1995, (ii) a
reduction in the accumulated earnings and profits of the Management Company
resulting from payment of stock and cash bonuses during 1994 and 1995, and (iii)
a reduction in the accumulated earnings and profits of the Management Company
resulting from an InterMation net operating loss for the 1995 period ending on
the date of the spin-off. The amount of these reductions has not been
independently reviewed as of the date of this Prospectus. Because the above
range is based on estimates and other assumptions, the actual amount of Acquired
Earnings may differ from the above range.
Based on its quarterly dividend history during 1994, the Company will be
required to increase its distributions during 1995 to distribute the Acquired
Earnings. The Company may accomplish these additional distributions by
increasing its quarterly distribution, making special distributions during 1995
or making a special year-end distribution. A year-end distribution must be
declared within the last three months of 1995, payable to shareholders of record
on a specified date in any such month and paid prior to January 31, 1996. This
distribution, to the extent it constitutes a dividend, would be treated for all
purposes as a 1995 dividend to the Company's shareholders even though received
by the shareholders after year-end. The Company intends to make distributions
that are sufficient to fully distribute the Acquired Earnings prior to the end
of 1995. As a result of these increased distributions, the Company's
shareholders will recognize additional dividend income in 1995.
The calculation of the amount of Acquired Earnings is subject to challenge
by the IRS. The IRS may 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 Acquired Earnings,
particularly since the IRS may consider all taxable years as open for review for
purposes of determining earnings and profits. Moreover, there can be no
assurance that the IRS will respect the valuations used for purposes of
allocating the consolidated earnings and profits between the Management
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Company and InterMation in connection with the 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.
If the IRS determines that the Company has not distributed the Acquired
Earnings prior to the end of 1995, the Company would fail to qualify as a REIT
for 1995. See "-- Failure of the Company to Qualify as a REIT." However, the
Company may make an additional distribution within 90 days of such a
determination by the IRS and would be required to pay the IRS an interest charge
based on 50% of the amount not previously distributed. If such additional
distribution is made, the Company's failure to distribute the Acquired Earnings
would not prevent it from qualifying as a REIT for years subsequent to 1995.
Reference is made to the applicable Prospectus Supplement for a current
discussion, if any, of the amount of Acquired Earnings and the expected timing
and amount of Company distributions.
FAILURE OF THE COMPANY TO QUALIFY AS A REIT
If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Company would be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates, thereby reducing the amount of cash available for
distribution to its shareholders. Distributions to shareholders in any year in
which the Company fails to qualify would not be deductible by the Company 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
Company 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 the Company would be entitled to
such statutory relief.
MANAGEMENT COMPANY MERGER
The Company has obtained an opinion from Perkins Coie that, among other
things, the Merger will be treated as a reorganization under Section 368(a) of
the Code and that no gain or loss will be recognized by the Company or the
Management Company in 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
such opinion. If the Merger does not qualify as a reorganization under Section
368(a) of the Code, the Management Company would recognize gain or loss in an
amount equal to the difference between the fair market value of the Common Stock
issued in the Merger and the adjusted tax basis of the Management Company assets
acquired in the Merger. Although the Company would 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, the Company will be primarily liable as the
successor to the Management Company for the resulting tax liability imposed on
the Management Company. Furthermore, the failure of the Merger to qualify as a
reorganization may cause the InterMation spin-off to fail to qualify as a
tax-free corporate division under Section 355(a)(1) of the Code.
STATE AND LOCAL TAXES
The Company or its shareholders, or both, may be subject to state or local
taxes in other jurisdictions such as those in which the Company may be deemed to
be engaged in activities or in which shareholders reside or own property or
other interests. Such tax treatment of the Company 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 Securities under the respective state
laws applicable to them.
31
<PAGE>
PLAN OF DISTRIBUTION
The Company may sell the Securities to one or more underwriters for public
offering and sale by them or may sell the Securities to investors directly or
through agents. Any such underwriter or agent involved in the offer and sale of
the Securities will be named in the applicable Prospectus Supplement.
Underwriters may offer and sell the Securities at a fixed price or prices,
which may be changed, at prices relating to the prevailing market prices at the
time of sale or at negotiated prices. The Company also may, from time to time,
authorize underwriters acting as the Company's agents to offer and sell the
Securities upon the terms and conditions as are set forth in the applicable
Prospectus Supplement. In connection with the sale of Securities, underwriters
may be deemed to have received compensation from the Company in the form of
underwriting discounts or commissions and may also receive commissions from
purchasers of Securities for whom they may act as agent. Underwriters may sell
Securities to or through dealers, and such dealers may receive compensation in
the form of discounts, concessions or commissions from the underwriters and/or
commissions from the purchasers for whom they may act as agent. Any underwriting
compensation paid by the Company to underwriters or agents in connection with
the offering of Securities, and any discounts, concessions or commissions
allowed by underwriters to participating dealers, will be set forth in the
applicable Prospectus Supplement. Underwriters, dealers and agents participating
in the distribution of the Securities may be deemed to be underwriters, and any
discounts and commissions received by them and any profit realized by them on
resale of the Securities may be deemed to be underwriting discounts and
commissions, under the Securities Act. Any such underwriter or agent will be
identified, and such compensation received from the Company will be described,
in the applicable Prospectus Supplement.
Underwriters, dealers and agents may be entitled, under agreements entered
into with the Company, to indemnification against and contribution toward
certain civil liabilities, including liabilities under the Securities Act.
Certain of the underwriters, dealers and agents and their affiliates may be
customers of, engage in transactions with and perform services for the Company
and its subsidiaries in the ordinary course of business.
Unless otherwise specified in the related Prospectus Supplement, each series
of Securities will be a new issue with no established trading market, other than
the Common Stock. The Common Stock is currently quoted on Nasdaq and has been
approved for listing on the NYSE commencing May 5, 1995. Unless otherwise
specified in the related Prospectus Supplement, any shares of Common Stock sold
pursuant to a Prospectus Supplement will be listed on the NYSE, subject to
official notice of issuance. The Company may elect to list any series of Debt
Securities or Preferred Stock on an exchange or Nasdaq, but is not obligated to
do so. It is possible that one or more underwriters may make a market in a
series of Securities, but will not be obligated to do so and may discontinue any
market making at any time without notice. Therefore, there can be no assurance
as to the liquidity of, or the trading market for, the Securities.
In order to comply with the securities laws of certain states, if
applicable, the Securities offered hereby will be sold in such jurisdictions
only through registered or licensed brokers or dealers. In addition, in certain
states Securities may not be sold unless they have been registered or qualified
for sale in the applicable state or an exemption from the registration or
qualification requirement is available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the Securities offered hereby may not
simultaneously engage in market making activities with respect to the Securities
for a period of two business days prior to the commencement of such
distribution.
32
<PAGE>
EXPERTS
The financial statements incorporated in this Prospectus by reference from
the Company's Annual Report on Form 10-K have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report, which is incorporated
herein by reference, and have been so incorporated in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.
LEGAL MATTERS
The validity of the Securities will be passed upon for the Company by
Perkins Coie, Seattle, Washington.
33
<PAGE>
[GRAPHICS]
Photograph of two men in Shurgard uniforms standing in front of a Shurgard self
storage center and two photographs of Shurgard self storage centers in Portland,
Oregon and Bellevue, Washington.
<PAGE>
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE
HEREUNDER AND THEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER OR
SOLICITATION BY ANYONE IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
------------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Supplement Summary.................. S-3
Risk Factors................................... S-12
The Company.................................... S-17
Use of Proceeds................................ S-17
Distribution Policy............................ S-18
Capitalization................................. S-19
Price Range of Common Stock and Distribution
History....................................... S-20
Discussion of Financial and Operating
Results....................................... S-21
Business and Properties........................ S-25
Policies Regarding Investment and Certain Other
Activities.................................... S-43
Management of the Company...................... S-46
Security Ownership of Certain Beneficial Owners
and Management................................ S-47
Certain Federal Income Tax Considerations to
Holders of Common Stock....................... S-49
Underwriting................................... S-53
Legal Matters.................................. S-54
PROSPECTUS
Available Information.......................... 2
Incorporation of Certain Documents by
Reference..................................... 2
The Company.................................... 3
Use of Proceeds................................ 3
Ratios of Earnings to Fixed Charges............ 3
Description of Debt Securities................. 4
Description of Common Stock and Class B Common
Stock......................................... 14
Description of Preferred Stock................. 17
Restrictions on Transfers of Capital Stock;
Excess Stock.................................. 23
Certain Federal Income Tax Considerations...... 24
Plan of Distribution........................... 32
Experts........................................ 33
Legal Matters.................................. 33
</TABLE>
4,500,000 SHARES
[SHURGARD LOGO]
COMMON STOCK
-----------------
PROSPECTUS SUPPLEMENT
-----------------
MERRILL LYNCH & CO.
ALEX. BROWN & SONS
INCORPORATED
DEAN WITTER REYNOLDS INC.
PRUDENTIAL SECURITIES INCORPORATED
SMITH BARNEY INC.
JUNE 7, 1995
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