<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 11, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SHURGARD STORAGE CENTERS, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 6519 95-1603837
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
Incorporation or Organization) Number)
</TABLE>
1201 THIRD AVENUE, SUITE 2200, SEATTLE, WASHINGTON 98101
(206) 624-8100
(Address, including Zip Code and Telephone Number, including
Area Code, of Registrant's Principal Executive Offices)
KRISTIN H. STRED
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
SHURGARD STORAGE CENTERS, INC.
1201 THIRD AVENUE, SUITE 2200
SEATTLE, WASHINGTON 98101
(206) 624-8100
(Name, Address, including Zip Code, and Telephone Number,
including Area Code, of Agent for Service)
------------------------
WITH COPIES TO:
<TABLE>
<S> <C>
Jeffrey T. Pero Vicki M. Pierce
William J. Cernius Linda A. Schoemaker
LATHAM & WATKINS PERKINS COIE
650 Town Center Drive, 20th Floor 1201 Third Avenue, 40th Floor
Costa Mesa, California 92626 Seattle, Washington 98101
(714) 540-1235 (206) 583-8888
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
------------------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED (2) PER SHARE PRICE (3) FEE
<S> <C> <C> <C> <C>
Class A Common Stock, par value $0.001
per share (1)......................... 4,609,303 shares -- $72,939,928 $25,152
<FN>
(1) Includes associated preferred share purchase rights.
(2) Represents the maximum number of shares issuable in the Mergers.
(3) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(f)(2) under the Securities Act of
1933, as amended. The fee was computed based upon (i) the historical
aggregate book value of units of limited partnership interest and the
general partner interest in IDS/Shurgard Income Growth Partners L.P.
($26,770,587 as of March 31, 1996), (ii) the historical aggregate book
value of units of limited partnership interest and the general partner
interest in IDS/Shurgard Income Growth Partners L.P. II ($21,812,025 as of
March 31, 1996) and (iii) the historical aggregate book value of units of
limited partnership interest and the general partner interest in
IDS/Shurgard Income Growth Partners L.P. III ($24,357,316 as of March 31,
1996).
</TABLE>
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SHURGARD STORAGE CENTERS, INC.
CROSS-REFERENCE SHEET BETWEEN ITEMS IN FORM S-4 AND
PROSPECTUS PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM LOCATION OF CAPTION IN PROXY
NO. FORM S-4 CAPTION STATEMENT/PROSPECTUS
- --------- ----------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus...................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Inside Front Cover Page; Available Information;
Incorporation of Certain Documents by Reference;
Table of Contents
3. Risk Factors, Ratio of Earnings to Fixed Charges and
Other Information................................... Summary; Selected Financial Information of the
Company; Risk Factors and Other Considerations; The
Special Meetings; The Mergers; Pro Forma
Consolidated Financial Statements; Business and
Properties of the Partnerships; Distributions and
Market Prices of Units; Distributions and Market
Prices of Common Stock
4. Terms of the Transaction............................. Summary; Background and Reasons for the Mergers; The
Acquisition Agreement
5. Pro Forma Financial Information...................... Pro Forma Consolidated Financial Statements
6. Material Contracts With the Company Being Acquired... The Mergers
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to Be Underwriters....... Not Applicable
8. Interests of Named Experts and Counsel............... Not Applicable
9. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities...................... Not Applicable
10. Information With Respect to S-3 Registrants.......... Incorporation of Certain Documents by Reference
11. Incorporation of Certain Information by Reference.... Incorporation of Certain Documents by Reference
12. Information With Respect to S-2 or S-3 Registrants... Incorporation of Certain Documents by Reference
13. Incorporation of Certain Information by Reference.... Incorporation of Certain Documents by Reference
14. Information With Respect to Registrants Other Than
S-2 or S-3 Registrants.............................. Not Applicable
15. Information With Respect to S-3 Companies............ Not Applicable
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM LOCATION OF CAPTION IN PROXY
NO. FORM S-4 CAPTION STATEMENT/PROSPECTUS
- --------- ----------------------------------------------------- -----------------------------------------------------
16. Information With Respect to S-2 or S-3 Companies..... Not Applicable
<C> <S> <C>
17. Information With Respect to Companies Other Than S-2
or S-3 Companies.................................... Business and Properties of the Partnerships;
Distributions and Market Prices of Units; Historical
Financial Statements
18. Information if Proxies, Consents or Authorizations
Are to Be Solicited................................. Outside Front Cover Page; Summary; The Special
Meetings; Background and Reasons for the Mergers;
Business and Properties of the Partnerships
19. Information if Proxies, Consents or Authorizations
Are Not to Be Solicited, or in an Exchange Offer.... Not Applicable
</TABLE>
<PAGE>
IDS/SHURGARD INCOME GROWTH PARTNERS L.P.
IDS/SHURGARD INCOME GROWTH PARTNERS L.P. II
IDS/SHURGARD INCOME GROWTH PARTNERS L.P. III
1201 THIRD AVENUE, SUITE 2200
SEATTLE, WASHINGTON 98101
, 1996
Dear Limited Partners:
Special Meetings of limited partners in IDS/Shurgard Income Growth Partners
L.P., IDS/Shurgard Income Growth Partners L.P. II, and IDS/Shurgard Income
Growth Partners L.P. III, each a Washington limited partnership (together, the
"Partnerships"), will be held on , 1996, at 10:00 a.m., local time,
at 1201 Third Avenue, Suite 2200, Seattle, Washington (the "Special Meetings").
You are cordially invited to attend the Special Meeting of the Partnership of
which you are a limited partner.
At each of the Special Meetings, including any adjournments or postponements
thereof, limited partners of the respective Partnerships will be asked to
consider and vote upon approval of the Acquisition Agreement dated as of July 1,
1996 (the "Acquisition Agreement"), by and among each of the Partnerships and
Shurgard Storage Centers, Inc., a Delaware corporation (the "Company"),
providing for the merger of each of the Partnerships with and into the Company
(collectively, the "Mergers"). Approval of the Acquisition Agreement and the
transactions contemplated thereby by limited partners of a Partnership will, if
applicable, also constitute approval of the amendments to the Partnership's
Amended and Restated Agreement of Limited Partnership that are necessary to
effect its respective Merger. THE CLOSING OF EACH OF THE MERGERS IS NOT
CONDITIONED UPON THE CLOSING OF ANY OF THE OTHER MERGERS.
The Acquisition Agreement and the transactions contemplated thereby are more
fully described in the accompanying Proxy Statement/Prospectus, including
discussions concerning the reasons for the Mergers and factors that should be
considered in connection with your vote on the Merger of your Partnership.
Please review this information carefully.
AFTER CAREFUL CONSIDERATION, THE GENERAL PARTNER OF EACH OF THE PARTNERSHIPS
HAS DETERMINED THAT THE APPLICABLE MERGER IS FAIR TO THE UNITHOLDERS OF THAT
PARTNERSHIP. ACCORDINGLY, EACH GENERAL PARTNER RECOMMENDS THAT UNITHOLDERS VOTE
FOR APPROVAL OF THE ACQUISITION AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY.
I hope that you will attend the Special Meeting of your Partnership.
However, whether or not you plan to attend your Special Meeting, please
complete, sign and date the enclosed proxy card and promptly return it in the
enclosed postage prepaid envelope. If you are present at your Special Meeting,
you may, if you wish, withdraw your proxy and vote in person. If you have
questions or need assistance in completing your proxy, please call D.F. King,
the Information Agent, at 1-800-207-2872.
Very truly yours,
CHARLES K. BARBO
GENERAL PARTNER OF THE GENERAL PARTNER
OF EACH OF
THE PARTNERSHIPS
<PAGE>
IDS/SHURGARD INCOME GROWTH PARTNERS L.P.
IDS/SHURGARD INCOME GROWTH PARTNERS L.P. II
IDS/SHURGARD INCOME GROWTH PARTNERS L.P. III
1201 THIRD AVENUE, SUITE 2200
SEATTLE, WASHINGTON 98101
------------------------
NOTICE OF SPECIAL MEETINGS OF LIMITED PARTNERS
TO BE HELD ON , 1996
------------------------
TO THE LIMITED PARTNERS OF IDS/SHURGARD INCOME GROWTH PARTNERS L.P. ("IDS1"),
IDS/SHURGARD INCOME GROWTH PARTNERS L.P. II ("IDS2") AND IDS/SHURGARD INCOME
GROWTH PARTNERS L.P. III ("IDS3"):
NOTICE IS HEREBY GIVEN THAT Special Meetings (the "Special Meetings") of
limited partners in each of IDS1, IDS2 and IDS3, each a Washington limited
partnership (together, the "Partnerships"), will be held on ,
1996, at 10:00 a.m., local time, at 1201 Third Avenue, Suite 2200, Seattle,
Washington, to consider and vote upon approval of an Acquisition Agreement dated
as of July 1, 1996 (the "Acquisition Agreement"), by and among each of the
Partnerships and Shurgard Storage Centers, Inc., a Delaware corporation (the
"Company"), providing for the merger of each of the Partnerships with and into
the Company (the "Mergers"). Under the Acquisition Agreement, each unit of
limited partnership interest ("Unit") of each Partnership that participates in
the Mergers will be converted into that number of shares of Class A Common Stock
of the Company, par value $.001 per share, derived by dividing the Net Asset
Value (as defined in the Acquisition Agreement) per Unit of the applicable
Partnership by the Share Price (as defined in the Acquisition Agreement).
Approval of the Acquisition Agreement and the transactions contemplated thereby
by limited partners of a Partnership will, if applicable, also constitute
approval of those amendments to the Partnership's Amended and Restated Agreement
of Limited Partnership necessary to effect its respective Merger. THE CLOSING OF
EACH OF THE MERGERS IS NOT CONDITIONED ON THE CLOSING OF ANY OF THE OTHER
MERGERS.
UNITHOLDERS SHOULD CAREFULLY REVIEW THE ACCOMPANYING PROXY
STATEMENT/PROSPECTUS, WHICH MORE FULLY DESCRIBES THE TERMS OF THE MERGERS AND
RELATED TRANSACTIONS. THE FULL TEXT OF THE ACQUISITION AGREEMENT IS ATTACHED AS
APPENDIX A TO THE PROXY STATEMENT/PROSPECTUS.
Limited partners as of the date of the accompanying Proxy
Statement/Prospectus whose Units have not been purchased by the Company pursuant
to the Company's cash tender offers commenced in July 1996 are entitled to
notice of the Special Meetings. If Units of a Partnership are transferred after
the date of the accompanying Proxy Statement/Prospectus but prior to the date of
that Partnership's Special Meeting or any adjournment or postponement thereof,
and the new holders of the transferred Units are admitted as substituted limited
partners of that Partnership, this Notice of Special Meeting, the accompanying
Proxy Statement/Prospectus and related information will be sent to the
substituted limited partners along with notice of their substitution and
admission. This substitution and admission will terminate the right of the prior
limited partners to vote on approval of the Acquisition Agreement and the
transactions contemplated thereby, and any votes as to the transferred Units may
be made by the substituted limited partners.
A limited partner will be entitled to dissenters' rights in connection with
the Mergers if the limited partner properly exercises those rights under Section
25.10.900 et seq. of the Washington Uniform Limited Partnership Act. The full
text of this Section is attached as Appendix E to the Proxy
Statement/Prospectus.
<PAGE>
Whether or not you plan to attend your Special Meeting, please complete,
sign and date the enclosed proxy card and return it promptly in the enclosed
postage prepaid envelope. Your prompt cooperation will be greatly appreciated.
Very truly yours,
CHARLES K. BARBO
GENERAL PARTNER OF THE GENERAL PARTNER
OF EACH OF
THE PARTNERSHIPS
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 11, 1996
SHURGARD STORAGE CENTERS, INC.
PROXY STATEMENT/PROSPECTUS
FOR THE SPECIAL MEETINGS OF LIMITED PARTNERS OF
IDS/SHURGARD INCOME GROWTH PARTNERS L.P.,
IDS/SHURGARD INCOME GROWTH PARTNERS L.P. II AND
IDS/SHURGARD INCOME GROWTH PARTNERS L.P. III
TO BE HELD ON , 1996
This Proxy Statement/Prospectus is being furnished to holders of units of
limited partnership interest ("IDS1 Units") in IDS/Shurgard Income Growth
Partners L.P. ("IDS1"), holders of units of limited partnership interest ("IDS2
Units") in IDS/Shurgard Income Growth Partners L.P. II ("IDS2") and holders of
units of limited partnership interest ("IDS3 Units," and together with the IDS1
Units and IDS2 Units, the "Units") in IDS/Shurgard Income Growth Partners L.P.
III ("IDS3"), each a Washington limited partnership, in connection with the
solicitation of proxies to be used at the special meetings of holders of the
Units (the "IDS1 Special Meeting," "IDS2 Special Meeting" and "IDS3 Special
Meeting," respectively, and collectively, the "Special Meetings") to be held on
, 1996, at 10:00 a.m., local time, at 1201 Third Avenue, Suite 2200,
Seattle, Washington. The holders of IDS1 Units, IDS2 Units and IDS3 Units are
referred to as the "IDS1 Unitholders," "IDS2 Unitholders" and "IDS3
Unitholders," respectively, and collectively, as the "Unitholders." IDS1, IDS2
and IDS3 are referred to collectively as the "Partnerships."
At each of the Special Meetings, Unitholders of each of the Partnerships
will be asked to consider and vote upon approval of an Acquisition Agreement
dated as of July 1, 1996 (the "Acquisition Agreement") by and among Shurgard
Storage Centers, Inc., a Delaware corporation (the "Company" or "SSCI"), and the
Partnerships, providing for the merger of each of the Partnerships with and into
the Company (the "IDS1 Merger," "IDS2 Merger" and "IDS3 Merger," respectively,
and collectively, the "Mergers"). The Acquisition Agreement provides that upon
consummation of the Mergers, each of the IDS1 Units, IDS2 Units and IDS3 Units
(other than Units held by the Company, which will be cancelled, and Units, if
any, held by Unitholders who perfect dissenters' rights) will be converted into
the right to receive that number of shares of Class A Common Stock, par value
$.001 per share, of the Company (the "Common Stock") derived by dividing the Net
Asset Value (as defined herein) per Unit of $257, $222 and $308, respectively,
by the average price of the Common Stock on the New York Stock Exchange during a
designated period prior to the Special Meetings. The Company may, however,
provide additional cash consideration in certain circumstances. For purposes of
computing the number of shares of common stock to be issued to Unitholders, if
the average price of the Common Stock is greater than $27.75 then it will be
deemed to be $27.75, and if the average price of the Common Stock is less than
$22.25 then it will be deemed to be $22.25. Approval of the Acquisition
Agreement by IDS2 Unitholders and IDS3 Unitholders will also constitute approval
of those amendments to the applicable Partnership's Amended and Restated
Agreement of Limited Partnership (the "Partnership Agreement") necessary to
effect the applicable Merger. A copy of the Acquisition Agreement is attached as
Appendix A to this Proxy Statement/Prospectus. The closing of each of the
Mergers is not conditioned upon the closing of any of the other Mergers. THE
GENERAL PARTNER OF EACH PARTNERSHIP (THE "IDS1 GENERAL PARTNER," "IDS2 GENERAL
PARTNER" AND "IDS3 GENERAL PARTNER," RESPECTIVELY, AND COLLECTIVELY, THE
"GENERAL PARTNERS"), WHICH HAS SIGNIFICANT CONFLICTS OF INTEREST IN CONNECTION
WITH THE MERGERS, RECOMMENDS THAT UNITHOLDERS VOTE FOR APPROVAL OF THE
ACQUISITION AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE
MERGERS.
SEE "RISK FACTORS" BEGINNING ON PAGE 20 OF THIS PROXY STATEMENT/PROSPECTUS
FOR CERTAIN FACTORS WHICH SHOULD BE CONSIDERED IN EVALUATING THE MATTERS
DESCRIBED HEREIN. THESE FACTORS INCLUDE, AMONG OTHERS:
- The Company, the General Partners and their affiliates have significant
conflicts of interest in connection with the Mergers, and no unaffiliated
representatives were appointed to negotiate the terms of the Mergers on
behalf of any of the Partnerships.
(CONTINUED ON NEXT PAGE)
------------------------
THE SECURITIES ISSUABLE PURSUANT TO THIS PROXY STATEMENT/PROSPECTUS 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 PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Proxy Statement/Prospectus is , 1996
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
-As a result of the Mergers, the nature of each Unitholder's investment will
change from an interest in a specified portfolio of properties for a finite
period to an investment in an ongoing fully-integrated real estate company,
which has a portfolio of properties that may be changed from time to time
without the approval of stockholders and which does not plan to liquidate
its assets within a fixed period of time.
-The Mergers will be taxable events resulting in the recognition of gain or
loss to Unitholders who are subject to federal income tax, and no special
cash distribution will be made to Unitholders for the payment of any tax.
-The Mergers may affect the level of distributions made to Unitholders who
become stockholders, with the potential that, depending upon the Share
Price (as defined herein), some Unitholders may receive smaller
distributions than they would receive if the Mergers were not consummated
and they remained Unitholders.
-The properties of the Partnerships may appreciate in value and might be
able to be liquidated at a later date for a price which would yield
Unitholders more consideration than they would receive in the Mergers.
-The Company could become more highly leveraged than any of the
Partnerships, resulting in an increase in debt service and an increase in
the risk of default on its obligations.
-The consideration to be received by Unitholders is based in substantial
part on third party appraisals of the market value of the Partnerships'
properties as of December 31, 1995. Appraisals are opinions of value as of
the date specified, are subject to certain assumptions and may not
represent the true worth or realizable value of the properties of the
Partnerships. The appraisals do not reflect any change that may have
occurred in the market value of the properties subsequent to December 31,
1995.
-There can be no assurance that the Company will continue to qualify as a
real estate investment trust ("REIT"). If the Company were to fail to
qualify as a REIT, its distributed income would be subject to two levels of
taxation and would reduce the amount of cash available for distribution to
stockholders.
-If the average price of Common Stock for the designated period used to
determine the Share Price is less than $22.25 per share or if the market
price of the Common Stock decreases after determination of the number of
Shares (as defined herein) to be issued in the Mergers and prior to the
issuance of the Shares, the market value of the Shares received by
Unitholders in the Mergers may be less than the Net Asset Values (as
defined herein) of the Partnerships.
-The market price of Common Stock may decrease following issuance of the
Shares if there is increased selling activity or as a result of general
market conditions or other factors.
-Under Washington law, a Unitholder will be entitled to dissenters' rights
of appraisal in connection with a Merger only if the Unitholder does not
vote in favor of that Merger and timely files a written demand for payment.
The Common Stock is traded on the New York Stock Exchange (the "NYSE") under
the symbol "SHU." On July 8, 1996, the closing price of the Common Stock on the
NYSE was $25.00. See "Distributions and Market Prices of Common Stock." There is
no established trading market for the Units. See "Distributions and Market
Prices of Units."
This Proxy Statement/Prospectus is first being mailed on or about ,
1996 to Unitholders of record at the close of business on the date of this Proxy
Statement/Prospectus.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH
INFORMATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR
THE PARTNERSHIPS. THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES, OR AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES TO
WHICH THIS PROXY STATEMENT/PROSPECTUS RELATES TO OR BY ANYONE IN ANY
JURISDICTION IN WHICH THE OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE THE OFFER OR SOLICITATION.
ii
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-4 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the shares of Common Stock to be issued upon consummation of the
Mergers. This Proxy Statement/Prospectus, which constitutes a part of the
Registration Statement, does not contain all the information set forth in the
Registration Statement and exhibits to the Registration Statement. Copies of the
Registration Statement and the exhibits are on file at the offices of the
Commission and may be obtained, upon payment of the fees prescribed by the
Commission, or may be examined without charge at the offices of the Commission.
All summaries of agreements contained in this Proxy Statement/Prospectus are
subject in all respects to the full text of such documents. Reference is made to
the copies of certain of those documents filed with the Commission for the
complete statement of their provisions.
The Company and each of the Partnerships are subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and, in accordance therewith, file reports and other information with the
Commission. Such reports and other information filed by the Company and the
Partnerships can be copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, the regional
offices of the Commission at 7 World Trade Center, 13th Floor, New York, New
York 10048, and Citicorp Center, Suite 1400, 500 West Madison Street, Chicago,
Illinois 60661. Copies of such material can be obtained at prescribed rates from
the Public Reference Section of the Commission at its office in Washington, D.C.
Such information for the Company can also be inspected at the offices of the
NYSE, 20 Broad Street, New York, New York 10005.
All information concerning the Company contained in this Proxy
Statement/Prospectus has been furnished by the Company and all information
concerning the Partnerships or the General Partners of the Partnerships has been
furnished by the applicable Partnership or General Partner. Neither the delivery
of this Proxy Statement/Prospectus nor any distribution of securities hereunder
shall under any circumstances be deemed to imply that there has been no change
in the assets, properties or affairs of the Company or any of the Partnerships
since the date hereof or that the information set forth herein is correct as of
any time subsequent to the date hereof.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by the Company are
incorporated by reference in this Proxy Statement/Prospectus:
(i) the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996;
(ii) the Company's Annual Report on Form 10-K for the year ended
December 31, 1995;
(iii) the description of Common Stock contained in the Company's
Registration Statement on Form 8-A, as amended, dated April 19, 1995; and
(iv) the description of the Preferred Share Purchase Rights contained in
the Company's Registration Statement on Form 8-A, as amended, dated April
19, 1995.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Proxy
Statement/Prospectus and prior to the date of the Special Meetings shall be
deemed to be incorporated by reference herein 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 Proxy Statement/Prospectus to the extent that a
statement contained herein or in any subsequently filed document which also is
or is deemed to be incorporated by reference herein modifies or supersedes that
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Proxy
Statement/Prospectus.
iii
<PAGE>
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF THESE DOCUMENTS (NOT
INCLUDING EXHIBITS TO THE DOCUMENTS, UNLESS THE EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE INTO THE INFORMATION THAT THIS PROXY
STATEMENT/PROSPECTUS INCORPORATES) WILL BE PROVIDED WITHOUT CHARGE TO EACH
PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS PROXY STATEMENT/PROSPECTUS
IS DELIVERED, UPON WRITTEN OR ORAL REQUEST. REQUESTS SHOULD BE DIRECTED TO
SHURGARD STORAGE CENTERS, INC., INVESTOR RELATIONS, 1201 THIRD AVENUE, SUITE
2200, SEATTLE, WASHINGTON 98101 (TELEPHONE NUMBER: (206) 624-8100).
CAUTIONARY STATEMENT
Statements contained in this Proxy Statement/Prospectus that are not based
on historical fact are "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Certain forward-looking
statements are identified specifically in this Proxy Statement/ Prospectus while
other forward-looking statements may be identified by the use of forward-looking
terminology such as "may," "will," "expect," "anticipate," "estimate,"
"continue" or similar terms, variations of those terms or the negative of those
terms. Cautionary statements set forth in "Risk Factors" and elsewhere in this
Proxy Statement/Prospectus identify important factors that could cause actual
results to differ materially from those in the forward-looking statements.
iv
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
AVAILABLE INFORMATION...................................................................................... iii
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................................................ iii
CAUTIONARY STATEMENT....................................................................................... iv
SUMMARY.................................................................................................... 1
The Company.............................................................................................. 1
The Partnerships......................................................................................... 1
The Special Meetings..................................................................................... 2
The Mergers.............................................................................................. 3
General Partners' Reasons for Recommending the Mergers................................................... 4
IPSC Consent............................................................................................. 4
Risk Factors............................................................................................. 5
Expected Benefits from the Mergers....................................................................... 7
Alternatives to the Mergers.............................................................................. 7
Comparison of Merger Consideration to Alternatives....................................................... 8
Fairness of the Mergers.................................................................................. 9
Third Party Opinions..................................................................................... 10
Comparison of the Partnerships and the Company........................................................... 11
Conflicts of Interest.................................................................................... 13
Amendments to Partnership Agreements..................................................................... 13
Dissenters' Rights of Unitholders........................................................................ 14
Material Federal Income Tax Considerations............................................................... 14
Accounting Treatment..................................................................................... 14
Ownership Structure of the Partnerships.................................................................. 15
SELECTED FINANCIAL INFORMATION OF THE COMPANY.............................................................. 16
PRO FORMA CONSOLIDATED FINANCIAL DATA...................................................................... 17
COMPARATIVE PER SHARE DATA................................................................................. 18
DISTRIBUTIONS AND MARKET PRICES OF COMMON STOCK............................................................ 19
RISK FACTORS............................................................................................... 20
Risks Relating to the Mergers............................................................................ 20
General Real Estate Investment Risks..................................................................... 22
Risks Relating to Qualification and Operation as a REIT.................................................. 25
Other General Risks...................................................................................... 26
THE SPECIAL MEETINGS....................................................................................... 27
General.................................................................................................. 27
The IDS1 Special Meeting................................................................................. 27
The IDS2 Special Meeting................................................................................. 28
The IDS3 Special Meeting................................................................................. 29
Solicitation of Proxies by Soliciting Agent.............................................................. 30
Information and Tabulation............................................................................... 31
BACKGROUND AND REASONS FOR THE MERGERS..................................................................... 31
Background............................................................................................... 31
Purposes and Structure of the Offers and the Mergers..................................................... 35
General Partners' Recommendations and Reasons............................................................ 36
Expected Benefits From the Mergers....................................................................... 36
Alternatives to the Mergers.............................................................................. 38
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FAIRNESS OF THE MERGERS.................................................................................... 40
Conclusions of the General Partners...................................................................... 40
Determination of Merger Consideration.................................................................... 40
Fairness of the Mergers to the Unitholders............................................................... 41
Comparison of Merger Consideration to Alternatives....................................................... 42
Distribution Comparison.................................................................................. 45
Conclusions of the Special Committee..................................................................... 46
THE ACQUISITION AGREEMENT.................................................................................. 47
The Mergers.............................................................................................. 47
Representation and Warranties............................................................................ 48
Conduct of Business Pending the Effective Time........................................................... 48
IPSC Consent............................................................................................. 48
Standstill Agreement..................................................................................... 48
No Solicitation of Transactions.......................................................................... 49
Indemnification.......................................................................................... 49
Conditions Precedent to the Mergers...................................................................... 49
Termination.............................................................................................. 50
Fees and Expenses........................................................................................ 51
Effect of Termination.................................................................................... 52
Amendment................................................................................................ 52
Dissenters' Rights....................................................................................... 52
Amendments to the Partnership Agreements................................................................. 52
General Partner Undertaking.............................................................................. 53
SOURCE AND AMOUNT OF FUNDS................................................................................. 53
APPRAISALS AND OPINIONS OF FINANCIAL ADVISORS.............................................................. 54
Portfolio Appraisals of the Partnerships' Properties..................................................... 54
Opinion of the Partnerships' Financial Advisor........................................................... 57
Opinion of the Company's Financial Advisor............................................................... 60
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS................................................................ 65
COMPARISONS OF PARTNERSHIPS AND COMPANY.................................................................... 69
CONFLICTS OF INTEREST...................................................................................... 83
Common Composition of General Partners................................................................... 83
Overlaps Between Affiliates of the General Partners and Directors and Officers of the Company............ 83
Company Ownership of Units............................................................................... 83
General Partner's Interest............................................................................... 83
Management Agreements.................................................................................... 84
Ownership of Company Common Stock by Affiliates of the General Partners.................................. 85
Contingent Shares Agreement.............................................................................. 85
Absence of Independent Soliciting Agent; Indemnification................................................. 85
FIDUCIARY RESPONSIBILITY................................................................................... 85
Directors and Officers of the Company.................................................................... 85
General Partners of the Partnerships..................................................................... 86
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BUSINESS AND PROPERTIES OF THE PARTNERSHIPS................................................................ 87
General.................................................................................................. 87
Employees and Property Management........................................................................ 88
IDS1..................................................................................................... 89
IDS2..................................................................................................... 93
IDS3..................................................................................................... 97
Beneficial Ownership..................................................................................... 102
DISTRIBUTIONS AND MARKET PRICES OF UNITS................................................................... 103
Partnership Distributions................................................................................ 103
Market Prices of Units................................................................................... 103
BUSINESS AND PROPERTIES OF THE COMPANY..................................................................... 108
History of the Company................................................................................... 108
The Properties........................................................................................... 108
DESCRIPTION OF CAPITAL STOCK............................................................................... 114
Common Stock and Class B Common Stock.................................................................... 114
Preferred Stock.......................................................................................... 117
Restrictions On Transfers Of Capital Stock; Excess Stock................................................. 117
DISSENTERS' RIGHTS OF UNITHOLDERS.......................................................................... 119
ESTIMATED TAXABLE GAIN OR LOSS............................................................................. 120
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS................................................................. 121
General.................................................................................................. 121
Opinion of Counsel....................................................................................... 121
Tax Consequences of the Mergers.......................................................................... 122
Taxation of the Company as a REIT........................................................................ 125
LEGAL MATTERS.............................................................................................. 132
EXPERTS.................................................................................................... 132
GLOSSARY OF TERMS.......................................................................................... 133
INDEX TO FINANCIAL STATEMENTS.............................................................................. F-1
APPENDIX A -- Acquisition Agreement........................................................................ A-1
APPENDIX B -- Summary Portfolio Appraisal Report of Robert A. Stanger & Co., Inc. ......................... B-1
APPENDIX C -- Fairness Opinion of Robert A. Stanger & Co., Inc. ........................................... C-1
APPENDIX D -- Fairness Opinion of Alex. Brown & Sons Incorporated ......................................... D-1
APPENDIX E -- Dissenters' Rights -- Section 25.10.900 et seq. of the Washington Uniform Limited Partnership
Act....................................................................................................... E-1
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SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED
INFORMATION APPEARING ELSEWHERE IN THIS PROXY STATEMENT/PROSPECTUS, INCLUDING
THE APPENDICES. UNITHOLDERS ARE URGED TO CAREFULLY READ THIS PROXY
STATEMENT/PROSPECTUS AND ITS APPENDICES IN THEIR ENTIRETY BEFORE VOTING ON THE
MATTERS DISCUSSED HEREIN. SEE "GLOSSARY OF TERMS" BEGINNING ON PAGE 133 FOR THE
DEFINITIONS OF CERTAIN OF THE CAPITALIZED TERMS USED IN THIS PROXY
STATEMENT/PROSPECTUS.
THE COMPANY
Shurgard Storage Centers, Inc. is a fully integrated, self-administered and
self-managed real estate investment trust that develops, acquires, owns and
manages self storage centers. The Company is one of the largest operators of
self storage centers in the United States. As of March 31, 1996, the Company
owned and operated, directly and through its subsidiaries and joint ventures,
178 self storage properties, containing approximately 11.7 million net rentable
square feet, which are located in over 20 major metropolitan areas in 19 states
and Europe. In addition, the Company owns two business parks and a commercial
building. The Company also manages, under the "Shurgard" name, 86 self storage
centers containing approximately 4.6 million net rentable square feet, of which
47 are owned by affiliates (including the properties owned by the Partnerships)
and 39 are owned by nonaffiliates. The Company developed 71 of its owned or
managed stores. For the quarter ended March 31, 1996, the self storage centers
owned by the Company had a weighted average net rentable square foot occupancy
rate of approximately 88% and a weighted average annual rent per net rentable
square foot of $8.84.
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 Shurgard Incorporated (the "Management Company"). On
March 24, 1995, the Management Company merged with and into the Company (the
"Management Company Merger"), and the Company became self-administered and
self-managed.
The Company was incorporated in Delaware 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.
THE PARTNERSHIPS
Each Partnership is a publicly held limited partnership formed under the
laws of the State of Washington for the purpose of acquiring, developing and
operating self storage centers and office and business parks. The Partnerships'
storage centers are designed to offer high-quality storage space for personal
and business use at a competitive price. The Partnerships' properties are
managed by the Company. All of the Partnerships' properties are operated under
the "Shurgard" name. Each Partnership's executive offices are located at 1201
Third Avenue, Suite 2200, Seattle, Washington 98101, and the telephone number is
(206) 624-8100.
IDS1. IDS1 owns and operates eight self storage properties and holds a 70%
interest in Shurgard Joint Partners II ("SJP II"), which owns four self storage
properties. The remaining 30% interest in SJP II is held by the Company. The 12
properties, which are located in six states, contained approximately 764,000 net
rentable square feet (including 100% of the SJP II properties) and had a
weighted average net rentable square foot occupancy rate of approximately 88% as
of March 31, 1996 and a weighted average annual rent per net rentable square
foot of $8.88 for the quarter ended March 31, 1996. IDS1 was organized on
September 29, 1987. See "Business and Properties of the Partnerships -- IDS1."
IDS2. IDS2 owns and operates eight self storage properties. The eight
properties, which are located in five states, contained approximately 538,000
net rentable square feet and had a weighted average net rentable square foot
occupancy rate of approximately 86% as of March 31, 1996 and a weighted average
annual rent per net rentable square foot of $8.88 for the quarter ended March
31, 1996. IDS2 was organized on November 15, 1988. See "Business and Properties
of the Partnerships -- IDS2."
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IDS3. IDS3 owns and operates 16 self storage properties and one office
building. The 17 properties, which are located in seven states, contained
approximately 1,000,000 net rentable square feet and had a weighted average net
rentable square foot occupancy rate of approximately 87% as of March 31, 1996
and a weighted average annual rent per net rentable square foot of $7.92 for the
quarter ended March 31, 1996. IDS3 was organized on November 15, 1988. See
"Business and Properties of the Partnerships -- IDS3."
THE SPECIAL MEETINGS
Each of the Special Meetings is scheduled to be held on , 1996,
at 10:00 a.m., local time, at 1201 Third Avenue, Suite 2200, Seattle,
Washington. At each of the Special Meetings, including any adjournments or
postponements thereof, Unitholders will be asked to consider and vote on a
proposal to approve the Acquisition Agreement and the transactions contemplated
thereby, providing for the Merger of their respective Partnership with and into
the Company. Approval of the Acquisition Agreement by IDS2 Unitholders and IDS3
Unitholders will also constitute approval of those amendments to the applicable
Partnership's Partnership Agreement necessary to effect its respective Merger.
See "The Special Meetings" and "The Acquisition Agreement -- Amendments to the
Partnership Agreements." The closing of each of the Mergers is not conditioned
upon the closing of any of the other Mergers.
For each Partnership, Unitholders as of the date of this Proxy
Statement/Prospectus whose Units have not been purchased by the Company pursuant
to the Offers (as defined below) are entitled to notice of their respective
Special Meeting. If Units of a Partnership are transferred after the date of
this Proxy Statement/Prospectus but prior to the date of the Partnership's
Special Meeting or any adjournment or postponement thereof, and the holders of
the transferred Units are admitted as substituted Unitholders, the Notice of
Special Meeting, this Proxy Statement/Prospectus and related information will be
sent to the substituted Unitholders along with notice of their substitution and
admission. This substitution and admission will terminate the right of the prior
Unitholders to vote on the approval of the Acquisition Agreement and the
transactions contemplated thereby, and any votes as to the transferred Units
must be made by the substituted Unitholders. Unitholders are entitled to one
vote at their respective Special Meeting or any adjournment or postponement
thereof for each Unit of their Partnership held of record by them as of the date
of the Special Meeting or any adjournment or postponement thereof.
For each Partnership, Unitholders holding more than 50% of that
Partnership's Units, in person or by proxy, constitute a quorum at the
applicable Special Meeting. For IDS1, the affirmative vote of IDS1 Unitholders
holding more than 75% of the outstanding IDS1 Units is required to approve the
Acquisition Agreement and the transactions contemplated thereby, including the
IDS1 Merger. For IDS2, the affirmative vote of IDS2 Unitholders holding more
than 50% of the outstanding IDS2 Units is required to approve the Acquisition
Agreement and the transactions contemplated thereby, including the IDS2 Merger
and the amendment to the IDS2 Partnership Agreement. For IDS3, the affirmative
vote of IDS3 Unitholders holding more than 50% of the outstanding IDS3 Units is
required to approve the Acquisition Agreement and the transactions contemplated
thereby, including the IDS3 Merger and the amendment to the IDS3 Partnership
Agreement.
As of the date of this Proxy Statement/Prospectus, there were approximately
148,202 IDS1 Units outstanding held by approximately 5,519 holders of record,
approximately 115,110 IDS2 Units outstanding held by approximately 3,989 holders
of record and approximately 119,215 IDS3 Units outstanding held by approximately
3,876 holders of record.
As of the date of this Proxy Statement/Prospectus, the Company beneficially
owns IDS1 Units (approximately %), IDS2 Units
(approximately %) and IDS3 Units (approximately %). The Company
intends to vote such Units for approval of the Acquisition Agreement and the
transactions contemplated thereby. The Company is expected to be admitted as a
substituted Unitholder on October 1, 1996 with respect to those Units for which
it holds proxies.
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THE MERGERS
BACKGROUND. Pursuant to the Acquisition Agreement, on , 1996,
the Company completed (i) a cash tender offer for up to 65,000 of the
outstanding IDS1 Units by purchasing or approximately % of the outstanding
IDS1 Units at $257 net per IDS1 Unit (the "IDS1 Offer"), (ii) a cash tender
offer for up to 49,000 of the outstanding IDS2 Units by purchasing or
approximately % of the outstanding IDS2 Units at $222 net per IDS2 Unit (the
"IDS2 Offer") and (iii) a cash tender offer for up to 52,000 of the outstanding
IDS3 Units by purchasing or approximately % of the outstanding IDS3
Units at $308 net per IDS3 Unit (the "IDS3 Offer," and together with the IDS1
Offer and IDS2 Offer, the "Offers"). The Offers were made and the Mergers are
being proposed for approval (i) to enable the Company to acquire the entire
equity interest in each of the Partnerships and (ii) to give Unitholders an
opportunity (a) to liquidate their Units for cash in the Offers or (b) to
continue to own an economic interest in a portfolio of properties, including the
Partnerships' properties, through an acquisition of an equity interest in the
Company in the Mergers.
THE MERGERS. With respect to each Partnership, upon the satisfaction or
waiver of the conditions to closing relating to that Partnership, it will merge
with and into the Company, with the Company continuing as the surviving entity
(the date of the Merger is referred to as the "Closing Date"). Each Unit of that
Partnership (other than Units owned by the Company and Units, if any, held by
Unitholders who perfect dissenters' rights under the Washington Uniform Limited
Partnership Act (the "WULPA")) and the general partner interest (the "GP
Interest") in that Partnership will be converted into the right to receive (i)
that number of whole shares of Common Stock, including associated preferred
stock purchase rights (the "Shares"), calculated by dividing (a) the Net Asset
Value (as defined below) of the applicable Partnership that would be allocated
to one Unit or the GP Interest, as the case may be, if the Net Asset Value were
distributed in a dissolution of the Partnership in accordance with its
Partnership Agreement (a "Dissolution") by (b) the Share Price (as defined
below), (ii) cash in lieu of a fractional Share and (iii) Additional
Consideration (as defined below), if any, that would be allocated to one Unit or
the GP Interest, as the case may be, if such cash payments were distributed in a
Dissolution. All Units owned by the Company will be cancelled upon consummation
of the Mergers. No certificates representing fractional Shares will be issued in
the Mergers, but cash will be paid in lieu thereof. The Shares to be issued and
the cash to be paid in lieu of fractional shares of Common Stock and as
Additional Consideration are referred to as the "Merger Consideration." To the
extent that a Partnership's Closing Net Asset Value exceeds the Partnership's
Net Asset Value, the Partnership will make cash distributions to its pre-Merger
Unitholders and General Partner in the amount of the difference.
The "Net Asset Value" of a Partnership is equal to (i) the sum of (a) the
appraised fair market value of the real estate assets of the Partnership as of
December 31, 1995 (the "Appraised Value") set forth in the Summary Portfolio
Appraisal Report dated June 26, 1996 (the "Appraisals"), prepared by Robert A.
Stanger & Co., Inc. ("Stanger"), which reflected the value of in-progress
buildouts and unit conversions, and (b) the book values of the non-real estate
assets, except for amortizable assets, of the Partnership as of March 31, 1996,
less (ii) the sum of (x) the Partnership's liabilities as of March 31, 1996, (y)
the estimated cost remaining to be incurred as of March 31, 1996 to complete
in-progress buildouts and unit conversions (the value of which was included in
the Appraised Value) and (z) the estimated costs of the Offers and the Mergers
that would be borne by the Partnership pursuant to the Acquisition Agreement,
assuming the applicable Merger is consummated. See "Fairness of the Mergers --
Conclusions of the General Partners" and "-- Determination of Merger
Consideration."
The "Closing Net Asset Value" of a Partnership is equal to (i) the sum of
(a) the Appraised Value, (b) the cost incurred to the Closing Date of buildouts
and unit conversions, if any, that were not reflected in the Appraised Value,
and (c) the book values of the non-real estate assets, except for amortizable
assets, of the Partnership as of the Closing Date of the applicable Merger, less
(ii) the sum of (x) the Partnership's liabilities as of the Closing Date, (y)
the estimated costs remaining to be
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incurred, if any, as of the Closing Date to complete the buildouts and unit
conversions that were included in the Appraised Value and (z) the Partnership's
Individual Expenses and pro rata share of Shared Expenses (as such terms are
defined herein).
The "Share Price" for a Partnership is equal to the average of the per share
closing prices of the Common Stock on the NYSE during the 20 consecutive trading
days ending on the fifth trading day prior to the date the General Partner of
the Partnership actually calls for the vote of the Partnership's Unitholders to
approve the applicable Merger (the "Vote Date"). If the Share Price, however, is
less than $22.25 per share, then for purposes of calculating the number of
Shares to be issued in the applicable Merger, the Share Price will be deemed to
equal $22.25, and if the Share Price is greater than $27.75 per share, then for
purposes of calculating the number of Shares to be issued in the applicable
Merger, the Share Price will be deemed to equal $27.75 (the range of $22.25 to
$27.75 is referred to as the "Share Price Range").
In the event the Share Price exceeds $28.50 for a particular Partnership,
the Company has the right to terminate the Acquisition Agreement as to that
Partnership. In the event the Share Price is less than $21.50 for a particular
Partnership, the General Partner of that Partnership may withdraw its
recommendation in favor of the applicable Merger or terminate the Acquisition
Agreement; provided, however, that prior to withdrawing its recommendation or
terminating the Acquisition Agreement as to that Partnership, the General
Partner, if so requested by the Company, must adjourn the Special Meeting of the
applicable Partnership for up to ten business days and the General Partner may
not withdraw its recommendation if, at least two business days prior to the date
of the adjourned Special Meeting, the Company agrees to pay an amount of cash
equal to the difference between the actual Share Price and $21.50, multiplied by
the number of Shares to be issued in the applicable Merger (the "Additional
Consideration").
GENERAL PARTNERS' REASONS FOR RECOMMENDING THE MERGERS
THE GENERAL PARTNER OF EACH PARTNERSHIP RECOMMENDS THAT UNITHOLDERS OF THE
PARTNERSHIP VOTE FOR APPROVAL OF THE ACQUISITION AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY. This recommendation is based upon each General Partner's
belief that (i) the terms of the respective Merger, when considered as a whole,
are fair to the Unitholders of the respective Partnership, (ii) the Merger
Consideration being offered in exchange for the Units constitutes fair
consideration for the interests of the Unitholders and (iii) after comparing
certain potential benefits and detriments of the respective Merger with those of
several alternatives, the respective Merger is more attractive to the
Unitholders than the alternatives. These beliefs are based upon each General
Partner's analysis of the terms of the respective Merger, assessment of the
respective Merger's potential economic impact upon the Unitholders, comparison
of certain potential benefits and detriments of the respective Merger and
several alternatives to the respective Merger and review of the financial
condition and performance of the respective Partnership and the Company and the
terms of material agreements by which they are bound.
IPSC CONSENT
Pursuant to the Agreement of Limited Partnership of each of the General
Partners (the "GP Agreements"), the general partners of each of the General
Partners may not have authority to approve the Mergers without the consent of
IDS Partnership Services Corporation, a limited partner of each of the General
Partners which is not affiliated with the Company ("IPSC"). Based on its review
of documents, the General Partners' review of alternatives to the Mergers and
the Stanger Fairness Opinions (as defined below), IPSC consented to the Mergers.
IPSC has certain conflicts of interest in the Mergers and tendered in the Offers
the Units it had owned. See "The Acquisition Agreement -- IPSC Consent" and
"Conflicts of Interest."
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RISK FACTORS
In evaluating the Mergers and the Company, Unitholders should carefully
consider the factors discussed under "Risk Factors." Some of the significant
factors include:
RISKS RELATING TO THE MERGERS
- The Company, the General Partners and their affiliates have significant
conflicts of interest in connection with the Mergers.
- The interests of the Unitholders have not been independently represented
in structuring and negotiating the terms of the Mergers; had separate
representation been arranged for the Unitholders, the terms of the Mergers
might have been different.
- As a result of the Mergers, the nature of each Unitholder's investment
will change from an interest in a specified portfolio of properties for a
finite period to an investment in an ongoing fully-integrated real estate
company, which has a portfolio of properties that may be changed from time
to time without the approval of stockholders and which does not plan to
liquidate its assets within a fixed period of time.
- The Mergers will be treated as taxable events, resulting in the
recognition by all non-tax-exempt Unitholders of either taxable income or
loss, and no special cash distributions will be made for the payment of
any tax.
- The Mergers are expected to affect the level of distributions made to
Unitholders who become stockholders of the Company. Depending upon the
Share Price used to determine the number of Shares to be issued in the
Mergers, the level of distributions after the Mergers to Unitholders who
have become Company stockholders may be lower than the level of
distributions received with respect to their Units prior to the Mergers.
- The consideration to be received by Unitholders is based in substantial
part on third party appraisals of the market value of the Partnerships'
properties as of December 31, 1995. Appraisals are opinions of value as of
the date specified, are subject to certain assumptions and may not
represent the true worth or realizable value of the properties of the
Partnerships. The appraisals do not reflect any change that may have
occurred in the market value of the properties subsequent to December 31,
1995.
- If the average price of Common Stock for the designated period used to
determine the Share Price is less than $22.25 per share or if the market
price of the Common Stock decreases after determination of the number of
Shares to be issued in the Mergers and prior to the issuance of the
Shares, the market value of the Shares received by Unitholders in the
Mergers may be less than the Net Asset Values of the Partnerships.
- The market price of Common Stock may decrease following issuance of the
Shares if there is increased selling activity or as a result of general
market conditions or other factors.
- The properties of the Partnerships may appreciate in value and might be
able to be liquidated at a later date for a price which would yield
Unitholders more consideration than they would receive in the Mergers.
- The Company could become more highly leveraged than any of the
Partnerships, resulting in an increase in debt service and an increase in
the risk of default on its obligations.
GENERAL REAL ESTATE INVESTMENT RISKS
- The Company is subject to general risks relating to real estate ownership
and operation of self storage centers, including the fact that real estate
investments are generally illiquid, as well as the risks normally
associated with changes in market rental rates and the impact of
environmental protection laws.
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- The Company is subject to risks of real estate development, such as
problems in obtaining necessary permits and approvals, cost overruns and
delays in construction, and difficulties and delays in property lease-up.
- The Company is authorized to invest in commercial real estate other than
self storage centers, exposing the Company to the risks unique to these
investments which may be different than the risks of being in the self
storage business.
- The Company may acquire indirect interests in real estate, including
interests outside the United States, through investments in limited
partnerships, joint ventures, participating mortgages and other legal
entities, exposing the Company not only to the risk of the underlying real
estate investments but also currency risks and risks associated with the
entity owning the real estate.
- 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.
- Competition may adversely affect the occupancy levels and rental rates of
the Company's properties.
- Limited potential for significant occupancy gains indicates that any
future increases in revenue from self storage centers currently owned by
the Company will be primarily the result of rental rate increases.
- Possible liability relating to environmental matters, including the
presence of hazardous substances on a property, may adversely affect the
Company's ability to sell the property or to borrow using the property as
collateral, and may cause the Company to incur substantial remediation or
other costs, such as liabilities resulting from a claim by a private party
for personal injury or a claim by an adjacent property owner for property
damage.
- The Company may be required to make capital expenditures for building
alterations to comply with the Americans with Disabilities Act, fire and
safety regulations, building codes and other land use regulations.
- Real property taxes on properties owned or developed or acquired in the
future by the Company may increase as property tax rates change and as the
properties are assessed or reassessed by tax authorities.
RISKS RELATING TO QUALIFICATION AND OPERATION AS A REIT
- There can be no assurance that the Company will continue to qualify as a
REIT. If the Company were to fail to qualify as a REIT, its distributed
income would be subject to two levels of taxation and would reduce the
amount of cash available for distribution to stockholders.
- The Company may have taxable income in excess of cash available for
distribution, and may be required to borrow money or liquidate investments
in order to meet the distribution requirements necessary to REIT status.
- Legislation, new regulations, administrative interpretations or court
decisions may significantly change the tax laws with respect to the
Company's qualification as a REIT or the federal income tax consequences
of such qualification.
OTHER GENERAL RISKS
- The Company manages 86 self storage properties (including those of the
Partnerships) under contracts that generally may be terminated without
cause on 60 days' notice. If these contracts were terminated, the Company
would lose management fees and other income and would experience decreased
economies of scale.
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- Market interest rates may increase, resulting in higher yields on other
financial instruments, which could adversely affect the market price of
the Common Stock.
EXPECTED BENEFITS FROM THE MERGERS
The following highlights the primary benefits the Mergers are expected to
generate for the Unitholders:
- The Company, unlike the Partnerships, may be able to take advantage of
attractive real estate acquisition and development opportunities subject
to its ability to raise additional equity capital or debt.
- As a larger entity with Common Stock listed on the NYSE, the Company has
access to debt and equity markets that are not available to the
Partnerships.
- The Company's real estate portfolio is substantially larger and more
geographically diverse than any of the Partnerships, reducing the
dependence of an investment in the Company on the performance of a
particular asset or group of assets.
- Unitholders will receive publicly traded securities listed on the NYSE,
enabling Unitholders to liquidate their investment in the public trading
market to meet personal financial planning objectives.
- The elimination of legal boundaries between the Partnerships through their
consolidation into a single commonly managed company will eliminate
conflicts of interest among the Partnerships and between the Partnerships
and the Company as property manager.
- Tax filing for investors is simplified because Company tax information is
included on Form 1099-DIV rather than the more complicated Schedule K-1.
ALTERNATIVES TO THE MERGERS
The following is a brief discussion of certain benefits and detriments of
alternatives to the Mergers that were considered by the General Partners.
LIQUIDATION. An alternative to the Mergers would be liquidating the assets
of the Partnerships and distributing the net liquidation proceeds to the General
Partners and Unitholders. Liquidating the Partnerships would result in
concluding the investors' investment in the Partnerships within the anticipated
liquidation timeframes for certain of the properties in the Partnerships'
portfolios and somewhat earlier than the anticipated liquidation timeframes for
other properties. The liquidations would result in the marketplace establishing
the fair market value of the Partnerships' assets. The General Partners believe
that the Mergers are a more attractive alternative than liquidation because the
Mergers permit Unitholders to participate in the Company's substantially larger,
more diversified investment portfolio, to benefit from the Company's ability to
access capital markets and to take advantage of acquisition and development
opportunities. In addition, the estimated transaction costs associated with the
Mergers are significantly less than would be incurred in a liquidation of the
Partnerships' assets.
CONTINUATION OF PARTNERSHIPS. Another alternative to the Mergers would be
to continue each of the Partnerships as a separate legal entity. Unitholders
would continue to receive regular quarterly distributions, which are expected to
improve in the foreseeable future. Also, continuation of the Partnerships avoids
those disadvantages which might be inherent in the Mergers. See "Risk Factors."
The primary disadvantage with continuing the Partnerships is the failure to
secure the benefits that the General Partners expect to result from the Mergers.
See "Background and Reasons for the Mergers--Expected Benefits From the
Mergers." If the Partnerships continue, Unitholders may not have an opportunity
for liquidity in the near future and there can be no assurance that Unitholders
will be able to sell their Units for consideration as attractive as the Merger
Consideration.
SUPPORT OF SECONDARY MARKET. Another alternative which would create
liquidity for Unitholders desiring to dispose of their investments in the
Partnerships would be a creation or support of the secondary market for the
Units through limited cash tender offers or repurchase programs sponsored
7
<PAGE>
by the Partnerships. While the General Partners believe that this alternative
might provide liquidity for some Unitholders, the terms of the Partnership
Agreements and federal tax laws effectively prevent this alternative from being
available with respect to a majority of the Units in any 12-month period. The
General Partners believe that the benefits of this alternative are not
sufficiently broad-based to provide an overall solution to the liquidity
problem. While this alternative was considered by the General Partners, no
detailed financial analysis was done that would allow the General Partners to
predict with any degree of certainty the possible impact of this alternative on
the value of the Units.
REORGANIZATIONS OF PARTNERSHIPS AS SEPARATE REITS. Reorganizing each of the
Partnerships as a separate corporation taxed as a REIT could provide Unitholders
with some of the advantages to be secured through the Mergers, such as providing
investors in the reorganized entities with some liquidity through the listing of
their equity securities in a recognized trading market and simplified federal
income tax reporting. In addition, these reorganizations could be effected on a
tax-free basis, unlike the Mergers, which will be taxable events for
Unitholders. The reorganizations of the Partnerships would, however, result in
substantial costs and expenses, and, due to the sizes of the Partnerships,
access to capital markets and the liquidity of the reorganized entities'
securities could be limited. The General Partners believe that the separate
REITs would not provide, or would provide on a more limited basis, the
advantages expected from the Mergers.
COMPARISON OF MERGER CONSIDERATION TO ALTERNATIVES
To assist Unitholders in evaluating the Mergers, the General Partner of each
Partnership has attempted to compare the Merger Consideration with (i) the
prices at which the Units have been sold in the illiquid secondary market, (ii)
estimates of the value of the Units on a liquidation basis assuming that the
Partnership's assets were sold at their Appraised Value or net book value and
the net proceeds distributed to the General Partner and Unitholders in
accordance with the applicable Partnership Agreement and (iii) estimates of the
value of the Units on a going concern basis assuming that the Partnership
continued as an operating business and its assets were sold at the end of 2000.
Due to the uncertainty in establishing these values, each General Partner has,
in instances it deemed appropriate, established a range of potential values for
each alternative, representing a high and low value for the potential
consideration. NO ASSURANCE CAN BE GIVEN THAT THE RANGE OF POTENTIAL VALUES
INDICATED ESTABLISHES THE HIGHEST OR LOWEST POSSIBLE VALUE.
The results of this comparative analysis are summarized in the table below.
The estimated values are based upon information available to each General
Partner at the time they were computed, including historical information
regarding the applicable Partnership and current real estate markets, and there
can be no assurance that the same conditions analyzed by each of the General
Partners in arriving at the estimates of value would exist at the time of
consummation of the Mergers. In addition, the estimated values assigned to the
alternatives are based on a variety of assumptions made by each General Partner
that relate, among other things, to (i) the Share Price as of the Closing Date
for the applicable Merger being within the Share Price Range, (ii) projections
as to the Partnership's future revenues, expenses, cash flow and other
significant financial matters, (iii) the capitalization rates that will be used
by prospective buyers when the Partnership's assets are liquidated, (iv) selling
costs, (v) appropriate discount rates to apply to expected cash flows in
computing the present value of the cash flows and (vi) the manner of sale of the
Partnership's properties.
The estimated values presented in the following table are "forward-looking
statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Actual
results may vary from those set forth below based on numerous factors, including
interest rate fluctuations, changes in capitalization rates used by prospective
purchasers, tax law changes, increased supply of or decreased demand for self
storage facilities leading to lower occupancy rates or lower rental rates, the
manner in
8
<PAGE>
which the properties are sold and the related selling costs and changes in
availability of capital to finance acquisitions of self storage properties. Each
Unit in the following table represents an original investment of $250.
<TABLE>
<CAPTION>
ESTIMATED LIQUIDATION
VALUE PER UNIT
SECONDARY ESTIMATED GOING ASSUMING PARTNERSHIP
MARKET PRICE CONCERN VALUE ASSETS SOLD AT:
MERGER PER UNIT (2) PER UNIT (3) ----------------------------
CONSIDERATION -------------------- -------------------- APPRAISED NET BOOK
PARTNERSHIP PER UNIT (1) HIGH LOW HIGH LOW VALUE (4) VALUE (5)
- ------------ --------------- --------- --------- --------- --------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
IDS 1 $ 257 $ 198 $ 150 $ 251 $ 235 $ 253 $ 175
IDS 2 222 185 162 218 203 217 183
IDS 3 308 200 165 304 283 299 192
</TABLE>
- ------------------------
(1) Assumes the Share Price is within the Share Price Range. The Merger
Consideration is payable in Shares and cash in lieu of fractional Shares.
See "Fairness of the Mergers -- Determination of Merger Consideration."
(2) The secondary market prices are those reported to Stanger for the first
calendar quarter of 1996. See "Distributions and Market Prices of Units --
Market Prices of Units."
(3) The going concern value estimates are based upon a number of assumptions
regarding the future net operating income and cash distributions of the
Partnership and assume a disposition of the Partnership's assets at the end
of 2000. See "Fairness of the Mergers -- Comparison of Merger Consideration
to Alternatives -- Going Concern Values."
(4) Estimated Liquidation Value at Appraised Value is based primarily upon the
Appraisals and adjustments for non-real estate assets and liabilities and
estimated selling costs. See "Fairness of the Mergers -- Comparison of
Merger Consideration to Alternatives -- Liquidation Values."
(5) Estimated Liquidation Value at Net Book Value is computed as of March 31,
1996, less estimated selling costs. See "Fairness of the Mergers --
Comparison of Merger Consideration to Alternatives -- Liquidation Values."
FAIRNESS OF THE MERGERS
The General Partner of each Partnership believes that the terms of the
applicable Merger, when considered as a whole, are fair to the Unitholders of
the Partnership and the Merger Consideration offered in exchange for the Units
of the Partnership constitutes fair consideration for the interests of the
Unitholders. The following provides a summary of the factors upon which the
General Partners based their conclusions as to the fairness of the Mergers and
the Merger Consideration to be received by Unitholders. The General Partners did
not find it practicable to, and did not attempt to, quantify or otherwise assign
relative weights to these factors in reaching their determinations.
- The Merger Consideration is determined based upon the Net Asset Values of
the Partnerships, which Net Asset Values were, in turn, based primarily
upon the independently appraised values of the real estate assets of the
Partnerships.
- Stanger has opined as to the fairness, from a financial point of view, of
the Merger Consideration to the Unitholders.
- The Share Price, which is used to determine the number of Shares to be
received by Unitholders in the Mergers, is based upon a 20-day average of
the per share closing prices of the Common Stock on the NYSE, thereby
reducing the likelihood that the Share Price will be artificially inflated
or affected by general market volatility.
- If the Share Price is below $21.50 for a Partnership, the General Partner
of that Partnership may withdraw its recommendation in favor of the
applicable Merger or terminate the Acquisition Agreement as to that
Partnership unless the Company elects to pay the Additional Consideration
in accordance with the provisions of the Acquisition Agreement.
9
<PAGE>
- The General Partners compared certain potential benefits and detriments of
the Mergers with certain potential benefits and detriments of several
alternatives to the Mergers, including liquidation of the Partnerships,
continuation of the Partnerships, support of secondary markets for the
Units of each Partnership and reorganizations of the Partnerships as
separate corporations taxed as REITs. Based upon these comparisons, the
General Partners believe the Mergers are more attractive than the
alternatives.
- Certain Merger expenses are considered shared expenses and have been
allocated equally between the Company, on the one hand, and the
Partnerships, on the other hand, and certain Merger expenses are
considered individual expenses to be paid by the party incurring the
expenses. Merger expenses allocated to the Partnerships will be
apportioned to the Partnerships based upon their relative Net Asset
Values.
- If the Closing Net Asset Value of a Partnership is greater than the
Partnership's Net Asset Value, the difference will be distributed to the
pre-Merger Unitholders and General Partner of the Partnership in
accordance with the applicable Partnership Agreement.
- The General Partners have followed the original distribution provisions of
the Partnership Agreements in allocating the Merger Consideration among
the Unitholders and General Partner of each Partnership.
- Unitholders who are opposed to the Mergers who properly exercise
dissenters' rights under the WULPA will be entitled to receive a cash
payment equal to the fair value of their Units.
- The General Partners, the Company and their affiliates have significant
conflicts of interest in connection with the Mergers, and no unaffiliated
representatives were appointed to negotiate the terms of the Mergers on
behalf of any of the Partnerships. The General Partners believe, however,
that their determination regarding the fairness of the Mergers was based
upon the proper exercise of their fiduciary duties, unaffected by these
conflicts of interest.
THIRD PARTY OPINIONS
THE APPRAISALS. The Partnerships retained Stanger to appraise the fair
market value of each Partnership's real estate portfolio as of December 31,
1995. In preparing the Appraisals, Stanger collected from the Partnerships
information regarding the operating history of the properties, conducted site
inspections of all of the Partnerships' properties in March 1996 and interviewed
and relied on representations of certain representatives of the Partnerships and
the Company as property manager. Stanger's conclusions are based upon conditions
Stanger observed at the properties during its inspection and assumptions,
qualifications and limitations Stanger deemed reasonable at the time concerning,
among other things, legal title, the absence of physical defects or hazardous
materials, future occupancy, income and competition with respect to each
property. The Appraisals reflect Stanger's valuation of the real estate
portfolios of the Partnerships as of December 31, 1995, in the context of the
information available on that date as well as the operating information
available as of March 31, 1996. Events occurring subsequent to December 31, 1995
could affect the properties and assumptions used in preparing the Appraisals.
The Summary Portfolio Appraisal Report for the Partnerships is attached as
Appendix B to this Proxy Statement/Prospectus. See "Appraisals and Opinions of
Financial Advisors -- Portfolio Appraisals of the Partnerships' Properties."
STANGER FAIRNESS OPINION. The Partnerships have obtained from Stanger a
written opinion dated July 1, 1996 (the "Stanger Fairness Opinion") to the
effect that, as of the date thereof, and subject to the assumptions,
qualifications and limitations contained therein, the consideration to be
received by Unitholders in the Mergers is fair to the Unitholders of each
Partnership from a financial point of view. The full text of the Stanger
Fairness Opinion is attached as Appendix C to this Proxy Statement/Prospectus.
Stanger was not requested to, and therefore did not (i) select the method of
determining the consideration offered in the Mergers, (ii) make any
recommendation to the Unitholders of the Partnerships with respect to whether to
approve or reject the Mergers or (iii) express any opinion as to the business
decision to effect the Mergers or alternatives to the Mergers,
10
<PAGE>
the tax implications of the Mergers, the allocation of Merger expenses, the
fairness of the Merger Consideration to be received in the Mergers if the actual
Share Price is lower than the low end of the Share Price Range, the allocation
of expenses associated with the Mergers between and among the Partnerships and
the Company, or any other terms of the Mergers other than the Merger
Consideration to be received by Unitholders. The Stanger Fairness Opinion is
based upon business, economic, real estate and securities markets, and other
conditions as of July 1, 1996, and does not reflect any changes in those
conditions that may have occurred since that date. See "Appraisals and Opinions
of Financial Advisors -- Opinion of the Partnerships' Financial Advisor."
COMPARISON OF THE PARTNERSHIPS AND THE COMPANY
The summary information below highlights a number of significant differences
between the Partnerships and the Company. See "Comparisons of Partnerships and
Company."
FORM OF ORGANIZATION. The Partnerships and the Company are each vehicles
appropriate for holding real estate investments and afford passive investors,
such as Unitholders and stockholders, certain benefits, including limited
liability, a professionally managed portfolio and the avoidance of double-level
taxation on distributed income. The Partnerships are under the control of their
respective General Partners, while the Company is governed by its Board of
Directors. In addition, there are significant differences in the tax treatment
of the Partnerships as partnerships and the Company as a REIT. See "Comparisons
of Partnerships and Company -- Taxation of Taxable Investors" and "-- Taxation
of Tax-Exempt Investors."
LENGTH OF INVESTMENT. Unitholders in each of the Partnerships expect
liquidation of their investments when the assets of the Partnership are
liquidated. In contrast, the Company does not expect to dispose of its assets
within any prescribed periods and, in any event, plans to retain the net sale
proceeds for future investments. Stockholders are expected to achieve liquidity
for their investments by trading shares of the Common Stock in the public market
and not through the liquidation of the Company's assets.
NATURE OF INVESTMENT. Both the Units and Shares represent equity interests
entitling the holders thereof to participate in the growth of the Partnerships
and the Company, respectively. Distributions and dividends payable with respect
to the Units and Shares depend upon the performance of the Partnerships and the
Company, respectively.
PROPERTIES AND DIVERSIFICATION. The real estate portfolio of each
Partnership was limited to the assets acquired with its initial equity offering
and limited debt financing. The Company holds a real estate portfolio
substantially larger and more diversified than the portfolio of any of the
Partnerships and with the potential for future growth through acquisition and
development. An investment in the Company should not be viewed as an investment
in a specific pool of assets, but instead as an investment in an ongoing real
estate investment business, subject to the risks normally attendant to ongoing
real estate ownership and to the risks related to property development.
PERMITTED INVESTMENTS. The Company and the Partnerships have concentrated
their investments almost solely in self storage facilities. The Amended Bylaws
of the Company (the "Bylaws") authorize it to make other commercial real estate
investments (including outside of the United States) or mortgage loans, secured
by collateral of a type in which the Company is permitted to invest, if the
Board of Directors makes certain determinations required by the Bylaws.
Accordingly, the Company's investments may be more diversified than the
investments of the Partnerships. The investment diversification, if it occurs,
while potentially serving as a hedge against the risk of having all of the
Company's investments limited to a single asset group, would expose the Company
to the risk of owning and operating assets not directly related to its primary
business.
ADDITIONAL EQUITY. As the Partnerships are not authorized to issue
additional Units or other equity interests, the Units are not subject to
dilution, except as provided in the Partnership Agreements. In contrast, the
Company has substantial flexibility to raise equity capital to finance its
businesses and affairs through the sale of equity securities. The Company,
through the issuance of
11
<PAGE>
new equity securities, may substantially expand its capital base to make new
real estate investments. The issuance of additional equity securities by the
Company may dilute the interests of stockholders and the Company may issue
Preferred Stock with priorities or preferences over Common Stock with respect to
dividends and liquidation proceeds.
BORROWING POLICIES. In conducting its business, the Company may borrow
funds subject to the limitations on indebtedness contained in the Bylaws of 50%
of its total assets and 300% of its adjusted net worth. The Company may be more
highly leveraged than any of the Partnerships. Borrowing funds may allow the
Company to substantially expand its asset base, but will also increase the
Company's risks due to its leveraged investments.
RESTRICTIONS ON RELATED PARTY TRANSACTIONS. Except for transactions
specifically approved in the Partnership Agreements (and which were disclosed in
the disclosure documents prepared for the offering and sale of the Units), the
Partnerships are not authorized to enter into transactions with the General
Partners and their affiliates unless the transactions are approved in advance by
a vote of the Unitholders. The Bylaws of the Company contain similar
restrictions, but the Company may enter into a transaction with its directors,
officers and significant stockholders if the transaction is approved by a
majority of the directors not interested in the matter (including a majority of
independent directors) following a determination that the transaction is fair,
competitive and commercially reasonable. The Bylaws do not require the approval
of stockholders for entering into transactions with interested parties.
COMPENSATION, FEES AND DISTRIBUTIONS. Under the Partnership Agreements and
the Management Services Agreements, each of the Partnerships pays compensation
to its General Partner and fees to the Company. After the Mergers, no fees will
be paid to the Company and the Company will manage the Partnerships' properties
through its employees. Unlike Unitholders, stockholders realize certain
efficiencies arising from the Company's self-managed structure and the Company
can expand its property holdings without a proportionate increase in the cost of
managing the properties.
MANAGEMENT CONTROL AND RESPONSIBILITIES. Stockholders have greater control
over management of the Company than the Unitholders have over the Partnerships
because the members of the Company's Board of Directors are elected for
three-year terms, with a portion of the Board of Directors elected at each
annual meeting of stockholders. The General Partners do not need to seek re-
election, but instead serve unless removed by an affirmative vote of Unitholders
owning a majority of the Units entitled to vote, which is generally an
extraordinary event. As passive investors, Unitholders and stockholders must
rely upon management of the Partnerships and Company, respectively, for the
prudent administration of their investments.
MANAGEMENT LIABILITY AND INDEMNIFICATION. The General Partner of each of
the Partnerships has, under most circumstances, no liability to its Partnership
for acts or omissions it undertakes when performed in good faith, in a manner
reasonably believed to be within the scope of its authority and in the best
interests of the Partnership. Each General Partner also has, under specified
circumstances, a right to be reimbursed by its Partnership for liability, loss,
damage, costs and expenses it incurs by virtue of serving as General Partner.
Although the standards are expressed somewhat differently, there are similar
protections from liability available to directors and officers of the Company
when acting on behalf of the Company and rights of directors and officers to
seek indemnification from the Company. In the Mergers, the Company will be
assuming all of the existing and contingent liabilities of the Partnerships,
including their obligations to indemnify the General Partners.
VOTING RIGHTS. Stockholders have different voting rights, including the
right to elect directors on a periodic basis, than the voting rights afforded to
Unitholders.
LIQUIDITY. The Units constitute illiquid investments and Unitholders may
find it difficult to dispose of their Units, if they wish to do so, or may be
obligated to sell the Units at substantial discounts to facilitate the sales. In
contrast, the Common Stock is listed on the NYSE.
12
<PAGE>
TAXATION OF TAXABLE INVESTORS. The Partnerships allow full pass-through of
tax benefits resulting in taxable income or loss being taxed only at the partner
level. Unitholders are taxed on their allocable share of Partnership income
regardless of the amount of cash distributions. The Company, as a REIT, is taxed
on income in excess of dividends paid to stockholders. Company losses do not
pass through to stockholders. Stockholders are taxed on cash dividends received
out of Company earnings and profits. Distributions in excess of earnings and
profits are taxable to stockholders to the extent they exceed the stockholders'
basis in his or her Common Stock.
TAXATION OF TAX-EXEMPT INVESTORS. A tax-exempt Unitholder is treated as
carrying on the trade or business activities of the Partnership in which it
invests. Income from real estate rental activities will not be characterized as
unrelated business taxable income ("UBTI") as long as only customary services
are rendered in connection with the activities. Accordingly, to avoid
characterization of the Unitholder's allocable share of Partnership income as
UBTI, the income received by the Partnership must be income from a rental
activity in which only customary services are rendered. Dividends paid with
respect to, or gain recognized on a disposition of, the Shares are not UBTI.
CONFLICTS OF INTEREST
A number of conflicts of interest are inherent in the relationships among
the Partnerships, the General Partners and the Company and their affiliates. See
"Conflicts of Interest." Certain of these conflicts of interest include, among
others:
- Since the general and limited partners are the same for each of the
General Partners, they are not in a position to view the proposed Mergers
solely from the perspective of a single Partnership.
- Because the general and limited partners of the General Partner of each of
the Partnerships have a financial interest in consummating the Mergers,
there is an inherent conflict of interest in the General Partner
structuring the terms and conditions of the Mergers and the terms of the
Mergers might have been different if structured by persons having no
financial interest in whether or not the Mergers were consummated.
- Charles K. Barbo, the Chairman, President and Chief Executive Officer and
a stockholder of the Company, is an individual general partner of each of
the General Partners and the sole shareholder and director of Shurgard
General Partner, Inc. ("SGPI"), the corporate general partner of each of
the General Partners. Arthur W. Buerk, a stockholder of the Company, is an
individual general partner of each of the General Partners. In addition,
certain executive officers of the Company also serve as executive officers
of SGPI.
- Pursuant to the terms of an agreement executed in connection with the
Management Company Merger, Messrs. Barbo and Buerk and the executive
officers of the Company, as former stockholders of the Management Company,
will receive Shares upon consummation of the Mergers.
- The Partnerships' properties are managed by the Company pursuant to
Management Services Agreements under which the Company receives certain
fees for its management services.
AMENDMENTS TO PARTNERSHIP AGREEMENTS
Approval of the Acquisition Agreement by IDS2 and IDS3 Unitholders will also
constitute approval of those amendments to their respective Partnership
Agreements necessary to effect the transactions contemplated by the Acquisition
Agreement, including the Mergers. See "The Special Meetings -- The IDS2 Special
Meeting" and "-- The IDS3 Special Meeting," "The Acquisition Agreement --
Amendments to the Partnership Agreements" and "Background and Reasons for the
Mergers."
13
<PAGE>
DISSENTERS' RIGHTS OF UNITHOLDERS
A Unitholder will be entitled to dissenters' rights in connection with the
Merger of his or her Partnership if the Unitholder properly exercises
dissenters' rights under Section 25.10.900 et seq. of the WULPA, the full text
of which is attached as Appendix E to this Proxy Statement/Prospectus. See
"Dissenters' Rights of Unitholders."
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The Merger involves numerous federal income tax consequences to Unitholders.
See "Material Federal Income Tax Considerations." These material federal income
tax consequences include:
- Unitholders who are subject to income tax will realize taxable gain or
loss in the Mergers. See "Estimated Taxable Gain or Loss." No special
distribution of cash will be made to Unitholders for the payment of any
tax. Any gain or loss will be recognized in the year the Merger is
consummated.
- For federal income tax purposes, gain resulting from the Merger is treated
as being recognized at the Partnership level. The amount of gain will be
allocated among Unitholders based on the allocation provisions of the
applicable Partnership Agreement.
- The gain or loss recognized by a Unitholder from the Merger generally will
be treated as arising from the sale of assets used in a trade or business
and will be characterized as capital gain or loss except to the extent a
portion of the amount realized by the Unitholder is attributable to
depreciation recapture in Partnership property.
- Unitholders who are not subject to income tax will not recognize a
material amount of UBTI in the Merger.
ACCOUNTING TREATMENT
Each of the Mergers will be accounted for as a purchase under generally
accepted accounting principles ("GAAP").
14
<PAGE>
OWNERSHIP STRUCTURE OF THE PARTNERSHIPS
The following diagram shows the ownership structure of the Partnerships and
the General Partners. The structure is the same for each Partnership. As
reflected in the diagram below, (i) Charles K. Barbo, the Chairman of the Board,
President and Chief Executive Officer and a stockholder of the Company, is an
individual general partner of each of the General Partners and the sole
shareholder and director of SGPI, the corporate general partner of each of the
General Partners, (ii) Arthur W. Buerk, a stockholder of the Company, is an
individual general partner of each of the General Partners and (iii) the Company
is a limited partner of each of the General Partners.
Under each of the Partnership Agreements, the General Partner initially
receives 5% of all Partnership distributions until the Unitholders have received
distributions equal to their capital contributions plus a preferred return.
Thereafter, the General Partner receives 20% of all further cash distributions
and the sharing arrangement between the partners of the General Partner is
revised. The diagram below reflects the initial sharing percentages between the
General Partner and Unitholders and among the partners of each General Partner.
The General Partners' percentage interest in the Merger Consideration will
be based upon these distribution principles. Based upon the Net Asset Values of
IDS1 and IDS2, the Unitholders in those Partnerships will not receive through
the Mergers the amount of their undistributed preferred returns. Accordingly,
the IDS1 General Partner and the IDS2 General Partner will only be entitled to
5% of the Merger Consideration paid with respect to those Partnerships. Based
upon the Net Asset Value for IDS3, the IDS3 Unitholders are expected to receive
Merger Consideration in excess of their undistributed preferred return,
entitling the IDS3 General Partner to 20% of some part, but not all, of the
Merger Consideration, resulting in the IDS3 General Partner receiving
approximately 7.5% of the Merger Consideration with respect to IDS3. See
"Conflicts of Interest--General Partner's Interests."
[LOGO]
- ------------------------
(1) As of the date of this Proxy Statement/Prospectus, the Company beneficially
owns IDS1 Units (approximately %), IDS2 Units (approximately
%) and IDS3 Units (approximately %).
15
<PAGE>
SELECTED FINANCIAL INFORMATION OF THE COMPANY
The following selected financial information is derived from the historical
consolidated financial statements of the Company. Selected unaudited financial
data for the three months ended March 31, 1995 and 1996 include all adjustments
(consisting only of normal recurring accruals) that the Company considers
necessary for a fair presentation of consolidated operating results for those
interim periods. Results for the interim periods are not necessarily indicative
of results for the full year. This information should be read in conjunction
with the Company's consolidated financial statements and other financial
information incorporated by reference in this Proxy Statement/Prospectus.
SHURGARD STORAGE CENTERS, INC.
<TABLE>
<CAPTION>
PREDECESSOR (1) COMPANY (2)
--------------------------------------------- --------------------------------------------------
THREE MONTHS ENDED MARCH
YEAR ENDED DEC. 31, JAN. 1 TO YEAR ENDED DEC. 31, 31,
---------------------------------- MARCH 1, ------------------------ ------------------------
1991 1992 1993 1994 1994 1995 1995 1996
--------- --------- ------------ --------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
OPERATING DATA:
Total revenue............... $ 60,767 $ 67,073 $ 72,346 $ 12,368 $ 66,921 $ 96,771 $ 21,368 $ 24,819
Net income.................. 20,411 22,055 18,284 34,286 17,821 29,572 5,354 7,313
Net income per common share
(3)........................ 38.08 41.15 34.11 63.97 1.05 1.43 .31 .32
Dividends declared per
common share (3)........... 60.45 56.71 59.57 732.05 1.02(4) 2.38(5) .90(6) 0(7)
OTHER DATA:
Funds from operations (8)... $ 32,991 $ 35,968 $ 39,657 $ 5,980 $ 29,759 $ 45,788 $ 8,868 $ 12,196
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, AS OF DECEMBER 31, MARCH 31,
------------------------------- MARCH 1, ------------------------ ------------------------
1991 1992 1993 1994 1994 1995 1995 1996
--------- --------- --------- --------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets................... $ 416,085 $ 400,182 $ 393,982 $ 391,685 $ 494,590 $ 610,394 $ 536,467 $ 617,928
Total borrowings............... 24,430 24,365 26,016 -- 167,137 142,840 181,392 157,260
</TABLE>
- ------------------------------
(1) The Predecessor information reflects the combination of the 17 partnerships
included in the Consolidation.
(2) The Company was inactive from January 1 through March 1, 1994.
(3) Predecessor "per share" information is based on earnings and distributions
per original $1,000 investment. Distributions for the period from January 1,
1994 to March 1, 1994 include the liquidating distributions made in
connection with the Consolidation.
(4) Does not include the dividend of $0.44 per share declared in January 1995
based on financial results for the quarter ended December 31, 1994.
(5) Includes the dividend of $0.44 per share declared in January 1995 based on
financial results for the quarter ended December 31, 1994, the special
dividend of $0.10 per share declared in November 1995 and the dividend of
$0.46 per share declared in December 1995 based on financial results for the
quarter ended December 31, 1995.
(6) Includes the dividend of $0.44 per share declared in January 1995 based on
financial results for the quarter ended December 31, 1994.
(7) The dividend for the quarter ended March 31, 1996 of $.47 per share was
declared in May 1996.
(8) The Company defines funds from operations ("FFO") as net income before
extraordinary items (determined in accordance with GAAP) plus depreciation
and amortization related to real estate activities, plus or minus certain
nonrecurring revenue and expenses. FFO is used by many financial analysts in
evaluating REITs. 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.
16
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL DATA
The following pro forma consolidated financial data as of March 31, 1996 and
for the three-month period then ended and for the year ended December 31, 1995
set forth the effect of the Mergers on the Company's pro forma pre-Merger
financial data as of and for the same dates as if the Offers were completed and
the Mergers had occurred on January 1, 1995.
The Company's pre-Merger pro forma consolidated financial data are based on
the Company's historical financial statements adjusted to reflect the
consummation of the following transactions as if such had occurred on January 1,
1995: (i) the Management Company Merger in March 1995, (ii) the acquisition of
Shurgard Evergreen Limited Partnership in May 1995, (iii) the sale of
approximately 4.9 million shares of Common Stock of the Company in June and July
1995, (iv) the acquisition of four storage centers completed in 1995 and (v) the
purchase of 29,640, 23,022 and 23,843 of the outstanding Units of IDS1, IDS2 and
IDS3, respectively, pursuant to the Offers. The 1995 pre-Merger pro forma
consolidated financial data assume that any additional net income generated by
the preceding assumptions was distributed to stockholders in 1995.
These pro forma consolidated financial data have been formatted to show the
pro forma adjustments to the Company's pre-Merger pro forma consolidated
financial data related to each of the Partnerships in three separate columns so
that the Unitholder can evaluate the results of the merger of any one, two or
three of the Partnerships with the Company.
The pro forma consolidated financial data are not necessarily indicative of
what the Company's actual financial position or results of operations would have
been as of the date or for the periods indicated, nor do they purport to
represent the Company's financial position or results of operations as of or for
any future period. The pro forma consolidated financial data should be read in
conjunction with all financial statements included elsewhere or incorporated by
reference in this Proxy Statement/Prospectus. See "Pro Forma Consolidated
Financial Statements."
PRO FORMA CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
COMPANY IDS1 IDS2 IDS3 COMPANY
PRE-MERGER PRO FORMA PRO FORMA PRO FORMA POST-MERGER
PRO FORMA ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS PRO FORMA
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
THREE MONTHS ENDED MARCH 31, 1996
Revenue............................................... $ 25,106 $ 1,327 $ 952 $ 1,587 $ 28,972
Net income............................................ 7,118 440 308 401 8,267
Net income per share (1).............................. 0.31 -- -- -- 0.31
Funds from operations (2)............................. 12,180 724 479 686 14,070
Weighted average shares outstanding (1)............... 23,196,858 1,276,961 856,799 1,275,199 26,605,817
YEAR ENDED DECEMBER 31, 1995
Revenue............................................... $ 100,669 $ 5,283 $ 3,718 $ 6,377 $ 116,047
Net income............................................ 31,555 1,939 1,259 1,737 36,490
Net income per share (1).............................. 1.36 -- -- -- 1.37
Funds from operations (2)............................. 49,175 3,058 1,947 2,850 57,031
Weighted average shares outstanding (1)............... 23,193,921 1,276,961 856,799 1,275,199 26,602,880
AS OF MARCH 31, 1996
Total assets.......................................... $640,282 $33,754 $25,978 $44,306 $744,320
Notes payable......................................... 154,601 -- 2,850 10,384 167,835
Equity................................................ 441,827 32,454 21,757 31,143 527,181
</TABLE>
- ------------------------------
(1) Calculation is based on an assumption of a $25.00 Share Price.
(2) The Company defines FFO as net income before extraordinary items (determined
in accordance with GAAP) plus depreciation and amortization related to real
estate activities, plus or minus certain nonrecurring revenue and expenses.
FFO is used by many financial analysts in evaluating REITs. 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.
17
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth certain comparative per share data:
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED AS OF AND FOR THE PERIOD ENDED
DECEMBER 31, 1995 MARCH 31, 1996
-------------------------------------- --------------------------------------
NET INCOME DIVIDENDS BOOK VALUE NET INCOME DIVIDENDS BOOK VALUE
----------- ------------ ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
The Company:
Pre-Merger pro forma (1).......... $ 1.36 $ 2.38(2) $ 18.73 $ .32 $ --(3) $ 19.05
Post-Merger pro forma combined
(4).............................. 1.37 2.38(2) 19.48 .31 --(3) 19.81
IDS1:
Historical (5).................... 16.04 19.22 183.44 4.06 4.84 182.66
Pro forma equivalent (6).......... 1.86 2.23 21.29 .47 .56 21.20
IDS2:
Historical (5).................... 12.06 16.25 192.34 2.85 4.06 191.13
Pro forma equivalent (6).......... 1.62 2.18 25.84 .38 .55 25.68
IDS3:
Historical (5).................... 15.02 18.75 205.67 4.24 4.69 205.22
Pro forma equivalent (6).......... 1.40 1.75 19.23 .40 .44 19.19
</TABLE>
- ------------------------
(1) Pre-Merger pro forma per share data are based on the Company's historical
financial statements adjusted to reflect the consummation of the following
transactions as if such had occurred on January 1, 1995: (i) the Management
Company Merger in March 1995, (ii) the acquisition of Shurgard Evergreen
Limited Partnership in May 1995, (iii) the sale of approximately 4.9 million
shares of Common Stock of the Company in June and July 1995, (iv) the
acquisition of four storage centers completed in 1995 and (v) the purchase
of 29,640, 23,022 and 23,843 of the outstanding Units of IDS1, IDS2 and
IDS3, respectively, pursuant to the Offers. The 1995 pre-Merger pro forma
data assume that any additional net income generated by the preceding
assumptions was distributed to stockholders in 1995. Per share amounts were
calculated by dividing the pre-Merger pro forma data by the number of
outstanding shares of Class A and Class B Common Stock of the Company
("Total Common Stock") as of December 31, 1995 and March 31, 1996
(23,193,921 and 23,196,858, respectively).
(2) Amount is based on historical dividends declared by the Company in the
periods indicated. Although it is the Company's intention to continue to pay
quarterly dividends, the payment of such in the future is subject to the
discretion of the Company's Board of Directors, which may consider such
factors as the Company's net income, financial condition, requirements for
qualification as a REIT and other matters it deems relevant.
(3) The dividend for the quarter ended March 31, 1996 was declared in May 1996.
(4) The post-Merger pro forma combined per share data give effect to the Mergers
by combining the Company's and the Partnerships' per share data using the
purchase method of accounting. Post-Merger outstanding shares (26,605,817
Shares) include the actual outstanding Total Common Stock at March 31, 1996,
plus the shares expected to be issued to Unitholders in connection with the
Mergers.
(5) Historical per share data is based on historical financial information
divided by 148,202, 115,110 and 119,215 Units of IDS1, IDS2 and IDS3,
respectively.
(6) Amounts represent historical financial information divided by the 1,276,961,
856,799 and 1,275,199 Shares to be issued in connection with the IDS1
Merger, the IDS2 Merger and the IDS3 Merger, respectively, assuming a Share
Price of $25.00.
18
<PAGE>
DISTRIBUTIONS AND MARKET PRICES OF COMMON STOCK
On May 5, 1995, the Company's Common Stock began trading on the NYSE under
the symbol "SHU." Before May 5, 1995, the Common Stock was quoted on the Nasdaq
National Market ("Nasdaq") under the symbol "SHUR." The table below sets forth
the high and low sale prices per share of Common Stock, as reported in published
financial sources, and distributions declared for the fiscal periods indicated.
<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 20.50 .44
Fourth Quarter.................................................. 23.00 17.75 .44
1995
First Quarter................................................... 24.00 19.50 .46
Second Quarter (3).............................................. 24.50 22.63 .46
Third Quarter................................................... 26.00 22.25 .46
Fourth Quarter.................................................. 27.00 24.75 .56(4)
1996
First Quarter................................................... 27.50 25.88 .47
Second Quarter.................................................. 26.13 24.13
Third Quarter (through July 8, 1996)............................ 25.38 24.88
</TABLE>
- ------------------------
(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 $24.50 and $22.63, respectively,
during the period from May 5, 1995, the date of commencement of trading of
the Common Stock on the NYSE, through June 30, 1995.
(4) Includes the special dividend of $.10 declared in November, 1995.
The last reported sale price per share of Common Stock on July 1, 1996, the
last trading day preceding public announcement of the Mergers, was $25.38. On
July 8, 1996, the last reported sale price per share of Common Stock was $25.00.
No public market exists for the Units. See "Distributions and Market Prices
of Units."
UNITHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR COMMON STOCK.
19
<PAGE>
RISK FACTORS
In evaluating the Mergers and the Company, Unitholders should carefully
consider the following factors, in addition to other matters set forth elsewhere
or incorporated in this Proxy Statement/ Prospectus by reference.
RISKS RELATING TO THE MERGERS
CONFLICTS OF INTEREST. The Company, the Partnerships, the General Partners
and their affiliates have significant conflicts of interest in connection with
the Mergers, including (i) Charles K. Barbo, the Chairman of the Board,
President and Chief Executive Officer and a stockholder of the Company, is an
individual general partner of each of the General Partners and the sole
shareholder and director of SGPI, the corporate general partner of each of the
General Partners, (ii) Arthur W. Buerk, a stockholder of the Company, is an
individual general partner of each of the General Partners, (iii) certain
executive officers of the Company are executive officers of the corporate
general partner of each of the General Partners, (iv) pursuant to the terms of
the Partnership Agreements, the General Partners will receive between 5% and
7.5% of the Merger Consideration in exchange for their GP Interests, (v) the
Company and IPSC are limited partners of each of the General Partners and will
receive Shares in the Mergers, (vi) pursuant to the Contingent Shares Agreement,
Messrs. Barbo and Buerk and certain executive officers of the Company, as former
stockholders of the Management Company, will receive Shares upon consummation of
the Mergers and (vii) the Partnerships' properties are managed by the Company
pursuant to the Management Services Agreements under which the Company receives
certain fees for its management services. See "Conflicts of Interest."
LACK OF INDEPENDENT REPRESENTATION. The terms of the Mergers have been
established through negotiations between the Company and the General Partners,
which have significant conflicts of interest as described in "-- Conflicts of
Interest." Unitholders were not separately represented in structuring and
negotiating the terms of the Mergers by an unaffiliated representative. Had
separate representation been arranged for the Unitholders, the terms of the
Mergers might have been different.
CHANGE IN NATURE OF INVESTMENT. Unitholders who receive Shares in the
Mergers will have changed the nature of their investment. While each of the
Partnerships was formed as a finite-life investment, with the Unitholders
receiving regular cash distributions out of the Partnership's net operating
income and special distributions upon liquidation of the Partnership's assets,
the Company intends to operate for an indefinite period of time and has no
specific plans for the sale of its assets. Stockholders receive distributions
out of the Company's cash flow from operations, but it is not expected that any
special distributions of liquidation proceeds will be made. Instead of having
their investments liquidated through the liquidation of the Company's assets,
stockholders may liquidate their investment in the Company only through the sale
of the Shares and the amount realized through the sale of the Shares may not be
equal to the amount that would have been realized by the stockholders through
the sale of the Company's assets. Stockholders are subject to the market risks
of all public companies, particularly in that the value of their equity
securities will fluctuate from time to time depending upon general market
conditions and the Company's future performance.
MERGERS AS TAXABLE EVENTS; NO SPECIAL CASH DISTRIBUTION FOR THE PAYMENT OF
ANY TAX. For taxable Unitholders, the Mergers will result in the recognition of
either taxable income or loss, and no special cash distribution will be made for
the payment of any tax. See "Material Federal Income Tax Considerations -- Tax
Consequences of the Mergers." The following summarizes the tax consequences for
Unitholders:
MERGERS AS TAXABLE EVENTS FOR NON-TAX-EXEMPT UNITHOLDERS. The Mergers
will result in the recognition of gain or loss to each Partnership based on
the difference between (i) the sum of the fair market value of Shares and
any cash paid by the Company as Additional Consideration and in lieu of a
fractional share and the amount of liabilities of the Partnership assumed or
pertaining to properties acquired by the Company and (ii) the Partnership's
adjusted tax basis in its assets
20
<PAGE>
acquired by the Company in the Mergers. Each Unitholder (except, as
discussed below, certain tax-exempt Unitholders) in a Partnership generally
will recognize his or her allocable share of gain or loss in accordance with
the terms of the applicable Partnership Agreement. Furthermore, that
Unitholder will recognize gain on the receipt of the Shares or cash to the
extent of the excess of the fair market value of the Shares and amount of
cash received by the Unitholder in the Merger over the Unitholder's adjusted
tax basis in his or her Units (as adjusted after taking into account the
Unitholder's allocable share of gain or loss recognized by the applicable
Partnership in the Mergers). Any gain recognized on the distribution of the
Shares or cash will be treated substantially as capital gain. Gain or loss
recognized by the Unitholders will be treated as passive income or loss. For
a discussion of potential withholding requirements, see "Material Federal
Income Tax Considerations -- Taxation of the Company as a REIT -- Backup
Withholding" and "-- State and Local Taxes and Withholding."
CONSEQUENCES OF MERGERS TO TAX-EXEMPT UNITHOLDERS. Based on the General
Partners' representations that the Partnerships do not hold their properties
for sale to customers in the ordinary course of a trade or business, the
Mergers will not result in recognition of a material amount of UBTI by
certain tax-exempt Unitholders that do not hold their Units as a dealer
under Section 512(b)(5)(B) of the Internal Revenue Code of 1986, as amended
(the "Code"), or as "debt-financed property" within the meaning of Code
Section 514. Certain tax-exempt organizations, however, do not qualify for
that treatment. See "Material Federal Income Tax Considerations -- Tax
Consequences of the Merger."
CHANGES IN TAX CHARACTERIZATION OF DISTRIBUTIONS. Stockholders are
taxed on cash dividends received out of Company earnings and profits.
Distributions in excess of earnings and profits are taxable to stockholders
to the extent they exceed the stockholder's basis in his or her Shares.
Company distributions to taxable Stockholders will be treated as "portfolio
income," eliminating the potential tax benefit of the Partnerships where
passive income could be passed through to Unitholders and used, to the
extent permitted under applicable tax laws, to offset passive losses from
other sources. Such dividends will not be treated as UBTI to certain
tax-exempt stockholders. See "Material Federal Income Tax Considerations --
Taxation of the Company as a REIT -- Taxation of Taxable Stockholders" and
"-- Taxation of Tax-Exempt Stockholders."
POTENTIAL DIFFERENCES BETWEEN MERGER CONSIDERATION AND REALIZABLE
VALUE. Unitholders are subject to the risk that the Net Asset Values of the
Partnerships, which are based primarily upon the independent appraised value of
the Partnerships' properties, do not reflect the realizable value of the
Partnerships' assets in an actual transaction. Were this to be the case as to a
Partnership, the Merger Consideration received by a Unitholder of that
Partnership may be understated. Stanger was engaged to evaluate each
Partnership's portfolio of real estate on a limited scope basis utilizing the
income approach and the sales comparison approach to valuation. The cost
approach, another approach typically used by appraisers in valuing real
property, was not utilized by Stanger. To the extent that the cost approach
would have produced different values for the portfolios, the Net Asset Values
may have varied. Stanger considered the cost approach to be less reliable than
the income approach or the sales comparison approach given the primary criteria
used by buyers of the type of property appraised in the Appraisals. The
Appraisals are as of December 31, 1995 and have not been updated to take into
account any developments since that date, such as changes in the portfolios'
operating results or changes in the yield expectations of prospective purchasers
of such real estate assets, possibly affecting real estate value.
UNCERTAINTY REGARDING MARKET PRICE OF COMMON STOCK. The number of Shares
that will be received by the Unitholders of each Partnership is based in part on
the average market price of the Common Stock for the 20 consecutive trading days
ending on the fifth trading day prior to the Vote Date; provided, however, that
the Share Price Range fixes the minimum Share Price at $22.25 regardless of the
actual market price of the Shares. See "Fairness of the Mergers -- Conclusions
of the General Partners" and "-- Determination of Merger Consideration."
Accordingly, if the market price of the Common Stock (i) is less than $22.25 per
share on the Share Price Date or (ii) decreases after
21
<PAGE>
determination of the number of Shares to be issued in the Mergers and prior to
issuance of the Shares, the market value of the Shares received by Unitholders
in the Mergers may be less than the Net Asset Values of the Partnerships. In
addition, the market value of the Shares may decrease following consummation of
the Mergers if there is increased selling activity or as a result of general
market and other factors.
POTENTIAL CHANGE IN LEVEL OF DISTRIBUTIONS. The Mergers are expected to
affect the level of distributions made to Unitholders who become stockholders of
the Company. Depending upon the Share Price used to determine the number of
Shares to be issued in the Mergers, the level of distributions after the Mergers
to Unitholders who have become Company stockholders may be lower than the level
of distributions received with respect to their Units prior to the Mergers. See
"Fairness of the Mergers -- Distribution Comparison."
POTENTIAL LOSS OF FUTURE APPRECIATION. The properties of the Partnerships
may appreciate in value and might be able to be liquidated at a later date for a
price which would yield Unitholders more consideration than they would receive
in the Mergers.
RISK OF SUBSTANTIAL INDEBTEDNESS. Each of the Partnerships has adhered to a
policy of limiting its borrowings, reducing the risk of leveraged investments
and allowing a substantial portion of the Partnership's net operating income to
be distributed to Unitholders. In contrast, the Company is authorized to borrow
up to 50% of its total assets as defined in the Company's Bylaws. If the Company
incurs substantial debt, it will be subject to the risks that (i) the Company
could lose its interests in properties given as collateral for secured borrowing
if the required principal and interest payments are not made when due and (ii)
the Company's obligation to make principal payments, which are not treated as
deductions for federal income tax purposes, does not relieve it from the
obligation of distributing at least 95% of the Company's REIT taxable income to
stockholders.
LOSS OF RELATIVE VOTING POWER. Both Unitholders and stockholders have one
vote per Unit and share of Common Stock, respectively. If the Mergers are
completed, Unitholders will have an investment in an entity larger than each of
the Partnerships and will thus lose relative voting power.
GENERAL REAL ESTATE INVESTMENT 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 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 stockholders would 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 Board of Directors to make such investments permits the
22
<PAGE>
Company flexibility in selecting appropriate investments and in adjusting to
changes in the marketplace, without requiring amendments to the Bylaws or
specific stockholder 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 FFO and its ability to make expected
distributions to stockholders.
INDIRECT INVESTMENTS. The Company has invested and may continue to invest
in real estate by acquiring equity interests in partnerships, joint ventures,
trusts or other legal entities that in turn have invested in real estate
constituting appropriate investments for the Company. For example, in 1995 and
1996, the Company invested an aggregate of $7.5 million (as of June 30, 1996) in
SSC Benelux & Co. SCS, a Belgian entity that owns and operates self storage
properties in the Benelux region of Europe. In addition, as of the date of this
Proxy Statement/Prospectus the Company beneficially owns IDS1 Units,
IDS2 Units and IDS3 Units. If one or more of the Partnerships
does not elect to participate in the Mergers, the Company may elect to hold the
Units for an indefinite period of time. Under the Bylaws, a number of conditions
must be satisfied before the Company is permitted to make these indirect
investments, including, among others, the requirement that a joint investment
not jeopardize the Company's eligibility to be taxed as a REIT or result in the
Company becoming an investment company under the Investment Company Act of 1940,
as amended. These indirect investments expose the Company to certain risks not
present had the Company invested directly in the real estate, including, among
others, currency risks, 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
stockholders.
LIMITED ASSET DIVERSIFICATION. The Company limits its investments primarily
to self storage properties. The success of an investment in the Company will
depend in large measure on the profitability of these 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.
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
self storage properties, which could adversely affect the Company's cash flow
from operations and its ability to meet debt service obligations and make
expected distributions to stockholders. 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. Entry into the self storage business through acquisition of existing
properties is relatively easy for persons or institutions with the required
initial capital. Some of the Company's competitors may have more resources than
the Company. 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 competition. Due
to recent increases in development of self storage properties in certain
markets, 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.
23
<PAGE>
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 achieve with
respect to stabilized properties. The Company anticipates that future increases
in revenue from stabilized properties in its portfolio 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.
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 certain 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 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 a 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.
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 cash
otherwise available for distribution to stockholders.
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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 REMAIN QUALIFIED AS A REIT. The Company has elected to be taxed
as a REIT under the Code, commencing with its taxable year ended December 31,
1994. So long as the Company meets the requirements under the Code for
qualification as a REIT each year, the Company will be entitled to a deduction
when calculating its taxable income for dividends paid to its stockholders. For
the Company to qualify as a REIT, however, certain detailed technical
requirements must be met (including certain income, asset and stock ownership
tests) under Code provisions for which, in many cases, there are only limited
judicial and administrative interpretations. In addition, the determination of
various factual matters and circumstances not entirely within the Company's
control may affect its ability to qualify as a REIT, and no assurance can be
given that new legislation, regulations, administrative interpretations or court
decisions will not significantly change the tax laws with respect to
qualification as a REIT or the federal income tax consequences of such
qualification. Although the Company believes that it is organized so as to
qualify as a REIT under the Code and that it has operated and will continue to
operate in such a manner to so 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 stockholders in calculating its taxable
income. Consequently, the net assets of the Company and distributions to
stockholders 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
four taxable years following the year during which the qualification was lost.
See "Material Federal Income Tax Considerations -- Taxation of the Company as a
REIT."
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 stockholders 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 "Material Federal Income Tax Considerations --
Taxation of the Company as a REIT -- Annual Distribution Requirements."
CHANGES IN TAX LAWS WHICH COULD AFFECT REITS. Income tax treatment of REITs
may be modified, prospectively or retroactively, by legislative, judicial or
administrative action at any time. No assurance can be given that legislation,
new regulations, administrative interpretations or court decisions will not
significantly change the tax laws with respect to the qualification as a REIT or
the
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federal income tax consequences of such qualification. While any such
legislation may contain transitional rules that would reduce their impact on the
Company, it is impossible to predict whether or in what form such legislation
may be enacted in the future. See "Material Federal Income Tax Considerations."
OTHER GENERAL RISKS
RISKS ASSOCIATED WITH MANAGEMENT OF PROPERTIES. The Company manages 86 self
storage properties, of which 47 are owned by affiliates (including the
Partnerships) and 39 are owned by nonaffiliates, under contracts that generally
may be terminated with or without cause on 60 days' notice. If these contracts
were terminated, the Company would lose management fee income and other revenue
and, in addition, would experience decreased economies of scale in advertising,
management and other overhead.
EFFECT OF MARKET INTEREST RATES ON PRICE OF COMMON STOCK. One of the
factors that influence 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.
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THE SPECIAL MEETINGS
GENERAL
This Proxy Statement/Prospectus is first being mailed on or about ,
1996 to the Unitholders of each of the Partnerships in connection with the
solicitation of proxies by each of the General Partners for use at the
respective Special Meetings to be held on , 1996, at 10:00 a.m., local
time, at 1201 Third Avenue, Suite 2200, Seattle, Washington, and at any
adjournment or postponement thereof.
THE IDS1 SPECIAL MEETING
At the IDS1 Special Meeting, including any adjournment or postponement
thereof, IDS1 Unitholders will be asked to consider and vote on a proposal to
approve the Acquisition Agreement and the transactions contemplated thereby,
including the IDS1 Merger. THE IDS1 GENERAL PARTNER HAS DETERMINED THAT THE IDS1
MERGER IS FAIR TO THE IDS1 UNITHOLDERS. ACCORDINGLY, THE IDS1 GENERAL PARTNER
RECOMMENDS THAT IDS1 UNITHOLDERS VOTE FOR APPROVAL OF THE ACQUISITION AGREEMENT
AND THE TRANSACTIONS CONTEMPLATED THEREBY.
The IDS1 Partnership Agreement prohibits IDS1 from entering into any
transaction with the IDS1 General Partner or its "affiliates," as such term is
defined therein (including the Company), not specifically authorized in the IDS1
Partnership Agreement, unless the terms and conditions of the transaction are
disclosed to IDS1 Unitholders in advance and approved by the affirmative vote of
IDS1 Unitholders holding of record more than 75% of the outstanding IDS1 Units.
Accordingly, approval of the Acquisition Agreement and the transactions
contemplated thereby requires the affirmative vote of IDS1 Unitholders holding
of record more than 75% of the outstanding IDS1 Units.
Unitholders as of the date of this Proxy Statement/Prospectus whose IDS1
Units have not been purchased by the Company in the IDS1 Offer are entitled to
notice of the IDS1 Special Meeting. If IDS1 Units are transferred after the date
of this Proxy Statement/Prospectus but prior to the date of the IDS1 Special
Meeting or any adjournment or postponement thereof, and the holders of the
transferred IDS1 Units are admitted as substituted IDS1 Unitholders, the Notice
of Special Meeting, this Proxy Statement/Prospectus, the accompanying form of
proxy and related information will be sent to the substituted IDS1 Unitholders
along with notice of their substitution and admission. This substitution and
admission will terminate the right of the prior IDS1 Unitholders to vote on
approval of the Acquisition Agreement and the transactions contemplated thereby,
and any votes as to the transferred IDS1 Units must be made by the substituted
IDS1 Unitholders. The IDS1 General Partner does not anticipate the substitution
of any new IDS1 Unitholders other than the Company with respect to those IDS1
Units it acquired in the IDS1 Offer and any person who obtains IDS1 Units as a
result of intrafamily or testamentary transfers. IDS1 Unitholders are entitled
to one vote at the IDS1 Special Meeting for each IDS1 Unit held of record by
them as of the date of the IDS1 Special Meeting or any adjournment or
postponement thereof. As of the date of this Proxy Statement/ Prospectus,
approximately 148,202 IDS1 Units were outstanding and held of record by
IDS1 Unitholders.
If a proxy card is returned, properly signed and dated, the IDS1 Units
represented thereby will be voted in the manner specified on the proxy card. If
an IDS1 Unitholder returns a signed proxy card but does not indicate how his or
her IDS1 Units are to be voted, the IDS1 Units will be voted FOR approval of the
Acquisition Agreement and the transactions contemplated thereby. Any proxy given
pursuant to this solicitation may be revoked by the person giving it at any time
before it is voted. Proxies may be revoked by (i) duly executing a later dated
proxy related to the same IDS1 Units and delivering it to Gemysis Corporation
prior to the taking of the vote at the IDS1 Special Meeting, (ii) filing with
Gemysis Corporation, at or before the taking of the vote at the IDS1 Special
Meeting, a written notice of revocation bearing a later date than the proxy, or
(iii) attending the IDS1 Special Meeting and voting in person (although
attendance at the IDS1 Special Meeting will not in and of itself constitute a
revocation of a proxy). Any subsequent proxy or written notice of revocation
should be mailed to
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Gemysis Corporation at P.O. Box 3897, Englewood, Colorado 80155-9756, or hand
delivered to Gemysis Corporation at 7103 S. Revere Parkway, Englewood, Colorado
80112, at or before the taking of the vote at the IDS1 Special Meeting.
The presence, either in person or by proxy, of a majority of the IDS1 Units
constitutes a quorum. The IDS1 Special Meeting may be adjourned for the purpose
of obtaining additional proxies or votes or for any other purpose, and, at any
subsequent reconvening of the IDS1 Special Meeting, all proxies will be voted in
the same manner as such proxies would have been voted at the original convening
of the IDS1 Special Meeting (except for any proxies that have theretofore
properly been revoked or withdrawn), notwithstanding that they may have been
properly voted on the same or any other matter at a previous meeting.
As of the date of this Proxy Statement/Prospectus, the Company beneficially
owns IDS1 Units or % of the then outstanding IDS1 Units. The Company
intends to vote these IDS1 Units FOR approval of the Acquisition Agreement and
the transactions contemplated thereby.
THE IDS2 SPECIAL MEETING
At the IDS2 Special Meeting, including any adjournment or postponement
thereof, IDS2 Unitholders will be asked to consider and vote on a proposal to
approve the Acquisition Agreement and the transactions contemplated thereby,
including the IDS2 Merger and the amendment to the IDS2 Partnership Agreement.
THE IDS2 GENERAL PARTNER HAS DETERMINED THAT THE IDS2 MERGER IS FAIR TO THE IDS2
UNITHOLDERS. ACCORDINGLY, THE IDS2 GENERAL PARTNER RECOMMENDS THAT IDS2
UNITHOLDERS VOTE FOR APPROVAL OF THE ACQUISITION AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY.
The IDS2 Partnership Agreement prohibits the sale of any property by the
IDS2 Partnership to the IDS2 General Partner or its "affiliates," as such term
is defined therein (including the Company). Accordingly, in order to consummate
the IDS2 Merger, the IDS2 Partnership Agreement must be amended to add the
following subsection to Section 13.3(c):
(iii) Notwithstanding any provision of this Agreement, the Partnership
may merge with and into Shurgard Storage Centers, Inc. (the "Company")
pursuant to, and consummate all other transactions contemplated by, the
terms of the Acquisition Agreement dated July 1, 1996, between the Company,
the Partnership, IDS/Shurgard Income Growth Partners L.P. and IDS/ Shurgard
Income Growth Partners L.P. III.
Amendment of the IDS2 Partnership Agreement requires approval of IDS2
Unitholders holding of record more than 50% of the outstanding IDS2 Units. Thus,
approval of the Acquisition Agreement and the transactions contemplated thereby
requires the affirmative vote of IDS2 Unitholders holding of record more than
50% of the outstanding IDS2 Units. By voting to approve the Acquisition
Agreement and the transactions contemplated thereby, IDS2 Unitholders will be
deemed to have voted in favor of the foregoing amendment to the IDS2 Partnership
Agreement.
Unitholders as of the date of this Proxy Statement/Prospectus whose IDS2
Units have not been purchased by the Company in the IDS2 Offer are entitled to
notice of the IDS2 Special Meeting. If IDS2 Units are transferred after the date
of this Proxy Statement/Prospectus but prior to the date of the IDS2 Special
Meeting or any adjournment or postponement thereof, and the holders of the
transferred IDS2 Units are admitted as substitute IDS2 Unitholders, the Notice
of Special Meeting, this Proxy Statement/Prospectus, the accompanying form of
proxy and related information will be sent to the substituted IDS2 Unitholders
along with notice of their substitution and admission. This substitution and
admission will terminate the right of the prior IDS2 Unitholders to vote on
approval of the Acquisition Agreement and the transactions contemplated thereby,
and any votes as to the transferred IDS2 Units must be made by the substituted
IDS2 Unitholders. The IDS2 General Partner does not anticipate the substitution
of any new IDS2 Unitholders other than the Company with respect to those IDS2
Units it acquired in the IDS2 Offer and any person who obtains IDS2 Units as a
result of intrafamily or testamentary transfers. IDS2 Unitholders are entitled
to one vote at the IDS2 Special Meeting for each IDS2 Unit held of record by
them as of the date of the IDS2 Special
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Meeting or any adjournment or postponement thereof. As of the date of this Proxy
Statement/ Prospectus, approximately 115,110 IDS2 Units were outstanding and
held of record by IDS2 Unitholders.
If a proxy card is returned, properly signed and dated, the IDS2 Units
represented thereby will be voted in the manner specified on the proxy card. If
an IDS2 Unitholder returns a signed proxy card but does not indicate how his or
her IDS2 Units are to be voted, the IDS2 Units will be voted FOR approval of the
Acquisition Agreement and the transactions contemplated thereby. Any proxy given
pursuant to this solicitation may be revoked by the person giving it at any time
before it is voted. Proxies may be revoked by (i) duly executing a later dated
proxy related to the same IDS2 Units and delivering it to Gemysis Corporation
prior to the taking of the vote at the IDS2 Special Meeting, (ii) filing with
Gemysis Corporation, at or before the taking of the vote at the IDS2 Special
Meeting, a written notice of revocation bearing a later date than the proxy, or
(iii) attending the IDS2 Special Meeting and voting in person (although
attendance at the IDS2 Special Meeting will not in and of itself constitute a
revocation of a proxy). Any subsequent proxy or written notice of revocation
should be mailed to Gemysis Corporation at P.O. Box 3897, Englewood, Colorado
80155-9756, or hand delivered to Gemysis Corporation at 7103 S. Revere Parkway,
Englewood, Colorado 80112, at or before the taking of the vote at the IDS2
Special Meeting.
The presence, either in person or by proxy, of a majority of the IDS2 Units
constitutes a quorum. The IDS2 Special Meeting may be adjourned for the purpose
of obtaining additional proxies or votes or for any other purpose, and, at any
subsequent reconvening of the IDS2 Special Meeting, all proxies will be voted in
the same manner as such proxies would have been voted at the original convening
of the IDS2 Special Meeting (except for any proxies that have theretofore
properly been revoked or withdrawn), notwithstanding that they may have been
properly voted on the same or any other matter at a previous meeting.
As of the date of this Proxy Statement/Prospectus, the Company beneficially
owns IDS2 Units or % of the then outstanding IDS2 Units. The Company
intends to vote these IDS2 Units FOR approval of the Acquisition Agreement and
the transactions contemplated thereby.
THE IDS3 SPECIAL MEETING
At the IDS3 Special Meeting, including any adjournment or postponement
thereof, IDS3 Unitholders will be asked to consider and vote on a proposal to
approve the Acquisition Agreement and the transactions contemplated thereby,
including the IDS3 Merger and the amendment to the IDS3 Partnership Agreement.
THE IDS3 GENERAL PARTNER HAS DETERMINED THAT THE IDS3 MERGER IS FAIR TO THE IDS3
UNITHOLDERS. ACCORDINGLY, THE IDS3 GENERAL PARTNER RECOMMENDS THAT IDS3
UNITHOLDERS VOTE FOR APPROVAL OF THE ACQUISITION AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY.
The IDS3 Partnership Agreement requires that a merger of IDS3 be approved by
IDS3 Unitholders owning of record more than 50% of the outstanding IDS3 Units.
In addition, the IDS3 Partnership Agreement prohibits the sale of any property
by the IDS3 Partnership to the IDS3 General Partner or its "affiliates," as such
term is defined therein (including the Company). Accordingly, in order to
consummate the IDS3 Merger, the IDS3 Partnership Agreement must be amended to
add the following subsection to Section 13.3(c):
(iii) Notwithstanding any provision of this Agreement, the Partnership
may merge with and into Shurgard Storage Centers, Inc. (the "Company")
pursuant to, and consummate all other transactions contemplated by, the
terms of the Acquisition Agreement dated July 1, 1996, between the Company,
the Partnership, IDS/Shurgard Income Growth Partners L.P. and IDS/ Shurgard
Income Growth Partners L.P. II.
Amendment of the IDS3 Partnership Agreement requires approval of IDS3
Unitholders holding of record more than 50% of the outstanding IDS3 Units. Thus,
approval of the Acquisition Agreement and the transactions contemplated thereby
requires the affirmative vote of IDS3 Unitholders holding
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of record more than 50% of the outstanding IDS3 Units. By voting to approve the
Acquisition Agreement and the transactions contemplated thereby, IDS3
Unitholders will be deemed to have voted in favor of the foregoing amendment to
the IDS3 Partnership Agreement.
Unitholders as of the date of this Proxy Statement/Prospectus whose IDS3
Units have not been purchased by the Company in the IDS3 Offer are entitled to
notice of the IDS3 Special Meeting. If IDS3 Units are transferred after the date
of this Proxy Statement/Prospectus but prior to the date of the IDS3 Special
Meeting or any adjournment or postponement thereof, and the holders of the
transferred IDS3 Units are admitted as substituted IDS3 Unitholders, the Notice
of Special Meeting, this Proxy Statement/Prospectus, the accompanying form of
proxy and related information will be sent to the substituted IDS3 Unitholders
along with notice of their substitution and admission. This substitution and
admission will terminate the right of the prior IDS3 Unitholders to vote on
approval of the Acquisition Agreement and the transactions contemplated thereby,
and any votes as to the transferred IDS3 Units must be made by the substituted
IDS3 Unitholders. The IDS3 General Partner does not anticipate the substitution
of any new IDS3 Unitholders other than the Company with respect to those IDS3
Units it acquired in the IDS3 Offer and any person who obtains IDS3 Units as a
result of intrafamily or testamentary transfers. IDS3 Unitholders are entitled
to one vote at the IDS3 Special Meeting for each IDS3 Unit held of record by
them as of the date of the IDS3 Special Meeting or any adjournment or
postponement thereof. As of the date of this Proxy Statement/ Prospectus,
approximately 119,215 IDS3 Units were outstanding and held of record by
IDS3 Unitholders.
If a proxy card is returned, properly signed and dated, the IDS3 Units
represented thereby will be voted in the manner specified on the proxy card. If
an IDS3 Unitholder returns a signed proxy card but does not indicate how his or
her IDS3 Units are to be voted, the IDS3 Units will be voted FOR approval of the
Acquisition Agreement and the transactions contemplated thereby. Any proxy given
pursuant to this solicitation may be revoked by the person giving it at any time
before it is voted. Proxies may be revoked by (i) duly executing a later dated
proxy related to the same IDS3 Units and delivering it to Gemysis Corporation
prior to the taking of the vote at the IDS3 Special Meeting, (ii) filing with
Gemysis Corporation, at or before the taking of the vote at the IDS3 Special
Meeting, a written notice of revocation bearing a later date than the proxy, or
(iii) attending the IDS3 Special Meeting and voting in person (although
attendance at the IDS3 Special Meeting will not in and of itself constitute a
revocation of a proxy). Any subsequent proxy or written notice of revocation
should be mailed to Gemysis Corporation, at P.O. Box 3897, Englewood, Colorado
80155-9756, or hand delivered to Gemysis Corporation at 7103 S. Revere Parkway,
Englewood, Colorado 80112, at or before the taking of the vote at the IDS3
Special Meeting.
The presence, either in person or by proxy, of a majority of the IDS3 Units
constitutes a quorum. The IDS3 Special Meeting may be adjourned for the purpose
of obtaining additional proxies or votes or for any other purpose, and, at any
subsequent reconvening of the IDS3 Special Meeting, all proxies will be voted in
the same manner as such proxies would have been voted at the original convening
of the IDS3 Special Meeting (except for any proxies that have theretofore
properly been revoked or withdrawn), notwithstanding that they may have been
properly voted on the same or any other matter at a previous meeting.
As of the date of this Proxy Statement/Prospectus, the Company beneficially
owns IDS3 Units or % of the then outstanding IDS3 Units. The Company
intends to vote these IDS3 Units FOR approval of the Acquisition Agreement and
the transactions contemplated thereby.
SOLICITATION OF PROXIES BY SOLICITING AGENT
Shurgard Realty Advisors, Inc. ("SRA"), as the soliciting agent, will enter
into a Soliciting Agent Agreement with the Company under which it will use its
best efforts to solicit Unitholders to approve the Mergers. A copy of the
Soliciting Agent Agreement will be filed as an exhibit to the Registration
Statement. SRA will not receive any commissions with respect to the Mergers;
however, all out-of-
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pocket expenses (including telephone, mailing and legal expenses) incurred by
SRA will be treated as solicitation expenses and will be reimbursed to SRA as
set forth in "The Acquisition Agreement -- Fees and Expenses." SRA is wholly
owned by Charles K. Barbo. See "Conflicts of Interest."
SRA may be deemed to be an underwriter under the Securities Act. The Company
has agreed to indemnify SRA against certain liabilities, including certain
liabilities under the Securities Act and state securities laws. To the extent
that such indemnification provisions purport to include indemnification for
liabilities under the Securities Act, in the opinion of the Commission, such
indemnification is contrary to public policy and, therefore, unenforceable.
INFORMATION AND TABULATION
D.F. King & Co., Inc. has been engaged as Information Agent to perform
consulting, administrative and clerical work in connection with the Mergers.
Total fees to the Information Agent are expected to be in the range of $75,000
to $200,000. Gemisys Corporation has been engaged by each of the Partnerships to
act as Inspector of Elections and will be responsible for receipt and tabulation
of proxies. Total fees to the Inspector of Elections are expected to be in the
range of $75,000 to $125,000. The costs of the Information Agent and the
Inspector of Elections are Shared Expenses and will be shared by the
Partnerships and the Company in accordance with the Acquisition Agreement. See
"The Acquisition Agreement -- Fees and Expenses."
Under the Partnership Agreements, Unitholders are entitled to inspect the
books and records of their respective Partnership at reasonable times upon
requisite notice to the General Partner of that Partnership (five business days'
notice in the case of IDS1 Unitholders and two business days' notice in the case
of IDS2 and IDS3 Unitholders). Any Unitholder, upon paying the cost of
duplicating and mailing, is entitled to a copy of the list of names and
addresses of Unitholders of his or her respective Partnership, including the
number of Units held by each Unitholder.
BACKGROUND AND REASONS FOR THE MERGERS
BACKGROUND
The Partnerships were organized to serve as investment vehicles for
investors interested in a professionally managed portfolio of self storage
facilities and office and business parks with cash flow and capital appreciation
potential. The Partnerships were presented to Unitholders as finite-life
investments, with the Unitholders receiving quarterly cash distributions and
special distributions upon liquidation of the real estate investments. The
Partnerships expected to dispose of their properties within a period of either
seven to nine years after acquisition or development for IDS1 and IDS2 or five
to ten years after acquisition or development for IDS3.
Since each Partnership expected to hold its investments for a number of
years after its formation, no efforts to dispose of the properties were made by
the General Partner in the early years of the Partnership's existence. Each
General Partner concentrated its initial efforts on making suitable investments
for the Partnership, consistent with the Partnership's investment policies and
restrictions, and, with the assistance of the Company and its predecessor, on
managing the properties efficiently to control operating expenses while
maximizing operating revenues.
In the fall of 1994, the General Partners began considering the termination
of the Partnerships through an acquisition of the Partnerships by the Company.
The General Partners and the Company recognized that an acquisition might
require the consent of IPSC under the terms of the GP Agreements. Consequently,
on September 22, 1994, a representative of the Company sent IPSC a letter
discussing potential advantages and disadvantages of an acquisition of the
Partnerships by the Company for the appraised values of the Partnerships,
whereby the Unitholders of the Partnerships would receive either cash or Common
Stock in exchange for their Units. The letter presented preliminary analyses of
values of the Partnerships and invited IPSC to contact the Company concerning
how
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or if IPSC and the Company might wish to proceed. Although representatives of
the Company and the Partnerships had occasional discussions with representatives
of IPSC concerning the business of the Partnerships thereafter, they did not
pursue a potential transaction at that time.
On or about June 22, 1995, representatives of the Company, the General
Partner and IPSC held a meeting in which they discussed the possibility of the
Partnerships merging with the Company and other alternatives, including
liquidation of the Partnerships, designed to enable the Unitholders to realize
value for their Units. The meeting was inconclusive, but the parties agreed to
continue to analyze alternatives for Unitholders in the Partnerships.
On July 18, 1995, Charles K. Barbo, on behalf of the Partnerships, sent a
letter to IPSC providing an analysis of alternative means to permit Unitholders
to realize value for their Units, including a merger of the Partnerships with
the Company, a liquidation of the Partnerships and a continuation of the
business of the Partnerships. Mr. Barbo recommended that the General Partners
consider, as the preferred alternative, mergers of the Partnerships with the
Company in which Unitholders would receive Common Stock or cash in the amount of
their respective Partnership's net asset value per Unit. The net asset value
would be based in substantial part on an independent appraisal of the properties
of each of the Partnerships. The letter emphasized that no decision had been
made to proceed with any transaction.
IPSC subsequently asked the General Partners for an analysis of the impact
on the partners of the General Partners with respect to their interests in the
Partnerships of the alternatives discussed in the July 18 letter. The General
Partners provided that analysis to IPSC in a letter dated November 10, 1995.
Thereafter, the parties agreed that they would be willing to have further
discussions after the beginning of the new year.
In January and February 1996, the General Partners and IPSC continued to
explore the possibility of a merger involving the Partnerships and the Company.
In late February 1996, the General Partners determined that the Partnerships
should engage an appraiser and an investment advisor to assist in considering
the possibility of pursuing a transaction with the Company.
On February 28, 1996, Everest Storage Investors, LLC ("Everest") commenced a
tender offer for Units of the Partnerships (the "Everest Tender Offer"). The
cash consideration offered by Everest (i) to the IDS1 Unitholders was $110 per
Unit, which was 27% to 44% below the prices at which the IDS1 Units were then
traded during the first quarter of 1996 on the secondary market and 57% below
the price paid by the Company in the IDS1 Offer, (ii) to the IDS2 Unitholders
was $120 per Unit, which was 26% to 35% below the prices at which the IDS2 Units
were then traded during the first quarter of 1996 on the secondary market and
46% below the price paid by the Company in the IDS2 Offer, and (iii) to the IDS3
Unitholders was $112 per Unit, which was 32% to 44% below the prices at which
the IDS3 Units were then traded during the first quarter of 1996 on the
secondary market and 64% below the price paid by the Company in the IDS3 Offer.
The General Partners advised Unitholders not to accept the Everest Tender Offer.
Through the Everest Tender Offer, Everest acquired a total of 1,816.5 IDS1
Units, 1,931.3 IDS2 Units and 1,582.5 IDS3 Units (collectively, the "Everest
Tendered Units").
On March 8, 1996, the General Partners, on behalf of the Partnerships,
engaged Stanger to provide opinions as to the fairness to the Unitholders, from
a financial point of view, of the consideration that might be offered to
Unitholders in a potential transaction with the Company and to render appraisals
as to the fair market values of the Partnerships' real estate portfolios.
Stanger previously conducted appraisals and provided fairness opinions and
special reports to affiliates of the General Partners with respect to the
Consolidation. See "Appraisals and Opinions of Financial Advisors."
On March 14, 1996, representatives of the General Partners, IPSC, Stanger
and the Partnerships met to discuss the terms on which the General Partners
would consider an acquisition of the Partnerships by the Company through a
one-step merger of the Partnerships into the Company. The discussion centered on
a transaction in which Unitholders would receive, at their election, Common
Stock or
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cash equal to their respective Partnership's net asset value (based on an
independent appraisal) per Unit. On March 18, 1996, legal counsel for the
Partnerships provided the Company with a draft of an agreement reflecting the
terms discussed by the parties.
On March 19, 1996, at a regular meeting of the Board of Directors of the
Company, the Board discussed the possible acquisition of the Partnerships
through a merger. The directors were informed by management of the Company of
the potential conflicts of interest involved in a transaction with the
Partnerships. See "Conflicts of Interest." The Board confirmed the appointment
of a special committee (the "Special Committee") consisting of two independent
directors, Donald W. Lusk and Wendell J. Smith, and authorized the Special
Committee (i) to review, evaluate and negotiate the terms of any proposed
transactions involving the acquisition of the Partnerships by the Company, (ii)
to make a recommendation to the Board of Directors with respect to the approval
or disapproval of any proposed transaction between the Company and the
Partnerships, and (iii) to select and retain legal counsel and financial
advisors. Thereafter, the Special Committee decided to retain Alex. Brown & Sons
Incorporated ("Alex. Brown") to assist in its evaluation of any transaction with
the Partnerships and also retained legal counsel to assist in its consideration
and negotiation of any transaction with the Partnerships.
On March 25, 1996, the Company and Public Storage, Inc. ("PS") entered into
an agreement whereby PS agreed that it would not acquire any interests in the
Company or any of the Company's affiliates (including the Partnerships) for a
period of two years without the Company's consent (preventing PS from making a
tender offer for the Units or proposing an alternative transaction with the
Partnerships without the permission of the Company). Soon thereafter, PS
disclosed to the Company that PS had an agreement with Everest, whereby PS had
agreed to purchase the interests owned by Everest in various public limited
partnerships, including the Partnerships, owning self storage assets. Pursuant
to a letter agreement dated April 1, 1996, the Company consented to PS's
acquisition of the Everest Tendered Units as well as other Units owned by
Everest, for a total of 1,824.5 IDS1 Units, 2,038.3 IDS2 Units and 1,602.5 IDS3
Units (collectively, the "Everest Units"), on the condition that PS grant to the
Company a right to purchase the Everest Units on terms substantially similar to
those on which PS acquired the Everest Units from Everest. PS acquired the
Everest Units from Everest on May 20, 1996 at a price of $200 per IDS1 Unit,
$180 per IDS2 Unit and $190 per IDS3 Unit. The Company exercised its option to
acquire the Everest Units from PS at the same price, plus four days of interest,
and PS transferred the Everest Units to the Company effective as of May 20,
1996.
From late March 1996 through May 1996, representatives of the Company and
the Partnerships discussed the possibility of the Company's acquisition of the
Partnerships. During this time, the parties discussed the possibility of
structuring the acquisition as a cash tender offer followed by a merger of the
Partnerships into the Company in which Unitholders would receive Shares in
exchange for their Units. The parties viewed a two-step transaction (a partial
cash tender offer followed by a stock merger) as being more desirable than a
one-step cash-election merger transaction. Completion of a merger would be
subject to a number of conditions (including the approval of Unitholders and
registration of the Shares) that would not be conditions to a cash tender offer.
Thus, the two-step transaction would provide Unitholders with an opportunity to
obtain liquidity for a portion of their Units more quickly than waiting for
completion of the merger. In addition, the Company favored a two-step
transaction because it believed that such structure might enable it to acquire
an ownership position in each of the Partnerships more quickly than would be the
case in a one-step merger. During the last week of May 1996, the Special
Committee proposed to the Partnerships that the Company acquire each of the
Partnerships for a price equal to their respective net asset value, pursuant to
a cash tender offer for up to a designated percentage of the outstanding Units
followed by a merger in which Unitholders would receive Shares with a value
equal to the per Unit net asset value of their respective Partnership. The value
attributable to a Share was proposed to be the average of the closing prices for
a Share on the NYSE during a designated future period (the "Average Price"). The
parties discussed setting the percentage of Units that would be sought in the
first step tender offer so that if the tender offer were
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fully subscribed, the Partnerships would not terminate for federal income tax
purposes due to a sale or exchange of 50% or more of the total interest in
Partnership capital and profits in a twelve-month period.
The Special Committee indicated that its proposal on behalf of the Company
would require that (i) if the acquisition were not completed under certain
circumstances, the Company would receive a fee from the Partnerships (a
"Termination Fee") and reimbursement for all expenses incurred by the Company in
connection with the transaction, and (ii) if the Average Price of a Share
exceeded or was lower than the limits of a price range, then the Average Price
would be fixed at the upper or lower limit of that price range, as appropriate.
On June 4, 1996, representatives of the Company and the Partnerships
commenced active negotiation of the terms of an acquisition agreement.
Thereafter, the terms of an acquisition agreement were also discussed with IPSC
and its legal counsel since the General Partner intended to seek the consent of
IPSC to complete a merger. See "The Acquisition Agreement." The most significant
negotiations concerned the operation of the price range and the Partnerships'
payment of the Termination Fee and reimbursement of the Company's expenses under
certain circumstances. During the negotiations, the General Partners advised the
Special Committee that IPSC objected to the Termination Fee and to any
requirement that the Partnerships complete the Mergers if the Average Price was
lower than the lower limit of the price range. The IDS1 General Partner also
advised the Special Committee that it would be prohibited by the terms of the
IDS1 Partnership Agreement from agreeing to pay the Termination Fee and the
Company's expenses. In light of the General Partners' positions and the
provisions of the IDS1 Partnership Agreement, the Special Committee ultimately
withdrew its request for the Termination Fee, determining that it was advisable
and in the best interests of the Company and its stockholders to proceed with
the transaction on this basis. The Partnerships and the General Partners agreed
to accept the price range with certain modifications that would allow the
General Partners to withdraw their recommendations of the Mergers and terminate
the Acquisition Agreement if the Average Price was more than $.75 below the
lower limit of the price range and the Company does not elect to increase the
consideration paid in the Mergers. IPSC informed the Company that it would
reserve the right to withdraw its consent under these circumstances. The parties
also agreed that the Company would similarly have the right to elect not to
proceed with the Mergers if the Average Price exceeded the upper limit of the
price range by more than $.75.
On June 13, 1996, representatives of the General Partners, IPSC, their
respective counsel and Stanger held a teleconference to discuss the Offers and
the Mergers and alternatives thereto and to consider the draft acquisition
agreement, draft appraisals and the draft fairness opinions and the assumptions
made in preparing the fairness opinions.
On June 26, 1996, Stanger delivered the Appraisals and revised draft
fairness opinions to the General Partners. On June 26, 1996, representatives of
the General Partners, IPSC and Stanger held a teleconference to discuss the
draft acquisition agreement, the Appraisals and revised draft fairness opinion.
During that teleconference, Stanger indicated its willingness to render the
Stanger Fairness Opinion in the forms presented to the General Partners. The
General Partners concluded that the terms of the Offers and the Mergers were
fair to Unitholders, approved the execution of the Acquisition Agreement and the
Partnerships' participation in the transaction and formulated the recommendation
set forth in this Proxy Statement/Prospectus, subject to Stanger's delivery of
the Stanger Fairness Opinion on July 1, 1996.
On June 26, 1996 and June 27, 1996, Alex. Brown presented to the Special
Committee a draft of its opinion that the consideration to be paid in the Offers
and the Mergers is fair to the Company from a financial point of view, together
with related materials, and discussed the opinion and related materials and the
analysis performed and the assumptions made in preparing the opinions with the
Special Committee and its legal counsel. Subsequent to that meeting the Special
Committee and its
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legal counsel and Alex. Brown met on June 27, 1996 with the other members of the
Company's Board of Directors in a meeting to discuss the transaction and the
draft of the Alex. Brown fairness opinions and related materials.
On July 1, 1996, the Special Committee, its legal counsel and Alex. Brown
met with the Board of Directors to discuss further the transaction. At that
meeting, Alex. Brown delivered its opinion to the effect that the consideration
to be paid in the Offers and the Mergers is fair to the Company from a financial
point of view, and the Special Committee recommended that the Board of Directors
of the Company approve, and the Board of Directors did approve, the Acquisition
Agreement and the consummation by the Company of the transactions contemplated
by the Acquisition Agreement.
On July 1, 1996, Stanger delivered the Stanger Fairness Opinion to the
General Partners.
On July 1, 1996, the Company and the General Partners on behalf of their
respective Partnerships executed and delivered the Acquisition Agreement.
On July 2, 1996, the Company commenced the Offers.
PURPOSES AND STRUCTURE OF THE OFFERS AND THE MERGERS
The Offers were made and the Mergers have been proposed for approval (i) to
enable the Company to acquire the entire equity interest in each of the
Partnerships and (ii) to give Unitholders an opportunity to (a) liquidate their
Units for cash in the Offers or (b) continue to own an equity interest in a
portfolio of properties, including their respective Partnership's properties,
through an acquisition of Shares in the Mergers. For information concerning the
factors leading to the decision by the Company to commence the Offers and the
Mergers, see "-- Background." If the conditions to the consummation of the
Mergers are satisfied, the Company intends to consummate the Mergers and acquire
the entire equity interest in the Partnerships that it does not already own.
The Company's proposal to acquire the Partnerships commenced with cash
tender offers for up to a specified number of Units of each Partnership and, if
applicable conditions have been satisfied, will be followed by Mergers in which
the outstanding equity interests in the Partnerships will be exchanged for the
Merger Consideration. Pursuant to the Partnership Agreements, approval of the
IDS1 Merger requires the affirmative vote by holders of greater than 75% of the
outstanding IDS1 Units and approval of the IDS2 Merger and the IDS3 Merger
requires the affirmative vote by holders of a majority of the IDS2 Units and the
IDS3 Units, respectively. The percentage of Units sought in each Offer was set
so that if the Offer was fully subscribed, the Partnership would not terminate
for federal income tax purposes due to a sale or exchange within a 12-month
period of 50% or more of the total interest in its capital and profits. The
parties viewed a two-step transaction (partial cash tender offers followed by
stock mergers) as being more desirable than one-step cash-election mergers
because completion of the mergers would be subject to a number of conditions
(including the approval of Unitholders and registration of the Shares) that
would not be conditions to tender offers. See "The Acquisition Agreement --
Conditions Precedent to the Mergers." Thus, the two-step transaction was
designed to provide Unitholders with an opportunity to obtain liquidity for a
portion of their Units more quickly than waiting for completion of the Mergers.
The Company favored a two-step transaction because that structure might enable
it to acquire an ownership position in each of the Partnerships more quickly
than through one-step mergers.
Pursuant to the General Partner Undertaking and the Standstill Agreement
contained in the Acquisition Agreement, the Company has agreed that, upon its
admission as a substituted limited partner with respect to any Units purchased
in the Offers, it will not, except through the Offers and the Mergers, directly
or indirectly acquire any additional Units, propose any merger or other business
combination involving any Partnership, or propose any other transaction pursuant
to which it would control any of the assets of any Partnership without the prior
written consent of a majority of the general partners of the General Partner of
the Partnership. In addition, in the event that any of the Mergers do not occur
for any reason, the Company will evaluate its other alternatives, including,
subject to the General Partner Undertaking and the Standstill Agreement and
restrictions imposed by law, purchasing additional Units in the open market, in
privately negotiated transactions, in another
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tender or exchange offer or otherwise, or taking no further action to acquire
additional Units. Any additional purchase of Units could be for cash, stock or a
combination thereof. Alternatively, the Company may sell or otherwise dispose of
any or all Units acquired pursuant to the Offers or otherwise. These
transactions may be effected on terms and at prices then determined by the
Company, which may vary from the Merger Consideration.
The Company regards the acquisition of the Partnerships as an attractive
investment opportunity at this time because it believes that the Partnerships'
future business prospects are favorable. In addition, the Mergers are being
undertaken within the time period within which the Partnerships expected to
liquidate their properties. See "-- Background."
GENERAL PARTNERS' RECOMMENDATIONS AND REASONS
THE GENERAL PARTNER OF EACH PARTNERSHIP RECOMMENDS THAT UNITHOLDERS OF THE
PARTNERSHIP VOTE FOR APPROVAL OF THE ACQUISITION AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY. This recommendation is based upon each General Partner's
belief that (i) the terms of the respective Merger, when considered as a whole,
are fair to the Unitholders of the respective Partnership, (ii) the Merger
Consideration being offered in exchange for the Units constitutes fair
consideration for the interests of the Unitholders and (iii) after comparing
certain potential benefits and detriments of the respective Merger with those of
several alternatives, the respective Merger is more attractive to the
Unitholders than the alternatives. These beliefs are based upon each General
Partner's analysis of the terms of the respective Merger, assessment of the
respective Merger's potential economic impact upon the Unitholders, comparison
of certain potential benefits and detriments of the respective Merger and
several alternatives to the respective Merger and review of the financial
condition and performance of the respective Partnership and the Company and the
terms of material agreements by which they are bound.
EXPECTED BENEFITS FROM THE MERGERS
In deciding whether to recommend the Mergers as well as in negotiating their
terms, the General Partners considered the benefits that would be derived as a
result of the Mergers. The following is a brief discussion of the primary
benefits for the Unitholders and the General Partners that are expected from the
Mergers:
GROWTH POTENTIAL. The Partnerships are not in a position to take advantage
of external growth opportunities since they have already committed their capital
and are not authorized to raise additional funds or reinvest net sale or
refinancing proceeds for new investments. In contrast, the Company not only may
reinvest net sale or refinancing proceeds but also may raise additional capital
through the sale of debt or equity securities, allowing the Company to take
advantage of investment opportunities that may be available in current real
estate markets. In addition, the Company may pursue development of new
facilities, which the Company believes will provide opportunities for
significant capital appreciation. The Company has recently expanded its
operations into Europe, which the Company believes provides attractive market
opportunities. Unitholders who become stockholders will be able to participate
in real estate acquisition and development opportunities and in the Company's
expansion into new markets and the Company's investments in participating
mortgages and joint ventures.
Even if the Partnerships were permitted to raise additional funds through
debt or equity offerings, the Company should be able to issue additional debt
and equity securities with greater ease and on more attractive terms than would
be available to any of the Partnerships due to the Company's larger base of
assets and stockholders' equity. The Company has a total market capitalization
of over $700 million, making the Company one of the larger equity REITs and one
of the largest owners of self storage facilities in the United States. The
Company's capital base makes it an attractive candidate for the services of
investment banking firms, financial institutions, institutional lenders and
others interested in placing large amounts of capital.
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ASSET DIVERSIFICATION. The Mergers permit Unitholders who become
stockholders to participate in an investment portfolio substantially larger and
more geographically diversified than the portfolio of any of the Partnerships.
The size and geographic diversity of the Company's portfolio spreads the risk of
an investment in the Company over a broader group of assets and reduces the
dependence of the investment upon the performance of any particular asset or
group of assets, such as assets in the same geographical area.
LIQUIDITY. No active trading market exists for the Units, and Unitholders
may have difficulty in disposing of their Units, if they so desire, or may be
obligated to sell the Units at substantial discounts to facilitate the sales. In
contrast, approval of the Mergers will provide Unitholders with the opportunity
to own Common Stock in an entity publicly traded on the NYSE. For a discussion
of the risks associated with owning Shares, see "Risk Factors."
SINGLE BUSINESS ENTITY TO PURSUE INVESTMENT OBJECTIVES. As separate legal
entities with different investors, each of the Partnerships must segregate its
assets and liabilities (to avoid commingling assets), conduct operations
independently and maintain separate books and records for the preparation of
financial statements, tax returns, investor information and reports and filings
to be made to the Commission. The assets of one Partnership cannot be employed
for the benefit of one or more of the other Partnerships. Potential conflicts of
interest arise in the allocation of management resources and efforts to
refinance or dispose of properties. In contrast, the Mergers place all of the
assets of the Partnerships under common ownership with the assets of the
Company, and allow such assets to be used to achieve a common set of investment
objectives. Through the Mergers, Unitholders will be entitled to share in the
advantages of the Company that cannot be fully pursued by each of the
Partnerships acting on its own. Such advantages include, but are not limited to,
the opportunity of making new investments, the availability of financing and
taking advantage of certain business opportunities (which may not be profitably
pursued by any of the Partnerships).
COMPANY AS SELF-ADMINISTERED REIT. The Partnerships are externally managed
by the Company pursuant to the terms of their respective Management Services
Agreements. Through the Mergers, Unitholders would benefit from the Company's
structure as a self-administered REIT, which enhances the Company's operations
in a number of significant ways, including:
(a) The persons managing the Company are employees of the Company,
directly accountable to its Board of Directors. They are not employees of a
separate management company or investment advisor whose activities may be
guided by objectives inconsistent with the Company's objectives.
(b) The Company can align management compensation more directly to the
Company's financial performance. The Company has adopted long-term
incentive, profit-sharing and other bonus programs to incentivize
performance and to maximize corporate profits and to align compensation more
closely with the interests of the stockholders. Since the Company's
management has a substantial equity interest in the Company, the financial
interest of management is directly tied to the financial interest of the
Company's stockholders, in contrast to the typical property management
arrangement where the manager receives a percentage of the managed assets'
gross income, benefiting from providing management services whether or not
the assets are profitably managed.
(c) The stockholders are the beneficiaries of all future developments
created by the Company's management. As operational systems are improved, or
applications of these systems are developed by management, these
opportunities may be economically exploited by the Company, consistent with
its overall investment objective of qualifying as a REIT. Any increase in
the value of the Company's goodwill, and the corresponding value in the
"Shurgard" name, will accrue to the benefit of the Company and its
stockholders. This is not true with respect to the Partnerships because
management services are performed by an outside property manager (the
Company) that retains control over all management systems and owns rights to
the "Shurgard" name under which the Partnerships' properties are managed.
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(d) Self-administered REITs are generally more favorably received in the
capital markets than externally managed REITs, with the result that the
equity securities of self-administered REITs trade at higher multiples to
earnings than those of externally managed REITs.
RETIREMENT PLAN AND IRA VALUATIONS. The Internal Revenue Service (the
"IRS") has taken the position that custodians and trustees of Keogh and
corporate retirement plans must determine, on an annual basis, the fair market
value of the units in the limited partnerships owned by such plans and, in some
cases, must use independent appraisal or valuation services to determine such
values. The cost of these independent valuations impacts the return on the
plan's investment in the limited partnership. In addition, custodians and
trustees of IRAs are required to report to the IRS on an annual basis, the fair
market value of the units owned by such IRAs. Approval of the Mergers generally
will allow custodians and trustees of such plans and IRAs to value the Shares by
reference to published price information from the NYSE without independent
valuation or appraisal.
SIMPLIFIED TAX ADMINISTRATION. The Mergers will result in simplified tax
administration for many Unitholders. Stockholders will receive Form 1099-DIV to
report their dividends from the Company. Form 1099-DIV is substantially easier
to understand than the more complicated Schedule K-1 prepared for the reporting
of the financial results of the Partnerships.
REDUCED STATE INCOME TAX REPORTING. Unitholders who become stockholders
will no longer be subject to the requirements to file state income tax returns
and/or pay state income taxes in the following states in which the Partnerships
earn taxable income (assuming the Unitholders are not otherwise required to file
in the states): Arizona, California, Georgia, Michigan, Oregon and Virginia.
ALTERNATIVES TO THE MERGERS
The following is a brief discussion of certain benefits and disadvantages of
alternatives to the Mergers that were considered by the General Partners.
LIQUIDATION. An alternative to the Mergers would be liquidating the assets
of the Partnerships, distributing the net liquidation proceeds to the General
Partners and Unitholders in accordance with the Partnership Agreements, and
thereafter dissolving the Partnerships. Through these liquidations, Unitholders'
investment in the Partnerships would be concluded. All Unitholders would be at
liberty to use the net liquidation proceeds for investment, business, personal
or other purposes.
In recent years, operating results with respect to the Partnerships'
properties have improved, there has been increased sales activity with respect
to self storage facilities and the capitalization rates at which facilities have
been selling have become more favorable to sellers resulting in higher prices.
The General Partners anticipate that net operating income from the Partnerships'
facilities will continue to improve although at a slower rate than in the past.
If performance improvements continue, the value of the properties of the
Partnerships would be expected to increase, so long as capitalization rates at
which self storage facilities are sold do not increase and sufficient capital
remains available to finance acquisitions. A complete liquidation of the
Partnerships would deprive those Unitholders who do not desire to liquidate
their investment in self storage properties from participating in the benefits
of future performance and possible property value improvements. In addition,
liquidation of the Partnerships' properties does not have certain of the other
benefits of the Mergers, including (i) permitting Unitholders to hold their
investment in real estate until a time when liquidation is appropriate for their
individual investment strategy and (ii) the opportunity to participate in
acquisition and development opportunities existing in the real estate market
through equity ownership in the Company.
The transaction costs associated with the Mergers are expected to be
significantly less than those which would be incurred in a liquidation of the
Partnerships' assets. If the Mergers are consummated, the Partnerships will
effectively dispose of all of their assets and liabilities in a single
transaction, which will minimize the liquidation costs. If the assets of the
Partnerships were liquidated over time, not only would higher transaction costs
likely be incurred, but distributions to Unitholders from the Partnerships' cash
flow from operations may be reduced since the Partnerships' fixed costs, such as
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general and administrative expenses, would not be proportionately reduced with
the liquidation of assets. In addition, the proceeds from the sale of the
Partnerships' properties are likely to be reduced by broker fees and other
transaction costs.
The General Partners favor the Mergers over liquidation of the Partnerships
because the Mergers will enable Unitholders to participate in the Company's
substantially larger, more diversified investment portfolio, to benefit from the
Company's ability to access capital markets and to take advantage of acquisition
and development opportunities. In addition, the estimated transaction costs
associated with the Mergers are significantly less than would be incurred in a
liquidation of the Partnerships' assets on a single transaction or multiple
transaction basis.
CONTINUATION OF THE PARTNERSHIPS. A second alternative to the Mergers would
be to continue each of the Partnerships as a separate legal entity, with its own
assets and liabilities. While the disclosure documents used to offer the Units
for sale to the public disclosed the intentions of the Partnerships to liquidate
their assets within seven to nine years after acquisition or development for
IDS1 and IDS2 and within five to ten years after acquisition or development for
IDS3, each of the Partnerships has a stated life of approximately forty years,
the Unitholders were advised that the liquidation of the Partnerships would
depend upon market conditions as they might change from time to time and the
Partnerships are all operating profitably and do not need to liquidate to
satisfy debt obligations or other current liabilities or to avert defaults,
foreclosures or other adverse business developments.
A number of advantages would be expected to arise from the continued
operation of the Partnerships. Unitholders would probably continue to receive
regular quarterly distributions of net cash flow arising from operations and the
sale or refinancing of their Partnership's assets. The General Partners expect
that net operating income from the properties would continue to improve,
although at a slower rate than in the past, which would support continued
improvements in quarterly distributions. In addition, the decision to continue
the Partnerships, if selected, would avoid whatever disadvantages might be
inherent in the Mergers. See "Risk Factors."
The primary disadvantage with continuing the Partnerships is the failure to
secure the benefits that the General Partners expect from the Mergers. See "--
Expected Benefits From the Mergers." In addition, if the Partnerships continue,
Unitholders may not have an opportunity for liquidity in the near future. The
Partnerships might, however, be sold at another time in another transaction that
could be on terms more or less favorable to Unitholders. Accordingly, the
General Partners have concluded that continuation of the Partnerships is not as
attractive as the Mergers.
SUPPORT OF SECONDARY MARKET. Another alternative which would create
liquidity for Unitholders desiring to dispose of their investments in the
Partnerships is the creation or support of the secondary market for the Units
through limited cash tender offers or repurchase programs sponsored by the
Partnerships. While the General Partners believe that this alternative might
provide liquidity for some Unitholders, the terms of the Partnership Agreements
and federal tax law prohibit this alternative from being available with respect
to a majority of the Units. No detailed financial analysis was done that would
allow the General Partners to predict with any degree of certainty the possible
impact of this alternative on the value of the Units.
REORGANIZATIONS OF PARTNERSHIPS AS SEPARATE REITS. The General Partners
considered the advisability of reorganizing each of the Partnerships as a
separate corporation taxed as a REIT, which could provide Unitholders some of
the advantages to be secured by the Mergers, such as providing investors in the
reorganized entities with some liquidity through the listing of their equity
securities in a recognized trading market and simplified federal income tax
reporting. In addition, the reorganizations could be effected on a tax-free
basis, unlike the Mergers, which will be a taxable event for Unitholders. The
reorganizations of the Partnerships would, however, result in substantial costs
and expenses, and, due to the size of the Partnerships, access to capital
markets and the liquidity of the reorganized entity's securities could be
limited. The General Partners have concluded that the Mergers are more
attractive than the reorganizations of the Partnerships as separate REITs
because the separate REITs would not provide, or would provide on a more limited
basis, the advantages expected
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from the Mergers, including the elimination of potential conflicts of interest,
simplified administration, self-administration, growth potential, asset
diversification and improved access to capital markets. See "-- Expected
Benefits From the Mergers."
FAIRNESS OF THE MERGERS
CONCLUSIONS OF THE GENERAL PARTNERS
The General Partners believe that the terms of the Mergers, when considered
as a whole, are fair to the Unitholders of each of the Partnerships and the
Shares offered in exchange for the Units of the Partnerships constitute fair
consideration for the interests of the Unitholders. This section discusses the
factors upon which the General Partners have based their conclusions as to the
fairness of the Mergers and should be carefully reviewed by Unitholders. The
General Partners did not find it practicable to, and did not attempt to,
quantify the relative importance of these factors, but have, where appropriate,
noted which of the factors support or detract from their belief as to the
fairness of the Mergers to Unitholders.
DETERMINATION OF MERGER CONSIDERATION
The General Partners believe that the methods used to determine the Merger
Consideration are fair to Unitholders. For each Partnership, the number of
Shares that would be received per Unit in each of the Mergers is derived by
dividing (i) the Partnership's Net Asset Value that would be allocated to one
Unit if the Partnership's Net Asset Value were distributed in accordance with a
Dissolution in accordance with the Partnership Agreement by (ii) the Share Price
(the average of the per share closing prices of the Common Stock on the NYSE
during the 20 consecutive trading days ending on the fifth trading day prior to
the Vote Date).
If the Share Price exceeds $27.75, then for purposes of calculating the
number of Shares to be issued in each of the Mergers, the Share Price will be
deemed to equal $27.75, and, if the Share Price is less than $22.25, then for
purposes of calculating the number of Shares to be issued in each of the
Mergers, the Share Price will be deemed to equal $22.25. If the Share Price
exceeds $28.50, the Company has the right to terminate the Acquisition
Agreement, and if the Share Price is less than $21.50, each of the General
Partners may withdraw its recommendation in favor of the applicable Merger or
terminate the Acquisition Agreement, subject to the Company's option to pay the
Additional Consideration. If the Share Price is between $27.75 and $28.50 and
all other conditions to the applicable Merger are satisfied, the Merger will be
consummated and Unitholders will receive Shares with a value in excess of the
Net Asset Value per Unit. If the Share Price is between $21.50 and $22.25 and
all other conditions to the applicable Merger are satisfied, the Merger will be
consummated and Unitholders will receive Shares with a value that is less than
the Net Asset Value per Unit.
The General Partners believe that the methods for determining the Merger
Consideration are fair because (i) the closing prices of the Shares have been
within the Share Price Range for more than a year, (ii) a fluctuation in average
share prices outside of the Share Price Range will likely be due to market
forces not directly related to the intrinsic value of the Shares, (iii) the
Share Price Range provides reciprocal protection for each of the Partnerships
and the Company, (iv) the $.75 difference between the lower end of the Share
Price Range and the Share Price at which each of the General Partners may
withdraw its recommendation and terminate the Acquisition Agreement is
approximately equal to the amount the General Partners estimate would be the
applicable Partnership's cost to negotiate and present a revised merger proposal
to Unitholders if the applicable Merger were not consummated on its currently
contemplated terms and (v) under certain circumstances, Unitholders may receive
Shares with a value in excess of Net Asset Value per Unit. Unitholders should
note that the Stanger Fairness Opinions do not address the fairness of the
Merger Consideration if the Share Price is less than $22.25.
40
<PAGE>
The following table sets forth the calculation of the Net Asset Values of
the Partnerships.
CALCULATION OF NET ASSET VALUE AS OF MARCH 31, 1996
<TABLE>
<CAPTION>
IDS1 IDS2 IDS3
-------------- -------------- ---------------
<S> <C> <C> <C>
Appraised value of real estate assets........................... $ 40,370,000 $ 30,520,000 $ 50,890,000
Balance sheet adjustments:
Cash and cash equivalents..................................... 625,600 367,914 395,166
Other assets.................................................. 342,800 193,561 358,552
Mortgages, lines of credit and other liabilities.............. (331,900) (3,589,529) (11,063,975)
Estimated transaction costs................................... (939,800) (630,100) (930,100)
-------------- -------------- ---------------
Total balance sheet adjustments................................. (303,300) (3,658,154) (11,240,357)
-------------- -------------- ---------------
Net Asset Value of Partnership.................................. $ 40,066,700 $ 26,861,846 $ 39,649,643
-------------- -------------- ---------------
-------------- -------------- ---------------
</TABLE>
ALLOCATION OF NET ASSET VALUE AMONG GENERAL AND LIMITED PARTNERS
<TABLE>
<CAPTION>
IDS1 IDS2 IDS3
-------------- -------------- ---------------
<S> <C> <C> <C>
Net Asset Value allocable to General Partner.................... $ 2,003,335 $ 1,343,092 $ 2,960,762
Net Asset Value allocable to Unitholders........................ 38,063,365 25,518,754 36,668,881
Net Asset Value per Unit........................................ 257 222 308
</TABLE>
FAIRNESS OF THE MERGERS TO THE UNITHOLDERS
REAL ESTATE PORTFOLIO APPRAISALS. The General Partners have relied in part
upon the Appraisals prepared by Stanger, an independent appraiser, to establish
the Appraised Values of the Partnerships' real estate assets. The Appraised
Values were utilized in determining the Net Asset Value of each Partnership. See
"Appraisals and Opinions of Financial Advisors."
STANGER FAIRNESS OPINION. The General Partners have relied in part upon the
Stanger Fairness Opinion to support their conclusion that the Merger
Consideration constitutes fair consideration to the Unitholders for the Units.
Subject to the assumptions, qualifications and limitations set forth in the
Stanger Fairness Opinion, Stanger concluded that, as of the date of the Stanger
Fairness Opinion, the Merger Consideration was fair to the Unitholders from a
financial point of view. The Stanger Fairness Opinion does not address the
fairness of any of the terms of the Mergers other than the Merger Consideration.
The Stanger Fairness Opinion is based upon business, economic, real estate and
securities markets, and other conditions as of July 1, 1996, and does not
reflect any changes in those conditions that may have occurred since that date.
See "Appraisals and Opinions of Financial Advisors."
COMPARISON OF CERTAIN BENEFITS AND DETRIMENTS OF ALTERNATIVES TO THE
MERGERS. Prior to concluding that the Mergers should be proposed to
Unitholders, the General Partners considered several alternatives to the
Mergers, including liquidation of the Partnerships, continuation of the
Partnerships, support of the secondary market and reorganizations of the
Partnerships as separate corporations taxed as REITs. See "Background and
Reasons for the Mergers -- Alternatives to the Mergers." To determine whether
the Mergers or one of their alternatives would be more attractive to the
Unitholders, the General Partners compared certain potential benefits and
detriments of the Mergers with certain potential benefits and detriments of the
alternatives. Based upon this comparison, the General Partners believe the
Mergers are more attractive than the alternatives. See "Reasons for the Mergers
- -- Alternatives to Mergers."
DISTRIBUTIONS IN ACCORDANCE WITH ORIGINAL INVESTOR UNDERSTANDINGS. Each of
the Partnership Agreements sets forth a procedure for allocating distributions
among the Unitholders and the General Partner. These distribution rules were
described in detail in the disclosure documents delivered to the Unitholders
when, through the sale of the Units, capital was originally raised by the
Partnerships, and
41
<PAGE>
constituted the basis upon which Unitholders elected to invest funds in the
Partnerships. The General Partners have followed the original distribution rules
in determining the Shares to be received by the Unitholders and General Partner
of each of the Partnerships.
FAIRNESS IN VIEW OF CONFLICTS OF INTEREST. The Company, the General
Partners and their affiliates have significant conflicts of interest in
connection with the Mergers, and no unaffiliated representatives were appointed
to negotiate the terms of the Mergers on behalf of any of the Partnerships. See
"Conflicts of Interest." The General Partners believe, however, that their
determination regarding the fairness of the Mergers was based upon the proper
exercise of their fiduciary duties, unaffected by these conflicts of interest.
ALLOCATION OF MERGER EXPENSES. The General Partners believe the procedures
for allocating the expenses of the Mergers are fair to the Partnerships,
inasmuch as each of the Partnerships (i) will bear its pro rata portion of the
Shared Expenses based on its relative Net Asset Value if Unitholders approve the
applicable Merger and (ii) will bear only a percentage of its pro rata portion
of the Shared Expenses equal to the percentage of Unitholders voting in favor of
the applicable Merger if Unitholders do not approve that Merger and if certain
other events have not occurred. While the Acquisition Agreement provides that
the Partnerships, except for IDS1, will pay a pro rata portion of the Shared
Expenses and the Individual Expenses that would otherwise be payable by the
Company if the Acquisition Agreement is terminated for certain reasons, the
General Partner believes this is fair because the circumstances under which such
expenses would be provided by the Partnerships are generally situations in which
the Partnerships have entered into an alternative transaction, presumably
resulting in greater value to Unitholders and prompted at least in part by the
proposed Mergers. See "The Acquisition Agreement -- Fees and Expenses."
IMPACT OF MERGER ON PARTNERSHIP DISTRIBUTIONS. The Merger Consideration to
be received by Unitholders is based primarily upon the Net Asset Value of their
respective Partnership. Recognizing that there may be changes in a Partnership's
values between March 31, 1996 (the date on which the Net Asset Values are based)
and the Partnership's Closing Date and that it is a condition to that Closing
that the respective Partnership's Closing Net Asset Value is no less than its
Net Asset Value, the General Partner of the Partnership may delay cash
distributions if it deems appropriate. As soon as practicable following the
Closing for a particular Partnership, pre-Merger Unitholders and the General
Partner of that Partnership will receive a cash distribution in an aggregate
amount equal to the amount, if any, by which the Partnership's Closing Net Asset
Value exceeds its Net Asset Value. If a Partnership does not participate in the
Mergers, the Mergers may only temporarily delay, but are not otherwise expected
to affect or reduce (except for the Partnership's portion of Merger expenses),
the total distributions made by the Partnership. The General Partners do not
consider this delay or reduction in distributions due to payment of Merger
expenses to affect materially the fairness of the Mergers with respect to
Unitholders.
WASHINGTON STATUTORY DISSENTERS' RIGHTS. Unitholders who are opposed to the
Mergers will be entitled to statutory dissenters' rights under the WULPA. Under
the WULPA, Unitholders opposing the Mergers may contest the fairness of the
value of the Merger Consideration, request that any unresolved dispute regarding
the value of the assets be determined by an appraiser or appraisers to be
selected by a Washington Superior Court and require that their interests be
purchased for an all cash payment. Dissenting Unitholders would not, however,
have the right to prevent their Partnership's participation in the Mergers if
their Partnership's Merger is approved by the requisite vote of the applicable
Unitholders. See "Dissenters' Rights of Unitholders."
COMPARISON OF MERGER CONSIDERATION TO ALTERNATIVES
GENERAL. To assist Unitholders in evaluating the Mergers, the General
Partner of each Partnership has attempted to compare the Merger Consideration
with (i) the prices at which the Units have been sold in the illiquid secondary
market, (ii) estimates of the value of the Units on a liquidation basis assuming
that the Partnership's assets were sold at their fair market value (based upon
the Appraisals) or net book value and the net proceeds distributed to the
General Partner and Unitholders in
42
<PAGE>
accordance with the applicable Partnership Agreement and (iii) estimates of the
value of the Units on a going concern basis assuming that the Partnership
continued as an operating business and its assets were sold at the end of 2000.
Due to the uncertainty in establishing these values, the General Partner has, in
instances it deemed appropriate, established a range of estimated values for
each alternative, representing a high and low estimated value for the potential
consideration. Each of the General Partners believe that analyzing the
alternatives in terms of ranges of estimated value, established based upon
currently available market data and, where appropriate, reasonable assumptions
made in good faith, establishes a reasonable framework for comparing
alternatives. The results of this comparative analysis are summarized in the
table below.
The estimated values are based upon information available to each General
Partner at the time they were computed, including historical information
regarding the applicable Partnership and current real estate markets, and there
can be no assurance that the same conditions analyzed by each of the General
Partners in arriving at the estimates would exist at the time of consummation of
the Mergers. In addition, the estimated values assigned to the alternatives
below are based on a variety of assumptions that have been made by each General
Partner that relate, among other things, to (i) the Share Price as of the
Closing Date for the applicable Merger being within the Share Price Range, (ii)
projections as to the Partnership's future revenues, expenses, cash flow and
other significant financial matters, (iii) the capitalization rates that will be
used by prospective buyers when the Partnership's assets are liquidated, (iv)
selling costs, (v) appropriate discount rates to apply to expected cash flows in
computing the present value of the cash flows and (vi) the manner of sale of the
Partnership's properties.
The estimated values presented in the following table are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Actual results may vary from those set forth below based on numerous
factors, including interest rate fluctuations, changes in capitalization rates
used by prospective purchasers, tax law changes, increased supply of or
decreased demand for self storage facilities leading to lower occupancy rates or
lower rental rates, the manner in which the properties are sold and the related
selling costs and changes in availability of capital to finance acquisitions of
self storage properties. Each Unit in the following table represents an original
investment of $250.
<TABLE>
<CAPTION>
ESTIMATED LIQUIDATION
ESTIMATED GOING VALUE PER UNIT ASSUMING
SECONDARY MARKET PARTNERSHIP ASSETS SOLD
CONCERN VALUE PER AT:
MERGER PRICE PER UNIT (2) UNIT (3) ------------------------
CONSIDERATION -------------------- -------------------- APPRAISED NET BOOK
PARTNERSHIP PER UNIT (1) HIGH LOW HIGH LOW VALUE (4) VALUE (5)
- --------------------------------------- ----------------- --------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
IDS1................................... $ 257 $ 198 $ 150 $ 251 $ 235 $ 253 $ 175
IDS2................................... 222 185 162 218 203 217 183
IDS3................................... 308 200 165 304 283 299 192
</TABLE>
- ------------------------
(1) Assumes the Share Price is within the Share Price Range. The Merger
Consideration is payable in Shares and cash in lieu of fractional Shares.
See "-- Determination of Merger Consideration."
(2) The secondary market prices are those reported to Stanger for the first
calendar quarter of 1996. See "Distributions and Market Prices of Units --
Market Prices of Units."
(3) The going concern value estimates are based upon a number of assumptions
regarding the future net operating income and cash distributions of the
Partnership and assume a disposition of the Partnership's assets at the end
of 2000. See "-- Comparison of Merger Consideration to Alternatives -- Going
Concern Values."
(4) Estimated Liquidation Value at Appraised Value is based primarily upon the
Appraisals and adjustments for non-real estate assets and liabilities and
estimated selling costs. See "--Comparison of Merger Consideration to
Alternatives -- Liquidation Values."
43
<PAGE>
(5) Estimated Liquidation Value at Net Book Value is computed as of March 31,
1996 less estimated selling costs. See "-- Comparison of Merger
Consideration to Alternatives -- Liquidation Values."
SECONDARY MARKET PRICES OF UNITS. The data in the table above on secondary
market activity shows the highest and lowest secondary market prices for the
Units in the first calendar quarter of 1996 as reported to Stanger by certain
secondary market firms involved in sales of the Units. See "Distributions and
Market Prices of Units -- Market Prices of Units."
Limited partnerships are designed as illiquid, long-term investments. No
market for the Units was ever expected to develop and the secondary market
transactions for the Units have been limited and sporadic. It is not known to
what extent the transactions in the secondary market are between willing buyers
and willing sellers, each having access to relevant information regarding the
financial affairs of the Partnerships, the expected value of their assets, and
their prospects for the future. Many transactions in the secondary market are
believed to be distressed sales where sellers are highly motivated to dispose of
the Units and willing to accept substantial discounts from what might otherwise
by regarded as the fair value of the interest being sold to facilitate the
sales. Secondary market prices generally do not reflect the current market value
of the Partnerships' assets, nor are they indicative of total return since prior
cash distributions and tax benefits received by the original investor probably
are not reflected in the price. Nonetheless, notwithstanding these
qualifications, the secondary market prices, to the extent that the reported
data are reliable, are indicative of the prices at which the Units trade in the
illiquid secondary markets.
GOING CONCERN VALUES. The General Partners have estimated the going concern
value of each of the Partnerships by analyzing each Partnership's projected cash
distributions, assuming that the Partnership was operated as an ongoing business
through the end of 2000 and its assets sold at that time based upon a
capitalization of projected property cash flows in 2001. Each Unitholder would
be entitled to receive a pro rata share of the quarterly distributions from his
or her Partnership's cash available for distribution and the special
distribution of the liquidation proceeds, net of existing liabilities, in
accordance with the Partnership Agreements. This analysis is consistent with the
expectation that each of the Partnerships would be a finite-life investment. The
assumption of property dispositions in 2000 is consistent with the anticipated
disposition timeframes for IDS2 and IDS3 and one year later than the anticipated
disposition timeframe for IDS1.
The General Partners have presented two estimates of the going concern value
of each of the Partnerships on a per Unit basis, which estimates are based on
the five-year property cash flows beginning in 1996 used by Stanger in preparing
the Appraisals, adjusted for general and administrative expenses (which are
assumed to increase at a rate of 3.5% per year) and debt service payments
(principal and interest), where applicable. The going concern value of each
Partnership was established by computing the present value of the projected
distributions with respect to the applicable Partnership's Units, discounted at
a rate of 13%, 13.25% and 13.5% per annum for IDS1, IDS2 and IDS3, respectively,
under the conservative scenario and at a rate of 12%, 12.25% and 12.5% per annum
for IDS1, IDS2 and IDS3, respectively, under the more favorable scenario, which
rates take into consideration, among other factors, differences in the leverage
levels of each Partnership. Under the conservative scenario, each Partnership's
assets are sold at the end of 2000 for an all-cash purchase price sufficient to
yield the buyer a 10.5% return based on the applicable Partnership's projected
property cash flows for 2001. Under the more favorable scenario, it is assumed
that the Partnership's assets are sold at the end of 2000 for an all-cash
purchase price sufficient to yield the buyer a 10% return based upon the
applicable Partnership's projected property cash flows in 2001.
The going concern analysis assumes all of the Partnerships' properties are
sold in a single transaction at the end of 2000 with selling expenses equal to
4% of then current real estate value. If, instead, the assets were liquidated
over time, even at prices equal to those projected, distributions to the
Unitholders out of the Partnerships' cash flow from operations might be reduced
because the
44
<PAGE>
Partnerships' relatively fixed costs, such as general and administrative
expenses, would not be proportionately reduced with the liquidation of assets.
Accordingly, the General Partners believe the assumption that all the properties
are sold in a single transaction results in the most favorable valuation for
Unitholders.
LIQUIDATION VALUES. Since one of the alternatives available to the General
Partners is to proceed with a liquidation of the Partnerships, and the
corresponding distribution of the net liquidation proceeds to the General
Partners and Unitholders, the General Partners have estimated the liquidation
value of the Units (i) assuming that the Partnerships' real estate portfolios
were sold at their Appraised Values and that non-real estate assets and
liabilities were sold at their book value except for amortizable assets and (ii)
assuming that all of the Partnerships' assets and liabilities were sold at their
net book value. Both alternatives assume that the Partnerships incur selling
costs of 4% of the real estate assets' value and the net liquidation proceeds
are distributed among the General Partners and Unitholders in accordance with
the applicable Partnership Agreement.
The liquidation analysis assumes that each of the Partnerships' portfolios
is sold in a single transaction at its Appraised Value or net book value. If,
instead, the assets were liquidated over time, even at prices equal to those
projected, distributions to the Unitholders out of the Partnerships' cash flow
from operations might be reduced because the Partnerships' relatively fixed
costs, such as general and administrative expenses, would not be proportionately
reduced with the liquidation of assets. Accordingly, the General Partner
believes the assumption that all of the properties are sold in a single
transaction results in the most favorable valuation for Unitholders.
Of the two columns provided for liquidation values in the above table, the
General Partners believe that the liquidations at Appraised Value are more
reflective of the amounts that would actually be distributed to the Unitholders
if the Partnerships were to proceed with liquidating their assets. See
"Appraisals and Opinions of Financial Advisors -- Portfolio Appraisals of the
Partnerships' Properties." The Appraisals set forth, subject to the specified
assumptions, limitations and qualifications, Stanger's professional opinion as
to the market value of the Partnerships' real estate portfolios. While the price
at which the assets would sell if actually liquidated could differ materially
from the Appraised Values, the Appraisals are intended to estimate the prices at
which the real estate assets would sell if disposed of in an arm's-length
transaction between a willing buyer and a willing seller, each having access to
relevant information regarding the historical revenues and expenses of the
properties. The Appraisals assume that the Partnerships' assets are disposed of
in an orderly manner and are not sold in forced or distressed sales where
sellers might be expected to dispose of their interests at substantial discounts
to their actual fair market value.
In contrast, the net book value represents the value of the Partnerships'
equity as of March 31, 1996, computed in accordance with GAAP, less selling
costs equal to 4% of the book value of the Partnerships' real estate assets. The
net book value computations are not adjusted for, or intended to be, estimates
of the fair market value of the real estate assets. Nonetheless, since book
value is a commonly used accounting principle, and shows the values at which the
assets are carried on the Partnerships' books, it does establish a basis for
comparing the value of the Units to other commonly used measures of value.
DISTRIBUTION COMPARISON
The General Partners have considered the potential impact of the Mergers
upon distributions that would be made to Unitholders becoming stockholders.
Depending upon the Share Price used to determine the number of Shares to be
issued in the Mergers, after the Mergers the level of distributions to
Unitholders who have become Company stockholders may be higher or lower than the
level of distributions with respect to their Units prior to the Mergers. The
General Partners believe that such changes in distribution levels are
justifiable when taking into account differences in the Partnerships' and the
Company's cash distribution policies, principal and interest payments on debt
and capital expenditure levels. The table below shows the pro forma
distributions that would have been made to Unitholders as if they became
stockholders on January 1, 1996, using the actual distribution made by
45
<PAGE>
the Company relating to results of operations for the quarter ended March 31,
1996 ($.47 per share of Common Stock), assuming that all Partnerships elected to
participate in the Mergers and the Mergers occurred on January 1, 1996 and
rounding the number of Shares to be received to the nearest whole Share. The
table compares these pro forma estimates against the actual distributions to
Unitholders attributable to first quarter 1996 Partnership operations (not upon
the amounts that might have been distributed by the Partnerships based upon
their cash balances).
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
MARCH 31, 1996 MARCH 31, 1996
DISTRIBUTION AT DISTRIBUTION AT
QUARTER ENDED $22.25 SHARE PRICE $27.75 SHARE PRICE
MARCH 31, 1996 -------------------------- -------------------------
PARTNERSHIP DISTRIBUTION $ % CHANGE $ % CHANGE
- ----------------------------------------- --------------- --------- --------------- --------- --------------
<S> <C> <C> <C> <C> <C>
IDS1..................................... $ 4.84 $ 5.64 17% $ 4.23 (13)%
IDS2..................................... 4.06 4.70 16 3.76 (7)
IDS3..................................... 4.69 6.58 40 5.17 10
</TABLE>
When reviewing this data, Unitholders should consider that a number of
factors affect the level of the Partnerships' quarterly distributions, including
the distributable income generated by the Partnerships' operations, the
principal and interest payments on the Partnerships' debt, capital expenditure
levels (in excess of normal expenditures for ongoing maintenance and repairs)
and the Partnerships' policy with respect to quarterly cash distributions. In
some cases, the Partnerships have, in order to maintain constant levels of
distributions, made quarterly distributions in excess of cash generated by the
Partnerships' operations during the preceding quarter. The Partnerships' ability
to make such an excess distribution would also be affected by existing cash
reserves and the ability to borrow funds necessary to make the distribution. In
addition, the portion of total assets and debt represented by income generating
real estate versus cash and non-cash generating assets differs among the
Partnerships. Such differences impact to some degree the amount of distributable
cash generated relative to the Net Asset Values of the Partnerships. For the
foregoing reasons, a comparison of pro forma and actual distributions for a
single period does not clearly show how the Mergers might affect a Partnership's
distribution levels when analyzed over a number of years.
CONCLUSIONS OF THE SPECIAL COMMITTEE
The Special Committee of the Board of Directors of the Company has reviewed
the terms of the Mergers and believes that the Mergers are fair to Unitholders.
In determining the fairness of the Mergers to the Unitholders, the Special
Committee considered a number of factors, including the following, and did not
assign relative weights to them in reaching its conclusion.
RECOMMENDATION OF THE GENERAL PARTNERS. The Special Committee considered
the fact that each General Partner, in discharging its fiduciary duties to the
Unitholders of its Partnership, (i) carefully reviewed the terms of the Merger
of its Partnership, (ii) concluded that the Merger of its Partnership is fair to
the Unitholders and (iii) recommends that the Unitholders vote for approval of
the Acquisition Agreement and the transactions contemplated thereby. See
"Background and Reasons for the Mergers -- General Partners' Recommendations and
Reasons."
CONSENT OF IPSC. The Special Committee considered the fact that IPSC, a
limited partner of each of the General Partners which is not affiliated with the
Company, consented to the Mergers. The Special Committee noted that pursuant to
the GP Agreements the consent of IPSC may be required to consummate the Mergers.
APPRAISALS. The Special Committee considered the Appraisals delivered to
the General Partners by Stanger and the fact that the Net Asset Value is based
in large part on the Appraisals. Copies of the Appraisals, which set forth
discussions of the specific assumptions, limitations and qualifications of the
analysis undertaken, are attached as Appendix B to this Proxy
Statement/Prospectus and should be read in their entirety by each Unitholder.
See "Appraisals and Opinions of Financial Advisors -- Portfolio Appraisals of
the Partnerships' Properties."
46
<PAGE>
FAIRNESS OPINION. The Special Committee considered the Stanger Fairness
Opinion delivered to the General Partner by Stanger that the Merger
Consideration is fair to the Unitholders of each Partnership from a financial
point of view. A copy of the Stanger Fairness Opinion, which sets forth the
assumptions made, matters considered and limitations of the review undertaken,
is attached as Appendix C to this Proxy Statement/Prospectus and should be read
in its entirety by each Unitholder. See "Appraisals and Opinions of Financial
Advisors -- Opinions of the Partnerships' Financial Advisor."
PREMIUM OVER RECENT MARKET PRICES. The Special Committee considered the
fact that the Merger Consideration (assuming the Share Price remains within the
Share Price Range) represents a premium of more than 28%, 19% and 53% over the
highest sales price in the secondary market of an IDS1 Unit, IDS2 Unit and IDS3
Unit, respectively, known to the General Partners since January 1, 1992. See
"Distributions and Market Prices of Units -- Market Prices of Units."
THE ACQUISITION AGREEMENT
The following is a summary of certain provisions of the Acquisition
Agreement, a copy of which is attached as Appendix A to this Proxy
Statement/Prospectus and is incorporated herein by reference. This summary does
not purport to be complete and is qualified in its entirety by reference to the
full text of the Acquisition Agreement.
THE MERGERS
Subject to the terms and conditions of the Acquisition Agreement, at the
effective time of the Mergers (the "Effective Time") each Partnership as to
which the conditions to closing have been satisfied or waived (each, a
"Participating Partnership") will be merged with and into the Company. At the
Effective Time, the separate existence of the Participating Partnerships will
cease, and the Company will continue as the surviving entity of the Mergers.
At the Effective Time, each Unit (other than Units owned by the Company and
Units owned by Unitholders exercising dissenters' rights) and the GP Interest of
each of the Participating Partnerships will be converted into the right to
receive (i) that number of Shares calculated by dividing (a) the Net Asset Value
of the applicable Partnership that would be allocated to one Unit or the GP
Interest, as the case may be, if the Partnership's Net Asset Value was
distributed in a Dissolution by (b) the Share Price and (ii) the amount of the
Additional Consideration, if any is payable, that would be allocated to one Unit
or the GP Interest, as the case may be, if the Additional Consideration was
distributed in a Dissolution, and (iii) cash in lieu of a fractional Share. All
Units owned by the Company will be cancelled upon consummation of the Merger.
In the event the Share Price exceeds $28.50 for a particular Partnership,
the Company has the right to terminate the Acquisition Agreement as to that
Partnership. In the event the Share Price is less than $21.50 for a particular
Partnership, the General Partner of that Partnership may withdraw its
recommendation in favor of the applicable Merger or terminate the Acquisition
Agreement; provided, however, that prior to withdrawing its recommendation or
terminating the Acquisition Agreement as to that Partnership, the General
Partner, if so requested by the Company, must adjourn the Special Meeting of the
applicable Partnership for up to ten business days and the General Partner may
not withdraw its recommendation if, at least two business days prior to the date
of the adjourned Special Meeting, the Company agrees to pay the Additional
Consideration. Additional Consideration, with respect to each Partnership, is
that amount of cash equal to the difference between the actual Share Price and
$21.50, multiplied by the number of Shares to be issued in the applicable
Merger.
The Acquisition Agreement provides that in the event the payment of the
Merger Consideration pursuant to the Acquisition Agreement would result in the
issuance by the Company of more than 20% of the outstanding shares of Common
Stock, the Company may elect to pay cash in lieu of shares
47
<PAGE>
of Common Stock in excess of such amount. The Company currently does not expect
that the number of Shares issued pursuant to the Acquisition Agreement will
exceed 20% of the outstanding shares of Common Stock.
REPRESENTATIONS AND WARRANTIES
In the Acquisition Agreement, the Company has made various representations
and warranties to each Partnership, including representations and warranties
relating to (i) the due organization of the Company and its authority to enter
into the Acquisition Agreement, (ii) the absence of the need (except as
specified) for third-party or governmental consents to the Mergers, (iii) the
Mergers' nonviolation of laws and material agreements, (iv) the Company's
capitalization, (v) the due authorization of the Shares to be issued in the
Mergers, (vi) the accuracy of publicly filed documents, (vii) financial
statements, (viii) full disclosure and (ix) the absence of material litigation.
In addition, each Partnership has made various representations and
warranties to the Company, including (i) the due organization of the
Partnership, (ii) its authority to enter into the Acquisition Agreement, (iii)
the absence of the need (except as specified) for third-party or governmental
consents to its Merger and its Merger's nonviolation of laws and material
agreements, (iv) the accuracy of publicly filed documents, (v) financial
statements, (vi) full disclosure, (vii) the absence of defaults of material
agreements, (viii) the absence of material litigation, (ix) title to assets and
properties and the absence of environmental liabilities and (x) payment of
taxes.
CONDUCT OF BUSINESS PENDING THE EFFECTIVE TIME
Each Partnership has agreed that, prior to the Effective Time or the earlier
termination of the Acquisition Agreement, it will carry on its business in the
ordinary course in substantially the same manner as previously conducted and
will use its reasonable efforts to preserve intact its present business
organization and goodwill, maintain permits, licenses and authorizations and
preserve its relationship with third parties. In addition, each Partnership has
agreed to use its best efforts to manage its business, including, but not
limited to, suspending cash distributions to its partners if the General Partner
deems it advisable to do so, so that the Partnership's Closing Net Asset Value
will not be less than the Partnership's Net Asset Value. To the extent the
Partnership's Closing Net Asset Value exceeds its Net Asset Value, a cash
distribution in the amount of such excess will be made to the Partnership's
pre-Merger Unitholders and General Partner in accordance with the terms of the
applicable Partnership Agreement as soon as practicable following the Closing.
IPSC CONSENT
Pursuant to the GP Agreements, the general partners of the General Partners
may not have authority to approve the Mergers without the consent of IPSC, a
limited partner of each of the General Partners which is not affiliated with the
Company. IPSC reviewed the registration statement relating to the Mergers,
including the preliminary Proxy Statement/Prospectus in substantially the form
intended to be finalized and filed with the Commission, the Acquisition
Agreement, the draft Appraisals and the form of the Stanger Fairness Opinion,
and retained independent legal counsel. IPSC did not conduct any due diligence
review of the information contained in this Proxy Statement/Prospectus and has
not participated in the management or control of the Partnerships. Based on its
review of documents, the General Partners' review of alternatives to the Offers
and the Mergers and the Stanger Fairness Opinion, IPSC consented to the Mergers.
IPSC has significant conflicts of interest in the Mergers because, if the
Mergers are consummated, IPSC would receive (based upon an assumed Share Price
of $25.00) approximately 32,050, 21,500 and 52,600 Shares with respect to its
limited partnership interests in the IDS1 General Partner, the IDS2 General
Partner and the IDS3 General Partner, respectively. See "Conflicts of Interest."
STANDSTILL AGREEMENT
The Company has agreed that, upon its admission as a substitute limited
partner with respect to the Units it purchased in the Offers, it will not,
directly or indirectly, without the prior written consent of a majority of the
general partners of the General Partner of the applicable Partnership (i)
acquire
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any additional Units of the Partnership, (ii) propose any merger or other
business combination involving the Partnership or (iii) propose any other
transaction pursuant to which it would control or acquire any of the assets of
the Partnership.
NO SOLICITATION OF TRANSACTIONS
Until the termination of the Acquisition Agreement, no Partnership will, nor
will it permit its partners (including any general or limited partner of its
General Partner), agents or other representatives (including, without
limitation, any investment banker, attorney or accountant retained by it) to,
directly or indirectly, initiate, solicit or encourage, or, except as required
by law, including fiduciary duties required by law, engage in discussions or
negotiations with or provide any information to any entity or group (other than
the Company or an affiliate of the Company) concerning any acquisition proposal,
tender offer, exchange offer, merger, consolidation, sale of a substantial
amount of assets, or sale of securities or equity interests, or in connection
with a liquidation, dissolution or similar transaction involving such
Partnership. Subject to fiduciary duty requirements of the General Partners, the
Partnerships have agreed to notify the Company immediately if any such inquiries
or proposals are received by, any such information is requested from, or any
such negotiations or discussions are sought to be initiated or continued with,
the Partnerships, and have agreed to keep the Company informed of the status and
terms of any such proposals and any such negotiations or discussions.
INDEMNIFICATION
From and after the Effective Time, the Company will indemnify and hold
harmless the General Partner of each of the Participating Partnerships and its
general and limited partners to the same extent that such persons would have
been entitled to indemnification by the Partnership under its Partnership
Agreement.
CONDITIONS PRECEDENT TO THE MERGERS
The consummation of a Merger as to any Partnership is not conditioned upon
the consummation of a Merger as to any other Partnership. In the event that the
conditions to Closing have been satisfied or waived with respect to one or two
Partnerships, the Mergers may be effected with respect to such Partnerships, and
in the event the conditions to Closing subsequently are satisfied or waived with
respect to any additional Partnerships, the Mergers may be effected as to such
Partnerships.
CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective obligations of each
party to effect the Mergers are subject to the fulfillment on or before the
Closing Date of the following conditions: (i) the Acquisition Agreement shall
have been approved by the requisite vote of the Unitholders of the Partnerships;
(ii) no injunctions relating to the Mergers or any of the parties thereto that
would have a material adverse effect on the Company or on the business or
properties of the Partnerships, taken as a whole or individually, or that would
prevent consummation of the Mergers, will have been issued or remain
outstanding; (iii) the Registration Statement will have been declared effective
by the Commission under the Securities Act and no stop order suspending the
effectiveness of the Registration Statement shall have been issued; and (iv) the
Shares will have been authorized for listing on the NYSE upon official notice of
issuance.
CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. In addition to the foregoing
conditions, the obligation of the Company to effect the Mergers as to each
Partnership is further subject to fulfillment or waiver before the Closing Date
of the following conditions: (i) receipt of a fairness opinion to the Company
from Alex. Brown as to the fairness to the Company, from a financial point of
view, of the Merger Consideration; (ii) receipt of a certificate from the
General Partner as of the Closing Date certifying that the Closing Net Asset
Value of each Partnership is not less than the Net Asset Value of the
Partnership; (iii) there will have been no material adverse change in the
Partnership's ability to consummate the Mergers, or in the Partnership's
business, operations, properties, assets or condition, financial or otherwise,
since the date of the Acquisition Agreement; (iv) the representations and
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warranties of the Partnership will be true in all material respects as of the
Closing Date; (v) all necessary consents and approvals from third parties shall
have been obtained; and (vi) the Company shall have received an opinion from
counsel to the Partnership.
CONDITIONS TO THE OBLIGATIONS OF THE PARTNERSHIPS. The obligation of each
of the Partnerships to effect the Mergers is subject to the fulfillment or
waiver in writing by the applicable Partnership on or before the Closing Date of
the following conditions: (i) the Partnership will have received the Stanger
Fairness Opinions; (ii) there has not been any material adverse change in the
Company's ability to pay the Merger Consideration, or in the Company's business,
operations, properties, assets or condition, financial or otherwise, since the
date of the Acquisition Agreement; (iii) the representations and warranties of
the Company contained in the Acquisition Agreement will be true in all material
respects as of the date of the Acquisition Agreement and on the Effective Date;
(iv) the Company will have performed or complied with in all material respects
all obligations, agreements and covenants contained in the Acquisition Agreement
to be performed and complied with by it on or prior to the Closing Date; (v) all
necessary consents and approvals from third parties shall have been obtained;
and (vi) the Partnership shall have received an opinion from counsel to the
Company.
TERMINATION
With respect to any Partnership, the Acquisition Agreement may be
terminated, and the Merger may be abandoned, at any time before the Closing
Date, notwithstanding approval of the Merger by the Unitholders of the
applicable Partnership:
(a) by the mutual written consent of the Board of Directors of the
Company and the General Partner of the Partnership;
(b) by either the Company or the Partnership if the Merger has not been
consummated by March 31, 1997;
(c) by either the Company or the Partnership if a court of competent
jurisdiction or governmental, regulatory or administrative agency or
commission shall have issued a nonappealable final order, decree or ruling,
or taken any other action having the effect of permanently restraining,
enjoining or otherwise prohibiting the Merger between the Company and the
Partnership;
(d) by either the Company or the Partnership if the requisite vote of
the Unitholders of the Partnership shall have not been obtained by March 31,
1997;
(e) by the Company if (i) the General Partner of the Partnership
withdraws or changes its approval of the Acquisition Agreement in a manner
adverse to the Company or has resolved to do so; (ii) the General Partner of
the Partnership recommends to the Unitholders certain alternative
transactions; (iii) any person (other than the Company or an affiliate of
the Company) will have acquired voting rights to, or the right to acquire
voting rights to, or any group has been formed which has voting rights to,
or the right to acquire voting rights to, 20% or more of the outstanding
Units of such Partnership; or (iv) if the Share Price, without taking into
account the application of the Share Price Range, exceeds $28.50;
(f) by the Company or the Partnership if (i) any representation or
warranty of the Partnership or the Company, respectively, set forth in the
Acquisition Agreement shall be materially untrue when made or shall become
materially untrue or (ii) upon a breach of any covenant or agreement on the
part of the Partnership or the Company, respectively, set forth in the
Acquisition Agreement, such that certain conditions to the Merger would not
be satisfied (either (i) or (ii) above being a "Terminating Breach");
provided, however, that if such Terminating Breach is curable prior to March
31, 1997 by the Company or the Partnership, as the case may be, through the
exercise of its reasonable best efforts and for so long as the Company or
the Partnership, as the case may be, continues to exercise such reasonable
best efforts, neither the Partnership nor the Company, respectively, may
terminate the Acquisition Agreement;
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<PAGE>
(g) by the Partnership or the Company, if the Partnership enters into a
definitive agreement accepting an Alternative transaction; or
(h) by the Partnership if the Share Price, without taking into account
the application of the Share Price Range, is less than $21.50 and the
Company has not agreed to pay the Additional Consideration.
FEES AND EXPENSES
Substantial expenses have been or will be incurred by the Company and the
Partnerships in connection with the Offers and the Mergers. Those expenses,
excluding the Individual Expenses (as defined below), will be shared by the
Company and the Partnerships (the "Shared Expenses"). The "Individual Expenses"
include legal fees and expenses, fees and expenses of investment bankers and
other financial advisors, the costs of the Appraisals and transfer fees payable
by the Company for the Units acquired through the Offers. Individual Expenses
incurred by the Company will be paid by the Company and Individual Expenses
incurred by a Partnership will be paid by the Partnership. The Company will pay
50% of the Shared Expenses and 50% of the Shared Expenses will be allocated (the
"Allocated Expenses") among the Partnerships pro rata based upon their relative
Net Asset Value (37.6%, 25.2% and 37.2% for IDS1, IDS2 and IDS3, respectively)
and will be paid by the Partnership to which the expenses have been allocated if
the Mergers are consummated. A Partnership's Allocated Expenses and Individual
Expenses will be deducted from the assets of the Partnership when computing the
Closing Net Asset Value and an estimate of such expenses was deducted from the
assets of the Partnerships in computing the Net Asset Value. Since each
Partnership will be entitled to make a cash distribution to its pre-Merger
partners in an amount that will reduce the Closing Net Asset Value to an amount
equal to the Net Asset Value, the Partnership's Allocated Expenses and
Individual Expenses will reduce the amount otherwise available for distribution
to the pre-Merger partners in the Partnership.
Except with respect to IDS1 as described below, in the event the Unitholders
in the Partnership fail to approve the Merger of the Partnership by the
requisite vote, the Partnership will be required to pay, in addition to its
Individual Expenses, only that percentage of its Allocated Expenses equal to the
percentage of its Units voted in favor of the Merger; the balance of the
Allocated Expenses will be paid by the Company.
IDS2 and IDS3 will be obligated under the Acquisition Agreement to pay a pro
rata portion (based upon that Partnership's relative Net Asset Value) of the
Shared Expenses and Individual Expenses otherwise payable by the Company if (i)
that Partnership has provided information to or entered into discussions with
another party regarding the acquisition of the Partnership, and prior to the
date of the Special Meeting the General Partner of the Partnership does not
reaffirm its approval of the Merger, and the Unitholders fail to approve the
Merger by the requisite vote, (ii) the Company terminates the Acquisition
Agreement because the General Partner of the Partnership withdraws its approval
of the Merger, recommends an alternative transaction, or third parties obtain
voting rights to 20% or more of the Units, or (iii) the Partnership enters into
an alternative transaction and the Partnership or the Company terminates the
Acquisition Agreement. Because the provisions of the IDS1 Partnership Agreement
preclude IDS1 from reimbursing the Company for expenses if the Merger is not
consummated, IDS1 will pay only its Individual Expenses if the IDS1 Merger is
not consummated for any reason.
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<PAGE>
The following table sets forth the estimated aggregate expenses expected to
be incurred by the Company and the Partnerships in connection with the Offers
and the Mergers.
<TABLE>
<CAPTION>
Shared Expenses:
<S> <C>
Printing and mailing......................................................... $ 500,000
Accounting fees.............................................................. 255,000
Real estate transaction costs................................................ 165,000
Information Agent/Inspector of Elections..................................... 425,000
Other........................................................................ 340,000
----------
1,685,000
Individual Expenses:
Legal fees................................................................... $1,811,000
Investment banking fees...................................................... 955,000
Partnership transfer fees for Tendered Units................................. 210,000
Appraisal fee................................................................ 92,000
----------
3,068,000
----------
Total Estimated Expenses....................................................... $4,753,000
----------
----------
</TABLE>
If all of the Mergers are consummated, (i) of the Shared Expenses, 50% will
be paid by the Company and 18.8%, 12.6% and 18.6% will be paid by IDS1, IDS2 and
IDS3, respectively, and (ii) of the Individual Expenses, approximately
$1,410,000 will be paid by the Company and approximately $623,000, $418,000 and
$617,000 will be paid by IDS1, IDS2 and IDS3, respectively.
EFFECT OF TERMINATION
If the Acquisition Agreement is terminated, there will be no liability or
obligation on the part of any party thereto or its respective affiliates,
partners, officers, directors or stockholders except (i) with respect to payment
of expenses described above, (ii) with respect to the Standstill Agreement and
(iii) to the extent that such termination results from the willful breach of a
party thereto of any of its representations, warranties, covenants or agreements
made in or pursuant to the Acquisition Agreement.
AMENDMENT
Neither the Acquisition Agreement nor any provision thereof may be waived,
modified, amended, discharged or terminated except in writing signed by the
party against which the enforcement of such waiver or amendment is sought, and
then only to the extent set forth in such instrument.
DISSENTERS' RIGHTS
Units held by Unitholders who properly exercise dissenters' rights with
respect thereto in connection with the Merger in accordance with Section
25.10.900 et seq. of the WULPA will not be converted into the right to receive
the Merger Consideration, but the holder of the Units will instead be entitled
to receive payment of the fair value of the Units in accordance with the
provisions of the WULPA unless and until the holder fails to perfect or has
effectively withdrawn or lost his or her rights to receive fair value under the
WULPA. See "Dissenters' Rights of Unitholders."
AMENDMENTS TO THE PARTNERSHIP AGREEMENTS
The IDS2 and IDS3 Partnership Agreements currently prohibit the sale of any
property by each Partnership to its General Partner or "affiliates," as such
term is defined therein (including the Company). Accordingly, the IDS2 and IDS3
Partnership Agreements must be amended in order to consummate the IDS2 and IDS3
Mergers. The Acquisition Agreement provides that the IDS2 and IDS3 Partnership
Agreements will be amended as described below.
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Section 13.3(c) of the IDS2 Partnership Agreement will be amended to add the
following subsection:
(iii) Notwithstanding any provision of this Agreement, the Partnership
may merge with and into Shurgard Storage Centers, Inc. (the "Company")
pursuant to, and consummate all other transactions contemplated by, the
terms of the Acquisition Agreement dated July 1, 1996, between the Company,
the Partnership, IDS/Shurgard Income Growth Partnership L.P. and IDS/
Shurgard Income Growth Partners L.P. III.
Section 13.3(c) of the IDS3 Partnership Agreement will be amended to add the
following subsection:
(iii) Notwithstanding any provision of this Agreement, the Partnership
may merge with and into Shurgard Storage Centers, Inc. (the "Company")
pursuant to, and consummate all other transactions contemplated by, the
terms of the Acquisition Agreement dated July 1, 1996, between the Company,
the Partnership, IDS/Shurgard Income Growth Partnership L.P. and IDS/
Shurgard Income Growth Partners L.P. II.
Approval of the Acquisition Agreement and the transactions contemplated
thereby by Unitholders of IDS2 and IDS3 will also constitute approval of the
amendments to the IDS2 and IDS3 Partnership Agreements, respectively, set forth
above. See "The Special Meetings -- The IDS2 Special Meeting" and "-- The IDS3
Special Meeting."
GENERAL PARTNER UNDERTAKING
Concurrent with the execution of the Acquisition Agreement, the General
Partner of each of the Partnerships entered into an agreement with the Company
(the "General Partner Undertaking") pursuant to which they agreed to make the
recommendations to Unitholders contained in this Proxy Statement/Prospectus, and
agreed not to withdraw such recommendations except in accordance with the
discharge of their fiduciary duties and as otherwise required by law. The
Company acknowledged that the General Partner is entitled to withdraw its
recommendation in the event that the Share Price calculated without regard to
the Share Price Range is less than $21.50 and the Company does not elect to pay
the Additional Consideration.
SOURCE AND AMOUNT OF FUNDS
The Company expects to pay its portion of the Shared Expenses and Individual
Expenses from borrowings under the Company's two revolving credit facilities
(the "Credit Facilities"). In the event the Company pays the Additional
Consideration, the funds required for the Additional Consideration will be
obtained through the Credit Facilities. Under the Credit Facilities, the Company
is authorized to borrow up to $100 million, on the terms and conditions provided
in (i) the Loan Agreement among the Company, Seattle-First National Bank, Key
Bank of Washington and West One Bank dated August 19, 1994 (the "First Loan
Agreement") and (ii) the Revolving Loan Agreement among the Company, SSC
Acquisitions Inc. and Nomura Asset Capital Corp. dated as of December 23, 1994
(the "Second Loan Agreement"). The Mergers are not subject to any financing
contingency, and neither the Company nor any subsidiary of the Company must
secure additional financing in connection with the Mergers.
The First Loan Agreement provides for financing of up to $50 million,
secured by certain real estate assets, bearing interest at a rate per annum of
either the lender's prime rate or LIBOR plus 175 basis points and matures on
August 18, 1996. As of the date of this Proxy Statement/Prospectus, the Company
has $ of borrowings outstanding under the First Loan Agreement. The Company
is currently engaged in negotiations to refinance its obligations under the
First Loan Agreement. The Second Loan Agreement provides for financing of $50
million, secured by certain real estate assets, bearing interest at a rate per
annum of either the prime rate of Citibank, N.A. minus 50 basis points or LIBOR
plus 175 basis points, requires a draw fee of 25 basis points of the amount
drawn, and matures on December 30, 1996. As of the date of this Proxy
Statement/Prospectus, the Company has $ of
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borrowings outstanding under the Second Loan Agreement. The amount available
under each of the 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 that Credit Facility.
The amounts outstanding under the First Loan Agreement and the Second Loan
Agreement include $ and $ , respectively, borrowed by the Company to pay
for Units purchased in the Offers.
APPRAISALS AND OPINIONS OF FINANCIAL ADVISORS
PORTFOLIO APPRAISALS OF THE PARTNERSHIPS' PROPERTIES
Stanger was engaged by the Partnerships to appraise the real estate
portfolio of each of the Partnerships and has delivered a written summary of its
analysis, based upon the review, analysis, scope and limitations described
therein, as to the fair market value of each Partnership's portfolio as of
December 31, 1995. The Partnerships selected Stanger to provide the appraisal
because of its experience and reputation in connection with partnerships and
real estate assets. In addition, the General Partners desired to take advantage
of the cost efficiencies associated with having the same party provide the
Appraisals as provided the Stanger Fairness Opinions. The Appraisals, which
contain a description of the assumptions and qualifications made, matters
considered and limitations on the review and analysis, are attached as Appendix
B to this Proxy Statement/Prospectus and should be read in their entirety.
Certain of the material assumptions, qualifications and limitations to the
Appraisals are described below.
EXPERIENCE OF STANGER. Since its founding in 1978, Stanger has provided
information, research, investment banking and consulting services to clients
throughout the United States, including major member firms of the NYSE and
insurance companies and over 70 companies engaged in the management and
operation of partnerships and real estate investment trusts. The investment
banking activities of Stanger include financial advisory services, asset and
securities valuations, industry and company research and analysis, litigation
support and expert witness services, and due diligence investigations in
connection with both publicly registered and privately placed securities
transactions.
Stanger, as part of its investment banking business, is regularly engaged in
the valuation of businesses and their securities in connection with mergers,
acquisitions and reorganizations and for estate, tax, corporate and other
purposes. Stanger's valuation practice principally involves partnerships,
partnership securities and the assets typically owned through partnerships, such
as oil and gas reserves, real estate, cable television systems and equipment
leasing assets.
SUMMARY OF METHODOLOGY. At the request of the Partnerships, Stanger
evaluated each of the Partnerships' portfolio of real estate on a limited scope
basis utilizing the income approach and the sales comparison approach to
valuation. Appraisers typically use up to three approaches in valuing real
property: (i) the cost approach, (ii) the income approach and (iii) the sales
comparison approach. The type and age of a property, market conditions and the
quantity and quality of data affect the applicability of each approach in a
specific appraisal situation. The value estimated by the cost approach
incorporates separate estimates of the value of the unimproved site and the
value of improvements, less observed physical wear and tear and functional or
economic obsolescence. The income approach estimates a property's capacity to
produce income through an analysis of the rental market, operating expenses and
net income. Net income may then be processed into a value through either direct
capitalization or discounted cash flow analysis, or a combination of these two
methods. The sales comparison approach involves a comparative analysis of the
subject property with other similar properties that have sold recently or that
are currently offered for sale in the market. Stanger considered the cost
approach to be less reliable than the income approach or the sales comparison
approach given the primary criteria used by buyers of the type of property
appraised in the Appraisals.
While the Appraisals were prepared for each Partnership's entire real estate
portfolio, Stanger analyzed the individual properties in the real estate
portfolio of each Partnership by (i) reviewing each
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property's historical operating statements, (ii) reviewing and relying on
specific information regarding prospective changes in rents and expenses for
each property provided by the Partnership, (iii) developing information from a
variety of sources about market conditions for each individual property and (iv)
considering the projected cash flow for each property. Representatives of
Stanger performed site inspections on all properties in the Partnerships during
March 1996. In the course of these site visits, Stanger inspected the physical
facilities, obtained current rental and occupancy information, gathered
information on competing properties and the local market, visited primary
competing properties and interviewed each local property manager or assistant
manager concerning performance of the subject property and other factors.
In conducting the Appraisals, Stanger also interviewed and relied upon
Partnership and property management personnel to obtain information relating to
the condition of each property, including any deferred maintenance, capital
budgets, status of ongoing or newly planned property additions,
reconfigurations, improvements and other factors affecting the physical
condition of the property improvements.
Stanger also interviewed district or regional property management personnel
responsible for the properties and the Partnerships' management personnel, all
of whom are employees of the Company, to discuss competitive conditions, area
economic and development trends affecting the properties, historical and
budgeted operating revenues and expenses and occupancies. Stanger also reviewed
historical operating statements and 1996 operating budgets for the subject
properties, and reviewed surveys of local self-service storage markets conducted
by local management personnel.
To define the occupancy, rental rate and expense escalators to be used in
developing property operating projections, Stanger reviewed the acquisition
criteria and projection parameters in use in the marketplace by major self
storage investors, owners and operators. In addition, Stanger reviewed other
published information concerning acquisition criteria in use by property
investors at or around December 31, 1995. Further, Stanger interviewed various
sources in local markets to identify recent sales of self storage properties and
derive certain valuation indicators. Sources for data concerning such
transactions included local appraisers, property owners, real estate brokers,
tax assessors and real estate research firms.
INCOME APPROACH. Stanger then determined the value of each of the
Partnerships' portfolios using the income approach. During the course of the
site inspections, Stanger identified competing properties and obtained data on
local market rental rates and occupancy. Stanger reviewed historical and
budgeted gross income and income from ancillary sources for each property in the
portfolios and conducted discussions with the property management personnel
concerning property and market trends and competitive conditions and other
pertinent information. After assessing the above factors, Stanger estimated each
property's effective gross income based upon unit configuration, market rental
rates, market occupancy rates and estimates of ancillary income. Expenses were
estimated based on historical and budgeted operating expenses, discussions with
management and certain industry expense guidelines. Estimated expenses were then
deducted from income to arrive at each property's estimated net operating
income. Expenses relating solely to investor reporting and accounting were
excluded.
Stanger then employed both direct capitalization and discounted cash flow
analysis to define the overall value of the portfolio. The direct capitalization
rate used by Stanger was based on current acquisition criteria among self
storage investors and reflected in specific sales transactions. Where
appropriate, the capitalization rate used for an individual property was
adjusted to reflect valuation factors unique to the property, such as overall
quality, recent buildouts and other unique valuation factors. Where deferred
maintenance or extraordinary capital expenditures were required Stanger adjusted
the capitalized value accordingly. Stanger applied capitalization rates ranging
from 9.25% to 10.25% to the projected net operating income from each of the
Partnerships' properties which were considered to be at stabilized occupancy
during the 12 months ending December 31, 1996.
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In applying discounted cash flow analysis, projections of cash flows from
each property (assuming no indebtedness thereon) were developed for a ten year
period ending December 31, 2005. Income and expense escalators used in
developing the projections were based on projection parameters currently in use
by property investors, market factors, historical and budgeted financial results
for each property and inflation rates. Income escalators generally ranged from
3% to 3.5%. In highly competitive markets or where a property's operations were
below stabilized levels, income escalators were adjusted as Stanger deemed
appropriate or until stabilized operations were achieved. Effective expense
escalators generally ranged from 2.7% to 3.5%.
Stanger then capitalized, at terminal capitalization rates ranging from
10.0% to 10.50% for IDS1, 10.0% to 10.25% for IDS2 and 10.25% to 10.75% (11.0%
for the office property) for IDS3, the estimated net operating income of each
property for the 12 months ending December 31, 2006, to determine the property's
residual value. The residual value was discounted after deducting appropriate
sales expenses to a present value using the same discount rate applied to the
stream of annual cash flows. The discount rates utilized, ranging from 12.0% to
12.5% for IDS1, 12.0% to 12.25% for IDS2 and 12.25% to 12.5% for IDS3, were
based on current acquisition criteria among self storage facility investors,
commercial/industrial property investors' target rates for return and the
historical spread in rates of return between real estate and other investments.
Stanger then correlated the values resulting from each method (direct
capitalization and discounted cash flow) to arrive at a final income approach
valuation.
SALES COMPARISON APPROACH. Stanger compiled transaction data involving
properties similar in type to the Partnerships' properties by interviewing
sources in local markets to identify recent sales of self storage or
office/storage properties, reviewing publicly available information on
acquisitions of self storage properties, reviewing information provided by
management, and contacting industry sources. Using this data, Stanger performed
a comparable sales analysis based upon price per square foot. A probable range
of value per square foot was estimated for each property based on the
relationship between observed sales prices per square foot and net operating
income per square foot. Price per square foot as estimated by this analysis was
multiplied by the rentable square footage of each property to derive an
estimated range of value. In the case of the IDS3 portfolio, the valuation
included consideration of the value of excess land parcels held for resale.
Stanger reconciled the estimated values resulting from the sales comparison
approach and the income approach for each property, and the resulting values
were summed to determine the estimated value of the Partnerships' entire
portfolio. Stanger adjusted the value conclusion for joint venture interests and
excess land parcels held for resale, and to reflect any deferred maintenance
items associated with the properties. The income approach was given primary
consideration by Stanger because properties such as those owned by the
Partnerships are typically purchased and sold based upon their income
characteristics. Stanger gave the sales comparison approach secondary
consideration.
CONCLUSIONS AS TO VALUE. Based on the valuation methodologies described
above, Stanger assigned a value to the portfolio of real property assets of each
Partnership. The following table sets forth the final portfolio value conclusion
of Stanger with respect to each of the Partnerships.
<TABLE>
<CAPTION>
PORTFOLIO VALUE
PARTNERSHIP CONCLUSION
- ---------------------------------------------------------- ------------------------
<S> <C>
IDS1...................................................... $ 40,370,000
IDS2...................................................... 30,520,000
IDS3...................................................... 50,890,000
------------------------
Total................................................. $ 121,780,000
------------------------
------------------------
</TABLE>
ASSUMPTIONS, LIMITATIONS AND QUALIFICATIONS OF PORTFOLIO
APPRAISALS. Stanger utilized certain assumptions to determine the appraised
value of the portfolios under the income approach and the sales comparison
approach. See Appendix B for a discussion of the specific assumptions,
limitations and qualifications of the Appraisals.
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The Appraisals reflect Stanger's valuation of the real estate portfolios of
the Partnerships as of December 31, 1995, in the context of the information
available on such date as well as the operating information available as of
March 31, 1996. Events occurring after December 31, 1995, and before the closing
of the Mergers could affect the properties or assumptions used in preparing the
real estate portfolio appraisals. Stanger has no obligation to update the
Appraisals on the basis of subsequent events. In connection with preparing the
Appraisals, Stanger was not engaged to, and consequently did not, prepare any
written report or compendium of its analysis for internal or external use beyond
the analysis set forth in Appendix B. Stanger will not deliver any additional
written summary of the analysis.
COMPENSATION AND MATERIAL RELATIONSHIPS. The Partnerships paid Stanger a
fee of $92,000 to prepare the Appraisals. In addition, Stanger is entitled to
reimbursement for reasonable travel and out-of-pocket expenses incurred in
making site visits and preparing the Appraisals and the Stanger Fairness
Opinion, subject to a maximum of $35,000, and is entitled to indemnification
against certain liabilities, including certain liabilities under federal
securities laws. The fees for the Appraisals were negotiated between the
Partnerships and Stanger and payment thereof is not dependent upon completion of
the Mergers. As noted in "-- Opinions of the Partnerships' Financial Advisor"
below, certain predecessor entities of the Company engaged Stanger to render
other appraisals, consulting or related services prior to the present
engagement. Stanger also has been compensated for rendering the Stanger Fairness
Opinion. See "-- Opinion of the Partnerships' Financial Advisor."
OPINION OF THE PARTNERSHIPS' FINANCIAL ADVISOR
Stanger was also engaged by the Partnerships to deliver a written summary of
its determination as to the fairness of the consideration, from a financial
point of view, to be received by the Unitholders of each of the Partnerships in
the Mergers. The full text of the Stanger Fairness Opinion, which contains a
description of the assumptions made, matters considered and limitations on the
review and analysis, is attached as Appendix C to this Proxy
Statement/Prospectus and should be read in its entirety. Certain of the material
assumptions and limitations to the Stanger Fairness Opinion are described below.
The summary set forth below does not purport to be a complete description of the
analyses used by Stanger in rendering the Stanger Fairness Opinion. Arriving at
a fairness opinion is a complex analytical process not necessarily susceptible
to partial analysis or amenable to summary description.
Except for certain assumptions described more fully below which the
Partnerships advised Stanger that it would be reasonable to make, the
Partnerships imposed no conditions or limitations on the scope of Stanger's
investigation or the methods and procedures to be followed in rendering the
Stanger Fairness Opinion. The Partnerships have agreed to indemnify Stanger
against certain liabilities arising out of Stanger's engagement to prepare and
deliver the Stanger Fairness Opinion.
SUMMARY OF MATERIALS CONSIDERED
In the course of Stanger's analysis to render its opinion regarding the
Mergers, Stanger: (i) reviewed drafts of this Proxy Statement/Prospectus and the
Acquisition Agreement in substantially the forms intended to be finalized and
filed with the Commission; (ii) reviewed the Partnerships' and the Company's
Annual Reports on Form 10-K for the fiscal years ended December 31, 1993, 1994
and 1995, and the Partnerships' and the Company's Quarterly Reports on Form 10-Q
for the quarter ended March 31, 1996; (iii) reviewed the Company's pro forma
financial statements and pro forma schedules prepared by the Partnerships'
management and the Company's management; (iv) performed appraisals of the
properties owned by the Partnerships as of December 31, 1995; (v) reviewed
information regarding purchases and sales of self storage properties by the
Company or any affiliated entities during the prior year and other information
available relating to acquisition criteria for self storage properties; (vi)
reviewed internal financial analyses and forecasts prepared by the Partnerships
(based in part on the Appraisals) of the current net liquidation value of the
Partnerships' assets and projections of cash flow from operations,
distributions, and going concern values for the Partnerships; (vii) conducted
discussions with senior management of the Partnerships and the
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Company regarding the conditions in self storage property markets, conditions in
the market for sales or acquisitions of properties similar to those owned by the
Partnerships, current and projected operations and performance, financial
condition and future prospects of the properties and the Partnerships; (viii)
reviewed historical market prices, trading volume and dividends for the Common
Stock and (ix) conducted such other studies, analyses, inquiries and
investigations as Stanger deemed appropriate.
SUMMARY OF ANALYSIS
The following is a summary of certain financial and comparative analyses
reviewed by Stanger in connection with and in support of its fairness opinion.
The summary of the opinion and analysis of Stanger set forth in this Proxy
Statement/Prospectus is qualified in its entirety by reference to the full text
of such opinion.
APPRAISALS. In preparing its opinion, Stanger performed independent
appraisals of the Partnerships' portfolios of properties. During the course of
the Appraisals, Stanger performed site inspections of each property owned by the
Partnerships, conducted inquiries into local market conditions affecting each
property, reviewed historical and budgeted operating statements for each
property, conducted interviews with the Partnerships and property management
personnel, reviewed the acquisition criteria in use in the marketplace by major
self storage property investors and owners and other real estate investors,
reviewed information concerning transactions involving self storage properties,
and estimated the market value of the portfolio utilizing the income and sales
comparison approaches to value. See "-- Portfolio Appraisals of the
Partnerships' Properties." Stanger observed that the Merger Consideration equals
the pro rata interest per Unit in the Appraised Values, as adjusted by the
General Partners for non-real estate assets and liabilities of the applicable
Partnership, estimated Merger costs and costs associated with the Offers to be
borne by the applicable Partnership and the Unitholders' share of the resulting
Net Asset Value according to the provisions of the applicable Partnership
Agreement.
REVIEW OF LIQUIDATION ANALYSIS. Stanger reviewed an analysis prepared by
the respective managements of the Partnerships of the estimated liquidation
values of each of the Partnerships utilizing estimates prepared by the
Partnerships of expenses associated with such a liquidation and the appraised
fair market value of the properties as determined by the Appraisals.
The liquidation analysis assumed that the properties in each Partnership's
portfolio were sold concurrently to an independent third party buyer at a price
equal to the appraised value of the portfolio. Costs of such property sales to
independent third parties were estimated by the Partnerships to total
approximately 4% of real estate asset value and are comprised of transaction
costs, taxes, commissions and legal and other closing costs. Such amounts were
based on prevailing transfer tax rates in the locale of each property and on
estimates of the Partnerships based on their knowledge and experience in similar
real estate transactions. The liquidation analysis also assumed that non-real
estate assets and liabilities except amortizable assets were sold at book value
and that net proceeds were distributed among the General Partner and the
Unitholders of the applicable Partnership in accordance with its Partnership
Agreement.
Stanger observed that the Merger Consideration exceeded the estimated
liquidation value per Unit by approximately $4, $5 and $9 for IDS1, IDS2 and
IDS3, respectively.
REVIEW OF GOING CONCERN ANALYSIS. Stanger reviewed financial analyses and
projections prepared by the managements of each of the Partnerships concerning
estimated cash flows and distributions from continued operation of the
Partnerships as independent stand-alone entities, and estimated sale proceeds
from the liquidation of the portfolio of properties owned by the Partnerships in
2000. The analyses incorporated estimates of cash flow from operating the
properties, payments on existing debt, entity level general and administrative
costs, and cash distributions to Unitholders from operations and sale of the
properties owned by the Partnerships during a five-year projection period. The
analyses and projections assumed, among other things, that (i) operating cash
flow for the
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portfolios would grow at a compound annual rate of approximately 3.0% for IDS1
(after property tax adjustments), 3.5% for IDS2 and 4.0% for IDS3 over the
projection period; (ii) general and administrative expenses would increase at an
average rate of 3.5% per annum over the projection period; (iii) the properties
would be sold in a single transaction at the end of the projection period at a
price based on property cash flows for 2001 capitalized at a rate of 10.0% to
10.5%; (iv) selling costs equal to 4% of real estate asset value would be
incurred; (v) cash flows were discounted at a rate of 12.0% to 13.0% for IDS1,
12.25% to 13.25% for IDS2 and 12.5% to 13.5% for IDS3, which rates take into
consideration, among other factors, differences in the leverage levels of each
Partnership, and (vi) the net proceeds of the sale plus other remaining non-real
estate assets less liabilities of the Partnership would be distributed according
to the provisions of the Partnership Agreements.
Stanger observed that the estimated going concern values resulting from the
above analyses ranged from $251 to $235 per IDS1 Unit compared with the IDS1
Offer Price of $257 per IDS1 Unit, $218 to $203 per IDS2 Unit compared with the
IDS2 Offer Price of $222 per IDS2 Unit and $304 to $283 per IDS3 Unit compared
with the IDS3 Offer Price of $308 per IDS3 Unit.
REVIEW OF TENDER OFFER AND SECONDARY MARKET PRICES. Stanger observed that
Units of the Partnerships have been purchased in recent months both through
transactions on the informal secondary market for partnership securities and
through a tender offer.
Stanger observed that Units in each of the Partnerships have been the
subject of one prior tender offer. According to information provided by the
Partnerships, on February 28, 1996 Everest commenced a tender offer for up to
4.9% of the IDS1 Units, IDS2 Units and IDS3 Units. Stanger observed that the
prices offered in this tender offer were $110 per IDS1 Unit compared with the
IDS1 Offer Price of $257 per IDS1 Unit, $120 per IDS2 Unit compared with the
IDS2 Offer Price of $222 per IDS2 Unit and $112 per IDS3 Unit compared with the
IDS3 Offer Price of $308 per IDS3 Unit. Stanger also observed that on May 20,
1996 Public Storage, Inc. sold 1,824.5 IDS1 Units, 2,038.3 IDS2 Units and
1,602.5 IDS3 Units to the Company for $200 per IDS1 Unit, $180 per IDS2 Unit and
$190 per IDS3 Unit (plus, in each case, four days' accrued interest) compared
with the Offer Prices of $257 per IDS1 Unit, $222 per IDS2 Unit and $308 per
IDS3 Unit.
Stanger also observed that, based on prices reported to Stanger by various
firms active in the informal secondary market for partnership interests, the
highest selling prices reported for Units in the informal secondary market since
January 1, 1995 were $200 per IDS1 Unit compared with the IDS1 Offer Price of
$257 per IDS1 Unit, $186 per IDS2 Unit compared with the IDS2 Offer Price of
$222 per IDS2 Unit and $200 per IDS3 Unit compared with the IDS3 Offer Price of
$308 per IDS3 Unit.
CONCLUSIONS
Stanger concluded that, based upon the foregoing and its analysis and the
assumptions, qualifications, and limitations stated below, and as of the date of
the Stanger Fairness Opinion, the Merger Consideration to be received by the
Unitholders in the Mergers is fair to the Unitholders of each respective
Partnership from a financial point of view.
ASSUMPTIONS
In rendering the Stanger Fairness Opinion, Stanger relied, without
independent verification, on the accuracy and completeness of all financial and
other information contained in the Proxy Statement/Prospectus or that was
otherwise publicly available or furnished or otherwise communicated to Stanger.
Stanger has not made an independent evaluation or appraisal of the
determinations of the non-real estate assets and liabilities of the
Partnerships. Stanger relied upon the balance sheet value determinations for the
Partnerships and the adjustments made by the General Partners to the real estate
portfolio appraisals to arrive at the Net Asset Values. Stanger also relied upon
the assurance of the Company, the Partnerships and the General Partners that the
calculations made to determine allocations within each of the Partnerships
between the General Partner and Unitholders are consistent with the provisions
of each Partnership's Partnership Agreement, that any financial projections,
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pro forma statements, projections, budgets, value estimates or adjustments
provided to Stanger were reasonably prepared or adjusted on bases consistent
with actual historical experience and reflect the best currently available
estimates and good faith judgments, that no material changes have occurred in
the Partnership's values subsequent to March 31, 1996, or in the real estate
portfolio values subsequent to December 31, 1995, which are not reflected in the
Partnership's Net Asset Values herein, and that the Partnerships and the General
Partners are not aware of any information or facts regarding the Partnerships
that would cause the information supplied to Stanger to be incomplete or
misleading.
LIMITATIONS AND QUALIFICATIONS OF FAIRNESS OPINION
Stanger was not asked to and therefore did not: (i) select the method of
determining the consideration offered in the Mergers; (ii) make any
recommendations to the Unitholders with respect to whether to approve or reject
the Mergers or whether to select the Offers made by the Company or the Shares
offered in the Mergers; (iii) express any opinion as to the fairness of the
Merger Consideration to be received in the Mergers if the actual Share Price is
less than $22.25 or (iv) express any opinion as to the business decision to
effect the Mergers, alternatives to the Mergers, tax factors resulting from the
Mergers, the allocation of expenses relating to the Mergers and the Offers
between the Company and the Partnerships or among the Partnerships, or any other
terms of the Mergers other than the Merger Consideration. The Stanger Fairness
Opinion is based on business, economic, real estate and securities markets, and
other conditions as of July 1, 1996, and does not reflect any changes in those
conditions that may have occurred since that date.
In connection with preparing the Stanger Fairness Opinion, Stanger was not
engaged to, and consequently did not, prepare any written report or compendium
of its analysis for internal or external use beyond the analysis set forth in
Appendix C. Stanger will not deliver any additional written summary of the
analysis.
COMPENSATION AND MATERIAL RELATIONSHIPS
Stanger has been paid fees by the Partnerships of $375,000 for preparing the
Stanger Fairness Opinion relating to the Mergers and $105,000 for preparing
fairness opinions relating to the Offers. In addition, in connection with its
preparation of the Appraisals and the fairness opinions relating to the Mergers
and the Offers, Stanger will be reimbursed for all reasonable out-of-pocket
expenses, including legal fees, up to a maximum of $35,000 and indemnified
against certain liabilities, including certain liabilities under the federal
securities laws. The fee was negotiated between the Partnerships and Stanger.
Payment of the fee to Stanger is not dependent upon completion of the Mergers.
The Company retained Stanger to perform appraisals and to deliver a fairness
opinion and special reports in connection with the Consolidation in March 1994.
Stanger was paid approximately $1,025,000 and was reimbursed for certain
expenses in connection with such services. In addition, the Company has paid
certain nominal amounts to Stanger for subscriptions to Stanger-prepared
national publications. Stanger also has been compensated for preparing the
Appraisals. See "-- Portfolio Appraisals of the Partnerships' Properties."
OPINION OF THE COMPANY'S FINANCIAL ADVISOR
In March 1996, the Company retained Alex. Brown to act as financial advisor
to the Special Committee in connection with the Offers and the Mergers,
including rendering its opinion to the Board of Directors of the Company as to
the fairness to the Company, from a financial point of view, of the
consideration payable to the Unitholders and General Partners of the
Partnerships. The Company and Alex. Brown subsequently executed a formal
engagement letter on June 20, 1996.
At the July 1, 1996 meeting of the Special Committee, representatives of
Alex. Brown rendered to the Board of Directors of the Company its opinion that,
as of that date, and subject to the assumptions made, matters considered and
limitations set forth in such opinion and summarized below, the
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consideration payable by the Company in the Offers and the Mergers was fair,
from a financial point of view, to the Company. No limitations were imposed by
the Special Committee upon Alex. Brown with respect to the investigations made
or procedures followed by it in rendering its opinion.
THE FULL TEXT OF ALEX. BROWN'S WRITTEN OPINION DATED JULY 1, 1996 (THE
"ALEX. BROWN OPINION"), WHICH SETS FORTH, AMONG OTHER THINGS, ASSUMPTIONS MADE,
MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS
APPENDIX D TO THIS PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY
REFERENCE. THE ALEX. BROWN OPINION ADDRESSES ONLY THE FAIRNESS TO THE COMPANY OF
THE CONSIDERATION PAYABLE BY THE COMPANY IN THE OFFERS AND THE MERGERS. THE
ALEX. BROWN OPINION DOES NOT ADDRESS THE FAIRNESS OF THE OFFERS AND THE MERGERS
TO THE UNITHOLDERS OR GENERAL PARTNERS OF THE PARTNERSHIPS. THE DISCUSSION OF
THE ALEX. BROWN OPINION IN THIS PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE ALEX. BROWN OPINION.
In connection with rendering the Alex. Brown Opinion, Alex. Brown reviewed
certain publicly available financial information and certain internal analyses
and other information concerning the Company and the Partnerships furnished to
it by the Company. Alex. Brown also held discussions with the members of the
senior management of the Company regarding the businesses and prospects of the
Company and the Partnerships and the joint prospects of a combined entity. In
addition, Alex. Brown (i) reviewed the reported prices and trading activity for
Shares and the Units of each of the Partnerships, (ii) compared certain
financial and stock market information for the Company with similar information
for certain comparable companies whose securities are publicly traded, (iii)
reviewed the financial terms of certain recent real estate transactions deemed
comparable in whole or in part, (iv) reviewed the terms of the Acquisition
Agreement and certain related documents and (v) performed such other studies and
analyses and considered such other factors as it deemed appropriate.
In conducting its review and arriving at the Alex. Brown Opinion, Alex.
Brown assumed and relied upon, without independent verification, the accuracy,
completeness and fairness of the information furnished to or otherwise reviewed
by or discussed with it. With respect to the financial projections of the
Partnerships and the Company and other information relating to the prospects of
the Partnerships and the Company provided to Alex. Brown by each entity, Alex.
Brown assumed that such projections and other information were reasonably
prepared and reflected the best currently available judgments and estimates of
the respective managements of the Partnerships and the Company as to the likely
future financial performances of their respective entities and of the combined
entity. Alex. Brown expressed no view as to such projections or the assumptions
on which they were based. Alex. Brown did not make an independent evaluation or
appraisal of the assets of the Partnerships. However, Alex. Brown reviewed the
Appraisals with respect to the real estate assets, although it was not permitted
to rely upon the Appraisals for purposes of the Alex. Brown Opinion. Alex. Brown
assumed that the Appraisals were prepared on a reasonable basis. The Alex. Brown
Opinion is based on market, economic and other conditions as they existed and
could be evaluated as of the date thereof.
The following is a summary of the material analyses performed and material
factors considered by Alex. Brown in connection with rendering the Alex. Brown
Opinion.
HISTORICAL FINANCIAL POSITION. Alex. Brown reviewed and analyzed for
informational purposes the historical and current financial condition of the
Company and the Partnerships which included: (i) an assessment of the Company's
and the Partnerships' recent financial statements; (ii) an analysis of the
Company's and the Partnerships' revenue, growth and operating performance
trends; and (iii) an assessment of the Partnerships' leverage, market share and
access to markets.
HISTORICAL STOCK PRICE PERFORMANCE. Alex. Brown reviewed and analyzed the
daily closing per share market prices, trading volume, and 20 day moving average
stock price for the Common Stock, from June 25, 1995 to June 25, 1996. This
information was presented to give the Special Committee background trading
information over the period indicated. Alex. Brown also reviewed and analyzed
information regarding the market prices and trading volume of the Partnerships'
units, on a quarterly basis, from September 1995 to April 1996.
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ANALYSIS OF CERTAIN OTHER PUBLICLY TRADED COMPANIES. This analysis examines
a company's valuation in the public market as compared to the valuation in the
public market of other selected publicly traded companies, in each case as a
multiple of its funds from operations, defined as per share net income,
excluding extraordinary gains or losses, plus depreciation from real estate
assets ("Funds From Operations"), estimated for 1996 and 1997. Alex. Brown
compared certain financial information relating to the Company and the
Partnerships to certain corresponding information with respect to a group of
four publicly traded REITs engaged primarily in the acquisition, operation and
management of storage center properties, namely the following companies: Storage
USA, Inc., Storage Trust Realty, Sovran Self Storage, Inc. and PS (collectively,
the "Selected Companies"). Such financial information included, among other
things, (i) common equity market prices, (ii) per share estimated 1996 and 1997
Funds From Operations and (iii) ratios of common equity market prices per share
("Equity Values") to estimated Funds From Operations. In the case of the
Selected Companies the financial information used was based on the latest
reported quarterly period as derived from publicly available information and on
estimated Funds from Operations for calendar years 1996 and 1997 as reported by
REALTY STOCK REVIEW. Alex. Brown obtained reference ranges of multiples of
Equity Value to estimated calendar year 1996 Funds From Operations of 9.9x to
12.5x, with a mean of 11.0x, and Equity Value to estimated calendar year 1997
Funds From Operations of 8.8x to 11.3x, with a mean of 10.1x, in each case for
the Selected Companies. Applying such reference multiple ranges to the estimated
calendar year 1996 and 1997 Funds From Operations for each of the Partnerships,
Alex. Brown determined reference valuation ranges from the Partnerships (on a
combined basis) of $105.3 million to $132.0 million, with a mean of $116.6
million, based upon estimated calendar year 1996 Funds From Operations, and
$108.8 million to $136.3 million, with a mean of $120.4 million, based upon
estimated calendar year 1997 Funds From Operations. As a result of the foregoing
procedures, Alex. Brown noted that the consideration of approximately $106.6
million in the aggregate to be paid by the Company in the Offers and the Mergers
was at the lower end of, or below, the ranges of the values obtained with
respect to the Selected Companies.
ANALYSIS OF SELECTED REAL ESTATE ACQUISITIONS. Alex. Brown reviewed the
financial terms, to the extent publicly available, of 15 proposed, pending or
completed real estate transactions in the storage center industry (the "Selected
Transactions"), and calculated for each of the Selected Transactions and the
Offers and the Mergers the capitalization rate, defined as net operating income
(minus capital expenditures) divided by the purchase price for the properties.
The Selected Transactions consisted of (i) the Company's bid to acquire four
National Self Storage properties, (ii) the Company's September 1, 1994
acquisition of Colonial Self-Storage, (iii) Storage USA Inc.'s September 12,
1995 acquisition of 13 storage center properties, (iv) Storage USA, Inc.'s April
13, 1995 acquisition of 25 storage center properties, (v) Storage USA, Inc.'s
April 13, 1995 acquisition of 16 storage center properties, (vi) Storage Trust
Realty's acquisition of Balcor/Colonial Storage Income Fund -- 86, (vii) Storage
Trust Realty's October 6, 1995 acquisition of 14 storage center properties,
(viii) Sovran Self Storage, Inc.'s June 30, 1995 acquisition of 12 storage
center properties, (ix) U-Haul International, Inc.'s bid for Balcor/Colonial
Storage Income Fund -- 86, (x) PS's June 14, 1996 acquisition of Prudential-
Bache/Watson & Taylor, Ltd.-1, (xi) PS's June 14, 1996 acquisition of
Prudential-Bache/Watson & Taylor, Ltd.-2, (xii) PS's June 14, 1996 acquisition
of Prudential-Bache/Watson & Taylor, Ltd.-3, (xiii) PS's June 14, 1996
acquisition of Prudential-Bache/Watson & Taylor, Ltd.-4, (xiv) PS's pending
acquisition of Storage Properties, Inc. and (xv) PS's February 29, 1996
acquisition of Southern Self Storage. Alex. Brown noted that the capitalization
rate based on the last reported annual net operating income prior to the
transaction (year ended December 31, 1995 in the case of the Partnerships) was
8.7% for the Partnerships (on a combined basis), which was at the lower end of
the range of 8.5% to 10.3%, with a mean of 9.4%, determined for the Selected
Transactions. Alex. Brown also noted that the capitalization rate based on the
projected net operating income for the year in which the acquisition took place
was 9.6% for the Partnerships (on a combined basis), falling in the middle of
the range of 9.0% to 10.5%, with a mean of 9.7% determined for the Selected
Transactions. All multiples for the
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Selected Transactions were based on public information available at the time of
announcement of such transaction, without taking into account differing market
and other conditions during the two year period during which the Selected
Transactions occurred.
DISCOUNTED CASH FLOW ANALYSIS. Alex. Brown obtained reference values for
each of the Partnerships by means of a discounted cash flow analysis, which
values a business based on the current value of the future cash flow that it is
projected to generate. To establish a current value under this approach, future
cash flow must be estimated and an appropriate discount rate determined. Alex.
Brown used projections and other information provided by the managements of the
Partnerships to estimate free cash flows, defined as total revenues minus
property operating and maintenance expenses, property management expenses, real
estate taxes and capital expenditures ("Free Cash Flows"), for the years ended
1996 through 2006, inclusive, with respect to the assets of the Partnerships,
using discount rates ranging from 11.0% to 13.0% and terminal value
capitalization rates applied to projected 2006 Free Cash Flow ranging from 9.0%
to 11.5%. Alex. Brown arrived at such discount rates based on its judgment of
the weighted average cost of capital of the Company and arrived at such terminal
values based on its review of the Selected Transactions. This analysis indicated
a range of values for the Partnerships' real estate of $106,459,161 to
$133,081,669 on a Free Cash Flow basis, as compared to the imputed value of the
Partnerships' real estate of $121,780,000 under the terms of the Offers and the
Mergers.
Alex. Brown also applied a discounted cash flow analysis to the
Partnerships' projected Funds From Operations, and funds available for
distribution, defined as Funds From Operations less capital expenditures, tenant
improvements and commissions ("Funds Available for Distribution"), using
discount rates ranging from 11.0% to 13.0% and terminal value capitalization
rates applied to Funds From Operations and Funds Available for Distribution, as
the case may be, projected for the year 2006, ranging from 9.0% to 11.5%. Alex.
Brown noted that this analysis indicated a range of values for the Partnerships
of $102,002,516 to $127,549,435 based upon estimated Funds From Operations and
$98,397,791 to $123,189,094 based upon estimated Funds Available for
Distribution. Based upon the Appraisals and certain balance sheet adjustments
provided by management, the Partnerships' indicated Net Asset Value, which is
also nominally the amount of consideration to be paid by the Company in the
Offers and the Mergers, is $106,578,185, which falls at the lower end of the
reference ranges of imputed values derived from the analysis.
PRO FORMA COMBINED EARNINGS ANALYSIS. Alex. Brown analyzed the Offers and
the Mergers with respect to the resulting dilution/accretion to the Company's
estimated Funds From Operations for the years ending 1996 and 1997 (assuming
different levels of cash and stock comprising the consideration paid), after
taking into account any potential cost savings and other synergies but not
taking into account nonrecurring costs relating to the Offers and the Mergers.
Alex. Brown noted that after taking into account potential cost savings and
other synergies for the years ending 1996 and 1997, respectively, and before
nonrecurring costs relating thereto, the Offers and the Mergers would be
slightly accretive to the Company's estimated Funds From Operations for such
years.
REAL ESTATE MARKET AND ECONOMIC FACTORS. In rendering its opinion, Alex.
Brown considered, among other factors, the condition of the U.S. stock markets,
particularly in the real estate sector, and the current level of economic
activity.
ANALYSIS OF OFFERS ABSENT CONSUMMATION OF MERGERS. Alex. Brown also
examined the financial effects to the Company of consummating one or more of the
Offers without also consummating the related Merger. Alex. Brown observed that
while a failure to consummate the Merger would result in the assets of the
relevant Partnership not being owned entirely by the Company and certain of the
anticipated combination synergies not being realized by the Company, the cash
purchase price offered by the Company in each of the Offers generally would
result in accretion to the Company's estimated Funds From Operations on a per
Unit basis, excluding nonrecurring transaction costs, regardless of how many
Units were actually purchased.
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No company used in the analysis of other publicly traded companies nor any
transaction used in the analysis of selected mergers and acquisitions summarized
above is identical to the Company, the Partnerships or any of the Offers and the
Mergers. Accordingly, such analyses must take into account differences in the
financial and operating characteristics of the Selected Companies and the
companies in the Selected Transactions and other factors that would affect the
public trading value and acquisition value of the Selected Companies and the
Selected Transactions, respectively.
While the foregoing summary describes all analyses and factors that Alex.
Brown deemed material in rendering the Alex. Brown Opinion, it is not a
comprehensive description of all analyses and factors considered by Alex. Brown.
The preparation of a fairness opinion is a complex process that involves various
determinations as to the most appropriate and relevant method of financial
analysis and the application of these methods to the particular circumstances
and, therefore, the process of preparing such an opinion is not readily
susceptible to summary description. Alex. Brown believes that its analyses must
be considered as a whole and that selecting portions of its analyses and of the
factors considered by it, without considering all analyses and the factors
considered by it, could create an incomplete view of the evaluation process
underlying the Alex. Brown Opinion. The analyses performed by Alex. Brown are
not necessarily indicative of actual values or future results, which may be
significantly more or less favorable than those suggested by such analyses.
Accordingly, such analyses and estimates are inherently subject to substantial
uncertainty. Additionally, analyses relating to the value of a business do not
purport to be appraisals or to reflect the prices at which the business actually
may be sold. Furthermore, no opinion is being expressed as to the prices at
which Shares may trade at any future time.
Pursuant to a letter agreement dated June 20, 1996 between the Company and
Alex. Brown, the fees payable to Alex. Brown for rendering the Alex. Brown
Opinion are $400,000. In addition, the Company has agreed to reimburse Alex.
Brown for its reasonable out-of-pocket expenses incurred in connection with
rendering financial advisory services, including fees and disbursements of its
legal counsel. The Company has agreed to indemnify Alex. Brown and its
directors, officers, agents, employees and controlling persons for certain
costs, expenses, losses, claims, damages and liabilities related to or arising
out of its rendering of services under its engagement as financial advisor.
The Special Committee retained Alex. Brown to act as its advisor based upon
Alex. Brown having acted as managing underwriter of a past offering of Common
Stock and as financial advisor to a special committee of the Board of Directors
of the Company regarding its merger with Shurgard Incorporated and based upon
Alex. Brown's qualifications, reputation, experience and expertise. Alex. Brown
is an internationally recognized investment banking firm and, as a customary
part of its investment banking business, is engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, private placements and for other purposes. Alex. Brown
may actively trade the equity securities of the Company for its own account and
for the account of its customers and, accordingly, may at any time hold a long
or short position in such securities. Alex. Brown maintains a market in the
Common Stock and regularly publishes research reports regarding the REIT
industry and the businesses and securities of the Company and other publicly
traded companies in the REIT industry.
64
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated balance sheet as of March 31,
1996 and unaudited pro forma consolidated statement of net income for the
three-month period then ended and the year ended December 31, 1995 set forth the
effect of the Mergers on the Company's pre-Merger pro forma balance sheet and
pre-Merger pro forma statements of income as of and for the same dates as if the
Offers were completed and the Mergers had occurred on January 1, 1995.
The Company's pre-Merger pro forma consolidated balance sheet and
consolidated statements of net income are based on the Company's historical
financial statements adjusted to reflect the consummation of the following
transactions as if they had occurred on January 1, 1995: (i) the Management
Company Merger in March 1995, (ii) the acquisition of Shurgard Evergreen Limited
Partnership in May 1995, (iii) the sale of approximately 4.9 million shares of
Common Stock in June and July 1995, (iv) the acquisition of four storage centers
completed in 1995 and (v) the purchase of 29,640, 23,022 and 23,843 of the
outstanding Units of IDS1, IDS2 and IDS3, respectively, pursuant to the Offers.
The 1995 pre-Merger pro forma consolidated statement of net income assumes that
any additional net income resulting from the preceding assumptions was
distributed to stockholders during 1995.
These pro forma consolidated financial statements have been formatted to
show the pro forma adjustments to the Company's pre-Merger pro forma
consolidated financial statements related to the Partnerships in three separate
columns so that the Unitholder can determine the results of the Merger of any
one, two or three of the Partnerships with the Company.
The pro forma consolidated financial statements are not necessarily
indicative of what the Company's actual financial position or results of
operations would have been as of the date or for the periods indicated, nor do
they purport to represent the Company's financial position or results of
operations as of or for any future period. The pro forma consolidated financial
statements should be read in conjunction with all financial statements included
elsewhere herein or incorporated by reference in this Proxy
Statement/Prospectus.
65
<PAGE>
PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1996
<TABLE>
<CAPTION>
COMPANY COMPANY
PRE-MERGER IDS1 (1) IDS2 (1) IDS3 (1) POST-MERGER
(IN THOUSANDS) PRO FORMA ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS PRO FORMA
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Storage centers, net....................... $ 537,732 $ 42,476(2) $ 30,520(2) $ 50,688(2) $ 661,416
Other real estate investments.............. 42,223 (9,810)(3) (5,104)(4) (7,136)(4) 20,173
Cash, cash equivalents and other assets.... 60,327 1,088(5) 562(5) 754(5) 62,731
------------ ----------- ----------- ----------- -----------
Total assets........................... $ 640,282 $ 33,754 $ 25,978 $ 44,306 $ 744,320
------------ ----------- ----------- ----------- -----------
------------ ----------- ----------- ----------- -----------
Accounts payable and other liabilities..... $ 43,854 $ 1,300(6) $ 1,371(6) $ 2,779( (7) $ 49,304
Notes payable.............................. 154,601 -- 2,850 10,384 167,835
------------ ----------- ----------- ----------- -----------
Total liabilities...................... 198,455 1,300 4,221 13,163 217,139
------------ ----------- ----------- ----------- -----------
Stockholders' equity....................... 441,827 32,454(8) 21,757(8) 31,143(8) 527,181
------------ ----------- ----------- ----------- -----------
Total liabilities and stockholders'
equity................................ $ 640,282 $ 33,754 $ 25,978 $ 44,306 $ 744,320
------------ ----------- ----------- ----------- -----------
------------ ----------- ----------- ----------- -----------
</TABLE>
- ------------------------------
(1) Amount represents the historical balances of the Partnership.
(2) Amounts reflect market value of self storage centers based on the
Appraisals. IDS1 includes only 70% of the step-up to market value of SJP
II's storage centers as the remaining 30% was owned by the Company prior to
the Mergers and will continue to be carried at the Company's historical
cost.
(3) Historical amounts have been adjusted to reflect the Units of the
Partnerships purchased by the Company ("Tendered Units") as if such purchase
had occurred on January 1, 1995 and the Company's 30% interest in SJP II.
(4) Historical amounts have been adjusted to reflect the purchase of the
Tendered Units.
(5) Historical assets have been reduced to eliminate amortizable assets which
were specifically excluded from the calculation of Net Asset Value per the
Acquisition Agreement.
(6) Historical amounts have been adjusted to include estimated liabilities for
Partnership transaction costs of $939,800, $630,100 and $930,100 for IDS1,
IDS2 and IDS3, respectively. See "The Acquisition Agreement -- Fees and
Expenses."
(7) Historical amount has been adjusted to include $257,000 of estimated costs
to complete the expansion of Dobson Ranch, the market value of which was
included in the Appraisal.
(8) Amount reflects Net Asset Value less the purchase price paid by the Company
for the Tendered Units.
66
<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF NET INCOME
THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
COMPANY COMPANY
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE PRE-MERGER IDS1 (1) IDS2 (1) IDS3 (1) POST-MERGER
DATA) PRO FORMA ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS PRO FORMA
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Rental revenue.............................. $ 23,531 $ 1,622 $ 1,093 $ 1,807 $ 28,053
Revenue from other real estate
investments................................ 721 (186)(2) (66)(3) (101)(3) 368
Property management revenue................. 854 (109)(4) (75)(4) (119)(4) 551
------------ ----------- ----------- ----------- -----------
Total revenue........................... 25,106 1,327 952 1,587 28,972
------------ ----------- ----------- ----------- -----------
Operating expense........................... 6,926 403 255 468 8,052
Depreciation and amortization............... 5,106 333(5) 216(5) 350(5) 6,005
Real estate taxes........................... 2,081 127 90 135 2,433
General and administrative.................. 1,082 34(4) 29(4) 28(4) 1,173
------------ ----------- ----------- ----------- -----------
Total expenses.......................... 15,195 897 590 981 17,663
------------ ----------- ----------- ----------- -----------
Income from operations...................... 9,911 430 362 606 11,309
------------ ----------- ----------- ----------- -----------
Interest and other income................... 95 10 5 9 119
Interest expense............................ (2,888) -- (59)(6) (214)(6) (3,161)
------------ ----------- ----------- ----------- -----------
Total other income (expense)............ (2,793) 10 (54) (205) (3,042)
------------ ----------- ----------- ----------- -----------
Net income.................................. $ 7,118 $ 440 $ 308 $ 401 $ 8,267
------------ ----------- ----------- ----------- -----------
------------ ----------- ----------- ----------- -----------
Net income per share........................ $ 0.31 $ 0.31
------------ -----------
------------ -----------
Funds from operations (7)................... $ 12,180 $ 724 $ 479 $ 686 $ 14,070
------------ ----------- ----------- ----------- -----------
------------ ----------- ----------- ----------- -----------
Weighted average number of shares........... 23,196,858 1,276,961(8) 856,799(8) 1,275,199(8) 26,605,817
------------ ----------- ----------- ----------- -----------
------------ ----------- ----------- ----------- -----------
</TABLE>
- ------------------------------
(1) Except as otherwise noted, amounts represent the historical balances of the
Partnership. Certain reclassifications to the historical balances have been
made to conform to the Company's historical presentation.
(2) Historical amounts have been adjusted to eliminate earnings related to the
Tendered Units and the Company's 30% interest in the earnings of SJP II.
(3) Historical amounts have been adjusted to eliminate earnings from the
Tendered Units.
(4) Historical amounts have been adjusted to eliminate management fees and
reimbursements (included as administrative expenses on the Partnerships'
books) received by the Company in connection with the management of the
Partnerships' properties.
(5) Historical amounts have been adjusted to reflect depreciation of the market
value of self storage centers based on the Appraisals.
(6) Historical amounts have been adjusted to reflect interest (at 8.25% per
annum) on the Partnership's debt. All Partnership debt will be refinanced in
the Mergers.
(7) The Purchaser defines funds from operations ("FFO") as net income before
extraordinary items (determined in accordance with GAAP), plus depreciation
and amortization related to real estate activities, plus or minus certain
nonrecurring revenue and expenses. FFO is used by many financial analysts in
evaluating REITs. FFO should not be considered as an alternative to net
income (determined in accordance with GAAP), as an indication of the
Company's or the Partnerships' 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 or the Partnerships' needs.
(8) Calculation is based on an assumption of a $25.00 Share Price.
67
<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF NET INCOME
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
COMPANY COMPANY
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE PRE-MERGER IDS1 (1) IDS2 (1) IDS3 (1) POST-MERGER
DATA) PRO FORMA ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS PRO FORMA
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Rental revenue.............................. $ 94,381 $ 6,465 $ 4,309 $ 7,225 $ 112,380
Revenue from other real estate
investments................................ 2,508 (739)(2) (278)(3) (358)(3) 1,133
Property management revenue................. 3,780 (443)(4) (313)(4) (490)(4) 2,534
------------ ----------- ----------- ----------- -----------
Total revenue........................... 100,669 5,283 3,718 6,377 116,047
------------ ----------- ----------- ----------- -----------
Operating expense........................... 26,194 1,516 958 1,820 30,488
Depreciation and amortization............... 18,143 1,331(5) 863(5) 1,399(5) 21,736
Real estate taxes........................... 7,727 466 324 506 9,023
General and administrative.................. 5,543 138(4) 90(4) 94(4) 5,865
------------ ----------- ----------- ----------- -----------
Total expenses.......................... 57,607 3,451 2,235 3,819 67,112
------------ ----------- ----------- ----------- -----------
Income from operations...................... 43,062 1,832 1,483 2,558 48,935
------------ ----------- ----------- ----------- -----------
Interest and other income................... 507 107 11 36 661
Interest expense............................ (12,014) -- (235)(6) (857)(6) (13,106)
------------ ----------- ----------- ----------- -----------
Total other income (expense)............ (11,507) 107 (224) (821) (12,445)
------------ ----------- ----------- ----------- -----------
Net income.................................. $ 31,555 $ 1,939 $ 1,259 $ 1,737 $ 36,490
------------ ----------- ----------- ----------- -----------
------------ ----------- ----------- ----------- -----------
Net income per share........................ $ 1.40 $ 1.37
------------ -----------
------------ -----------
Funds from operations (7)................... $ 49,175 $ 3,058 $ 1,947 $ 2,850 $ 57,031
------------ ----------- ----------- ----------- -----------
------------ ----------- ----------- ----------- -----------
Weighted average number of shares........... 23,193,921 1,276,961(8) 856,799(8) 1,275,199(8) 26,602,880
------------ ----------- ----------- ----------- -----------
------------ ----------- ----------- ----------- -----------
</TABLE>
- ------------------------------
(1) Except as otherwise noted, amounts represent the historical balances of the
Partnership. Certain reclassifications to the historical balances have been
made to conform to the Company's historical presentation.
(2) Historical amounts have been adjusted to eliminate earnings related to the
Tendered Units and the Company's 30% interest in the earnings of SJP II.
(3) Historical amounts have been adjusted to eliminate earnings from the
Tendered Units.
(4) Historical amounts have been adjusted to eliminate management fees and
reimbursements (included as administrative expenses on the Partnerships'
books) received by the Company in connection with the management of the
Partnerships' properties.
(5) Historical amounts have been adjusted to reflect depreciation of the market
value of self storage centers based on the Appraisals.
(6) Historical amounts have been adjusted to reflect interest (at 8.25% per
annum) on the Partnership's debt. All Partnership debt will be refinanced in
the Mergers.
(7) The Company defines funds from operations ("FFO") as net income before
extraordinary items (determined in accordance with GAAP), plus depreciation
and amortization related to real estate activities, plus or minus certain
nonrecurring revenue and expenses. FFO is used by many financial analysts in
evaluating REITs. FFO should not be considered as an alternative to net
income (determined in accordance with GAAP), as an indication of the
Company's or the Partnerships' 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 or the Partnerships' needs.
(8) Calculation is based on an assumption of a $25.00 Share Price.
68
<PAGE>
COMPARISONS OF PARTNERSHIPS AND COMPANY
The information below highlights a number of the significant differences
between the Partnerships and the Company relating to, among other things, forms
of organization, investment objectives, policies and restrictions, asset
diversification, capitalization, management structure, and investor rights.
These comparisons are intended to assist Unitholders in understanding how their
investments will be changed if, as a result of the Mergers, their Units are
exchanged for Shares. Following the captioned sections is a summary discussion
of the expected effects of the Mergers on Unitholders who receive Shares in
exchange for their Units.
<TABLE>
<CAPTION>
PARTNERSHIP COMPANY
- -------------------------------------------- --------------------------------------------
<S> <C>
FORM OF ORGANIZATION
The Partnerships are limited partnerships The Company is a Delaware corporation formed
organized under Washington law formed for for the purpose of investing in a real
the purpose of investing in a real estate estate portfolio consisting primarily of
portfolio consisting primarily of self self storage facilities. The Company began
storage facilities. The Partnerships have operations on March 1, 1994 through the
been taxed as partnerships for federal Consolidation and became self-administered
income tax purposes. See "Business and through the Management Company Merger in
Properties of the Partnerships." March 1995. The Company qualifies as a REIT
for federal income tax purposes.
</TABLE>
THE PARTNERSHIPS ARE LIMITED PARTNERSHIPS UNDER WASHINGTON STATE LAW, WHILE
THE COMPANY IS ORGANIZED AS A DELAWARE CORPORATION. THE PARTNERSHIPS AND THE
COMPANY ARE EACH VEHICLES APPROPRIATE FOR HOLDING REAL ESTATE INVESTMENTS AND
AFFORD PASSIVE INVESTORS, SUCH AS UNITHOLDERS AND STOCKHOLDERS, CERTAIN
BENEFITS, INCLUDING LIMITED LIABILITY, A PROFESSIONALLY MANAGED PORTFOLIO AND
THE AVOIDANCE OF DOUBLE-LEVEL TAXATION ON DISTRIBUTED INCOME. THE PARTNERSHIPS
ARE UNDER THE CONTROL OF THEIR GENERAL PARTNERS, WHILE THE COMPANY IS GOVERNED
BY ITS BOARD OF DIRECTORS. IN ADDITION, THERE ARE SIGNIFICANT DIFFERENCES IN THE
TAX TREATMENT OF THE PARTNERSHIPS AS PARTNERSHIPS AND THE COMPANY AS A REIT.
SOME OF THE MATERIAL TAX DIFFERENCES ARE SUMMARIZED BELOW UNDER THE CAPTIONS "--
TAXATION OF TAXABLE INVESTORS" AND "-- TAXATION OF TAX-EXEMPT INVESTORS."
69
<PAGE>
<TABLE>
<CAPTION>
PARTNERSHIP COMPANY
- -------------------------------------------- --------------------------------------------
<S> <C>
LENGTH OF INVESTMENT
An investment in each of the Partnerships Unlike the Partnerships, the Company intends
was presented to Unitholders as a finite to continue its operations for an indefinite
length investment, with the Unitholders to time period and has no specific plans for
receive regular cash distributions out of disposition of the assets acquired through
the Partnership's net operating income and the Consolidation or subsequent
special distributions of net sale proceeds acquisitions. The Company is required to
through the liquidation of the Partnership's distribute at least 95% of its REIT Taxable
real estate investments. Under each of the Income (as defined in "Material Federal
Partnership Agreements, the Partnerships Income Tax Considerations -- Taxation of the
will terminate December 31, 2030; however, Company as a REIT -- Annual Distribution Re-
each of the General Partners of IDS1 and quirements") to maintain its REIT status.
IDS2 stated its intention of selling its However, the Company is allowed to retain
Partnership's properties within a period of its net sale or refinancing proceeds for new
seven to nine years and the General Partner investments, capital expenditures, working
of IDS3 stated its intention of selling capital reserves or other appropriate
within five to ten years after acquisition purposes. See "Background and Reasons for
or development of the properties. the Mergers -- Expected Benefits from the
Unitholders were advised that sale of the Mergers."
Partnerships' assets would, however, be
dependent upon market conditions. See
"Business and Properties of the
Partnerships."
</TABLE>
UNITHOLDERS IN EACH OF THE PARTNERSHIPS EXPECT LIQUIDATION OF THEIR
INVESTMENTS WHEN THE ASSETS OF THE PARTNERSHIP ARE LIQUIDATED. IN CONTRAST, THE
COMPANY DOES NOT EXPECT TO DISPOSE OF ITS INVESTMENTS WITHIN ANY PRESCRIBED
PERIODS AND, IN ANY EVENT, PLANS TO RETAIN THE NET SALE PROCEEDS FOR FUTURE
INVESTMENTS. STOCKHOLDERS ARE EXPECTED TO ACHIEVE LIQUIDITY FOR THEIR
INVESTMENTS BY TRADING SHARES OF THE COMMON STOCK IN THE PUBLIC MARKET AND NOT
THROUGH THE LIQUIDATION OF THE COMPANY'S ASSETS. THE COMMON STOCK MAY TRADE AT A
DISCOUNT FROM, OR PREMIUM TO, THE LIQUIDATION VALUE OF THE COMPANY'S PROPERTIES.
<TABLE>
<S> <C>
NATURE OF INVESTMENT
The Units of each Partnership constitute The Shares constitute equity interests in
equity interests entitling each Unitholder the Company. Each stockholder will be
to its pro rata share of cash distributions entitled to his or her pro rata share of the
made to the Unitholders of the Partnership. dividends made with respect to the Common
Each of the Partnership Agreements specifies Stock. The dividends payable to the
how cash available for distribution, whether Stockholders are not fixed in amount and are
arising from operations or sales or only paid when declared by the Company's
refinancings, is to be shared among the Board of Directors. The Company has in the
General Partner and Unitholders. The past made quarterly dividends and intends to
distributions made to the Unitholders are continue to make such payments in the
not fixed in amount and depend upon each future. In order to qualify as a REIT, the
Partnership's operating results and the Company must distribute at least 95% of its
amounts received upon sale or refinancing of REIT Taxable Income.
the Partnership's assets.
</TABLE>
BOTH THE UNITS AND SHARES REPRESENT EQUITY INTERESTS ENTITLING THE HOLDERS
THEREOF TO PARTICIPATE IN THE GROWTH OF THE PARTNERSHIPS AND THE COMPANY,
RESPECTIVELY. DISTRIBUTIONS AND DIVIDENDS PAYABLE WITH RESPECT TO THE UNITS AND
SHARES DEPEND UPON THE PERFORMANCE OF THE PARTNERSHIPS AND THE COMPANY,
RESPECTIVELY.
70
<PAGE>
<TABLE>
<CAPTION>
PARTNERSHIP COMPANY
- -------------------------------------------- --------------------------------------------
<S> <C>
PROPERTIES AND DIVERSIFICATION
The investment portfolio of each of the The Company operates a network of
Partnerships is limited to the assets approximately 265 storage centers located
acquired with the initial equity raised from throughout the United States and in Europe.
the General Partners and Unitholders as well Of these properties, it owns, as of March
as the debt financing obtained by the 31, 1996, directly and through its wholly
Partnership within the established borrowing owned subsidiaries and joint ventures, 178
restrictions. The Partnerships are not self storage properties located in 19 states
authorized to issue additional equity and Europe and containing approximately 11.7
securities to expand their investment million net rentable square feet. In
portfolios. See "Business and Properties of addition, the Company owns two business
the Partnerships." parks and a commercial building containing
approximately 220,000 net rentable square
feet located in the Seattle metropolitan
area. The Company is currently expanding its
portfolio of real estate properties and real
estate based investments through the use of
equity and debt capital, joint ventures and
the acquisition and development of new
facilities. See "Business and Properties of
the Company."
</TABLE>
THE INVESTMENT PORTFOLIO FOR EACH PARTNERSHIP WAS LIMITED TO THE ASSETS
ACQUIRED WITH ITS INITIAL EQUITY AND LIMITED DEBT FINANCING. THE COMPANY HOLDS
AN INVESTMENT PORTFOLIO SUBSTANTIALLY LARGER AND MORE DIVERSIFIED THAN THE
PORTFOLIO OF ANY OF THE PARTNERSHIPS AND WITH THE POTENTIAL FOR FUTURE GROWTH
THROUGH ACQUISITION AND DEVELOPMENT. AN INVESTMENT IN THE COMPANY SHOULD NOT BE
VIEWED AS AN INVESTMENT IN A SPECIFIC POOL OF ASSETS BUT INSTEAD AS AN
INVESTMENT IN AN ONGOING REAL ESTATE INVESTMENT BUSINESS, SUBJECT TO THE RISKS
NORMALLY ATTENDANT TO ONGOING REAL ESTATE OWNERSHIP AND TO THE RISKS RELATED TO
PROPERTY DEVELOPMENT.
71
<PAGE>
<TABLE>
<CAPTION>
PARTNERSHIP COMPANY
- -------------------------------------------- --------------------------------------------
<S> <C>
PERMITTED INVESTMENTS
Each of the Partnerships was authorized to Under its Bylaws, the Company is authorized
invest in self storage facilities and office to invest in self storage facilities and
and business parks. The Partnerships have office and business parks, and may make
limited their investments to self storage mortgage loans, secured by properties of the
facilities, with the exception of IDS3, type in which the Company may invest, as
which has invested in an office building as long as such investments do not exceed 25%
well as self storage facilities. See of its "total assets" (as defined in the
"Business and Properties of the Bylaws) and satisfy certain specified
Partnerships." underwriting criteria. As of March 31, 1996,
over 90% of the Company's assets are
invested in self storage properties and
cash. In addition, the Company may make
other commercial real estate investments if
the Board of Directors specifically
authorizes such investments after making a
determination that the investments offer a
means of maximizing the value of the
Company's assets or diversifying its
portfolio to protect the value of its other
investments. The Company has no present
plans to make such other commercial real
estate investments.
</TABLE>
THE PARTNERSHIPS AND THE COMPANY HAVE CONCENTRATED THEIR INVESTMENTS ALMOST
SOLELY IN SELF STORAGE FACILITIES. THE BYLAWS OF THE COMPANY AUTHORIZE IT TO
MAKE OTHER COMMERCIAL REAL ESTATE INVESTMENTS OR MORTGAGE LOANS, SECURED BY
APPROPRIATE INVESTMENTS, IF THE BOARD OF DIRECTORS MAKES CERTAIN DETERMINATIONS
REQUIRED BY THE BYLAWS. ACCORDINGLY, THE COMPANY'S INVESTMENTS MAY BE MORE
DIVERSIFIED THAN THE INVESTMENTS OF THE PARTNERSHIPS. THE INVESTMENT
DIVERSIFICATION, IF IT OCCURS, WHILE POTENTIALLY SERVING AS A HEDGE AGAINST THE
RISK OF HAVING ALL OF THE COMPANY'S INVESTMENTS LIMITED TO A SINGLE ASSET GROUP,
WOULD EXPOSE THE COMPANY TO THE RISK OF OWNING AND OPERATING ASSETS NOT DIRECTLY
RELATED TO ITS PRIMARY BUSINESS.
72
<PAGE>
<TABLE>
<CAPTION>
PARTNERSHIP COMPANY
- -------------------------------------------- --------------------------------------------
<S> <C>
ADDITIONAL EQUITY
None of the Partnerships are authorized to The Board of Directors may, in its
issue equity securities other than the discretion, issue additional equity
Units. Therefore, no dilution of the securities consisting of Common Stock or
Unitholders' distributive share of cash Preferred Stock, provided that the total
available for distribution can occur. After number of shares issued does not exceed the
the Unitholders receive cumulative authorized number of shares of Common Stock
distributions equal to their collective or Preferred Stock set forth in the
capital contributions plus a cumulative Company's Certificate of Incorporation. The
noncompounded return of 9% per annum on Company expects to raise additional equity
their "adjusted capital contributions," as from time to time to increase its available
defined in the Partnership Agreements, the capital. The issuance of additional shares
Unitholders' share of cash available for of either Common Stock or Preferred Stock
distribution decreases from 95% to 80%. may result in the dilution of the interests
of the stockholders.
</TABLE>
THE PARTNERSHIPS ARE NOT AUTHORIZED TO ISSUE ADDITIONAL UNITS OR OTHER
EQUITY INTERESTS AND, THEREFORE, THE UNITS ARE NOT SUBJECT TO DILUTION, EXCEPT
AS PROVIDED IN THE PARTNERSHIP AGREEMENTS. IN CONTRAST, THE COMPANY HAS
SUBSTANTIAL FLEXIBILITY TO RAISE EQUITY CAPITAL TO FINANCE ITS BUSINESS AND
AFFAIRS THROUGH THE SALE OF COMMON STOCK OR PREFERRED STOCK. THE COMPANY,
THROUGH THE ISSUANCE OF NEW EQUITY SECURITIES, MAY SUBSTANTIALLY EXPAND ITS
CAPITAL BASE TO MAKE NEW REAL ESTATE INVESTMENTS. THE ISSUANCE OF ADDITIONAL
EQUITY SECURITIES BY THE COMPANY MAY DILUTE THE INTERESTS OF STOCKHOLDERS AND
THE COMPANY MAY ISSUE PREFERRED STOCK WITH PRIORITIES OR PREFERENCES OVER COMMON
STOCK WITH RESPECT TO DIVIDENDS AND LIQUIDATION PROCEEDS.
<TABLE>
<S> <C>
BORROWING POLICIES
Each of the Partnerships is authorized to The Company is permitted to borrow, on a
borrow funds necessary, appropriate or secured or unsecured basis, funds to finance
advisable in conducting its business and its business, subject to the restriction
affairs. The Partnership Agreements place contained in the Bylaws limiting its
various restrictions on the authority of the borrowing to not more than 50% of its "total
Partnerships to borrow funds. Furthermore, assets" and not more than 300% of its
as a matter of overall policy, each of the "adjusted net worth" (as those terms are
Partnerships limited the amount it borrowed defined in the Bylaws).
to finance its acquisitions and other
business activities. See "Business and
Properties of the Partnerships" for the
outstanding borrowings of each of the
Partnerships as of March 31, 1996.
</TABLE>
IN CONDUCTING ITS BUSINESS, THE COMPANY MAY BORROW FUNDS SUBJECT TO THE
LIMITATION ON INDEBTEDNESS OF 50% OF TOTAL ASSETS AND 300% OF ADJUSTED NET
WORTH. THE COMPANY MAY BE MORE LEVERAGED THAN ANY OF THE PARTNERSHIPS, WHICH
HAVE NOT INCURRED SIGNIFICANT BORROWINGS IN COMPARISON TO THE OVERALL VALUE OF
THEIR ASSETS. BORROWING FUNDS MAY ALLOW THE COMPANY TO SUBSTANTIALLY EXPAND ITS
ASSET BASE, BUT WILL ALSO INCREASE THE COMPANY'S RISKS DUE TO ITS LEVERAGED
INVESTMENTS.
73
<PAGE>
<TABLE>
<CAPTION>
PARTNERSHIP COMPANY
- -------------------------------------------- --------------------------------------------
<S> <C>
RESTRICTIONS UPON RELATED PARTY TRANSACTIONS
Each of the Partnership Agreements restricts The Bylaws prohibit the Company from
the respective Partnership from entering engaging in a transaction with a director,
into certain business transactions with the officer, advisor, person owning or
General Partners and its affiliates, except controlling 10% or more of any class of the
to the extent that such transactions were Company's outstanding voting securities, or
specifically disclosed in the disclosure any affiliate of the aforementioned
document pursuant to which the Units were ("interested parties"), except to the extent
offered and sold to the public. The that such transactions are specifically
Partnership Agreement for IDS1 authorizes authorized by the terms of the Bylaws. The
the Partnership to enter into other Bylaws prohibit the Company from entering
transactions with its General Partner or its into a transaction with any of the
affiliates only if the terms and conditions interested parties unless the terms and
of the transaction have been disclosed to conditions of such transactions have been
the Unitholders in advance and approved by disclosed to the Board of Directors and
the Unitholders holding of record more than approved by a majority of directors not
75% of the outstanding Units and, with otherwise interested in the matter
respect to any proposed services to be (including a majority of independent
rendered to the Partnership, the directors), and such directors in approving
compensation for such services is comparable the transaction have determined it to be
and competitive with that charged by a third fair, competitive and commercially
party rendering comparable services and reasonable, and on terms and conditions not
certain other conditions are met. While the less favorable to the Company than those
Partnership Agreements for IDS2 and IDS3 do available from unaffiliated third parties.
not specify a procedure for authorizing In addition, the Bylaws specifically
transactions with their General Partners or authorize the Company to acquire property
affiliates, it is possible to amend their from interested parties to the extent that
Partnership Agreements to authorize such a the terms and conditions of the acquisition
transaction because each of the Partnership have been approved by a majority of the
Agreements may be amended by a majority vote directors not otherwise interested in the
of Unitholders. transaction (including a majority of the
independent directors) and such directors
have made good-faith determinations as to
the fairness of the compensation provided
for such property.
</TABLE>
EXCEPT FOR TRANSACTIONS SPECIFICALLY APPROVED IN THE PARTNERSHIP AGREEMENTS
(AND WHICH WERE DISCLOSED IN THE DISCLOSURE DOCUMENTS PREPARED FOR THE OFFERING
AND SALE OF THE UNITS), THE PARTNERSHIPS ARE NOT AUTHORIZED TO ENTER INTO
TRANSACTIONS WITH THE GENERAL PARTNERS AND THEIR AFFILIATES UNLESS THE
TRANSACTIONS ARE APPROVED IN ADVANCE BY A VOTE OF THE UNITHOLDERS. THE BYLAWS OF
THE COMPANY CONTAIN SIMILAR RESTRICTIONS, BUT THE COMPANY MAY ENTER INTO A
TRANSACTION WITH ITS DIRECTORS, OFFICERS AND SIGNIFICANT STOCKHOLDERS IF THE
TRANSACTION IS APPROVED BY A MAJORITY OF THE DIRECTORS NOT INTERESTED IN THE
MATTER (INCLUDING A MAJORITY OF INDEPENDENT DIRECTORS) FOLLOWING A DETERMINATION
THAT THE TRANSACTION IS FAIR, COMPETITIVE AND COMMERCIALLY REASONABLE. THE
BYLAWS DO NOT REQUIRE THE APPROVAL OF STOCKHOLDERS FOR ENTERING INTO
TRANSACTIONS WITH INTERESTED PARTIES.
74
<PAGE>
<TABLE>
<CAPTION>
PARTNERSHIP COMPANY
- -------------------------------------------- --------------------------------------------
<S> <C>
COMPENSATION, FEES AND DISTRIBUTIONS
The compensation and fees paid by the Since the Management Company Merger, the
Partnerships relating to the management of Company has been internally managed. Instead
the Partnerships and their properties are as of paying fees for management services, the
follows: Company uses its own employees to manage its
(a) Property management fee to the Company properties.
equal to 6% of gross revenues (reduced to
5% of gross revenues from office and
business parks) received from operating
the Partnership's properties;
(b) Advertising fee to the Company at the
rate of $75 per month for each property
(except with respect to the office
building owned by IDS3); and
(c) Reimbursements to the Company for
certain out-of-pocket expenses incurred in
the management of the Partnership's
assets.
In addition, the General Partner of each
Partnership receives 5% of cash available
for distribution until the Unitholders of
that Partnership have received cumulative
distributions equal to the Unitholders'
collective capital contributions plus a
cumulative noncompounded return of 9% per
annum on their Adjusted Capital
Contributions, as defined in the Partnership
Agreements. Thereafter, the General Partner
receives 20% of cash available for
distribution.
</TABLE>
UNDER THE PARTNERSHIP AGREEMENTS AND THE MANAGEMENT SERVICES AGREEMENTS,
EACH OF THE PARTNERSHIPS PAYS COMPENSATION TO ITS GENERAL PARTNER AND FEES TO
THE COMPANY. AFTER THE MERGERS, NO FEES WILL BE PAID TO THE COMPANY AND THE
COMPANY WILL MANAGE THE PARTNERSHIPS' PROPERTIES THROUGH ITS EMPLOYEES. UNLIKE
UNITHOLDERS, STOCKHOLDERS REALIZE CERTAIN EFFICIENCIES ARISING FROM THE
COMPANY'S SELF-MANAGED STRUCTURE AND THE COMPANY CAN EXPAND ITS PROPERTY
HOLDINGS WITHOUT A PROPORTIONATE INCREASE IN THE COST OF MANAGING THE
PROPERTIES, WHICH RESULTS WHEN PROPERTIES ARE MANAGED BY AN OUTSIDE ADVISOR.
75
<PAGE>
<TABLE>
<CAPTION>
PARTNERSHIP COMPANY
- -------------------------------------------- --------------------------------------------
<S> <C>
MANAGEMENT CONTROL AND RESPONSIBILITY
Under each of the Partnership Agreements, The Board of Directors has exclusive control
the General Partners are, subject to certain over the Company's business and affairs
narrow limitations, vested with all subject only to the restrictions in the
management authority to conduct the business Certificate of Incorporation and the Bylaws.
of the Partnership, including authority and Stockholders have the right to elect members
responsibility for overseeing all executive, of the Board of Directors. The directors are
supervisory and administrative services accountable to the Company as fiduciaries
rendered to the Partnership. The General and are required to exercise good faith and
Partners have the right to continue to serve integrity in conducting the Company's
in such capacities unless removed by a affairs. See "Fiduciary Responsibility."
majority vote of the Unitholders.
Unitholders have no right to participate in
the management and control of the
Partnership and have no voice in its affairs
except for certain limited matters that may
be submitted to a vote of the Unitholders
under the terms of the Partnership
Agreements. See "-- Voting Rights." The
General Partners are accountable as
fiduciaries to the Partnership and are
required to exercise good faith and
integrity in their dealings in conducting
the Partnership's affairs. See "Fiduciary
Responsibility."
</TABLE>
STOCKHOLDERS HAVE GREATER CONTROL OVER MANAGEMENT OF THE COMPANY THAN THE
UNITHOLDERS HAVE OVER THE PARTNERSHIPS BECAUSE THE MEMBERS OF THE COMPANY'S
BOARD OF DIRECTORS ARE ELECTED FOR THREE-YEAR TERMS, WITH A PORTION OF THE BOARD
OF DIRECTORS ELECTED AT EACH ANNUAL MEETING OF STOCKHOLDERS. THE GENERAL
PARTNERS DO NOT NEED TO SEEK RE-ELECTION, BUT INSTEAD SERVE UNLESS REMOVED BY AN
AFFIRMATIVE VOTE OF UNITHOLDERS OWNING A MAJORITY OF THE UNITS ENTITLED TO VOTE,
WHICH IS GENERALLY AN EXTRAORDINARY EVENT. STOCKHOLDERS, LIKE UNITHOLDERS, ARE
PASSIVE INVESTORS AND MUST RELY UPON MANAGEMENT FOR THE PRUDENT ADMINISTRATION
OF THEIR INVESTMENTS.
76
<PAGE>
<TABLE>
<CAPTION>
PARTNERSHIP COMPANY
- -------------------------------------------- --------------------------------------------
<S> <C>
MANAGEMENT LIABILITY AND INDEMNIFICATION
As a matter of state law, the General The Company's directors are not personally
Partners have liability for the payment of liable for ordinary liabilities of the
Partnership obligations and debts, unless Company. The Certificate of Incorporation
limitations upon such liability are provides that a director's liability for
expressly stated in the obligation. Each of breach of fiduciary duty is limited to the
the Partnership Agreements provides that full extent allowable under Delaware law.
neither General Partners nor any of the The Bylaws and state laws provide broad
affiliates performing services on behalf of indemnification rights to directors and
the Partnership will be liable to the officers who act in good faith, and in a
Partnership or its Unitholders for any act manner reasonably believed to be in or not
or omission performed in good faith pursuant opposed to the best interests of the Company
to authority granted by the Partnership and, with respect to criminal actions or
Agreement, and in a manner reasonably proceedings, who act without reasonable
believed to be within the scope of authority cause to believe their conduct was unlawful.
granted and in the best interests of the In addition, the Bylaws indemnify directors
Partnership, provided that such act or and officers against amounts paid in
omission did not constitute fraud, settlement, authorize the Company to advance
misconduct, bad faith or negligence. In expenses incurred in defense, upon the
addition, the Partnership Agreements Company's receipt of an appropriate
indemnify the General Partners and their undertaking to repay such amounts if
affiliates for liability, loss, damage, appropriate, and authorize the Company to
costs and expenses, including attorneys' carry insurance for the benefit of its
fees, incurred by them in conducting the officers and directors even for matters as
Partnerships' business, except in the case to which such persons are not entitled to
of fraud, misconduct, bad faith or indemnification. See "Fiduciary
negligence. Responsibility." In the Mergers, the Company
will be assuming all existing and contingent
liabilities of the Partnerships, including
their obligations to indemnify the General
Partners.
</TABLE>
THE GENERAL PARTNER OF EACH OF THE PARTNERSHIPS HAS, UNDER MOST
CIRCUMSTANCES, NO LIABILITY TO ITS PARTNERSHIP FOR ACTS OR OMISSIONS IT
UNDERTAKES WHEN PERFORMED IN GOOD FAITH, IN A MANNER REASONABLY BELIEVED TO BE
WITHIN THE SCOPE OF ITS AUTHORITY AND IN THE BEST INTERESTS OF THE PARTNERSHIP.
EACH GENERAL PARTNER ALSO HAS, UNDER SPECIFIED CIRCUMSTANCES, A RIGHT TO BE
REIMBURSED BY ITS PARTNERSHIP FOR LIABILITY, LOSS, DAMAGE, COSTS AND EXPENSES IT
INCURS BY VIRTUE OF SERVING AS GENERAL PARTNER. ALTHOUGH THE STANDARDS ARE
EXPRESSED SOMEWHAT DIFFERENTLY, THERE ARE SIMILAR PROTECTIONS FROM LIABILITY
AVAILABLE TO DIRECTORS AND OFFICERS OF THE COMPANY WHEN ACTING ON BEHALF OF THE
COMPANY AND RIGHTS OF DIRECTORS AND OFFICERS TO SEEK INDEMNIFICATION FROM THE
COMPANY. THE COMPANY BELIEVES THAT THE SCOPE OF THE LIABILITY AND
INDEMNIFICATION PROVISIONS IN THE COMPANY'S GOVERNING DOCUMENTS PROVIDES
PROTECTION AGAINST CLAIMS FOR PERSONAL LIABILITY AGAINST THE COMPANY'S DIRECTORS
AND OFFICERS WHICH IS COMPARABLE TO, THOUGH NOT IDENTICAL WITH, THE PROTECTIONS
AFFORDED TO THE GENERAL PARTNERS AND THEIR AFFILIATES UNDER THE PARTNERSHIP
AGREEMENTS. IN THE MERGERS, THE COMPANY WILL BE ASSUMING ALL OF THE EXISTING AND
CONTINGENT LIABILITIES OF THE PARTNERSHIPS, INCLUDING THEIR OBLIGATIONS TO
INDEMNIFY THE GENERAL PARTNERS.
77
<PAGE>
<TABLE>
<CAPTION>
PARTNERSHIP COMPANY
- -------------------------------------------- --------------------------------------------
<S> <C>
ANTITAKEOVER PROVISIONS
Changes in management can be effected only The Certificate of Incorporation and Bylaws
by removal of the General Partners, which contain a number of provisions that might
action requires a majority vote of have the effect of delaying or discouraging
Unitholders. Due to transfer restrictions in a hostile takeover of the Company. These
the Partnership Agreements, the General provisions include, among others, the
Partners may restrict transfers of the Units following:
and, in particular, affect whether the (a) the power of the Board of Directors to
transferees have voting rights. An assignee issue 40,000,000 shares of Preferred
of a Unit may not become a substitute Stock, with such rights and preferences as
Unitholder, entitling him or her to vote on determined by the Board of Directors;
matters that may be submitted to the (b) the power of the Board of Directors to
Unitholders for approval, unless such stop transfer and/or redeem shares of
substitution is consented to by the General Common Stock under the following
Partners, which consent, in the General conditions: from any stockholder who owns,
Partners' absolute discretion, may be directly or indirectly, 9.8% or more of
withheld. The General Partners may exercise the outstanding Common Stock, from any
this right of approval to deter, delay or five or fewer stockholders who own,
hamper attempts by persons to acquire a directly or indirectly, more than 50% of
majority interest of the Unitholders. the outstanding Common Stock, or from any
other stockholder if the Board of
Directors otherwise determines in good
faith that ownership of the outstanding
Common Stock has or may become
concentrated to an extent that may prevent
the Company from qualifying as a REIT
under the Code. Any Common Stock
transferred in violation of this
restriction becomes "Excess Stock," with
no voting or distribution rights. The
Company has the power to purchase or
direct the sale of such Excess Stock, with
the sale proceeds being paid to the former
owner; and
(c) the classified Board of Directors,
wherein only one-third of directors are
re-elected to the Board in any given year
and directors serve three-year terms.
In addition, the Company has a Stockholder
Rights Plan. See "Description of Capital
Stock -- Common Stock and Class B Common
Stock -- Stockholder Rights Plan."
</TABLE>
CERTAIN PROVISIONS OF THE GOVERNING DOCUMENTS OF THE PARTNERSHIPS AND THE
COMPANY COULD BE USED TO DETER ATTEMPTS TO OBTAIN CONTROL OF THE PARTNERSHIPS
AND THE COMPANY IN TRANSACTIONS NOT APPROVED BY THE GENERAL PARTNERS AND THE
BOARD OF DIRECTORS, RESPECTIVELY. BECAUSE THE COMMON STOCK IS FREELY
TRANSFERABLE AND THE COMPANY'S DIRECTORS ARE ELECTED BY THE STOCKHOLDERS, THERE
IS A GREATER LIKELIHOOD OF CHANGES IN CONTROL IN THE CASE OF THE COMPANY THAN
THE PARTNERSHIPS, NOTWITHSTANDING THOSE PROVISIONS DESCRIBED ABOVE.
78
<PAGE>
<TABLE>
<CAPTION>
PARTNERSHIP COMPANY
- -------------------------------------------- --------------------------------------------
<S> <C>
VOTING RIGHTS
Unitholders by a majority vote may, without The Company's Board of Directors consists of
the concurrence of the General Partners, three classes. Stockholders are entitled to
amend the Partnership Agreement, dissolve elect one class of the Company's Board of
the Partnership, remove and/or elect a Directors at each annual meeting of the
General Partner, and approve or disapprove Company. The Certificate of Incorporation
the sale of all or substantially all of the and the Bylaws grant stockholders the
Partnership's assets. Unitholders may not non-exclusive right, without approval of the
exercise these rights in a way to extend the Board of Directors, to amend the Certificate
term of the Partnership, change the of Incorporation or the Bylaws, dissolve the
Partnership to a general partnership, change Company, vote to remove members of the Board
the limited liability of the Unitholders or of Directors, and approve or disapprove the
affect the status of the Partnership for sale of substantially all of the Company's
federal income tax purposes. assets. In addition, certain other actions
may not be taken by the Board of Directors
without the approval of a majority vote of
stockholders, including:
(a) amending the Certificate of
Incorporation;
(b) amending certain of the Bylaw
provisions;
(c) merging the Company with or into
another corporation, unless the Company is
the surviving entity and certain other
conditions are met;
(d) selling all or substantially all of
the Company's assets; and
(e) dissolving the Company.
</TABLE>
STOCKHOLDERS HAVE DIFFERENT VOTING RIGHTS, INCLUDING THE RIGHT TO ELECT
DIRECTORS ON A PERIODIC BASIS, THAN THE VOTING RIGHTS AFFORDED TO UNITHOLDERS.
<TABLE>
<S> <C>
LIMITED LIABILITY OF INVESTORS
Under each of the Partnership Agreements and Under Delaware law, stockholders will not be
applicable state law, the liability of liable for Company debts or obligations. The
Unitholders for the Partnership's debts and Shares, upon issuance, will be fully paid
obligations is limited to the amount of and nonassessable.
their investment in the Partnership,
together with an interest in undistributed
income, if any. The Units are fully paid and
nonassessable.
</TABLE>
THE LIMITATION ON PERSONAL LIABILITY OF STOCKHOLDERS OF THE COMPANY IS
SUBSTANTIALLY THE SAME AS THAT OF UNITHOLDERS IN THE PARTNERSHIPS.
79
<PAGE>
<TABLE>
<CAPTION>
PARTNERSHIP COMPANY
- -------------------------------------------- --------------------------------------------
<S> <C>
REVIEW OF INVESTOR LISTS
Unitholders of each of the Partnerships are A stockholder is entitled, upon written
entitled to request copies of investor lists demand, to inspect and copy the Company's
showing the names and addresses of all stock records at any time during usual
Unitholders of the Partnership. The right to business hours for a purpose reasonably
receive such investor lists is conditioned related to his or her interest as a
upon the Unitholder's payment of the cost of stockholder.
duplication and mailing.
</TABLE>
UNITHOLDERS AND STOCKHOLDERS ARE ENTITLED TO ACCESS TO INVESTOR LISTS AND TO
STOCK RECORDS, RESPECTIVELY, SUBJECT TO CERTAIN REQUIREMENTS.
<TABLE>
<S> <C>
LIQUIDITY
The Units may not be transferred if such The Common Stock is freely transferable and
transfers would result in the termination of listed on the NYSE. See "Risk Factors."
the Partnership under Section 708 of the
Code or cause the Partnership to lose its
classification as a "partnership" for
federal income tax purposes. In addition, no
transferee of a Unit has the right to become
a substitute Unitholder (entitling such
person to vote on matters submitted to a
vote of the Unitholders) unless, among other
things, such substitution is approved by the
General Partners, who may grant or withhold
such consent in their absolute discretion.
In view of the foregoing restrictions, it
was never intended that the Units would be
actively traded, and no broad-based
secondary market for the Units exists.
</TABLE>
THE UNITS CONSTITUTE ILLIQUID INVESTMENTS AND UNITHOLDERS MAY FIND IT
DIFFICULT TO DISPOSE OF THEIR UNITS, IF THEY WISH TO DO SO, OR MAY BE OBLIGATED
TO SELL THE UNITS AT SUBSTANTIAL DISCOUNTS TO FACILITATE THE SALES. IN CONTRAST,
THE COMMON STOCK IS LISTED ON THE NYSE.
80
<PAGE>
<TABLE>
<CAPTION>
PARTNERSHIP COMPANY
- -------------------------------------------- --------------------------------------------
<S> <C>
TAXATION OF TAXABLE INVESTORS
Income or loss earned by each of the Because the Company qualifies as a REIT, the
Partnerships is not taxed at the partnership Company generally is permitted to deduct
level. Unitholders are required to report distributions to its stockholders, which
their allocable share of Partnership income effectively reduces or eliminates the
and loss on their respective tax returns. "double taxation" (at the corporate and
Income and loss from the Partnership stockholder levels) that typically results
generally constitute "passive" income and when a corporation earns income and
loss, which can generally offset "passive" distributes that income to stockholders in
income and loss from other investments. Due the form of dividends. Stockholders will
to depreciation and other noncash items, recognize income on Company distributions to
cash distributions are not generally the extent of current and accumulated
equivalent to the income and loss allocated earnings and profits of the Company.
to Unitholders. During operations, such cash Distributions in excess of such earnings and
distributions are partially sheltered but, profits are taxable to stockholders to the
if the properties retain their value or extent such distributions exceed the
appreciate, gain upon liquidation of the stockholder's tax basis in his or her
asset will exceed the cash distributions shares. Dividends received by stockholders
available to Unitholders. After the end of from the Company generally will constitute
each fiscal year, Unitholders receive annual portfolio income, which cannot offset
schedule K-1 forms showing their allocable "passive" income and loss from other
share of Partnership income and loss for investments. Losses and credits generated
inclusion on their federal income tax within the Company do not pass through to
returns. Unitholders are also required to the stockholders. Because the amount of
file state income tax returns and/or pay distributions required to be made by the
state income taxes in Arizona, California, Company for purposes of maintaining its REIT
Georgia, Michigan, Oregon and Virginia. characterization is determined based on a
percentage of taxable income (calculated
with depreciation deductions, excluding any
net capital gains and prior to payment of
any dividends) the amount of distributions
required to be made by the Company may be
less than the distributions made by the
Partnership. After the end of the Company's
calendar year, stockholders will receive the
less complicated Form 1099-DIV used by
corporations to report their dividend
income. See "Material Federal Income Tax
Considerations."
</TABLE>
EACH OF THE PARTNERSHIPS IS A PASS-THROUGH ENTITY, WHOSE INCOME AND LOSS IS
NOT TAXED AT THE ENTITY LEVEL BUT INSTEAD ALLOCATED DIRECTLY TO THE GENERAL
PARTNER AND UNITHOLDERS. UNITHOLDERS ARE TAXED ON INCOME OR LOSS ALLOCATED TO
THEM, WHETHER OR NOT CASH DISTRIBUTIONS ARE MADE TO THE UNITHOLDERS. IN
CONTRAST, THE COMPANY QUALIFIES AS A REIT, ALLOWING IT TO DEDUCT DIVIDENDS PAID
TO ITS STOCKHOLDERS. TO THE EXTENT THE COMPANY HAS NET INCOME (AFTER TAKING INTO
ACCOUNT THE DIVIDENDS PAID DEDUCTION), SUCH INCOME WILL BE TAXED AT THE COMPANY
LEVEL AT THE STANDARD CORPORATE TAX RATES. DIVIDENDS PAID TO STOCKHOLDERS WILL
CONSTITUTE PORTFOLIO INCOME AND NOT PASSIVE INCOME.
81
<PAGE>
<TABLE>
<CAPTION>
PARTNERSHIP COMPANY
- -------------------------------------------- --------------------------------------------
<S> <C>
TAXATION OF TAX-EXEMPT INVESTORS
Income or loss earned by each of the The IRS has ruled that income attributable
Partnerships is generally treated as UBTI to an investment in a REIT will not
unless the type of income generated by the constitute UBTI to certain tax-exempt
Partnerships would constitute qualified investors as long as such investor does not
rental income or other specifically excluded hold its shares subject to acquisition
types of income. For Partnership income to indebtedness. Accordingly, dividends
be characterized as rental income, the received from the Company by tax- exempt
Partnerships cannot provide services to stockholders should not constitute UBTI if
tenants that are considered other than those such stockholders did not finance the
usually or customarily rendered in acquisition of the Shares. The amount of
connection with the rental of rooms for dividends paid to tax-exempt stockholders
occupancy only. Although the Partnerships may be less than the distributions made to
have not obtained a ruling from the IRS such entities from their respective
addressing the issue of whether the income Partnerships because of the REIT requirement
received by the Partnerships in connection that distributions be based on a percentage
with the leasing of self storage units of REIT Taxable Income. See "Material
constitutes rental income for these UBTI Federal Income Tax Considerations."
purposes, the Company has obtained a private
ruling from the IRS with respect to the
characterization of the Company's rental
income taking into account the services
rendered by the Company. Based on
representations from the General Partners
that the services rendered with respect to
the properties owned by the Partnerships are
consistent with those services described in
the Company's ruling, the Partnerships'
income should not be treated as UBTI for
tax-exempt partners; however, this is a
factual issue on which the Partnerships have
received no ruling.
</TABLE>
A TAX-EXEMPT ENTITY IS TREATED AS OWNING AND CARRYING ON THE BUSINESS
ACTIVITY CONDUCTED BY A PARTNERSHIP IN WHICH SUCH ENTITY OWNS AN INTEREST.
ACCORDINGLY, TO THE EXTENT A TAX-EXEMPT PARTNER OWNS AN INTEREST IN A
PARTNERSHIP, THE INCOME RECEIVED BY SUCH PARTNERSHIP MUST NOT CONSTITUTE UBTI IN
ORDER FOR THE TAX-EXEMPT PARTNER TO AVOID TAXATION. THE INCOME RECEIVED FROM THE
PARTNERSHIPS' SELF STORAGE BUSINESS SHOULD QUALIFY AS RENTAL INCOME FOR THESE
PURPOSES (THEREFORE, NOT UBTI). DIVIDENDS PAID WITH RESPECT TO, OR GAIN
RECOGNIZED ON A DISPOSITION OF, THE SHARES ARE NOT UBTI.
82
<PAGE>
CONFLICTS OF INTEREST
A number of conflicts of interest are inherent in the relationships among
the Partnerships, the General Partners and the Company and its directors and
officers. Certain of these conflicts of interest are summarized below.
COMMON COMPOSITION OF GENERAL PARTNERS
Although a different limited partnership serves as the General Partner of
each Partnership, the general and limited partners of each of the General
Partners are identical. The General Partner of each Partnership has an
independent obligation to ensure that such Partnership's participation in the
Mergers is fair and equitable, without regard to whether the Mergers are fair
and equitable to the other participants (including the other Partnerships). See
"Fiduciary Responsibility -- General Partners of the Partnerships." The General
Partners of the Partnerships have sought to discharge faithfully this obligation
to each Partnership; however, Unitholders should consider that each of the
general and limited partners of the General Partner of each Partnership serves
in a similar capacity with respect to the General Partner of each of the
Partnerships. If each of the Partnerships had a separate General Partner with
general and limited partners who did not serve in similar capacities for any of
the other Partnerships, these persons would have had an independent perspective
which might have led them to advocate positions during negotiating and
structuring the Mergers different than those taken by the General Partners.
OVERLAPS BETWEEN AFFILIATES OF THE GENERAL PARTNERS AND DIRECTORS AND OFFICERS
OF THE COMPANY
Charles K. Barbo, the Chairman of the Board, President and Chief Executive
Officer of the Company, is an individual general partner of each of the General
Partners and the sole shareholder and director of SGPI, the corporate general
partner of each of the General Partners. As such, he is able to control
decisions made by the general partners of the General Partners. In addition,
Harrell L. Beck, Senior Vice President, Chief Financial Officer and Treasurer of
the Company, serves as Treasurer of SGPI; Kristin H. Stred, Senior Vice
President, General Counsel and Secretary of the Company, serves as Secretary of
SGPI; and Michael Rowe, Chief Operating Officer of the Company, serves as Vice
President of SGPI.
COMPANY OWNERSHIP OF UNITS
As of the date of this Proxy Statement/Prospectus, the Company beneficially
owns approximately IDS1 Units (approximately %), IDS2 Units
(approximately %) and IDS3 Units (approximately %). The Company
participates in the Partnerships' distributions on the same terms as other
Unitholders in respect of the Units owned by it. The Company intends to vote
these Units in favor of the Mergers. No other partner of the General Partners
beneficially owns any Units.
GENERAL PARTNER'S INTEREST
Pursuant to each of the Partnership Agreements, the General Partner is
entitled to a percentage of the Partnership's cash distributions based upon the
amount of distributions made to the Unitholders. Initially, the General Partner
receives 5% of all Partnership distributions until such time as the Unitholders
have received a cumulative amount of Partnership distributions equal to their
collective capital contributions plus a cumulative noncompounded return of 9%
per annum on their adjusted capital contributions (such cumulative amount being
referred to as the "Unitholders' Preference"). Once the Unitholders have
received distributions equal to their Unitholders' Preference, the General
Partner receives 20% of all further cash distributions. As of the date of this
Proxy Statement/ Prospectus, the Unitholders have not received Partnership cash
distributions equal to the
83
<PAGE>
Unitholders' Preference for any of the Partnerships. Accordingly, the General
Partners have been limited to receiving 5% of Partnership cash distributions
resulting in the receipt of the following distributions by the General Partners
for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------------- MARCH 31,
PARTNERSHIP 1993 1994 1995 1996
- --------------------------------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
IDS1................................... $ 118,219 $ 132,846 $ 149,909 $ 37,782
IDS2................................... 94,664 95,610 98,448 24,612
IDS3................................... 96,077 111,764 117,648 29,412
</TABLE>
The Company (or its predecessor) and IPSC each received 40% of these
amounts. Messrs. Barbo and Buerk each received 9.9% and SGPI received .2% of
these amounts in accordance with the applicable GP Agreement.
The General Partners' percentage interest in the Merger Consideration will
be based upon the above distribution principles. As of the date of this Proxy
Statement/Prospectus, the Net Asset Value of IDS1 and IDS2 is not expected to
exceed the amount of its undistributed Unitholders' Preference. Accordingly, the
IDS1 General Partner and the IDS2 General Partner will only be entitled to 5% of
the Merger Consideration paid for those Partnerships. With respect to IDS3,
however, the Net Asset Value initially allocable to Unitholders is expected to
exceed an amount equal to its undistributed Unitholders' Preference.
Accordingly, the Unitholders will be treated as receiving their Unitholders'
Preference and the IDS3 General Partner will be entitled to share in 20% of some
part, but not all, of the Merger Consideration. See "Fairness of the Mergers --
Determination of Merger Consideration" for additional information regarding the
portion of the Net Asset Values allocated to the General Partners and upon which
the Merger Consideration to be received by the General Partners will be based.
Upon consummation of the Mergers (based upon a Share Price of $25.00), each
of the Company and IPSC will receive approximately 32,050 and 21,500 Shares for
its limited partner interest in the IDS1 General Partner and the IDS2 General
Partner, respectively. With respect to IDS3, IPSC will receive 52,600 Shares and
the Company will receive 49,975 Shares for their limited partner interest in the
IDS3 General Partner. Pursuant to the Contingent Shares Agreement, certain of
the Shares received by the Company in the Mergers for its limited partner
interest in each of the General Partners will be remitted to former stockholders
of the Management Company, which include Messrs. Barbo and Buerk and the
executive officers of the Company.
MANAGEMENT AGREEMENTS
The Partnerships' properties are managed by the Company pursuant to
Management Services Agreements under which the Company, as compensation for its
management services, receives a monthly fee of 6% of gross revenues from self
storage properties (5% of revenues from office and business parks), plus $75 per
month per self storage property for rendering advertising services. For the
years ended December 31, 1993, 1994 and 1995 and the three months ended March
31, 1996, the Company (or the Management Company prior to the Management Company
Merger) received the following amounts in payment for these property management
and advertising fees: approximately $310,000, $338,000, $362,000 and $91,000,
respectively, from IDS1; approximately $224,000, $249,000, $265,000 and $67,000,
respectively, from IDS2; and approximately $257,000, $408,000, $448,000 and
$112,000, respectively, from IDS3. In addition, the Company is reimbursed at
cost by the Partnerships for certain expenses it incurs as property manager.
Pursuant to an agreement executed in connection with the Consolidation, the
Company paid an affiliate of IPSC a quarterly fee of $12,000 for each quarter
commencing July 1, 1994 and ending June 30, 1996 for expenses incurred in
rendering certain administrative services. In addition, the
84
<PAGE>
Company will reimburse the IPSC affiliate for its expenses incurred for similar
services provided in connection with the Offers and Mergers. The IPSC affiliate
estimates that such expenses will not exceed $50,000.
OWNERSHIP OF COMPANY COMMON STOCK BY AFFILIATES OF THE GENERAL PARTNERS
Charles K. Barbo and Arthur W. Buerk, individual general partners of each of
the General Partners, are also stockholders of the Company. As of March 31,
1996, Messrs. Barbo and Buerk beneficially owned approximately 3% and 2%,
respectively, of the Company's outstanding Common Stock.
CONTINGENT SHARES AGREEMENT
In connection with the Management Company Merger, the Company and the former
shareholders of the Management Company executed a Contingent Shares Agreement
dated as of March 24, 1995 (the "Contingent Shares Agreement") whereby the
former Management Company shareholders are entitled to receive shares of Common
Stock upon the sale or transfer of, or the occurrence of certain other events
with respect to, the Company's interests in certain limited partnerships
formerly owned by the Management Company, including the Partnerships. Assuming
the Share Price is $25.00 and that all the Mergers are consummated, pursuant to
the Contingent Shares Agreement, Messrs. Barbo and Buerk and the executive
officers of the Company, as former stockholders of the Management Company, will
receive approximately 19,025, 11,575 and 4,450 shares, respectively, upon
consummation of the Mergers.
ABSENCE OF INDEPENDENT SOLICITING AGENT; INDEMNIFICATION
SRA, the Soliciting Agent in connection with this Proxy
Statement/Prospectus, is wholly owned by Charles K. Barbo. Mr. Barbo, the
Chairman of the Board, President and Chief Executive Officer of the Company, is
an individual general partner of each of the General Partners and the sole
stockholder and director of SGPI, the corporate general partner of each of the
General Partners.
Because of federal and state securities laws, underwriters of securities
offered to the public may be expected to take such steps as may be necessary to
satisfy themselves that the information contained in the prospectus pursuant to
which the securities are offered is accurate and complete. These steps are
typically taken by a "lead underwriter" or "dealer manager" which participates
in the preparation of the prospectus. Because SRA is affiliated with the General
Partners and the Company, the review and investigation of the Partnerships and
the Company by SRA and the information provided in this Proxy
Statement/Prospectus will not have the benefit of, and may not be as meaningful
as, a review and investigation by an independent dealer manager. Investors must
rely on the General Partners and the Company regarding the information contained
in this Proxy Statement/ Prospectus. In addition, the Company has agreed to
indemnify SRA against certain liabilities to which SRA may become subject under
the federal and state securities laws.
FIDUCIARY RESPONSIBILITY
DIRECTORS AND OFFICERS OF THE COMPANY
The directors of the Company are accountable to the Company and its
stockholders as fiduciaries and must perform their duties in good faith, in a
manner they believe to be in the best interests of the Company and its
stockholders and with such care, including reasonable inquiry, as an ordinarily
prudent person in a like position would use under similar circumstances. The
Certificate of Incorporation provides that the directors will not be personally
liable to the Company or to any stockholder of the Company for the breach of a
fiduciary responsibility, to the full extent that such limitation or elimination
of liability is permitted under Delaware law. The Certificate of Incorporation
and Bylaws provide that the Company will indemnify its directors and officers to
the full extent permitted under Delaware law. Pursuant to the Bylaws and
Delaware law, the Company will indemnify each director and officer against any
liability and related expenses (including attorneys' fees) incurred in
connection with any proceeding in which he or she may be involved by reason of
serving in such capacity so
85
<PAGE>
long as the director or officer acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. A director and
officer is also entitled to indemnification against expenses incurred in any
action or suit by or in the right of the Company to procure a judgment in its
favor by reason of serving in such capacity if he or she acted in good faith and
in a manner reasonably believed to be in or not opposed to the best interests of
the Company, except that no such indemnification will be made if the director or
officer is judged to be liable to the Company, unless the applicable court of
law determines that despite the adjudication of liability the director or
officer is reasonably entitled to indemnification for such expenses. The Bylaws
authorize the Company to advance funds to a director or officer for costs and
expenses (including attorneys' fees) incurred in a suit or proceeding upon
receipt of an undertaking by such director or officer to repay such amounts if
it is ultimately determined that he or she is not entitled to be indemnified.
Stockholders may have more limited recourse against such persons than would
apply absent these provisions. To the extent that the foregoing provisions
concerning indemnification apply to actions arising under the Securities Act,
the Company has been advised that, in the opinion of the Commission, such
provisions are contrary to public policy and therefore are not enforceable.
GENERAL PARTNERS OF THE PARTNERSHIPS
Under Washington partnership law, the General Partners are accountable to
the Partnerships as fiduciaries and are required to exercise good faith and
integrity in all their dealings in the Partnerships' affairs. The Partnership
Agreements generally provide that neither the General Partners nor any of their
affiliates performing services on behalf of the Partnerships will be liable to
the Partnerships or any of the Unitholders for any act or omission by any such
person performed in good faith pursuant to the authority granted to such person
by the Partnership Agreements, or in accordance with its provisions, and in a
manner reasonably believed by such person to be within the scope of authority
granted to such person and in the best interests of the Partnerships, provided
that such act or omission did not constitute fraud, misconduct, bad faith or
negligence. As a result, Unitholders might have a more limited right of action
in certain circumstances than they would have in the absence of such a provision
in the Partnership Agreements.
The Partnership Agreements also generally provide that the General Partners
and their affiliates performing services on behalf of the Partnerships are
indemnified from losses incurred by them on behalf of their respective
Partnership or in furtherance of the Partnership's interests (except to the
extent indemnification is prohibited by law) provided that such person
determined in good faith that the course of conduct was in the best interests of
the Partnership and provided further that the course of conduct did not
constitute fraud, negligence, bad faith or misconduct. For purposes of the
foregoing, the affiliates of the General Partners will be indemnified only when
operating within the scope of the General Partner's authority and, for IDS2 and
IDS3, when performing services on behalf of their respective Partnership. Any
claim for indemnification under the Partnership Agreements will be satisfied
only out of the assets of the applicable Partnership and no Unitholder will have
any personal liability to satisfy an indemnification claim made against its
Partnership.
Notwithstanding the foregoing, neither the above-mentioned persons nor
certain related parties are to be indemnified by the Partnerships from loss
incurred by such person in connection with any claim involving allegations that
such person violated federal or state securities laws unless (i) there has been
a successful adjudication on the merits of each count involving alleged
securities law violations as to the person seeking indemnification and the court
approves indemnification of the litigation costs, (ii) such claims have been
dismissed with prejudice on the merits by a court of competent jurisdiction and
the court approves indemnification of the litigation costs or (iii) a court of
competent jurisdiction has approved a settlement of the claims against the
person seeking indemnification and finds that indemnification of the settlement
and related costs should be made. In each of the foregoing situations, the court
of law considering the request for indemnification must be advised as to the
position of the Commission, certain state agencies specified in the Partnership
Agreement and any other applicable regulatory authority regarding
indemnification for violations of securities
86
<PAGE>
laws. Indemnification may not be enforceable as to certain liabilities arising
from claims under the Securities Act and state securities laws. In the opinion
of the Commission, indemnification from these liabilities is contrary to public
policy and is therefore unenforceable.
The Partnerships may also advance funds to a person indemnified under the
Partnership Agreements for legal expenses and other costs incurred as a result
of legal action brought against such person only if (i) the legal action relates
to the performance of duties or services by such person on behalf of the
Partnership, (ii) the legal action is initiated by a party other than a
Unitholder and (iii) such person undertakes to repay the advanced funds to the
Partnership if it is subsequently determined that such person is not entitled to
indemnification pursuant to the terms of the Partnership Agreement. Any
indemnification required by the Partnership Agreements will be made promptly
following the fixing of the liability by a final judgment of any court,
settlement, contract or otherwise. The Partnerships do not pay for any insurance
covering liability of the General Partners or any other indemnified person for
acts or omissions for which indemnification is not permitted by the Partnership
Agreements, although the General Partners and any other indemnified person may
be named as additional insured parties on policies obtained for the benefit of a
Partnership if there is no additional cost to the Partnership. As part of its
assumption of liabilities in the Mergers, the Company will indemnify the General
Partners and their affiliates to the extent of the indemnity under the terms of
the Partnership Agreements and applicable law.
BUSINESS AND PROPERTIES OF THE PARTNERSHIPS
GENERAL
Each Partnership was formed for the purpose of acquiring, developing and
operating self storage centers and office and business parks. The Partnerships
have completed the acquisition and development phase of their businesses and
currently focus on operating the storage centers. The principal investment
objectives of the Partnerships are to provide their Unitholders with regular
quarterly cash distributions which, for taxable Unitholders, are expected to be
partially tax-sheltered; to obtain long-term appreciation in the value of their
property; and to preserve and protect their Unitholders' capital. The
Partnerships share executive offices with the Company.
The following table sets forth selected information regarding the
capitalization, investments, leverage and real estate portfolio investments for
each of the Partnerships and their properties.
<TABLE>
<CAPTION>
PERCENT LEVERAGE
INVESTMENT IN ACCUMULATED AMOUNT OF OF REAL ESTATE
DATE ORIGINAL TOTAL PROPERTIES AT DEPRECIATION NET BOOK VALUE LEVERAGE AT APPRAISAL VALUE
OFFERING CAPITAL MARCH 31, AT MARCH 31, AT MARCH 31, MARCH 31, AT MARCH 31,
PARTNERSHIP CLOSED RAISED (1) 1996 (2) 1996 1996 (3) 1996 (4) 1996 (5)
- ----------------- --------- -------------- --------------- -------------- -------------- -------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
IDS1............. Mar-89 $ 37,052,578 $ 36,093,046 $ 7,592,287 $ 26,770,587 $ 0 0.0%
IDS2............. Mar-90 28,777,448 29,649,739 4,900,913 21,812,025 3,319,503 10.9
IDS3............. Mar-92 29,803,675 37,480,443 3,577,384 24,357,316 10,384,295 20.4
-------------- --------------- -------------- -------------- -------------- ------
Total........ $ 95,633,701 $ 103,223,228 $ 16,070,584 $ 72,939,928 $ 13,703,798 11.3%
-------------- --------------- -------------- -------------- -------------- ------
-------------- --------------- -------------- -------------- -------------- ------
</TABLE>
- ------------------------
(1) Total capital represents the gross offering proceeds raised from investors,
including General Partner and Unitholder contributions.
(2) Amount represents the total investment in land, buildings, and personal
property prior to depreciation.
(3) Net book value equals the Partnership's total assets less total liabilities
as of March 31, 1996.
(4) Amount represents total short- and long-term debt outstanding.
(5) The percentages included in this column for each of the Partnerships is
equal to a Partnership's outstanding debt as of March 31, 1996 divided by
the Appraised Value of that Partnership's real
87
<PAGE>
estate portfolio. The "Total" was computed by dividing the aggregate
outstanding debt of all of the Partnerships by the aggregate value of the
Partnerships' properties as determined by the Appraisals.
The following table sets forth certain information with respect to the
timing of investments in the Partnerships.
<TABLE>
<CAPTION>
TIME TO
INVEST 90% OF ORIGINAL ORIGINAL
YEAR OF YEAR OF AMOUNT AVERAGE EXPECTED EXPECTED
NUMBER OF FIRST LAST AVAILABLE FOR LENGTH OF HOLDING DISPOSITION
PARTNERSHIP INVESTMENTS INVESTMENT INVESTMENT INVESTMENT INVESTMENT (1) PERIOD (2) TIME (3)
- -------------------------- --------------- ---------- ---------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
IDS1 (4).................. 12 1988 1990 20 months 7 years 7-9 years 1995-1999
IDS2...................... 8 1988 1991 28 months 6.5 years 7-9 years 1995-2000
IDS3...................... 17 1991 1994 30 months 3.5 years 5-10 years 1996-2004
</TABLE>
- ------------------------
(1) This column is based on the simple average of the length of time the first
property acquired by the Partnership has been held by the Partnership and
the length of time the last property acquired by the Partnership has been
held by the Partnership.
(2) This is the anticipated holding period as stated in the Partnership's
prospectus.
(3) The range of the original disposition time frame is based upon the date the
first property was acquired by the Partnership plus the minimum original
expected holding period and the date the last property was acquired by the
Partnership plus the maximum original expected holding period.
(4) Includes four properties owned by SJP II in which IDS1 owns a 70% interest
and the Company owns a 30% interest.
EMPLOYEES AND PROPERTY MANAGEMENT
Management of the Partnerships' facilities is conducted through the
employees of the Company pursuant to the Management Services Agreements. See
"Conflicts of Interest -- Management Agreements." The Company provides on-site
managers as well as operation and district managers to supervise on-site
management. Under the Management Services Agreements, the salary and salary
related expenses of on-site employees are borne by the Partnerships.
88
<PAGE>
IDS1
PROPERTY INFORMATION
IDS1 owns and operates eight self storage properties and holds a 70%
interest in SJP II, which owns four self storage properties. The remaining 30%
interest in SJP II is held by the Company. These 12 properties, which are
located in six states, contained approximately 764,000 net rentable square feet
(including 100% of the SJP II properties) and had a weighted average net
rentable square foot occupancy rate of approximately 88% as of March 31, 1996
and a weighted average annual rent per net rentable square foot of $8.88 for the
quarter ended March 31, 1996. IDS1 was organized on September 29, 1987.
The following table sets forth the average occupancy and average rent per
square foot for IDS1 for the years ended December 31, 1993, 1994 and 1995 and
the three months ended March 31, 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
------------------------------------- ENDED MARCH 31,
1993 1994 1995 1996
----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Average occupancy...................................... 90% 90% 90% 88%
Average rent per square foot........................... $ 7.33 $ 8.03 $ 8.63 $ 8.88
</TABLE>
The following table lists selected information regarding the storage centers
for IDS1.
<TABLE>
<CAPTION>
OCCUPANCY AT
--------------------
NET RENTABLE
SQUARE FEET DEC. 31,
YEAR AT DEC. 31, --------------------
PROPERTY NAME PROPERTY LOCATION OWNED SINCE BUILT 1995 ACREAGE 1993 1994
- ---------------------------- -------------------- ----------- ---------- ------------ ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
South Military Hwy.......... Virginia Beach, VA 1988 1984 48,000 2.7 * *
Midlothian Turnpike......... Richmond, VA 1988 1984 44,000 2.9 * *
Burke....................... Fairfax, VA 1988 1984 32,000 1.7 * *
Margate..................... Margate, FL 1988 1984/86 75,000 4.0 92 92
Walnut...................... Walnut, CA 1988 1986 96,000 3.6 83 82
Ontario..................... Ontario, CA 1988 1984 57,000 2.1 * *
Morgan Falls................ Dunwoody, GA 1988 1990 76,000 3.7 95 95
Factoria Square............. Bellevue, WA 1990 1989 70,000 1.9 95 96
Canton **................... Canton, MI 1988 1986 58,000 3.3 * *
Fraser **................... Fraser, MI 1988 1985 73,000 5.2 * *
Livonia **.................. Livonia, MI 1988 1985 67,000 4.8 * *
Warren **................... Warren, MI 1988 1985 68,000 4.6 * *
------------ ---
Total....................... 764,000 40.5
------------ ---
------------ ---
<CAPTION>
MAR. 31,
-----------
PROPERTY NAME 1995 1996
- ---------------------------- --------- -----------
<S> <C> <C>
South Military Hwy.......... * *
Midlothian Turnpike......... * *
Burke....................... * *
Margate..................... 89 88
Walnut...................... 78 77
Ontario..................... * *
Morgan Falls................ 93 93
Factoria Square............. 97 98
Canton **................... * *
Fraser **................... * *
Livonia **.................. * *
Warren **................... * *
Total.......................
</TABLE>
- ------------------------------
* These properties are individually less than 10% of historical cost of total
properties of IDS1 and SJP II. The average occupancy of these projects at
December 31, 1993, 1994 and 1995, and March 31, 1996 was 86%, 87%, 89% and
89%, respectively.
** Property owned by SJP II in which IDS1 has a 70% interest and the Company
has a 30% interest. Net rentable square feet is the total for the property.
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<PAGE>
SELECTED FINANCIAL INFORMATION
The following selected consolidated financial information is derived from
the historical consolidated financial statements of IDS1. Selected unaudited
consolidated financial data for the three months ended March 31, 1995 and 1996
include all adjustments (consisting only of normal recurring accruals) that IDS1
considers necessary for a fair presentation of consolidated operating results
for such interim periods. Results for the interim periods are not necessarily
indicative of results for the full year. The consolidated financial information
set forth below should be read in conjunction with IDS1's consolidated financial
statements, related notes and other consolidated financial information
incorporated by reference in this Proxy Statement/Prospectus.
IDS/SHURGARD INCOME GROWTH PARTNERS L.P.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
(IN THOUSANDS, EXCEPT PER UNIT DATA) 1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Rental revenue........................... $ 4,154 $ 4,853 $ 5,463 $ 5,996 $ 6,465 $ 1,541 $ 1,622
Interest and other income................ 20 24 29 60 107 22 10
Earnings................................. 867 1,488 1,821 2,224 2,503 535 634
Earnings per Unit (1).................... 5.56 9.54 11.67 14.25 16.04 3.43 4.06
Distributions to Unitholders............. 2,223 2,223 2,246 2,524 2,848 694 718
Distributions per Unit (1)............... 15.00 15.00 15.16 17.03 19.22 4.69 4.84
OTHER DATA:
Funds from operations (2)................ $ 2,034 $ 2,469 $ 2,825 $ 3,233 $ 3,500 $ 791 $ 868
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 1996
--------- --------- --------- --------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets.......................... $ 32,419 $ 32,943 $ 32,278 $ 31,948 $ 29,739 $ 29,603
Note payable.......................... -- 1,537 1,496 1,451 -- --
Partners' equity...................... 29,216 28,365 27,821 27,388 26,892 26,771
</TABLE>
- ------------------------------
(1) Earnings per Unit and distributions per Unit are based on earnings and
distributions, respectively, allocated to IDS1 Unitholders divided by the
number of IDS1 Units outstanding during the period (approximately 148,202
IDS1 Units for all periods shown).
(2) IDS1 defines FFO as net income before extraordinary items (determined in
accordance with GAAP), plus depreciation and amortization related to real
estate activities, plus or minus certain nonrecurring revenue and expenses.
FFO is used by many financial analysts in evaluating REITs. FFO should not
be considered as an alternative to net income (determined in accordance
with GAAP), as an indication of IDS1'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 IDS1's needs.
90
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1996 AND 1995.
REVENUES. IDS1's performance continued to improve with earnings up $99,000
or 19% in the first quarter of 1996 compared to the same quarter of 1995. Rental
revenue in turn increased $81,200 or 5% due to a 6% increase in the average
rental rate per square foot and stable occupancies throughout IDS1. The Morgan
Falls, Ontario and Midlothian Turnpike storage centers contributed the largest
revenue gains for the quarter of $23,000, $10,000 and $9,000, respectively. SJP
II, a partnership in which IDS1 owns a 70% interest, had $33,000 in additional
rental revenue compared to last year. The Canton and Warren storage centers had
the largest revenue contributions for SJP II of $13,300 and $12,600,
respectively. Occupancies remained stable at an average of 89% at March 31, 1996
compared to 88% at March 31, 1995.
EXPENSES. In the first quarter of 1996, expenses decreased 4% or $40,000
compared to the same quarter of 1995. The majority of this decrease is due to
the elimination of interest expense resulting from the payoff of IDS1's bank
note in December 1995. Additionally, depreciation expense declined as certain
assets became fully depreciated; this decrease does not affect IDS1's cash flow.
Operating and administrative expenses, however, increased 2% over 1995 primarily
due to the increased cost in snow removal at the Warren storage center as well
as an overall increase in advertising expense at all of IDS1's storage centers.
RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993.
REVENUES. IDS1's performance increased in 1995 and 1994 as a result of
significant increases in revenue and earnings. Earnings rose 13% from 1994 to
1995 and 22% from 1993 to 1994. Rental revenue also rose $469,000 in 1995 after
a $533,000 increase in 1994. The 1995 revenue increase was due to a slight
increase in average occupancies and a 7.5% increase in average rental rates.
Additionally, all the SJP II stores, in which IDS1 owns a 70% interest, had
significant revenue gains, with 1995 averaging 13.7% over 1994. Revenue gains
from 1993 to 1994 were primarily the result of stable occupancies and a 9.5%
increase in average rental rates. Average occupancy has increased slightly,
averaging 88% at December 31, 1993 and 1994 to 89% at December 31, 1995. IDS1
seeks to maximize revenue by adjusting rents to match demand. Store managers
evaluate their store's rental rates, based on unit demand, unit availability and
competitors' rental rates. IDS1 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.
EXPENSES. Operating expenses increased $110,000 in 1995 and $58,000 in
1994. The majority of the 1995 increase was due to the increased personnel costs
resulting from additional hours worked by managers, an increase in landscaping
expense during the spring and summer months at the Canton, Fraser and Warren
storage centers, and repairs made to the air conditioning units at the Margate
storage center. In 1994, operating expenses increased due to higher utility
usage from a colder than normal winter in the South, additional phone lines
installed for modem communications, and increased repair and maintenance at the
Livonia and Morgan Falls storage centers due to snow removal and landscaping.
Interest expense increased $33,000 in 1995 after remaining stable in 1994.
The majority of the change in 1995 reflects the rise in the interest rate from
7.75% at December 1994 to 9.25% at December 1995.
Real estate taxes decreased $25,000 in 1995 after an $11,300 drop in 1994.
The 1995 decrease was due to tax refunds received as a result of successful real
estate tax appeals for the Fraser, Margate and Ontario storage centers. The 1994
decrease was largely due to levy decreases in the Michigan districts. IDS1 does
not expect to be able to continue to decrease real estate taxes in the future.
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<PAGE>
Administrative expenses rose $36,000 in 1995 after a slight increase in
1994. The 1995 increase is primarily due to the increase in printing costs for
IDS1's quarterly and annual reports.
LIQUIDITY AND CAPITAL RESOURCES - THREE MONTHS ENDED MARCH 31, 1996 AND 1995.
TRANSACTION COSTS. IDS1 continues to investigate various alternatives to
provide the limited partners with greater liquidity. During the first quarter of
1996, costs incurred by IDS1 in exploring various alternative transactions
totaled approximately $91,000. Whether and when IDS1 will reach agreement
regarding the implementation of any of the various alternatives will depend on a
number of factors. There can be no assurance that any agreement will be reached
or, if reached, that the transactions contemplated thereby will be consummated.
DISTRIBUTIONS TO PARTNERS. The average annual distribution rate was 7.75%
for the three months ended March 31, 1996 and 1995.
LIQUIDITY AND CAPITAL RESOURCES - YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993.
CASH FROM OPERATIONS. Cash from operations increased by $338,800 from 1993
to 1994 and $408,500 from 1994 to 1995, reflecting the increase in earnings.
Management believes that cash balances and cash flow from operations will be
adequate to support the future operating needs of IDS1.
INVESTING ACTIVITIES. Investments in storage centers have been $99,000,
$137,000, and $119,000 during 1995, 1994 and 1993, respectively. The majority of
improvements in 1995 included building improvements at the Ontario and Canton
storage centers as well as pavement upgrades at the Warren and Canton storage
centers. Improvements completed during 1994 were security upgrades at the South
Military Highway, Walnut and Ontario storage centers and pavement work at the
Canton and Warren storage centers. In 1993, investments were for pavement work
at the Canton and Livonia storage centers and security equipment at the
Midlothian Turnpike storage center. Planned improvements for 1996 total
approximately $63,300 and are expected to be funded from operations and cash
reserves.
FINANCING ACTIVITIES. On December 6, 1995, IDS1 repaid its seven-year note
payable to a bank of $1,418,201 with cash accumulated from operations. During
1995, 1994 and 1993, IDS1 had made principal payments on this note of $33,000,
$45,000, and $41,000, respectively. IDS1 now has no outstanding long-term debt.
DISTRIBUTIONS TO PARTNERS. The average annual distribution rates were
7.69%, 6.81% and 6.06% for 1995, 1994 and 1993, respectively. Distributions are
expected to continue on a quarterly basis and will reflect IDS1's future
operating results and cash position.
92
<PAGE>
IDS2
PROPERTY INFORMATION
IDS2 owns and operates eight self storage properties. These eight
properties, which are located in five states, contained approximately 538,000
net rentable square feet and had a weighted average net rentable square foot
occupancy rate of approximately 86% as of March 31, 1996 and a weighted average
annual rent per net rentable square foot of $8.88 for the quarter ended March
31, 1996. IDS2 was organized on November 15, 1988.
The following table sets forth the average occupancy and average rent per
square foot for IDS2 for the years ended December 31, 1993, 1994 and 1995 and
the three months ended March 31, 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
------------------------------------- ENDED MARCH 31,
1993 1994 1995 1996
----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Average occupancy...................................... 87% 91% 88% 86%
Average rent per square foot........................... $ 7.78 $ 8.08 $ 8.59 $ 8.88
</TABLE>
The following table lists selected information regarding the storage centers
for IDS2.
<TABLE>
<CAPTION>
OCCUPANCY AT
--------------------
NET RENTABLE
SQUARE FEET DEC. 31,
YEAR AT DEC. 31, --------------------
PROPERTY NAME PROPERTY LOCATION OWNED SINCE BUILT 1995 ACREAGE 1993 1994
- ------------------------------ -------------------- ----------- --------- ------------ ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Orange........................ Orange, CA 1989 1985 90,000 2.8 91 92
Sterling Heights.............. Sterling Heights, MI 1988 1986 105,000 8.9 95 88
Newport News North............ Newport News, VA 1989 1986 59,000 3.8 * *
Chesapeake.................... Chesapeake, VA 1989 1986/95 58,000 5.2 * *
Leesburg...................... Leesburg, VA 1989 1986 28,000 1.6 * *
T.C. Jester................... Houston, TX 1990 1990 64,000 2.8 92 92
Bellefield.................... Bellevue, WA 1990 1978/86 67,000 2.9 92 93
Kennydale..................... Renton, WA 1991 1991 67,000 2.8 91 91
------------ ---
Total......................... 538,000 30.8
------------ ---
------------ ---
<CAPTION>
MAR. 31,
-----------
PROPERTY NAME 1995 1996
- ------------------------------ --------- -----------
<S> <C> <C>
Orange........................ 86 86
Sterling Heights.............. 80 84
Newport News North............ * *
Chesapeake.................... * *
Leesburg...................... * *
T.C. Jester................... 87 85
Bellefield.................... 93 93
Kennydale..................... 87 88
Total.........................
</TABLE>
- ------------------------------
* These properties are individually less than 10% of historical cost of total
properties for IDS2. The average occupancy of these projects at December
31, 1993, 1994 and 1995, and March 31, 1996 was 88%, 87%, 88% and 87%,
respectively.
93
<PAGE>
SELECTED FINANCIAL INFORMATION
The following selected financial information is derived from the historical
financial statements of IDS2. Selected unaudited financial data for the three
months ended March 31, 1995 and 1996 include all adjustments (consisting only of
normal recurring accruals) that IDS2 considers necessary for a fair presentation
of operating results for such interim periods. Results for the interim periods
are not necessarily indicative of results for the full year. The financial
information set forth below should be read in conjunction with IDS2's financial
statements, related notes and other financial information incorporated by
reference in this Proxy Statement/Prospectus.
IDS/SHURGARD INCOME GROWTH PARTNERS L.P. II
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
(IN THOUSANDS, EXCEPT PER UNIT DATA) 1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Rental revenue........................... $ 2,277 $ 3,240 $ 3,618 $ 4,038 $ 4,309 $ 1,014 $ 1,093
Interest and other income................ 104 7 4 20 11 2 5
Earnings................................. 1,134 968 1,094 1,340 1,461 295 346
Earnings per Unit (1).................... 9.36 7.99 9.03 11.06 12.06 2.44 2.85
Distributions to Unitholders............. 1,799 1,799 1,799 1,817 1,871 468 468
Distributions per Unit (1)............... 15.62 15.62 15.62 15.78 16.25 4.06 4.06
OTHER DATA:
Funds from operations (2)................ $ 1,813 $ 1,836 $ 1,983 $ 2,234 $ 2,369 $ 502 $ 560
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 1996
--------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets.............................. $ 26,372 $ 26,124 $ 26,322 $ 25,866 $ 25,685 $ 25,402
Notes payable............................. 1,240 1,794 3,005 2,938 3,338 3,320
Partners' equity.......................... 24,763 23,838 23,039 22,467 21,959 21,812
</TABLE>
- ------------------------------
(1) Earnings per Unit and distributions per Unit are based on earnings and
distributions, respectively, allocated to IDS2 Unitholders divided by the
number of IDS2 Units outstanding during the period (approximately 115,110
IDS2 Units for all periods shown).
(2) IDS2 defines FFO as net income before extraordinary items (determined in
accordance with GAAP), plus depreciation and amortization related to real
estate activities, plus or minus certain nonrecurring revenue and expenses.
FFO is used by many financial analysts in evaluating REITs. FFO should not
be considered as an alternative to net income (determined in accordance
with GAAP), as an indication of IDS2'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 IDS2's needs.
94
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1996 AND 1995.
REVENUES. IDS2's performance continued to improve with earnings up $50,400
or 17% over the same quarter of 1995. Rental revenue increased $79,000 or 8% in
the first quarter of 1996 compared to the corresponding quarter of 1995. The
increase resulted primarily from a 6% increase in the average rental rate per
square foot as well as the increase in revenue from storage center expansions.
The Kennydale, Newport News North and Leesburg storage centers contributed the
largest revenue gains in IDS2 of $25,800, $15,600 and $12,500, respectively.
Occupancies decreased two percentage points from 89% at March 31, 1995 to 87% at
March 31, 1996.
EXPENSES. Total expenses rose 4% for the quarter compared to the same
quarter of 1995. Operating and administrative expenses increased 6% over the
first quarter of 1995. The majority of this increase resulted from additional
hours worked by the store managers and increased salaries. Interest expense also
rose 7% due to the additional borrowings on IDS2's line of credit since March
31, 1995.
RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993.
REVENUES. IDS2's rental revenue rose $271,000 and $420,000 in 1995 and
1994, respectively. These increases resulted primarily from the rise in the
average rental rate per square foot from $7.78 in 1993 to $8.08 in 1994 to $8.59
in 1995 as well as storage center expansions. Additionally, earnings increased
$120,000 in 1995 and $246,000 in 1994. The average occupancy for all of IDS2's
storage centers was 87%, 90% and 91% at December 31, 1995, 1994 and 1993,
respectively. Although the average occupancy for IDS2 decreased three percentage
points during 1995, total revenue increased as a result of IDS2 seeking to
maximize revenue by adjusting rents to match demand. Store managers evaluate
their store's rental rates, based on unit demand, unit availability and
competitors' rental rates. IDS2 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.
EXPENSES. Operating expenses increased $68,000 in 1995 after an $89,000
increase in 1994. Operating expenses for 1995 rose primarily due to increased
hours worked by store managers, higher postage and supply costs, increased
payout of tenant claims and foreclosure expenses and the increase in utility
expense at the Chesapeake storage center due to the new expansion. Increases in
1994 were primarily attributable to repair and maintenance costs for the air
conditioning unit at T.C. Jester and higher salary cost throughout IDS2's
storage centers.
Real estate taxes decreased each year from 1993 to 1995. The slight decrease
in 1995 was due to a tax refund received in 1995 as a result of the successful
real estate tax appeal of the Sterling Heights storage center's 1994 assessed
value. The decrease in real estate taxes in 1994 was accredited to winning an
appeal for Kennydale's 1993 and 1994 assessed value. The refund due for 1993
taxes was offset against the taxes due in 1994. IDS2 does not expect to be able
to continue to decrease real estate taxes in the future.
Additionally, interest expense rose $16,000 and $72,000 in 1995 and 1994,
respectively. The increase in 1995 was due to additional borrowings on IDS2's
line of credit to fund the Chesapeake expansion as well as the slight rise in
interest rates from 8.125% at December 31, 1994 to 8.5% at December 31, 1995 on
the commercial bank note totaling $1,200,000. The increase in 1994 was due to
IDS2 borrowing on its line of credit to finance the expansion of Newport News
North, which was subsequently refinanced.
Administrative expenses rose $29,000 in 1995 after a slight increase in
1994. The 1995 increase was primarily due to the increase in printing costs for
IDS2's quarterly and annual reports.
95
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES - THREE MONTHS ENDED MARCH 31, 1996 AND 1995.
TRANSACTION COSTS. IDS2 continues to investigate various alternatives to
provide the limited partners with greater liquidity. During the first quarter of
1996, costs incurred by IDS2 in exploring various alternative transactions
totaled approximately $61,000. Whether and when IDS2 will reach agreement
regarding the implementation of any of the various alternatives will depend on a
number of factors. There can be no assurance that any agreement will be reached
or, if reached, that the transactions contemplated thereby will be consummated.
INVESTING ACTIVITIES. IDS2 invested approximately $475,000 during the first
quarter of 1995 to expand the Chesapeake center.
FINANCING ACTIVITIES. During the March 1995 quarter, IDS2 drew $185,000 on
their $1,500,000 line of credit in order to fund the Chesapeake buildout. On May
1, 1995 IDS2 converted the $1,500,000 line of credit to an $850,000
non-revolving line of credit, maturing May 1, 1997.
DISTRIBUTIONS TO PARTNERS. The annualized distribution rate was 6.5% for
the three months ended March 31, 1996 and 1995.
LIQUIDITY AND CAPITAL RESOURCES - YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993.
CASH FROM OPERATIONS. Cash from operations increased by $460,800 from 1993
to 1994 and $289,500 from 1994 to 1995, reflecting the increase in earnings.
These fluctuations reflect changes in earnings adjusted by the timing of certain
expense payments and payments due to affiliates. Management believes that cash
balances and cash flow from operations will be adequate to support the future
operating needs of IDS2.
INVESTING ACTIVITIES. During 1994 and 1995 IDS2 invested approximately
$1,200,000 to expand the Chesapeake storage center. This project entailed the
construction of two, one-story buildings adding approximately 26,000 square feet
of storage space, as well as the addition of 2,400 square feet of RV parking.
The new expansion opened the beginning of April 1995 and is currently 76%
occupied. The expenditures during 1994 and 1995 were primarily funded from
operating cash flow and cash reserves; the remaining costs were funded from the
line of credit. The expansion of IDS2's existing facilities provides an
opportunity to increase revenue without a significant increase in operating
costs. In 1993 IDS2 completed the expansion at Newport News North at a cost of
$763,000. This expansion added 26,000 square feet to the existing 33,000 square
feet of storage. The additional space includes both climate controlled and
non-climate controlled units.
Additionally, investments in the remaining storage centers have been
$69,000, $51,000 and $47,000 in 1995, 1994 and 1993, respectively. In 1995,
investments included pavement work at the Sterling Heights and Bellefield
storage centers as well as security upgrades at the Orange storage center. The
majority of improvement in 1994 were security upgrades at the Orange and
Sterling Heights storage centers. During 1993 improvements included new pavement
at the Bellefield and Sterling Heights storage centers as well as new doors
installed at the Orange storage center. Planned improvements for 1996 total
approximately $91,000 and are expected to be funded from operations of IDS2.
FINANCING ACTIVITIES. On May 1, 1995, IDS2 obtained an $850,000
non-revolving line of credit with interest rate of prime plus one half percent,
maturing May 1, 1997. During 1995, IDS2 drew $470,000 on the line of credit in
order to fund the Chesapeake expansion. IDS2 intends to pay off or refinance
this line of credit from operating cash flow over the next two years.
Additionally, in 1994, IDS2 converted its $1,250,000 line of credit into a
seven-year note which will mature in March 2001.
DISTRIBUTIONS TO PARTNERS. Annualized distribution rates were 6.5%, 6.31%
and 6.25% for 1995, 1994 and 1993, respectively. Distributions are expected to
continue on a quarterly basis and will reflect IDS2's future operating results
and cash position.
96
<PAGE>
IDS3
PROPERTY INFORMATION
IDS3 owns and operates 16 self storage properties and one office building.
These 17 properties, which are located in seven states, contained approximately
1,000,000 net rentable square feet and had a weighted average net rentable
square foot occupancy rate of approximately 87% as of March 31, 1996 and a
weighted average annual rent per net rentable square foot of $7.92 for the
quarter ended March 31, 1996. IDS3 was organized on November 15, 1988.
The following table sets forth the average occupancy and average rent per
square foot for ISD3 for the years ended December 31, 1993, 1994 and 1995 and
the three months ended March 31, 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
------------------------------------- ENDED MARCH 31,
1993 1994 1995 1996
----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Average occupancy...................................... 90% 92% 89% 87%
Average rent per square foot........................... $ 5.79 $ 6.72 $ 7.45 $ 7.92
</TABLE>
The following table lists selected information regarding the storage centers
for IDS3.
<TABLE>
<CAPTION>
OCCUPANCY AT
--------------------
NET RENTABLE
SQUARE FEET DEC. 31,
YEAR AT DEC. 31, --------------------
PROPERTY NAME PROPERTY LOCATION OWNED SINCE BUILT 1995 ACREAGE 1993 1994
- ------------------------------ -------------------- ----------- --------- ------------ ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Gilbert....................... Gilbert, AZ 1991 1985 66,000 4.0 * *
Delray Beach.................. Delray Beach, FL 1991 1986 77,000 4.5 * *
Allen Blvd.................... Beaverton, OR 1991 1973/75 42,000 2.6 * *
Windcrest..................... San Antonio, TX 1991 1975/93 86,000 6.5 * *
Dobson Ranch.................. Mesa, AZ 1992 1978 55,000 4.2 * *
Norcross...................... Norcross, GA 1992 1984 62,000 9.3 * *
Stone Mountain................ Stone Mountain, GA 1992 1995 61,000 10.1 * *
Tucker........................ Tucker, GA 1992 1987 60,000 4.6 * *
Forest Park................... Forest Park, GA 1992 1980 65,000 7.9 * *
Rochester..................... Utica, MI 1992 1989 57,000 4.8 * *
Castro Valley................. Castro Valley, CA 1993 1975/88 69,000 2.8 96 95
Newark........................ Newark, CA 1993 1991 61,000 3.1 * *
San Leandro................... San Leandro, CA 1993 1991 59,000 2.7 * *
Tracy......................... Tracy, CA 1993 1986 70,000 3.0 * *
Sacramento.................... Sacramento, CA 1994 1991 53,000 2.6 N/A *
San Lorenzo................... San Lorenzo, CA 1994 1990 54,000 1.9 N/A *
Castro Valley Office
Building..................... Castro Valley, CA 1994 1989 3,000 0.3 N/A *
------------ ---
Total......................... 1,000,000 74.7
------------ ---
------------ ---
<CAPTION>
MAR. 31,
-----------
PROPERTY NAME 1995 1996
- ------------------------------ --------- -----------
<S> <C> <C>
Gilbert....................... * *
Delray Beach.................. * *
Allen Blvd.................... * *
Windcrest..................... * *
Dobson Ranch.................. * *
Norcross...................... * *
Stone Mountain................ * *
Tucker........................ * *
Forest Park................... * *
Rochester..................... * *
Castro Valley................. 91 93
Newark........................ * *
San Leandro................... * *
Tracy......................... * *
Sacramento.................... * *
San Lorenzo................... * *
Castro Valley Office
Building..................... * *
Total.........................
</TABLE>
- ------------------------------
* These properties are individually less than 10% of historical cost of total
properties for IDS3. The average occupancy of these projects at December
31, 1993, 1994 and 1995, and March 31, 1996 was 93%, 92%, 87% and 87%,
respectively.
97
<PAGE>
SELECTED FINANCIAL INFORMATION
The following selected financial information is derived from the historical
financial statements of IDS3. Selected unaudited financial data for the three
months ended March 31, 1995 and 1996 include all adjustments (consisting only of
normal recurring accruals) that IDS3 considers necessary for a fair presentation
of operating results for such interim periods. Results for the interim periods
are not necessarily indicative of results for the full year. The financial
information set forth below should be read in conjunction with IDS3's financial
statements, related notes and other financial information incorporated by
reference in this Proxy Statement/Prospectus.
IDS/SHURGARD INCOME GROWTH PARTNERS L.P. III
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
(IN THOUSANDS, EXCEPT PER UNIT DATA) 1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Rental revenue........................... $ 355 $ 2,573 $ 4,110 $ 6,609 $ 7,225 $ 1,720 $ 1,807
Interest and other income................ 584 333 230 57 36 7 9
Earnings................................. 607 1,065 1,427 1,655 1,885 386 532
Earnings per Unit (1).................... 9.76 8.98 11.37 13.19 15.02 3.08 4.24
Distributions to Unitholders............. 685 1,556 1,825 2,124 2,235 559 559
Distributions per Unit (1)............... 11.59 13.80 15.31 17.81 18.75 4.69 4.69
OTHER DATA:
Funds from operations (2)................ 672 1,532 2,219 2,441 2,685 655 801
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1991 1992 1993 1994 1995 MARCH 31, 1996
--------- --------- --------- --------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets.......................... $ 20,320 $ 26,271 $ 36,726 $ 36,930 $ 35,636 $ 35,164
Notes payable......................... -- -- 10,821 11,620 10,746 10,384
Partners' equity...................... 19,957 25,956 25,462 24,882 24,414 24,357
</TABLE>
- ------------------------------
(1) Earnings per Unit and distributions per Unit are based on earnings and
distributions, respectively, allocated to IDS3 Unitholders divided by the
number of IDS3 Units outstanding during the period (approximately 119,215
IDS3 Units for all periods shown).
(2) IDS3 defines FFO as net income before extraordinary items (determined in
accordance with GAAP), plus depreciation and amortization related to real
estate activities, plus or minus certain nonrecurring revenue and expenses.
FFO is used by many financial analysts in evaluating REITs. FFO should not
be considered as an alternative to net income (determined in accordance
with GAAP), as an indication of IDS3'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 IDS3's needs.
98
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1996 AND 1995.
REVENUES. IDS3's performance continued to improve with earnings up $145,000
or 38% over the same quarter of 1995. Rental revenue increased $86,000 or 5% in
the first quarter of 1996 compared to the corresponding quarter of 1995. The
increase resulted primarily from a 10% increase in the average rental rate per
square foot. The Stone Mountain, Tracy and Castro Valley storage centers
contributed the largest revenue gain in IDS3 of $21,300, $19,500 and $18,300,
respectively. During the month of March 1996 IDS3 lost its only tenant in the
Castro Valley office building representing approximately $5,000 per month in
rent. Management is currently making efforts to fill the office space; however,
it has impacted average occupancies at quarter end. Occupancies decreased eight
percentage points from 89% at March 31, 1995 to 81% at March 31, 1996.
EXPENSES. Total expenses decreased 4% for the first quarter compared to the
same quarter of 1995. The majority of this decrease was due to the drop in
amortization expense which does not affect IDS3's cash flow. Additionally,
interest expense decreased as a result of the final payment on the seller's note
which originated with the purchase of the Castro Valley storage center.
Operating and administrative expenses increased 2% over the same quarter of 1995
due to additional hours worked by the store mangers as well as increased
salaries. Real estate taxes increased 7% over the same quarter of 1995 due to a
refund received in March 1995 for the successful appeal of San Lorenzo's 1994
real estate taxes.
RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993.
From 1993 to 1995, IDS3's revenue and expenses increased primarily due to
the acquisition of new storage centers and the interest on the corresponding
debt. During this period, IDS3 acquired the following storage centers:
Sacramento and San Lorenzo (February 1994); Castro Valley office building (May
1994); Castro Valley, Newark, San Leandro and Tracy (August 1993).
IDS3's rental revenue and earnings from 1994 to 1995 increased 9% and 14%,
respectively, resulting from a 10.7% increase in the average rental rate per
square foot. Rate increases were partially offset by a decline in occupancies
from 93% at December 31, 1993 to 90% at December 31, 1994 to 88% at December 31,
1995. Although the average occupancy for IDS3 has decreased, it seeks to
maximize revenue by adjusting rents to match demand more flexibly. Store
managers evaluate their store's rental rates, based on unit demand, unit
availability and competitors' rental rates. IDS3 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.
Revenue for the three storage centers purchased in 1994 increased 20% or
$156,000 in 1995 over their 1994 results, while comparable operating expenses
increased by 5% or $15,000. These combined to provide a 32% or $141,000 increase
in 1995 earnings for these centers compared to their 1994 operating results.
These increases resulted from the additional two months of operations.
Occupancies for these three centers, which averaged 91% during 1994, rose
slightly to an average of 92% during 1995.
Revenue and operating expenses for the four properties purchased in 1993
rose 161% or $1.3 million and 145% or $415,000 from 1993 to 1994, respectively.
These increases reflect the additional seven months of operations in 1994.
Additionally, revenue and expenses increased 8% or $173,000 and 4% or $26,000
from 1994 to 1995, respectively. This provided an 11% increase in 1995 earnings
for these centers compared to 1994. Annual occupancies for these four centers
averaged 91%, 90% and 91% at December 31, 1993, 1994 and 1995, respectively.
Storage centers owned prior to 1993 had increased revenue of 14% from 1993
to 1994 and 8% from 1994 to 1995. Operating expenses for these storage centers
increased 8% or $126,000 in 1995 over 1994. The majority of this increase is due
to additional hours worked by managers, higher repair and
99
<PAGE>
maintenance expenses which included retail renovations at the Tucker facility,
and increased store inventory costs. Additionally, operating expenses increased
3% in 1994 over 1993. Annual occupancies for these storage centers averaged 94%
at December 31, 1993, 89% at December 31, 1994, and 85% December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES - THREE MONTHS ENDED MARCH 31, 1996 AND 1995.
IDS3 continues to investigate various alternatives to provide the limited
partners with greater liquidity. During the first quarter of 1996, costs
incurred by IDS3 in exploring various alternative transactions totaled
approximately $82,000. Whether and when IDS3 will reach agreement regarding the
implementation of any of the various alternatives will depend on a number of
factors. There can be no assurance that any agreement will be reached or, if
reached, that the transactions contemplated thereby will be consummated.
Capital improvements for the first quarter of 1996 totaled $38,600, which
represents the conversion of storage units at the Dobson Ranch storage center.
During the first quarter of 1996, IDS3 borrowed $600,000 on its bank note in
order to make final payment of $909,653 on the seller's note that originated
with the purchase of the Castro Valley storage center. During the first quarter
of 1995, IDS3 made payments totaling $378,900 on the seller's notes pertaining
to the Castro Valley and Newark storage centers. These payments were funded out
of operating cash flow.
Annualized distribution rates were 7.50% for the three months ended March
31, 1996 and 1995.
LIQUIDITY AND CAPITAL RESOURCES - YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993.
CASH FROM OPERATIONS. Cash from operations increased by $720,300 from 1993
to 1994 and $337,200 from 1994 to 1995, reflecting the increase in earnings.
Management believes that cash balances and cash flow from operations will be
adequate to support the future operating needs of IDS3.
INVESTING ACTIVITIES. In 1993, IDS3 invested $237,000 in existing storage
centers, including office remodeling at Norcross, Stone Mountain, Tucker and
Forest Park and new signage at Rochester. IDS3 also purchased four storage
centers during the third quarter of 1993 at a total cost of $13.3 million. IDS3
acquired a security interest in two additional properties as part of a binding
purchase agreement with the same seller. These two centers were purchased on
February 10, 1994, for $5.7 million. All six California properties are subject
to similar terms under the purchase and sales agreements. These agreements
provide IDS3 with a 10% return on funds invested for the first three years. All
of these storage centers are located in northern California, San Francisco Bay
and Sacramento areas and they range in size from 58,000 to 69,000 net rentable
square feet. Additionally, in March 1994, IDS3 purchased an office building from
the same seller at a total cost of $500,000.
In 1994, IDS3 invested $157,000 in existing storage centers. These
improvements included new signage at Castro Valley, Newark, San Leandro and
Tracy. Security improvements were also made at the Gilbert, Dobson Ranch, Castro
Valley, Newark and Tracy storage centers. As part of Stone Mountain and Forest
Park's original acquisitions, IDS3 acquired undeveloped land in Atlanta adjacent
to each storage center. IDS3 has listed both parcels with a local real estate
broker for resale.
During 1995, IDS3 invested $147,000 in capital improvements which included
pavement work at the Gilbert, Allen Boulevard and Rochester storage centers, as
well as a new perimeter fence at the Windcrest storage center. Additionally, the
septic system at the Delray Beach storage center was replaced. Planned
improvements for 1996 total approximately $188,600 and are expected to be funded
from operations and cash reserves.
FINANCING ACTIVITIES. During 1993, IDS3 issued $10,821,000 of debt in
conjunction with the purchase of the six storage centers in the San Francisco
area. This debt was comprised of an $8 million bank note and $2,821,000 in
seller notes. Seller's notes require quarterly interest payments to the
100
<PAGE>
extent any center's net operating income, as defined, exceeds 10% of IDS3's
investment in the related center. Annual payments are due under conditions
provided in the note agreement based on each center's performance.
During 1994, IDS3 consolidated existing outstanding notes payable totaling
$8 million and borrowed an additional $1.5 million. This new note matures April
1, 2001 and bears an interest rate of 8% until September 1, 1996, at which time
it reprices and can be fixed for various periods at IDS3's option. Cash proceeds
from the additional borrowing under this note were used to make $580,000 in
payments on the seller's notes taken in 1993 and fund the $500,000 purchase
price of the Castro Valley office building. The terms of this note provide IDS3
the option to borrow up to an additional $3 million. It may be necessary for
IDS3 to borrow under this provision to meet the future repayment obligations of
the seller's notes to the extent they cannot be funded from operating cash flow.
In 1994, IDS3 made the final payments of $651,000 on the seller's notes that
originated with the purchase of the Tracy and San Leandro storage centers.
In 1995, IDS3 made a $65,347 payment on the seller's note which originated
with the purchase of the Castro Valley storage center as well as final payment
of $615,000 on the seller's note which originated with the purchase of the
Newark storage center.
DISTRIBUTIONS TO PARTNERS. Annualized distribution rates were 7.5%, 7.125%,
and 6.125% for 1995, 1994 and 1993, respectively. Distributions are expected to
continue on a quarterly basis and will reflect IDS3's future operating results
and cash position.
101
<PAGE>
BENEFICIAL OWNERSHIP
The following table sets forth as of June 30, 1996 certain information
regarding beneficial ownership of equity interests in the Partnerships and the
Common Stock by the General Partner of each of the Partnerships and by the
individual general partners of each of the General Partners. The Partnerships do
not know of any other person who beneficially owns directly or indirectly more
than 5% of the interest in any of the Partnerships. Except as otherwise noted,
the Partnerships believe that the beneficial owners of interests listed below,
based on information furnished by such owners, have sole voting and investment
power with respect to such interests. Except as otherwise noted, all shares of
Common Stock included in the following table are shares of the Company's Class A
Common Stock.
<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK
BENEFICIALLY
PERCENT OF EQUITY SHARES OF COMMON SHARES OF COMMON OWNED AFTER
INTEREST PRIOR TO THE MERGERS STOCK STOCK TO BE THE MERGERS
BENEFICIALLY ISSUED IN (1)
------------------ OWNED PRIOR TO CONNECTION WITH -------------
NAME AND ADDRESS IDS1 IDS2 IDS3 THE MERGERS THE MERGERS (1) NUMBER
- ------------------------------ ----- ----- ----- ----------------- ----------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Shurgard Associates L.P. 5% -- -- -- 80,133 80,133 (2)
1201 Third Ave.
Suite 2200
Seattle, WA 98101
Shurgard Associates L.P. II -- 5 % -- -- 53,724 53,724 (2)
1201 Third Ave.
Suite 2200
Seattle, WA 98101
Shurgard Associates L.P. III -- -- 7.5 % -- 118,430 118,430 (2)
1201 Third Ave.
Suite 2200
Seattle, WA 98101
Charles K. Barbo * * * 710,126 (4) 40,553 (6) 750,679
1201 Third Ave.
Suite 2200
Seattle, WA 98101
Arthur W. Buerk * * * 437,841 (5) 32,679 (7) 470,520
1201 Third Ave.
Seattle, WA 98101
<CAPTION>
NAME AND ADDRESS PERCENT
- ------------------------------ -----------
<S> <C>
Shurgard Associates L.P. *
1201 Third Ave.
Suite 2200
Seattle, WA 98101
Shurgard Associates L.P. II *
1201 Third Ave.
Suite 2200
Seattle, WA 98101
Shurgard Associates L.P. III *
1201 Third Ave.
Suite 2200
Seattle, WA 98101
Charles K. Barbo 2.8 %
1201 Third Ave.
Suite 2200
Seattle, WA 98101
Arthur W. Buerk 1.8 %
1201 Third Ave.
Seattle, WA 98101
</TABLE>
- ------------------------------
*Less than one percent.
(1) Assumes the Share Price is $25.00 and that all three Partnerships
participate in the Mergers.
(2) The shares of Common Stock beneficially owned by each of the General
Partners after the Mergers will be distributed to their respective limited
and general partners in accordance with the applicable GP Agreement.
(3) Includes 3,747 shares held for Mr. Barbo's individual account under the
Company's Employee Retirement Savings Plan and Trust, 4,900 shares held by
trusts of which Mr. Barbo is a trustee, 2,500 shares over which Mr. Barbo's
wife has voting and investment power and 6,000 shares issuable on exercise
of stock options currently exercisable or exercisable within 60 days.
(4) Includes 78,075 shares of Class B Common Stock, which are convertible into
Class A Common Stock at a one-to-one ratio upon repayment of a loan made in
connection with satisfaction of certain general partner capital obligations
in connection with the Consolidation.
(5) Includes 76,529 shares of Class B Common Stock, which are convertible into
Class A Common Stock at a one-to-one ratio upon repayment of a loan made in
connection with satisfaction of certain general partner capital obligations
in connection with the Consolidation.
(6) Represents approximately 7,933, 5,319 and 7,851 shares issuable to Mr. Barbo
with respect to his interest as a general partner of the IDS1 General
Partner, the IDS2 General Partner and the IDS3 General Partner,
respectively; 160, 107 and 159 shares issuable to SGPI, of which Mr. Barbo
is the sole shareholder, as the corporate general partner of the IDS1
General Partner, the IDS2 General Partner and the IDS3 General Partner,
respectively; and 4,007, 2,941 and 12,076 shares issuable by the Company to
Mr. Barbo with respect to the IDS1 Merger, the IDS2 Merger and the IDS3
Merger, respectively, pursuant to the Contingent Shares Agreement.
(7) Represents approximately 7,933, 5,319 and 7,851 shares issuable to Mr. Buerk
with respect to his interest as a general partner of the IDS1 General
Partner, the IDS2 General Partner and the IDS3 General Partner,
respectively, and 2,438, 1,789 and 7,349 shares issuable by the Company to
Mr. Buerk with respect to the IDS1 Merger, the IDS2 Merger and the IDS3
Merger, respectively, pursuant to the Contingent Shares Agreements.
102
<PAGE>
DISTRIBUTIONS AND MARKET PRICES OF UNITS
PARTNERSHIP DISTRIBUTIONS
The following table sets forth the distributions paid per Unit of IDS1, IDS2
and IDS3 in the periods indicated below. Amounts paid in the indicated quarter
were determined based upon Partnership operations during the preceding quarter.
The original cost per Unit was $250 for each of the Partnerships.
<TABLE>
<CAPTION>
1988 (1) 1989 (1) 1990 (1) 1991 1992 1993 1994
----------- ----------- ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
IDS1
Quarter 1............................. N/A $ 2.76 $ 3.75 $ 3.75 $ 3.75 $ 3.75 $ 4.06
Quarter 2............................. N/A 3.75 3.75 3.75 3.75 3.75 4.14
Quarter 3............................. $ 2.25 3.75 3.75 3.75 3.75 3.75 4.38
Quarter 4............................. 3.03 3.75 3.75 3.75 3.75 3.91 4.45
IDS2
Quarter 1............................. N/A N/A 1.31 3.91 3.91 3.91 3.91
Quarter 2............................. N/A N/A 4.13 3.91 3.91 3.91 3.91
Quarter 3............................. N/A N/A 3.60 3.91 3.91 3.91 3.91
Quarter 4............................. N/A N/A 3.91 3.91 3.91 3.91 4.06
IDS3
Quarter 1............................. N/A N/A N/A 3.44 3.75 3.75 4.22
Quarter 2............................. N/A N/A N/A 3.78 3.79 3.75 4.38
Quarter 3............................. N/A N/A N/A 3.78 3.87 3.75 4.53
Quarter 4............................. N/A N/A 3.76 3.75 3.75 4.06 4.69
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
IDS1
Quarter 1............................. $ 4.69 $ 4.84
Quarter 2............................. 4.84 --
Quarter 3............................. 4.84 --
Quarter 4............................. 4.84 --
IDS2
Quarter 1............................. 4.06 4.06
Quarter 2............................. 4.06 --
Quarter 3............................. 4.06 --
Quarter 4............................. 4.06 --
IDS3
Quarter 1............................. 4.69 4.69
Quarter 2............................. 4.69 --
Quarter 3............................. 4.69 --
Quarter 4............................. 4.69 --
</TABLE>
- ------------------------
(1) "N/A" for a particular quarter means that the Partnership had not commenced
operations as of the immediately preceding quarter.
MARKET PRICES OF UNITS
VOLUME OF SALES. The Units of IDS1, IDS2 and IDS3 are not listed on any
national securities exchange or quoted in the over the counter market, and there
is no established public trading market for the Units. Secondary sales activity
for the Units has been limited and sporadic. The General Partner for each
Partnership monitors transfers of its Partnership Units (i) because the
admission of the transferee as a substitute Unitholder requires the consent of
the General Partner under each Partnership Agreement and (ii) in order to track
compliance with safe harbor provisions to avoid treatment as a "publicly traded
partnership" for tax purposes. While the General Partners receive some
information regarding the prices at which secondary sale transactions in the
Units have been effectuated, they do not receive or maintain comprehensive
information regarding the activities of all broker/dealers and others known to
facilitate secondary sales of the Units. It should be noted that some
transactions may not be reflected on the records of the Partnerships.
The General Partners estimate, based solely on the transfer records of the
Partnerships, that the number of Units transferred in secondary market
transactions (i.e., excluding transactions believed to be between related
parties, family members or the same beneficial owner) was as follows:
IDS1
<TABLE>
<CAPTION>
% OF TOTAL
NO. OF UNITS UNITS NO. OF
PERIOD TRANSFERRED OUTSTANDING TRANSACTIONS
- --------------------------------------------------------------- ------------- ------------- -----------------
<S> <C> <C> <C>
1992........................................................... 821 .554% 13
1993........................................................... 248 .167 8
1994........................................................... 2,244 1.514 35
1995........................................................... 1,204 .812 33
Three months ending March 31, 1996............................. 347 .234 11
</TABLE>
103
<PAGE>
IDS2
<TABLE>
<CAPTION>
% OF TOTAL
NO. OF UNITS UNITS NO. OF
PERIOD TRANSFERRED OUTSTANDING TRANSACTIONS
- --------------------------------------------------------------- ------------- ------------- -----------------
<S> <C> <C> <C>
1992........................................................... 178 .155% 6
1993........................................................... 96 .083 5
1994........................................................... 985 .856 22
1995........................................................... 1,232 1.070 36
Three months ending March 31, 1996............................. 117 .102 6
</TABLE>
IDS3
<TABLE>
<CAPTION>
% OF TOTAL
NO. OF UNITS UNITS NO. OF
PERIOD TRANSFERRED OUTSTANDING TRANSACTIONS
- --------------------------------------------------------------- ------------- ------------- -----------------
<S> <C> <C> <C>
1992........................................................... -- -- --
1993........................................................... 84 .070% 4
1994........................................................... 372 .312 10
1995........................................................... 555 .466 16
Three months ending March 31, 1996............................. 54 .045 3
</TABLE>
SECONDARY MARKET INFORMATION. Set forth in the following table is certain
information regarding sale transactions in Units of the Partnerships, which was
obtained by the Company and Partnerships from Stanger. Stanger summarizes
secondary market prices for the Units based on actual transactions during the
reporting periods listed on the tables below. The transactions reflected in the
tables represent only some of the sale transactions in the Units. The following
secondary market firms provide price data to Stanger: 2nd Market Capital
Services; American Partnership Services; Bigelow Management, Inc.; Chicago
Partnership Board; Cuyler & Associates; DCC Securities Corp.; Empire Securities;
EquityLine Properties; Equity Resources Group; Fox & Henry, Inc.; Frain Asset
Management; MacKenzie-Patterson Securities; Murillo & Company; Nationwide
Partnership Marketplace; New York Partnership Exchange; Pacific Partnership
Group; Partnership Service Network; Raymond James & Associates; Secondary Income
Funds; Securities Planners, Inc.; SunPoint Securities, Inc.; and The Partnership
Marketing Company.
The information from Stanger set forth below is also reported in The Stanger
Report, a monthly trade publication. The following legend accompanies the
secondary market information included in The Stanger Report: "Limited
partnerships are designed as illiquid, long-term investments. Secondary market
prices generally do not reflect the current value of partnership assets, nor are
they indicative of total return since prior cash distributions and tax benefits
received by the original investor are not reflected in the price. Transaction
prices are not verified by Robert A. Stanger & Company."
Because no assurances can be given that the prices reflected in the tables
below represent the true value of the Units, such information should not be
relied upon as indicative of the ability of the Unitholders to sell their Units
in secondary sale transactions or as to the prices at which such Units may be
sold.
104
<PAGE>
IDS1 SECONDARY MARKET INFORMATION
<TABLE>
<CAPTION>
TRANSACTION PRICE(1)
--------------------
REPORTING PERIOD LOW HIGH NUMBER OF UNITS
- ------------------------------------------------------ --------- --------- -----------------
<S> <C> <C> <C>
1992
Quarter 1 (2)....................................... -- -- --
Quarter 2........................................... $ 95.63 $ 142.86 328
Quarter 3........................................... 100.00 126.26 161
Quarter 4........................................... 125.00 125.00 35
1993
Quarter 1........................................... 119.00 129.00 65
Quarter 2........................................... 129.00 139.00 136
Quarter 3........................................... 129.60 150.00 74
Quarter 4........................................... 152.00 152.00 260
1994
Quarter 1........................................... 145.00 175.00 954
Quarter 2........................................... 150.00 170.00 359
Quarter 3........................................... 160.00 180.00 287
Quarter 4........................................... 155.00 175.00 512
1995
Quarter 1........................................... 168.00 190.00 586
Quarter 2........................................... 175.00 180.25 198
Quarter 3........................................... 163.75 198.53 257
Quarter 4........................................... 180.00 200.00 153
1996 (3)
Quarter 1........................................... 150.00 198.00 413
</TABLE>
- ------------------------
(1) The Transaction Price is given on a per Unit basis. The General Partner does
not know whether the transaction prices shown are before or after
commissions. However, the secondary-market firms providing information to
Stanger are instructed that, if they act as "principals," the reported price
per Unit should include any mark-ups and if they act as "agents," the
reported price per Unit should include any commissions, unless the firm acts
as a retail broker. The firms are further instructed not to include
commissions paid by retail buyers or sellers to their retail brokers.
(2) No trade was reported to Stanger during this quarter.
(3) Secondary market information for the second quarter of 1996 is not yet
available from Stanger.
105
<PAGE>
IDS2 SECONDARY MARKET INFORMATION
<TABLE>
<CAPTION>
TRANSACTION PRICE(1)
--------------------
REPORTING PERIOD LOW HIGH NUMBER OF UNITS
- ------------------------------------------------------ --------- --------- -----------------
<S> <C> <C> <C>
1992
Quarter 1........................................... $ 126.00 $ 132.00 130
Quarter 2 (2)....................................... -- -- --
Quarter 3........................................... 100.00 132.20 114
Quarter 4........................................... 119.58 130.00 96
1993
Quarter 1........................................... 134.00 134.00 20
Quarter 2........................................... 135.00 135.00 30
Quarter 3 (2)....................................... -- -- --
Quarter 4........................................... 157.00 157.00 18
1994
Quarter 1........................................... 154.05 154.05 28
Quarter 2........................................... 150.00 163.90 434
Quarter 3........................................... 129.16 168.00 664
Quarter 4........................................... 150.00 180.00 382
1995
Quarter 1........................................... 146.00 177.00 440
Quarter 2........................................... 149.00 176.58 102
Quarter 3........................................... 150.00 185.97 569
Quarter 4........................................... 170.00 185.98 266
1996 (3)
Quarter 1........................................... 162.00 185.00 140
</TABLE>
- ------------------------
(1) The Transaction Price is given on a per Unit basis. The General Partner does
not know whether the transaction prices shown are before or after
commissions. However, the secondary-market firms providing information to
Stanger are instructed that, if they act as "principals," the reported price
per Unit should include any mark-ups and if they act as "agents," the
reported price per Unit should include any commissions, unless the firm acts
as a retail broker. The firms are further instructed not to include
commissions paid by retail buyers or sellers to their retail brokers.
(2) No trade was reported to Stanger during this quarter.
(3) Secondary market information for the second quarter of 1996 is not yet
available from Stanger.
106
<PAGE>
IDS3 SECONDARY MARKET INFORMATION
<TABLE>
<CAPTION>
TRANSACTION PRICE(1)
--------------------
REPORTING PERIOD LOW HIGH NUMBER OF UNITS
- ------------------------------------------------------ --------- --------- -----------------
<S> <C> <C> <C>
1992
Quarter 1 (2)....................................... -- -- --
Quarter 2 (2)....................................... -- -- --
Quarter 3 (2)....................................... -- -- --
Quarter 4........................................... $ 131.00 $ 131.00 20
1993
Quarter 1 (2)....................................... -- -- --
Quarter 2........................................... 129.00 167.00 53
Quarter 3 (2)....................................... -- -- --
Quarter 4........................................... 120.00 157.90 284
1994
Quarter 1........................................... 166.00 166.00 60
Quarter 2........................................... 182.00 182.00 60
Quarter 3........................................... 166.25 175.00 80
Quarter 4........................................... 160.00 194.25 140
1995
Quarter 1........................................... 171.86 174.44 34
Quarter 2........................................... 175.00 175.00 20
Quarter 3........................................... 165.00 177.00 253
Quarter 4........................................... 175.00 187.50 114
1996 (3)
Quarter 1........................................... 165.00 200.00 294
</TABLE>
- ------------------------
(1) The Transaction Price is given on a per Unit basis. The General Partner does
not know whether the transaction prices shown are before or after
commissions. However, the secondary-market firms providing information to
Stanger are instructed that, if they act as "principals," the reported price
per Unit should include any mark-ups and if they act as "agents," the
reported price per Unit should include any commissions, unless the firm acts
as a retail broker. The firms are further instructed not to include
commissions paid by retail buyers or sellers to their retail brokers.
(2) No trade was reported to Stanger during this quarter.
(3) Secondary market information for the second quarter of 1996 is not yet
available from Stanger.
107
<PAGE>
BUSINESS AND PROPERTIES OF THE COMPANY
HISTORY OF THE COMPANY
The Company 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. In order to create a fully integrated company and more
closely align the interests of management with stockholders, the Management
Company merged with the Company on March 24, 1995. In connection with the
Management Company Merger, the outstanding shares of the Management Company were
converted into 1,266,705 newly issued shares of Common Stock, subject to certain
adjustments. The Management Company stockholders may receive additional shares
over the five years following the Management Company Merger as consideration for
certain partnership interests, including interests in the Partnerships held by
the Management Company that were not valued at the time of the Management
Company Merger. As a result of the Management Company 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, to sponsor and
operate real estate investments. From its formation until the Management Company
Merger, the Management Company was involved in the organization of 20 public
partnerships, which raised in the 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. The
Company 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.
THE PROPERTIES
The Company owned and operated, as of March 31, 1996, directly and through
its subsidiaries and joint ventures, 178 self storage properties located in 19
states and Europe. In addition, the Company owns two business parks and a
commercial building located in the Seattle metropolitan area. 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 and stay for
longer terms, are more reliable payers 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.
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
the majority of its properties. The Company believes it
108
<PAGE>
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. Property 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 generally are
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.
In some cases, multistory buildings able to bear substantial weight loads,
such as warehouses and newspaper plants, have been converted into self storage
properties. In addition, similar multistory buildings for self storage have been
constructed in dense urban areas where land costs, zoning and other development
considerations make it impractical or undesirable to construct single-story
buildings.
Storage units are usually rented on a month-to-month basis. The Company
estimates that 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 (averaging 2 to 3 years), and those of
residential customers, who tend to stay in rented units for shorter periods
(averaging 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.
The following table provides information regarding the year developed or
acquired (by the Company or by one of the partnerships included in the
Consolidation, 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 March 31, 1996. The Company owns additional undeveloped
properties not reflected in the table.
<TABLE>
<CAPTION>
APPROXIMATE
PROPERTY PROPERTY OWNED YEAR NET RENTABLE
PROPERTY NAME LOCATION STATE SINCE BUILT SQUARE FEET ACREAGE
- ------------------------- ---------------- --------- --------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Chandler Chandler AZ 1986 1986 69,000 4.0
Mesa Mesa AZ 1987 1985 103,000 4.8
Phoenix Phoenix AZ 1985 1984 77,000 2.7
Phoenix East Phoenix AZ 1987 1984 66,000 2.0
Scottsdale Scottsdale AZ 1985 1976/85 47,000 3.0
Scottsdale North Scottsdale AZ 1985/87 1985 112,000 4.1
Tempe Tempe AZ 1984 1976 54,000 3.0
Warner (1) Mesa AZ 1995 1985 62,000 3.1
Colton Colton CA 1985 1984 73,000 3.8
Culver City Los Angeles CA 1988 1989 76,000 1.4
Daly City Daly City CA 1995 1989 96,000 5.2
El Cajon El Cajon CA 1986 1977 127,000 6.0
El Cerrito Richmond CA 1986 1987 62,000 1.5
Fontana Sierra Fontana CA 1987 1980/85 84,000 3.6
Hayward Hayward CA 1985 1983 48,000 2.8
</TABLE>
109
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
PROPERTY PROPERTY OWNED YEAR NET RENTABLE
PROPERTY NAME LOCATION STATE SINCE BUILT SQUARE FEET ACREAGE
- ------------------------- ---------------- --------- --------- --------- ------------- -----------
Huntington Beach Huntington CA 1988 1986 91,000 3.3
Beach
<S> <C> <C> <C> <C> <C> <C>
Kearney-Balboa San Diego CA 1986 1984 94,000 2.3
La Habra La Habra CA 1986 1979/91 97,000 7.1
Mountain View Mountain View CA 1987 1986 29,000 0.7
Palo Alto Palo Alto CA 1986 1987 49,000 1.4
S. San Francisco San Francisco CA 1987 1985 57,000 2.1
Santa Ana Santa Ana CA 1986 1975/86 168,000 8.1
Solana Beach (3) Solana Beach CA 1987 1984 95,000 4.5
Sunnyvale Sunnyvale CA 1986 1974/75 122,000 6.5
Union City Hayward CA 1985 1985 42,000 2.9
Westwood Santa Monica CA 1986 1988 38,000 0.3
Lakewood Golden CO 1986 1985 67,000 2.7
Northglenn Northglenn CO 1987 1979 75,000 5.5
Tamarac Denver CO 1984 1977 25,000 1.9
Thornton Denver CO 1984 1984 41,000 2.4
Windermere Littleton CO 1984 1977/79 83,000 5.3
Military Trail West Palm Beach FL 1987 1981 124,000 9.4
Oakland Park Ft. Lauderdale FL 1985 1974/78 292,000 13.4
Seminole Seminole FL 1986 1984/85 61,000 2.7
West Palm Beach West Palm Beach FL 1987 1975 163,000 11.8
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
Roswell Roswell GA 1986 1986 57,000 3.8
Alsip Alsip IL 1982 1980 66,000 4.6
Bridgeview Bridgeview IL 1985 1983 75,000 4.1
Dolton Calumet City IL 1982 1979 64,000 3.0
Hillside Hillside IL 1988 1988 65,000 5.3
Lisle Lisle IL 1986 1976/86 52,000 3.4
Lombard Lombard IL 1982 1980 52,000 3.1
Oak Forest Orland Park IL 1995 1991 63,000 3.9
Rolling Meadows Rolling Meadows IL 1982 1980 60,000 4.5
Schaumburg Schaumburg IL 1982 1980 71,000 4.3
Willowbrook Willowbrook IL 1986 1979/82 44,000 3.3
College Park Indianapolis IN 1986 1984 70,000 6.0
Glendale Indianapolis IN 1986 1985 60,000 5.6
Briggs Chaney Silver Spring MD 1994 1987 28,000 2.0
Clinton Clinton MD 1986 1985 31,000 2.0
Crofton Gambrills MD 1988 1985 40,000 2.1
Frederick Frederick MD 1994 1987 32,000 1.7
Gaithersburg Gaithersburg MD 1994 1986 57,000 5.4
Germantown Germantown MD 1994 1988 45,000 1.9
Laurel Laurel MD 1988 1984 30,000 2.0
Oxon Hill Ft. Washington MD 1994 1987 28,000 1.3
Suitland Suitland MD 1987 1985 44,000 2.7
Ann Arbor Ann Arbor MI 1988 1977 62,000 3.9
Canton (4) Canton MI 1988 1986 58,000 3.3
Fraser (4) Fraser MI 1988 1985 73,000 5.2
Grand Rapids Grand Rapids MI 1983 1978 46,000 3.2
Kalamazoo Kalamazoo MI 1980 1980 43,000 3.0
Lansing Lansing MI 1983 1978/79 41,000 2.5
Livonia (4) Livonia MI 1988 1985 67,000 4.8
Madison Heights Madison Heights MI 1995 1977 66,000 4.1
Plymouth Canton MI 1985 1979 75,000 5.3
Township
Southfield Southfield MI 1983 1976 77,000 4.3
Taylor Taylor MI 1995 1980 66,000 4.2
</TABLE>
110
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
PROPERTY PROPERTY OWNED YEAR NET RENTABLE
PROPERTY NAME LOCATION STATE SINCE BUILT SQUARE FEET ACREAGE
- ------------------------- ---------------- --------- --------- --------- ------------- -----------
Troy East Troy MI 1981 1975/77 79,000 4.8
<S> <C> <C> <C> <C> <C> <C>
Troy West Troy MI 1983 1979 88,000 5.2
Walled Lake Walled Lake MI 1985/89 1984 68,000 4.3
Warren (4) Warren MI 1988 1985 68,000 4.6
Bellefontaine St. Louis MO 1985 1979 45,000 4.9
Brentwood Brentwood MO 1988 1977 53,000 3.4
Olive Innerbelt St. Louis MO 1987 1952/86 94,000 2.5
Capital Blvd Raleigh NC 1994 1984 35,000 2.1
Cary Cary NC 1994 1984 62,000 4.7
Garner Garner NC 1994 1987 28,000 3.1
Glenwood Raleigh NC 1994 1983 31,000 1.9
Morrisville Morrisville NC 1994 1988 40,000 3.3
Old Bridge Matawan NJ 1987 1987 78,000 6.1
Northern Long Island City NY 1987 1940 78,000 1.9
Gold Brooklyn NY 1986 1940 108,000 0.4
Utica Brooklyn NY 1986 1964 71,000 1.1
Van Dam Long Island City NY 1986 1925 63,000 0.5
Yonkers Yonkers NY 1986 1928 102,000 1.6
Barbur Boulevard Portland OR 1995 1993 67,000 2.8
Beaverton Beaverton OR 1985 1974 26,000 2.0
Denny Road Beaverton OR 1989 1988 65,000 6.2
King City Tigard OR 1987 1986 84,000 4.9
Liberty Road Salem OR 1995 1993 54,000 4.4
Oregon City Portland OR 1995 1992 57,000 3.2
Portland Portland OR 1988 1988 49,000 2.1
Salem Salem OR 1983 1979/81 67,000 3.8
Airport Philadelphia PA 1986 1985 101,000 6.7
Edgmont Philadelphia PA 1995 1992 64,000 5.5
West Chester (3) West Chester PA 1986 1980 87,000 7.0
Franklin (5) Nashville TN 1995 1995 55,000 3.3
Hermitage (6) Nashville TN 1995 1995 68,000 19.0
Medical Center (7) Nashville TN 1994 1995 60,000 2.3
Arlington Arlington TX 1986 1984 57,000 2.7
Bandera Road San Antonio TX 1988 1981 76,000 3.6
Bedford Bedford TX 1985 1984 69,000 2.7
Beltline Rd. Irving TX 1989 1985/86 89,000 6.3
Blanco Road San Antonio TX 1988 1989/91 66,000 3.6
Euless Blvd. Hurst TX 1987 1974 68,000 4.7
Federal Houston TX 1988 1988 55,000 3.4
Fredricksburg San Antonio TX 1987 1978/82 82,000 4.5
Greenbriar Houston TX 1989 1988 60,000 1.8
Hill Country Village San Antonio TX 1985 1982 79,000 4.0
Hillcroft (3) Houston TX 1991 1988 59,000 3.4
Imperial Valley Houston TX 1988 1987 54,000 3.1
Irving Irving TX 1985 1975/84 78,000 4.2
Kingwood Kingwood TX 1988 1988 54,000 3.3
MacArthur Blvd. Irving TX 1986 1984 63,000 7.2
Medical Center Houston TX 1989 1989 57,000 2.6
North Austin Austin TX 1986 1982 76,000 5.9
Park Cities East Dallas TX 1995 1995 56,000 4.3
Parker Road Plano TX 1995 1995 46,000 3.5
San Antonio NE San Antonio TX 1985 1982 74,000 3.6
South Hwy (6) Houston TX 1995 1995 53,000 4.1
Sugarland Sugarland TX 1988 1987 55,000 3.0
Thousand Oaks San Antonio TX 1986 1987 53,000 2.9
Universal City (1) San Antonio TX 1995 1985 77,000 5.1
Westheimer Houston TX 1986 1977 73,000 3.7
</TABLE>
111
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
PROPERTY PROPERTY OWNED YEAR NET RENTABLE
PROPERTY NAME LOCATION STATE SINCE BUILT SQUARE FEET ACREAGE
- ------------------------- ---------------- --------- --------- --------- ------------- -----------
Woodlands Houston TX 1988 1988 64,000 3.8
<S> <C> <C> <C> <C> <C> <C>
Bayside Virginia Beach VA 1988 1984 28,000 1.7
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
Fairfax Fairfax VA 1986 1980 62,000 5.6
Falls Church Falls Church VA 1987 1988 93,000 1.5
Gainesville Gainesville VA 1994 1988 31,000 2.0
Herndon Herndon VA 1988 1985 39,000 3.0
Holland Road Virginia Beach VA 1994 1985 34,000 3.9
Jefferson Davis Hwy Richmond VA 1994 1990 35,000 5.2
Kempsville Virginia Beach VA 1989 1985 33,000 2.0
Laskin Road Virginia Beach VA 1994 1984 39,000 2.5
Manassas East Manassas VA 1988 1984 35,000 2.0
Manassas West Manassas VA 1988 1985 35,000 1.5
Newport News S. Newport News VA 1985/92 1985 60,000 3.9
North Richmond Richmond VA 1988 1984 37,000 2.6
Princess Anne Road Virginia Beach VA 1994 1985 40,000 2.2
Temple Avenue Petersburg VA 1994 1989 34,000 4.0
Virginia Beach Virginia Beach VA 1989 1985 36,000 2.3
Aurora North Seattle WA 1986 1978 58,000 1.6
Bellevue East and West Bellevue WA 1984 1975 165,000 10.8
(8)
Bellingham Bellingham WA 1981 1981 73,000 5.7
Burien Seattle WA 1985 1974 92,000 5.3
Capitol Hill (9) Seattle WA 1987 1988 76,000 0.7
Downtown Seattle (10) Seattle WA 1986 1912 28,000 0.3
East Lynnwood Lynnwood WA 1986 1978 80,000 3.8
Edmonds Edmonds WA 1984 1974/75 120,000 6.5
Everett Everett WA 1981 1978 64,000 4.2
Factoria Bellevue WA 1984 1984 57,000 3.8
Federal Way Federal Way WA 1984 1975 134,000 5.7
Fife (11) Tacoma WA 1984 1977 64,000 3.9
Highland Hill Tacoma WA 1981 1982 60,000 3.9
Interbay Seattle WA 1987 1988 80,000 0.4
Issaquah Issaquah WA 1985 1986 56,000 4.7
Lake City (1) Seattle WA 1995 1987 51,000 1.1
North Spokane Spokane WA 1984 1976 76,000 4.1
Renton Renton WA 1984 1979/89 80,000 4.5
Sea-Tac Seattle WA 1985 1979 60,000 3.0
Seattle Seattle WA 1983 1979 79,000 4.5
Smokey Point Arlington WA 1987 1984/87 34,000 2.2
South Hill Seattle WA 1995 1980 44,000 2.8
South Tacoma Tacoma WA 1987 1975 46,000 3.1
Southcenter Renton WA 1985 1979 67,000 4.1
Tacoma Interstate (11) Tacoma WA 87/88/91 1979/81 128,000 12.2
Totem Lake Kirkland WA 1984 1978 61,000 2.6
Vancouver Mall Vancouver WA 1980 1982 46,000 3.3
West Seattle Seattle WA 1980 1981 48,000 3.4
Woodinville Woodinville WA 1984 1982/84 70,000 3.5
Forest (2) Brussels Belgium 1995 1995 49,000 0.4
Molenbeek (2) Brussels Belgium 1995 1995 34,000 0.5
Waterloo (2) Waterloo Belgium 1995 1995 86,000 3.5
</TABLE>
- ------------------------------
(1) The Company owns a 59.5% interest in this property.
(2) The Company owns an 85.6% interest in this property.
(3) The Company does not have fee title, but has a long-term lease, with
respect to the land on which property is located.
112
<PAGE>
(4) Through its ownership in SJP II (a joint venture with IDS1), the Company
owns a 30% interest in this property.
(5) The Company owns a 92% interest in this property.
(6) The Company owns a 50% interest in this property.
(7) The Company owns a 67% interest in this property.
(8) Bellevue East and Bellevue West are now operated as one property.
(9) The Company owns a 90% interest in this property.
(10) Property is a commercial building.
(11) Property is a business park.
The following table sets forth information regarding weighted average net
rentable square foot occupancy and weighted average annual rent per net rentable
square foot for the domestic self storage properties owned by the Company (and
its predecessors) for the years ended December 31, 1993, 1994 and 1995 and the
quarter ended March 31, 1996.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE OCCUPANCY
------------------------------------------------------ AVERAGE RENT PER SQUARE FOOT
-------------------------------
YEAR ENDED
DECEMBER 31, THREE MONTHS YEAR ENDED DECEMBER 31,
------------------------------------- ENDED MARCH 31, -------------------------------
STATE 1993(1) 1994 1995 1996 1993(1) 1994 1995
- ----------------------------------- ----------- ----- ----- --------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Arizona............................ 97% 91% 84% 79% $ 6.26 $ 7.50 $ 9.15
California......................... 88 86 85 85 8.85 9.28 10.04
Colorado........................... 96 91 88 82 6.30 7.01 7.52
Florida............................ 83 85 83 84 7.67 7.70 8.12
Illinois........................... 91 95 95 89 7.47 7.84 8.30
Michigan........................... 87 91 93 90 6.08 6.66 7.38
New York........................... 80 87 92 90 14.34 14.63 15.14
Oregon............................. 89 93 92 92 6.82 7.22 7.77
Texas.............................. 79 87 82 77 7.41 7.63 8.13
Virginia........................... 90 89 90 90 9.40 9.94 8.95
Washington......................... 88 88 89 90 7.58 7.83 8.17
Other.............................. 89 92 89 87 7.95 8.53 9.48
-- -- -- --
--------- --------- ---------
Total.......................... 87% 89% 88% 86% $ 7.84 $ 8.25 $ 8.84
-- -- -- --
-- -- -- --
--------- --------- ---------
--------- --------- ---------
<CAPTION>
THREE
MONTHS
ENDED MARCH
STATE 31, 1996
- ----------------------------------- -----------
<S> <C>
Arizona............................ $ 9.05
California......................... 10.21
Colorado........................... 7.76
Florida............................ 8.72
Illinois........................... 8.50
Michigan........................... 7.73
New York........................... 15.49
Oregon............................. 8.21
Texas.............................. 8.33
Virginia........................... 9.14
Washington......................... 7.98
Other.............................. 10.05
-----------
Total.......................... $ 9.04
-----------
-----------
</TABLE>
- ------------------------
(1) Calculated as the weighted average of the original 137 properties owned by
the Company.
The following table sets forth same store information regarding aggregate
weighted average net rentable square foot occupancy and weighted average annual
rent per net rentable square foot for the 137 self storage properties originally
owned by the Company for the years ended December 31, 1991 through December 31,
1995 and the quarter ended March 31, 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
--------------------------------------------------------------- ENDED MARCH
1991 (1) 1992 (1) 1993 (1) 1994 1995 31, 1996
----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Weighted average occupancy..................... 82% 86% 87% 89% 88% 86%
Weighted average rent per square foot.......... $ 7.35 $ 7.68 $ 7.84 $ 8.25 $ 8.84 $ 9.04
</TABLE>
- ------------------------
(1) Calculated as a simple average for the 17 partnerships included in the
Consolidation.
113
<PAGE>
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK AND CLASS B COMMON STOCK
The Company has authority to issue 120,000,000 shares of Class A 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 May 31, 1996, the
Company had outstanding 24,046,517 shares of Common Stock and 154,604 shares of
Class B Common Stock. The following description of the Common Stock sets forth
certain general terms and provisions of the Common 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 Certificate of
Incorporation and Bylaws.
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 of Common Stock by the Company will be subject to certain
restrictions if the Company fails to pay dividends on any outstanding Preferred
Stock.
See "-- 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 possesses 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 do
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 do 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
issued pursuant to the Mergers 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 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 stockholder. 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
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 has taken 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.
STOCKHOLDER 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")
114
<PAGE>
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 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
115
<PAGE>
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.
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.
116
<PAGE>
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 stockholder 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.
PREFERRED STOCK
The Company is authorized to issue 40,000,000 shares of Preferred Stock, par
value $.001 per share, of which no shares are outstanding. 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 "--
Common Stock and Class B Common Stock -- Stockholder Rights Plan." The following
description of the Preferred Stock sets forth certain general terms and
provisions of the Preferred Stock. 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 and
Bylaws.
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 as well as the
designations and powers, preferences and relative, participating, optional or
other special rights and qualifications, limitations or restrictions of each
series. The Board of Directors or a committee thereof is authorized to fix
provisions for each series of Preferred Stock concerning voting, redemption,
dividends, dissolution or the distribution of assets, conversion or exchange,
and other matters fixed by resolution. The Preferred Stock will, when issued, be
fully paid and nonassessable and will have no preemptive rights.
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 335 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 "Material
Federal Income Tax Considerations -- Taxation of the Company as a REIT --
Requirements for Qualification." Any class or series of Preferred Stock may be
subject to these restrictions if so stated in the
117
<PAGE>
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 stockholders 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 stockholders; and (c) Excess Stock will not be
entitled to any dividends or other distributions. Any person who becomes an
owner of Excess Stock is obligated to immediately give the 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 stockholder 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.
118
<PAGE>
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.
DISSENTERS' RIGHTS OF UNITHOLDERS
The following is a summary of the rights of Unitholders who dissent from the
Mergers. The summary does not purport to be complete and is qualified in its
entirety by reference to Section 25.10.900 et seq. of the WULPA (the
"Dissenters' Rights Statute"), a copy of which is attached as Appendix E to this
Proxy Statement/Prospectus). Holders of Common Stock will not be entitled to
dissenters' rights as a result of the Mergers because they are not entitled to
vote on the Mergers.
Any Unitholder contemplating the exercise of dissenters' rights is urged to
review the full text of the Dissenters' Rights Statute. The procedures set forth
in such Statute must be followed exactly or dissenters' rights may be lost.
A Unitholder who properly follows the procedures for dissenting and
demanding payment for his or her Units pursuant to the Dissenters' Rights
Statute may be entitled to receive in cash the "fair value" of his or her Units
plus accrued interest in lieu of the consideration provided in the Acquisition
Agreement. The "fair value" of a dissenting Unitholder's Units will be the value
of the Units immediately prior to the Effective Time. The "fair value" could be
more than, equal to or less than the value of the consideration the Unitholder
would have received pursuant to the Acquisition Agreement if the Unitholder had
not dissented. In the event the dissenting Unitholder and the Company cannot
agree on the "fair value" of the dissenter's Units, "fair value" may ultimately
be determined by a court in an appraisal proceeding.
Not less than ten days prior to the approval of the Merger, the Partnership
must send a written notice to all Unitholders entitled to approve the Merger
that they may be entitled to assert dissenters' rights and include a copy of the
Dissenters' Rights Statute. To properly exercise dissenters' rights with respect
to the Merger and to be entitled to payment under the Dissenters' Rights
Statute, a Unitholder must, among other things, not vote in favor of the Merger
and, upon receipt of a dissenters' notice from the Partnership (as described
below), timely deliver a demand for payment. A VOTE AGAINST IS NOT IN ITSELF A
SUFFICIENT EXERCISE OF DISSENTERS' RIGHTS. Any Unitholder who wishes to dissent
and who executes and returns the accompanying proxy must either vote "against"
or "abstain" as to his or her Partnership's participation in the Merger. If the
Unitholder returns a signed ballot without voting, or votes in favor of the
Merger, the Unitholder will be deemed to have voted in favor of the Merger, and
the Unitholder will lose any dissenters' rights. Within ten days after the
approval of the Merger, the Partnership will send a written dissenters' notice
to each Unitholder who satisfied the requirements above, indicating where the
payment demand must be sent and informing Unitholders as to the extent transfer
of the Units will be restricted. Such notice will include, among other things, a
form of payment demand and the date by which the Partnership must receive the
payment demand, which date may not be less than 30 or more than 60 days after
the dissenters' notice is delivered. Unitholders who fail to file a timely
written intent to demand payment or who vote in favor of the approval of the
Acquisition Agreement and the transactions contemplated thereby will not be
entitled to receive the dissenters' notice and will be bound by the terms of the
Acquisition Agreement.
Within 30 days after the later of the Effective Time and the date the
payment demand is received, each Partnership will pay each dissenter who is a
Unitholder of that Partnership and who complied with the conditions above the
amount that the Partnership estimates to be the fair value of his or her Units,
plus accrued interest. The payment must be accompanied by, among other things,
(i) copies of the Partnership's financial statements for the most recent fiscal
year, (ii) an explanation of how the Partnership estimated the fair value of the
Units and how the accrued interest was calculated, (iii) a statement of the
dissenters' right to demand payment and (iv) a copy of the Dissenters' Rights
Statute.
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A dissenter may notify the Partnership in writing of the dissenter's own
estimate of the fair value of the dissenter's Units and the amount of interest
due, and demand payment of the dissenter's estimate, less any payment made, if:
(a) the dissenter believes that the amount paid is less than the fair
value of the dissenter's Units or that the interest due is incorrectly
calculated;
(b) the Partnership fails to make payment within 60 days after the date
set for demanding payment; or
(c) the Merger is not effected and the Partnership does not release the
transfer restrictions imposed on Units within 60 days after the date set
forth demanding payment.
A dissenter will be deemed to have waived the right to demand payment unless
the dissenter notifies the Partnership of his or her demand in writing within 30
days after the Partnership makes payment for the dissenter's Units.
If a demand for payment remains unsettled, the Partnership will commence a
proceeding in the Superior Court of King County, Washington, within 60 days
after receiving the payment demand and petition the court to determine the fair
value of the Units and accrued interest. If the Partnership does not commence
such proceeding within the 60-day period, it shall pay each dissenter whose
demand remains unsettled the amount demanded. The Partnership will make all
dissenters (whether or not residents of Washington) whose demands remain
unsettled parties to the proceeding as in an action against their Units, and all
parties must be served with a copy of the petition. The Partnership may join as
a party to the proceeding any Unitholder who claims to be a dissenter but who
has not, in the Partnership's opinion, complied with the provisions of the
Dissenters' Rights Statute. If the court determines that such Unitholder has not
complied with the provisions of the Dissenters' Rights Statute, the Unitholder
shall be dismissed as a party. Each dissenter made a party to the proceeding
will be entitled to judgment for the amount, if any, by which the court finds
the fair value of the dissenter's Units, plus interest, exceeds the amount paid
by the Partnership.
ESTIMATED TAXABLE GAIN OR LOSS
In order to assist Unitholders in estimating the federal income tax
consequences of the Mergers, the following table, prepared by the General
Partners, sets forth the estimated gain or loss that may be realized by
Unitholders receiving Shares in the Mergers in exchange for each Unit. These
estimates assume that the fair market value of the Shares is equal to the Net
Asset Values of the assets acquired in the Mergers. The actual amount and timing
of gain or loss recognized by each Unitholder will depend upon a variety of
factors including the actual value of the Shares at the Closing Date for federal
income tax purposes (which may be different than the estimates set forth below)
and the adjusted tax basis of the Partnership's assets as of the Closing Date.
These estimates assume that the Unitholder acquired his or her Units in the
original offering and not through the secondary market. Purchasers of Units on
the secondary market may recognize additional gain to the extent the fair market
value of the Shares and amount of cash received as additional consideration or
in lieu of fractional shares exceeds such Unitholder's adjusted tax basis in his
or her Units (adjusted to reflect its allocable share of Partnership gain or
loss recognized on the Mergers). See "Material Federal Income Tax
Considerations."
<TABLE>
<CAPTION>
MERGER
CONSIDERATION TAX BASIS ESTIMATED TAXABLE GAIN
PARTNERSHIP PER UNIT (1) PER UNIT(2) PER UNIT (3)
- ------------------------------------------------------ --------------- ----------- -------------------------
<S> <C> <C> <C>
IDS1.................................................. $ 257 $ 214 $ 43
IDS2.................................................. 222 220 2
IDS3.................................................. 308 236 72
</TABLE>
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- ------------------------
(1) "Merger Consideration Per Unit" is computed by dividing that portion of the
Net Asset Value allocable to the Unitholders by the number of outstanding
Units in each Partnership and assumes that the Share Price is within the
Share Price Range.
(2) "Tax Basis Per Unit" is computed by dividing the adjusted portion of the tax
basis of each Partnership's assets net of the Partnership's liabilities as
of December 31, 1995 that is allocable to the Unitholders by the number of
outstanding Units in such Partnership. The adjusted tax basis will differ
from the above amounts depending upon the timing of the Mergers.
(3) "Estimated Taxable Gain Per Unit" is computed by subtracting the tax basis
from the Merger Consideration Per Unit for each Partnership.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following discussion summarizes certain material federal income tax
considerations that affect a Unitholder's exchange of Units for Shares in a
Merger and his or her subsequent ownership and disposition of such Shares. The
discussion is general in nature and is not tax advice. It is, of course, not
possible to discuss all aspects of federal income tax law that may have
relevance with respect to the Mergers based on the individual circumstances of
particular Unitholders in light of their personal investment or tax
circumstances, or to certain types of investors (including insurance companies,
financial institutions or broker-dealers, foreign corporations or partnerships
and, except to the limited extent described below, tax-exempt organizations and
persons who are not citizens or residents of the United States) subject to
special treatment under the federal income tax laws. This analysis is not
intended as a substitute for careful tax planning, and prospective investors are
urged to consult their own tax advisors, attorneys or accountants with specific
reference to their own tax situation and potential changes in the applicable
law. No representations are made as to state, local or foreign tax consequences
to any Unitholder resulting from the Mergers and the subsequent ownership and
disposition of the Shares. ACCORDINGLY, UNITHOLDERS SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE EXCHANGE OF
UNITS FOR SHARES AND CASH, IF ANY, AND THEIR SUBSEQUENT OWNERSHIP AND
DISPOSITION OF SUCH SHARES, INCLUDING THE APPLICATION AND EFFECT OF FEDERAL,
STATE, LOCAL AND OTHER TAX LAWS AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
OPINION OF COUNSEL
The Partnerships have obtained an opinion of Perkins Coie, counsel to the
Partnerships ("Counsel"), concerning the likely outcome on the merits of the
material federal income tax issues. The summary of federal income tax
considerations to the Unitholders set forth in this Proxy Statement/ Prospectus
has been reviewed by Counsel, and, to the extent such summary involves matters
of law or legal conclusions, Counsel is of the opinion that such statements are
correct. Such opinion and the discussion herein are based on the Code, as
amended, applicable Treasury Regulations adopted thereunder, reported judicial
decisions and IRS rulings, all as of the date hereof, and certain
representations of the Company and the General Partners and factual assumptions
related to the ownership and operation of the Company and the Partnerships, and
assume that the actions described in this Proxy Statement/Prospectus are
completed in a timely fashion. In the opinion of Counsel, the following
discussion fairly summarizes the federal income tax considerations that are
likely to be material to the holder of Units who exchanges such Units for
Shares. There can be no assurance, however, that the legal authorities on which
such opinion and this discussion are based will not change, perhaps
retroactively, that the Company's representations and factual assumptions
underlying this discussion will be accurate or that there will not be a change
in the future in the circumstances of the Company that would affect this
discussion. Accordingly, there can be no assurance that the IRS will not
challenge the conclusion or propriety of any of Counsel's opinions. Although
reasonable arguments
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can be made for the positions that the Company proposes to take as to tax
matters as described in this Proxy Statement/Prospectus, the federal income tax
consequences of a proposed investment in the Company cannot be predicted with
certainty, and there can be no assurance as to how the law will develop, or, if
various issues are litigated, the outcome of the court decisions.
Specifically, Counsel has reached the following conclusions regarding the
material federal income tax issues under the law as currently in effect: (a) the
Company has been organized in conformity with the requirements for qualification
as a REIT under the Code and its method of operation as described in this Proxy
Statement/Prospectus and as represented by the Company has permitted, and will
continue to permit, it to continue to so qualify for its prior, current and
future taxable years; (b) based on the General Partners' representation that the
assets of the Partnerships are held by the Partnerships for investment and not
for sale to customers in the ordinary course of a trade or business, the Mergers
will not result in recognition of a material amount of unrelated business
taxable income by any tax-exempt Unitholder that does not hold its interest in a
Partnership either as a dealer under Code Section 512(b)(5)(B) or as
"debt-financed property" within the meaning of Code Section 514, and is not an
organization described in Code Section 501(c)(7) (social clubs), 501(c)(9)
(voluntary employee beneficiary associations), 501(c)(17) (supplemental
unemployment benefit trusts) or 501(c)(20) (qualified group legal services
plans); (c) the Mergers will be taxable events for Unitholders in which gain or
loss will (subject to the limits described below) be recognized to the extent of
each Unitholder's allocable share of the difference between (i) the sum of the
fair market value of the Shares received by a Partnership from the Company, the
amount of any cash paid by the Company to the Partnership as additional
consideration or in lieu of a fractional Share and the amount of any liabilities
of the Partnership assumed or pertaining to properties acquired by the Company
and (ii) the Partnership's adjusted tax basis in its assets exchanged therefor;
and (d) Unitholders will recognize gain on receipt of the Shares in the Merger
to the extent that the fair market value of the Shares and the amount of cash
received as additional consideration or in lieu of a fractional Share exceeds
the Unitholder's adjusted tax basis in his or her Units exchanged therefor.
With respect to the opinion of Counsel relating to the qualification of the
Company as a REIT, it should be noted that whether the Company will qualify as a
REIT under the Code in prior, current and future taxable years will depend on
whether the Company met or meets the various qualification tests imposed under
the Code (discussed below) through actual annual operating results, distribution
levels and diversity of stock ownership. The results of these tests have not
been and will not be reviewed by Counsel. Accordingly, no assurance can be given
that the actual results of the Company's operations for any particular taxable
year have satisfied and will satisfy such requirements. See "-- Taxation of the
Company as a REIT--Requirements for Qualification" and "-- Failure to Qualify."
TAX CONSEQUENCES OF THE MERGERS
TAX CONSEQUENCES OF ACQUISITION. In the Mergers, solely for federal income
tax purposes, each Partnership's assets will be treated as being transferred to
the Company in return for Shares of the Company and cash paid as additional
consideration or in lieu of fractional Shares. Such transfer will (subject to
the limits described below) result in recognition of gain or loss by each
Partnership and, therefore, will result in recognition of gain or loss by the
Unitholders in each Partnership (other than certain tax-exempt Unitholders who
had not held their Units as a dealer under Code Section 512(b)(5)(B) or as
"debt-financed property" within the meaning of Code Section 514). See "--
Consequences to Tax-Exempt Unitholders." The overall amount of gain or loss
recognized by each Partnership will (subject to the limits described below)
equal the difference between (a) the sum of the fair market value of the Shares
received by the Partnership in the Merger plus any cash paid by the Company to
the Partnership as additional consideration or in lieu of a fractional Share and
the amount of liabilities of the Partnership assumed or pertaining to properties
acquired by the Company and (b) the Partnership's adjusted tax basis in the
assets exchanged therefor. Counsel can give no opinion regarding the amount of
gain or loss recognized by a Partnership because of the factual nature of the
determination. To assist the Unitholders in estimating the tax cost associated
with the Mergers, the General
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Partners have prepared a table estimating the amount of gain or loss that may be
recognized by a Unitholder receiving Shares in the Mergers in exchange for each
Unit. See "Estimated Taxable Gain Or Loss."
As of December 31, 1995, no Partnership has made an election under Code
Section 754. Accordingly, the amount of gain or loss recognized by a Partnership
as a result of the Mergers will be not be determined by reference to the
purchase price paid prior to 1996 by any Unitholder for his or her Units. The
Partnerships may make an election under Code Section 754 in 1996 to adjust the
tax basis of their assets to reflect the amount paid by any Unitholder
purchasing his or her interest in the Partnerships during 1996. Any reduction in
gain or increase in loss resulting from this adjustment in tax basis will be
allocated entirely to such purchasing Unitholders. As described in greater
detail below, the basis that each Unitholder will have in Shares received as a
result of the Mergers will equal the Unitholder's basis in his or her Units,
adjusted to reflect any gain or loss recognized on the distribution of Shares or
cash to the Unitholder and any gain or loss allocated to him or her from his or
her Partnership as a result of the Mergers.
ALLOCATION OF GAIN OR LOSS AMONG PARTICIPATING UNITHOLDERS. The amount of
gain or loss recognized by the Partnerships in the year of the Mergers will be
allocated among their respective Unitholders in accordance with the terms of
their respective Partnership Agreements. Pursuant to these terms, in the case of
Partnerships that recognize a gain or loss on the Mergers, each Unitholder will
be allocated and must report its allocable share of such gain or loss.
CHARACTERIZATION OF GAIN OR LOSS. In general, gains or losses realized with
respect to transfers of the assets of each of the Partnerships will be treated
as realized from the sale of a Code "Section 1231" asset (i.e., real property
and depreciable assets used in a trade or business and held for more than one
year). A Unitholder's share of gains or losses from the sale of Section 1231
assets of a Partnership would be combined with any other Section 1231 gains and
losses recognized by such Unitholder in that year. If the result is a net loss,
such loss is characterized as an ordinary loss. If the result is a net gain,
such gain is characterized as a capital gain; provided, however, that such gain
will be treated as ordinary income to the extent the Unitholder has
"non-recaptured" Section 1231 losses. For these purposes, "non-recaptured"
Section 1231 losses means a Unitholder's aggregate Section 1231 losses for the
five most recent prior years that have not previously been recaptured. In
addition, a Unitholder's net gain will be treated as ordinary income to the
extent such gain is attributable to previously allowed depreciation deductions
subject to recapture under Code Section 1245 or 1250.
Each Partnership has incurred syndication costs in connection with its
initial offering of the Units. In connection with a liquidation of a
partnership, the IRS has suggested that syndication costs are deductible by a
partner only to the extent that the amount of cash liquidation proceeds received
by the partner are less than the adjusted tax basis of his or her partnership
interest. It is not clear, therefore, whether Unitholders will realize a
deduction in connection with these syndication expenditures as a result of the
Merger. Counsel is of the belief, however, that because a Unitholder of a
Partnership participating in a Merger is treated as having liquidated his or her
interest in the Partnership, the Unitholder's allocable share of these
syndication costs should be deductible as a capital loss in the year of the
Merger. This capital loss is generally deductible to the extent of the
Unitholder's other capital gains recognized during the year including the
Unitholder's share of Section 1231 gain recognized in the Merger. The estimates
provided in "Estimated Taxable Gain or Loss" reflect the taxable gain net of the
capital loss realized from the syndication expense.
Any gain recognized as a result of the distribution of Shares or cash to a
Unitholder as described below will be treated as capital gain except to the
extent a portion of the gain is attributable to previously allowed depreciation
deductions subject to recapture under Code Section 1245 or 1250.
For purposes of the passive activity rules of Code Section 469, gains or
losses recognized from transfers of the Partnerships' assets generally should be
treated as passive activity income or loss. The Code provides that, in general,
a taxpayer who disposes of his or her entire interest in a passive activity
during a taxable year is entitled to treat the excess of passive losses from
such activity
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(including such activity's suspended passive losses from prior periods plus any
loss recognized on the disposition) over that year's passive income or gains
from all the taxpayer's activities as not being subject to passive activity loss
limitations. For this provision to apply, however, the taxpayer must dispose of
his or her entire interest in the passive activity to an unrelated taxpayer.
Because a Unitholder who receives Shares in the Company has a continuing
indirect interest in the Partnership's activity following the Mergers, it is
uncertain whether the Mergers will result in a disposition of a Unitholder's
entire interest in the passive activity of a Partnership. Dissenting Unitholders
receiving solely cash, however, should be treated as having disposed of their
entire interest in the Partnership and therefore should be able to utilize this
provision of the Code.
MERGERS OF THE PARTNERSHIPS. Upon consummation of the Mergers, each
Partnership will cease to exist and will be treated for federal income tax
purposes as distributing to its Unitholders the Shares it is treated as
receiving in the Merger. The taxable year of each Partnership will end at such
time. Assuming the Closing Date is no later than December 31, 1996, each
Unitholder must report, in his or her taxable year that includes the Merger, his
or her share of all income, gain, loss, deduction and credit for such
Partnership for the period January 1, 1996 through the date of the Merger
(including his or her allocable share of the gain or loss resulting from the
Merger described above). Accordingly, an individual Unitholder would report on
his or her return for 1996 his or her share of all income, gain, loss, deduction
and credit for such Partnership, including any gain or loss from the Merger. A
Unitholder whose taxable year differs from that of the Partnership's could have
a "bunching" of income from the Partnership and the Company because of the short
taxable year of the Partnership. However, a Unitholder whose taxable year is the
calendar year will not experience any "bunching" of income.
DISTRIBUTION OF SHARES. The distribution by a Partnership of Shares or cash
to a Unitholder will be taxable to the Unitholder to the extent that the fair
market value of the Shares distributed to such Unitholder and the amount of cash
paid as additional consideration or in lieu of a fractional Share exceeds the
adjusted tax basis of such Unitholder's interest in the Partnership immediately
before the distribution as adjusted by such Unitholder's allocable share of the
taxable gain or loss recognized by the Partnership in the Merger. Because the
Shares will be publicly traded after the Mergers, they are treated for these
purposes in the same manner as cash to the extent of their fair market value as
of the date of distribution. Notwithstanding the above, a Unitholder will not
recognize a taxable loss on the distribution of the Shares to the extent the
fair market value of the Shares and the amount of cash paid as additional
consideration or in lieu of a fractional Share is less than the adjusted tax
basis of a Unitholder's interest in the Partnership. Any gain recognized as a
result of the distribution of Shares or cash to a Unitholder will be treated as
capital gain except to the extent a portion of the gain is attributable to
previously allowed depreciation deductions subject to recapture under Code
Section 1245 or 1250.
A Unitholder who receives Shares in the Merger will have a basis in the
Shares equal to the sum of (a) the Unitholder's basis in his or her Units
adjusted by such Unitholder's distributive share of income, gain, loss,
deduction and credit for the final taxable year of the Partnership as well as
distributions (including any cash paid as additional consideration or in lieu of
a fractional Share) received in such final taxable year (other than the
distribution of Shares to the Unitholder) and (b) the amount of gain, if any,
recognized by the Unitholder on the distribution and receipt of the Shares
pursuant to the foregoing. A Unitholder's holding period for the Shares will
begin on the date of the Merger.
TAX CONSEQUENCES TO DISSENTING UNITHOLDERS. A Unitholder subject to federal
income tax who exercises dissenters' rights will recognize taxable income or
loss equal to the difference between (a) the sum of the amount of cash received
plus the amount of the Unitholder's liabilities as determined pursuant to
Section 752 of the Code and (b) the adjusted tax basis in his or her Units, as
adjusted immediately prior to the Merger. Any gain or loss recognized by a
dissenting Unitholder will be treated as capital gain or loss except to the
extent a portion of such gain is attributable to previously allowed depreciation
deductions subject to recapture under Code Section 1245 or 1250.
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CONSEQUENCES TO TAX-EXEMPT UNITHOLDERS. Based on the General Partners'
representation that the Partnerships' assets are held by the Partnerships for
trade or business purposes and not for sale to customers in the ordinary course
of a trade or business, Counsel is of the opinion that the Mergers will not
result in recognition of a material amount of UBTI by a tax-exempt Unitholder
that does not hold an interest in the Partnerships either as a dealer under Code
Section 512(b)(5)(B) or as "debt-financed property" within the meaning of Code
Section 514, and is not an organization described in Code Section 501(c)(7)
(social clubs), 501(c)(9) (voluntary employee beneficiary associations),
501(c)(17) (supplemental unemployment benefit trusts) or 501(c)(20) (qualified
group legal services plans) regardless of whether such Unitholder participates
or exercises dissenters' rights in connection with the Mergers. The four classes
of exempt organizations noted in the previous sentence may recognize a material
amount of gain or loss in the Mergers.
TAX CONSEQUENCES TO THE COMPANY. The Company will not recognize gain or
loss as a result of the Mergers. The basis of the assets received by the Company
from the Partnerships will equal the fair market value of the Shares issued by
the Company in the Mergers, plus any cash paid by the Company in the Mergers as
additional consideration or in lieu of fractional Shares or, on behalf of the
Partnerships, to Unitholders exercising dissenters' rights and the amount of
Partnership liabilities assumed by the Company in the Mergers. The Company's
basis in the properties may differ from the Partnerships' basis in such
properties and the properties will be subject to longer depreciable lives as a
result of the Mergers. These factors could result in an overall increase or
decrease in the depreciation deductions attributable to the assets of the
Partnerships following the Mergers.
TAXATION OF THE COMPANY AS A REIT
GENERAL. Unitholders participating in the Mergers will own shares in the
Company. The Company has made an election to be taxed as a REIT under Code
Sections 856 through 860, commencing with its taxable year ended December 31,
1994. The Company believes that, commencing with its taxable year ending
December 31, 1994, it has been organized and has operated in such a manner as to
qualify for taxation as a REIT under the Code. The Company intends to continue
to operate in such a manner, but no assurance can be given that it will operate
in a manner so as to qualify or remain qualified.
These sections of the Code are highly technical and complex. The
determination of various factual matters and circumstances are not entirely
within the control of the Company and may affect its ability to qualify as a
REIT. The following summary sets forth the material aspects of the Code that
govern the federal income tax treatment of a REIT and its stockholders. This
summary is qualified in its entirety by the applicable Code provisions, rules
and regulations promulgated thereunder, and administrative and judicial
interpretations thereof.
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on its net income that is currently
distributed to stockholders. This treatment substantially eliminates the "double
taxation" (at the corporate and stockholder levels) of income that generally
results from investment in a regular corporation. The Company, however, will be
subject to federal income and excise taxes as follows:
(a) The Company will be taxed at regular corporate rates on any
undistributed REIT taxable income, including undistributed net capital
gains.
(b) Under certain circumstances, the Company may be subject to the
"alternative minimum tax" on its items of tax preference.
(c) If the Company has (i) net income from the sale or other disposition
of "foreclosure property" that is held primarily for sale to customers in
the ordinary course of business or (ii) other nonqualifying income from
foreclosure property, it will be subject to tax at the highest corporate
rate on such income.
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(d) If the Company has net income from prohibited transactions (which
are, in general, certain sales or other dispositions of property held
primarily for sale to customers in the ordinary course of business other
than foreclosure property), such income will be subject to a 100% tax.
(e) If the Company should fail to satisfy the 75% gross income test or
the 95% gross income test (as discussed below), but has nonetheless
maintained its qualification as a REIT because certain other requirements
have been met, it will be subject to a 100% tax on an amount equal to (i)
the gross income attributable to the greater of the amount by which the
Company fails the 75% or gross income 95% test, multiplied by (ii) a
fraction intended to reflect the Company's profitability.
(f) If the Company should fail to distribute during each calendar year
at least the sum of (i) 85% of its REIT ordinary income for such year, (ii)
95% of its REIT capital gain net income for such year, and (iii) any
undistributed taxable income from prior periods, the Company would be
subject to a 4% excise tax on the excess of such required distribution over
the amounts actually distributed.
(g) With respect to any asset (a "Built-in Gain Asset") acquired by the
Company from a corporation that is or has been a C corporation (i.e.,
generally, a corporation subject to full corporate-level tax) in certain
transactions in which the basis of the Built-in Gain Asset in the hands of
the Company is determined by reference to the basis period (the "Recognition
Period") beginning on the date on which such asset was acquired by the
Company, then, to the extent of the "Built-in Gain" (i.e., the excess of (i)
the fair market value of such asset over (ii) the Company's adjusted basis
in such asset, determined as of the beginning of the Recognition Period),
such gain will be subject to tax at the highest regular corporate rate
pursuant to Treasury Regulations that have not yet been promulgated. The
results described above with respect to the recognition of built-in gain
assume that the Company will make or has made an election pursuant to IRS
Notice 88-19.
On March 19, 1996, President Clinton submitted to Congress a budget bill
that includes a proposal to require large C corporations (defined as any C
corporation having aggregate stock value greater than $5,000,000) that after
December 31, 1996 either convert to REIT status or are acquired by existing
REITs in otherwise qualified reorganizations under Code Section 368 to recognize
any Built-in Gain at the time of the conversion or acquisition. As of the date
of this Proxy Statement/ Prospectus, no further legislative action has been
taken with respect to this proposal.
REQUIREMENTS FOR QUALIFICATION. The Code defines a REIT as a corporation,
trust or association (i) that is managed by one or more trustees or directors,
(ii) the beneficial ownership of which is evidenced by transferable shares, or
by transferable certificates of beneficial interest, (iii) that would be taxable
as a domestic corporation, but for Code Sections 856 through 859, (iv) that is
neither a financial institution nor an insurance company subject to certain
provisions of the Code, (v) the beneficial ownership of which is held by 100 or
more persons, (vi) during the last half of each taxable year not more than 50%
in value of the outstanding stock of which is owned, directly or constructively,
by five or fewer individuals (as defined in the Code to include certain
entities), and (vii) that meets certain other tests, described below, regarding
the nature of its income and assets. The Code provides that conditions (i) to
(iv), inclusive, must be met during the entire taxable year and that condition
(v) must be met during at least 335 days of a taxable year of 12 months, or
during a proportionate part of a taxable year of less than 12 months. Conditions
(v) and (vi) will not apply until after the first taxable year for which an
election is made to be taxed as a REIT.
The Company has issued sufficient shares to allow it to satisfy conditions
(v) and (vi). In addition, the Company's Certificate of Incorporation provides
for restrictions regarding the transfer and ownership of its stock, which
restrictions are intended to assist the Company in continuing to satisfy the
stock ownership requirements described in conditions (v) and (vi) above. Such
transfer and ownership restrictions are described in "Description of Capital
Stock -- Restrictions on Transfers of Capital
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Stock; Excess Stock." There can be no assurance, however, that such transfer and
ownership restrictions will, in all cases, prevent a violation of the stock
ownership provisions described in conditions (v) and (vi) above.
INCOME TESTS. In order to maintain qualification as a REIT, the Company
must satisfy annually three gross income requirements. First, at least 75% of
the Company'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 Company's gross income
(excluding gross income from prohibited transactions) for each taxable year must
be derived from such real property investments, 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 on 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 Company's gross income (including gross income from prohibited
transactions) for each taxable year.
Rents received by the Company on the lease of self-service 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 or
sales. Second, the Code provides that rents received from a tenant will not
qualify as "rents from real property" in satisfying the gross income tests if
the REIT, or an owner of 10% or more of the REIT, 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 a lease of real
property, is greater than 15% of the total rent received under the lease, then
the portion of rent attributable to such personal property will not qualify as
"rents from real property." 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-service storage facilities.
Finally, for rents received to qualify as "rents from real property," the
Company generally must not operate or manage the property or furnish or render
services to the tenants of such property, other than through an independent
contractor from whom the REIT derives no revenue; provided, however, that the
REIT may directly perform certain services that are "usually or customarily
rendered" in connection with the rental of space for occupancy only and are not
otherwise considered "rendered to the occupant" of the property. The Company
performs or "self-administers" the property management activities for properties
it owns. The Company has obtained a private letter ruling from the IRS providing
that the property management services rendered by the Company will not adversely
affect the characterization of the Company's rents from real property. The
ruling is based on a description of those management services 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 truck rentals and certain other ancillary
services do not qualify under these gross income tests ("Nonqualifying Income").
The Company has represented that the services to be rendered by the Company with
respect to the Partnerships' properties acquired in the Mergers are consistent
with those management services described in the ruling. In addition, the fees
and consideration received by the Company for performance of management and
administrative services with respect to properties that are not owned by the
Company will also be treated as Nonqualifying Income. Such income will not
qualify
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under either the 75% or 95% gross income test and may adversely affect the
Company's continued qualification as a REIT. The Company believes that the
aggregate amount of the service income (and any other Nonqualifying Income) in
any taxable year will not exceed the limits on Nonqualifying Income under the
gross income tests described above.
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "interest"
solely by reason of being based on a fixed percentage or percentages of receipts
or sales.
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 will be generally available if the Company's failure to meet such
tests was due to reasonable cause and not due to willful neglect, the Company
attaches a schedule of the sources of its income to its return and any incorrect
information on the schedule was not due to fraud with the intent to evade tax.
It is not possible, however, to state whether in all circumstances the Company
would be entitled to the benefit of these relief provisions. As discussed above
in "-- General," even if these relief provisions apply, a tax would be imposed
with respect to the excess net income.
ASSET TESTS. The Company, at the close of each quarter of its taxable year,
must also satisfy three tests relating to the nature of its assets. First, at
least 75% of the value of the Company's total assets must be represented by real
estate assets (including (i) its allocable share of the real estate assets held
by partnerships in which the Company owns an interest and (ii) stock or debt
instruments held for not more than one year purchased with the proceeds of a
stock offering or long-term (at least five years) public debt offering of the
Company), cash, cash items and government securities. Second, not more than 25%
of the Company's total assets may be represented by securities other than those
in the 75% asset class. Third, of the investments included in the 25% asset
class, the value of any one issuer's securities owned by the Company may not
exceed 5% of the value of the Company's total assets and the Company may not own
more than 10% of any one issuer's outstanding voting securities.
The Company owns interests in several subsidiary partnerships. In the case
of a REIT that is a partner in a partnership, Treasury Regulations provide that
the REIT will be deemed to own its proportionate share of the assets of the
partnership and will be deemed to be entitled to the income of the partnership
attributable to such share. In addition, the character of the assets and gross
income of the partnership shall retain the same character in the hands of the
REIT for purposes of Code Section 856, including satisfying the gross income
tests and the asset tests.
The treatment for partnerships is conditioned on the treatment of these
entities as partnerships for federal income tax purposes (as opposed to
associations or publicly traded partnerships taxable as corporations). If a
partnership is treated as an association, it would be taxable as a corporation.
Furthermore, if a partnership is publicly traded, it will be taxed as a
corporation unless at least 90% of its gross income is derived from certain
qualifying sources including real property rents. In such situations, if a
REIT's ownership in any partnership taxed as a corporation exceeded 10% of the
partnership's voting interest or the value of such interest exceeded 5% of the
value of the REIT's assets, the REIT would cease to qualify as a REIT.
Furthermore, in such situations, distributions from any of the Partnerships to
the Company would be treated as dividends, which are not taken into account in
satisfying the 75% gross income test described above and which could, therefore,
make it more difficult for the REIT to qualify for the taxable year in which
such distributions are received. In addition, in such situations, the interest
in any of the Partnerships held by the REIT would not qualify as "real estate
assets," which could make it more difficult for the REIT to meet the 75% asset
test described above. Finally, in such situations, the REIT would not be able to
deduct its share of any losses generated by the Partnerships in computing its
taxable income. The Company believes that
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each of the partnerships in which it owns an interest will be treated for tax
purposes as a partnership (and not as an association taxable as a corporation).
Nonetheless, there can be no assurance that the IRS may not successfully
challenge the tax status of any of these partnerships.
ANNUAL DISTRIBUTION REQUIREMENTS. The Company, in order to qualify as a
REIT, is required to distribute dividends (other than capital gain dividends) to
the stockholders in an amount at least equal to (a) the sum of (i) 95% of the
Company's REIT taxable income (computed without regard to the dividends paid
deduction and the Company's net capital gain (as defined in Code Section
857(b)(2), the "REIT Taxable Income")) and (ii) 95% of the net income (after
tax), if any, from foreclosure property, minus (b) the sum of certain items of
noncash income. In addition, if the Company disposes of any Built-in Gain Asset
during its Recognition Period, the Company will be required, pursuant to
Treasury Regulations that have not yet been promulgated, to distribute at least
95% of the Built-in Gain (after tax), if any, recognized on the disposition of
such asset. Such distributions must be paid in the taxable year to which they
relate, or in the following taxable year if declared before the Company timely
files its tax return for such year and if paid on or before the first regular
dividend payment after such declaration. To the extent that the Company does not
distribute all of its net capital gain or distributes at least 95%, but less
than 100%, of its REIT Taxable Income, as adjusted, it will be subject to tax
thereon at regular ordinary and capital gain corporate tax rates. The Company
intends to make timely distributions sufficient to satisfy these annual
distribution requirements.
It is possible that the Company, from time to time, may not have sufficient
cash or other liquid assets to meet the distribution requirements described
above due to timing differences between (i) the actual receipt of income and
actual payment of deductible expenses and (ii) the inclusion of such income and
deduction of such expenses in arriving at taxable income of the Company. In the
event that such timing differences occur, in order to meet the distribution
requirements, the Company may find it necessary to arrange for short-term, or
possibly long-term, borrowings or to pay dividends in the form of taxable stock
dividends.
If, as a result of an adjustment by the IRS, the Company would fail to meet
the above distribution requirements for a particular year, the Company may be
able to rectify such failure by paying "deficiency dividends" to the
stockholders in a later year, which may be included in the Company's deduction
for dividends paid for the earlier year. Thus, the Company may be able to avoid
being taxed on amounts distributed as deficiency dividends; however, the Company
will be required to pay interest based on the amount of any deduction taken for
deficiency dividends.
Furthermore, if the Company should fail to distribute during each calendar
year at least the sum of (i) 85% of its REIT ordinary income for such year, (ii)
95% of its REIT capital gain income for such year, and (iii) any undistributed
taxable income from prior periods, the Company will be subject to a 4% excise
tax on the excess of such required distribution over the amounts actually
distributed.
FAILURE TO QUALIFY. If the Company fails to qualify for taxation as a REIT
in any taxable year, and the relief provisions do not apply, the Company will be
subject to tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates. Distributions to the stockholders in any year
in which the Company fails to qualify will not be deductible by the Company nor
will distributions be required to be made. As a result, the Company's failure to
qualify as a REIT will reduce the cash available for distribution by the Company
to the stockholders. In addition, if the Company fails to qualify as a REIT, all
distributions to the stockholders will be taxable as ordinary income to the
extent of current and accumulated earnings and profits, and, subject to certain
limitations of the Code, corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under specific statutory
provisions, the Company will also be disqualified from taxation as a REIT for
the four taxable years following the year during which qualification was lost.
It is not possible to state whether in all circumstances the Company would be
entitled to such statutory relief.
TAXATION OF TAXABLE STOCKHOLDERS. As long as the Company qualifies as a
REIT, distributions made to the Company's taxable stockholders out of current or
accumulated earnings and profits (and
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not designated as capital gain dividends) will be taken into account by them as
ordinary income and will not be eligible for the dividends received deduction
for corporations. Distributions that are designated as capital gain dividends
will be taxed as long-term capital gain (to the extent they do not exceed the
Company's actual net capital gain for the taxable year) without regard to the
period for which the stockholder has held its shares. However, corporate
stockholders may be required to treat up to 20% of certain capital gain
dividends as ordinary income. Distributions in excess of current and accumulated
earnings and profits will not be taxable to a stockholder to the extent that
they do not exceed the adjusted basis of the stockholder's shares, but rather
will reduce the adjusted basis of such shares. To the extent that such
distributions exceed the adjusted basis of a stockholder's shares they will be
included in income as long-term capital gain (or short-term capital gain if the
shares have been held for one year or less) assuming the shares are a capital
asset in the hands of the stockholder. In addition, any dividend declared by the
Company in October, November or December of any year payable to a stockholder of
record on a specified date in any such month shall be treated as both paid by
the Company and received by the stockholder on December 31 of such year;
provided, however, that the dividend is actually paid by the Company during
January of the following calendar year. Stockholders may not include in their
individual income tax returns any net operating losses or capital losses of the
Company.
Distributions paid to stockholders will constitute portfolio income (i.e.,
income from dividends that is not derived in the ordinary course of a trade or
business) for purposes of Code Section 469 and not passive activity income.
Accordingly, such income will not be subject to reduction by losses from passive
activities (e.g., any interest in a trade or business held by a stockholder in
which the stockholder does not materially participate) of stockholders who are
subject to the passive activity loss rules. However, income attributable to
distributions may be offset by investment expense deductions, subject to the
limitation that individual investors may only deduct miscellaneous itemized
deductions (including investment expense) to the extent such deductions exceed
2% of the investor's adjusted gross income.
Gain or loss recognized by a stockholder who is not a dealer in securities
on the sale of shares that have been held for more than one year will generally
be taxable as long-term capital gain or loss. Furthermore, if a stockholder
sells shares that were held for six months or less (after applying certain
holding period rules) and with respect to which a capital gain distribution was
received, any loss on the sale up to the amount of the capital gain distribution
will be treated as long-term capital loss.
TAXATION OF TAX-EXEMPT STOCKHOLDERS. The IRS has ruled that amounts
distributed as dividends by a qualified REIT do not constitute UBTI when
received by a tax-exempt entity. Based on that ruling, provided that a
tax-exempt stockholder (except certain tax-exempt stockholders described below)
has not held its shares of Common Stock or Units it exchanged for Shares as
"debt-financed property" within the meaning of the Code and the shares of Common
Stock are not otherwise used in an unrelated trade or business, the dividend
income from the Company will not be UBTI to a tax-exempt stockholder. Similarly,
income from the sale of shares of Common Stock will not constitute UBTI unless
such tax-exempt stockholder has held such shares as "debt-financed property"
within the meaning of Code Section 514 or is a dealer under Code Section
512(b)(5)(B).
For tax-exempt stockholders that are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts and qualified
group legal services plans exempt from federal income taxation under Code
Section 501(c)(7), (c)(9), (c)(17) and (c)(20), respectively, income from an
investment in the Company will constitute UBTI unless the organization is able
to properly deduct amounts set aside or placed in reserve for certain purposes
so as to offset the income generated by its investment in the Company. Such
prospective investors should consult their own tax advisors concerning these
"set aside" and reserve requirements.
Notwithstanding the above, however, a portion of the dividends paid by a
"pension held REIT" shall be treated as UBTI as to any trust that (i) is
described in Code Section 401(a), (ii) is tax-exempt
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under Code Section 501(a) and (iii) holds more than 10% (by value) of the
interests in the REIT. Tax-exempt pension funds that are described in Code
Section 401(a) are referred to below as "qualified trusts."
A REIT is a "pension held REIT" if (i) it would not have qualified as a REIT
but for the fact that Code Section 856(h)(3) provides that stock owned by
qualified trusts shall be treated, for the purposes of the "not closely held"
requirement, as owned by the beneficiaries of the trust (rather than by the
trust itself), and (ii) either (a) at least one such qualified trust holds more
than 25% (by value) of the interests in the REIT or (b) one or more such
qualified trusts, each of which owns more than 10% (by value) of the interests
in the REIT, hold in the aggregate more than 50% (by value) of the interests in
the REIT. The Company believes that it has not been, and will not be immediately
following the Closing Date, a "pension held REIT" within the meaning of the
Code.
TAXATION OF FOREIGN STOCKHOLDERS. The rules governing U.S. income, gift and
estate taxation of foreign entities and individuals who are neither citizens nor
residents of the United States are complex. They depend not only on U.S. federal
and state income, gift and estate tax principles, but also on the treaties, if
any, between the United States and the country of the nonresident investor.
Accordingly, no attempt will be made in this Proxy Statement/Prospectus to
provide more than a brief summary of certain rules relating to the Mergers. All
foreign Unitholders should consult their own tax advisors as to the treatment of
the Mergers and the ownership of Shares and the operation of the Company under
the tax laws applicable to them.
The Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA")
introduced special rules applicable to foreign investors in U.S. real property.
FIRPTA generally subjects foreign investors to U.S. taxation at regular U.S.
rates on the gain from the sale by such foreign investors of U.S. real property
interests ("USRPIs"), which include (i) U.S. real estate and (ii) interests in
certain entities (including partnerships) holding U.S. real estate. FIRPTA also
imposes withholding on such sales.
Code Section 702(b) determines the character of an item included in a
partner's distributive share of gain realized by a partnership as if the item
were realized directly from the source from which the item was realized by the
partnership. Therefore, if a partnership sells a USRPI, FIRPTA should apply as
if the foreign partner had sold the USRPI directly. The Company, based on the
advice of Counsel, believes that substantially all the assets in the
Partnerships consist of USRPIs. Accordingly, each foreign Unitholder should take
into account its distributive share of any gain or loss recognized by a
Partnership on its disposition of the USRPIs in the Mergers, and, consequently,
the foreign Unitholder should be subject to tax upon its distributive share of
any such gain.
Under FIRPTA, a domestic partnership must withhold tax at the rate of 35%
with respect to the partnership's gain recognized on the disposition of an
USRPI, to the extent such gain is allocable to a foreign partner. FIRPTA
withholding, however, is superseded to the extent the withholding rules of Code
Section 1446 apply. Code Section 1446 requires partnerships to withhold, at a
39.6% rate with respect to noncorporate foreign partners and 35% rate with
respect to corporate foreign partners, on "effectively connected taxable income"
allocable to foreign partners. Withholding arises under Code Section 1446 from a
foreign partner's distributive share of the income from a disposition of a USRPI
since FIRPTA characterizes gain as effectively connected income. Any amounts
withheld in respect of a foreign partner are treated as a credit against the tax
liability of each such foreign partner for the partner's taxable year in which
the partner is subject to U.S. tax on the income to which the withholding
relates. Withheld amounts are treated as a distribution on the last day of the
partnership taxable year for which the withheld amount was paid (or, if earlier,
on the last day on which the partner owned an interest in the partnership).
To satisfy the above withholding obligation with respect to the Mergers, a
Partnership may retain and place in an escrow account, or similar arrangement,
the shares or cash to be received by a foreign Unitholder, pending a sale of a
portion of the shares sufficient to satisfy the withholding or, alternatively,
the receipt of an amount of cash from the Unitholder sufficient to satisfy the
withholding.
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BACKUP WITHHOLDING. The Company will report to the stockholders 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 stockholder will be
subject to backup withholding equal to 31% of the dividend paid unless the
stockholder (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 stockholder that does not provide the Company with its
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
stockholder's income tax liability. In addition, the Company may be required to
withhold a portion of capital gain distributions made to any stockholders who
fail to certify their nonforeign status to the Company.
STATE AND LOCAL TAXES AND WITHHOLDING. Unitholders may be subject to
taxation by state or local jurisdictions, including those states in which the
Partnerships in which they are a partner own real property or transact business,
on their allocable share of income or loss of such Partnerships, including any
gain or loss arising from the Mergers. In addition, certain states impose
withholding obligations on the Partnerships in connection with the
above-described taxes. To satisfy this withholding obligation, a Partnership may
retain and place in an escrow account, or similar arrangement, the shares and
cash, if any, to be received by a Unitholder, pending a sale of a portion of the
shares sufficient to satisfy the withholding or, alternatively, the receipt of
an amount of cash from the Unitholder sufficient to satisfy the withholding. The
Company and its stockholders will be subject to state or local taxation in
various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the
Unitholders, the Partnerships, the Company and its stockholders may not conform
to the federal income tax consequences discussed above. Consequently,
Unitholders should consult their own tax advisors regarding the effect of state
and local tax laws on the Mergers and on an investment in the Company.
LEGAL MATTERS
Latham & Watkins, Costa Mesa, California has delivered an opinion to the
effect that, upon the consummation of the Mergers, the Shares offered pursuant
to this Proxy Statement/Prospectus will be validly issued, fully paid and
nonassessable. Perkins Coie, Seattle, Washington has delivered an opinion to the
effect that the discussion under "Material Federal Income Tax Considerations"
fairly summarizes the federal income tax considerations that are likely to be
material to a Unitholder whose Units are exchanged for Shares in a Merger.
EXPERTS
The financial statements incorporated by reference in this Proxy
Statement/Prospectus from the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995 and the financial statements of the
Partnerships for the years ended December 31, 1995, 1994 and 1993 included
herein have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports which are incorporated herein by reference with respect
to the Company and included herein with respect to the Partnerships, and have
been so incorporated or included in reliance upon the reports of such firm given
upon their authority as experts in accounting and auditing.
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GLOSSARY OF TERMS
Certain capitalized terms used in this Proxy Statement/Prospectus have the
following meanings unless the context otherwise requires:
"ACQUISITION AGREEMENT" means the Acquisition Agreement dated as of July 1,
1996 by and among the Company and the Partnerships.
"ADDITIONAL CONSIDERATION" means the additional cash consideration which may
be paid by the Company if the Share Price is less than $21.50, calculated as the
difference between the actual Share Price and $21.50, multiplied by the number
of Shares to be issued in the applicable Merger.
"ALEX. BROWN" means Alex. Brown & Sons Incorporated, the financial advisor
to the Special Committee.
"ALEX. BROWN OPINION" means the opinion rendered by Alex. Brown as to the
fairness to the Company, from a financial point of view, of the consideration
payable by the Company in the Offers and the Mergers.
"ALLOCATED TRANSACTION EXPENSES" means 50% of the Shared Expenses allocated
among the Partnerships pro rata based upon their relative Net Asset Value.
"APPRAISALS" means the Summary Portfolio Appraisal Report dated June 26,
1996 relating to the Partnerships' real estate portfolios.
"APPRAISED VALUE" means the appraised fair market values of the real estate
assets of each Partnership as of December 31, 1995 set forth in the Appraisals.
"BYLAWS" means the Bylaws of the Company, as amended.
"CERTIFICATE OF INCORPORATION" means the Certificate of Incorporation of the
Company, as amended and restated.
"CLASS B COMMON STOCK" means Class B Common Stock, par value $.001 per
share, of the Company.
"CLOSING DATE" means the day on which the closing of the applicable Merger
occurs.
"CLOSING NET ASSET VALUE" with respect to each Partnership means (i) the sum
of (a) the Appraised Value, (b) the cost incurred to the Closing Date of
buildouts and unit conversions, if any, that were not reflected in the Appraised
Value, and (c) the book values of the non-real estate assets, except for
amortizable assets, of the Partnership as of the Closing Date of the applicable
Merger, less (ii) the sum of (x) the Partnership's liabilities as of the Closing
Date, (y) the estimated costs remaining to be incurred, if any, as of the
Closing Date to complete the buildouts and unit conversions that were included
in the Appraised Value and (z) the Partnership's Individual Expenses and pro
rata share of Shared Expenses.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMISSION" means the Securities and Exchange Commission.
"COMMON STOCK" means Class A Common Stock, par value $.001 per share, of the
Company, together with certain associated preferred stock purchase rights.
"COMPANY" means Shurgard Storage Centers, Inc., a Delaware corporation.
"CONSOLIDATION" means the consolidation on March 1, 1994 of 17 publicly held
real estate limited partnerships that were sponsored by the Management Company.
"CONTINGENT SHARES AGREEMENT" means the agreement, dated March 24, 1995,
between the Company and the former shareholders of the Management Company, made
in connection with the Management Company Merger, whereby the former Management
Company shareholders are entitled
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to receive shares of Common Stock upon the sale or transfer of, or the
occurrence of certain other events with respect to, the Company's interests in
certain limited partnerships formerly owned by the Management Company, including
the Partnerships.
"DISSENTERS' RIGHTS STATUTE" means Section 25.10.900 et seq. of the WULPA.
"DISSOLUTION" means a dissolution of a Partnership in accordance with its
Partnership Agreement.
"EFFECTIVE TIME" means, with respect to each Partnership, the effective time
of the applicable Merger.
"EVEREST" means Everest Storage Investors, LLC.
"EVEREST TENDER OFFER" means a tender offer for Units of the Partnerships
commenced by Everest on February 28, 1996.
"EVEREST TENDERED UNITS" means the 1,816.5 IDS1 Units, 1,913.5 IDS2 Units
and 1,582.5 IDS3 Units acquired by Everest through the Everest Tender Offer.
"EVEREST UNITS" means the total of 1,824.5 ISD1 Units, 2,038.3 IDS2 Units
and 1,602.5 IDS3 Units acquired by PS from Everest.
"EXCESS STOCK" means any Common Stock transferred in violation of the Board
of Directors of the Company stopping transfer and/or redeeming shares of Common
Stock under certain conditions specified in the Certificate of Incorporation.
Such Excess Stock has no voting or distribution rights and the Company has the
power to purchase or direct its sale.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"FFO" or "FUNDS FROM OPERATIONS" means net income before extraordinary items
(determined in accordance with GAAP, plus depreciation and amortization related
to real estate activities, plus or minus certain nonrecurring revenue and
expenses.
"GAAP" means generally accepted accounting principles.
"GENERAL PARTNER UNDERTAKING" means an agreement between the General
Partners and the Company pursuant to which the General Partners agreed to make
the recommendations to Unitholders contained in this Proxy Statement/Prospectus
and agreed not to withdraw such recommendations except in accordance with the
discharge of their fiduciary duties and as otherwise required by law.
"GENERAL PARTNER" means, with respect to each of the Partnerships, the
entity serving as the general partner of that Partnership.
"GP AGREEMENTS" means the Agreement of Limited Partnership of each of the
General Partners.
"GP INTERESTS" means the General Partner interest of each of the
Partnerships.
"IDS1" means IDS/Shurgard Income Growth Partners L.P., a Washington limited
partnership.
"IDS1 GENERAL PARTNER" means Shurgard Associates L.P., a Washington limited
partnership and the general partner of IDS1.
"IDS1 MERGER" means the merger of IDS1 with and into the Company.
"IDS1 OFFER" means a cash tender offer by the Company for up to 65,000 of
the outstanding IDS1 Units at $257 net per IDS1 Unit.
"IDS1 SPECIAL MEETING" means the special meeting of holders of the IDS1
Units to be held on , 1996, at 10:00 a.m., local time, at 1201 Third
Avenue, Suite 2200, Seattle, Washington.
"IDS1 UNITHOLDERS" means the holders of IDS1 Units.
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"IDS1 UNITS" means units of limited partnership interest in IDS1.
"IDS2" means IDS/Shurgard Income Growth Partners L.P. II, a Washington
limited partnership.
"IDS2 GENERAL PARTNER" means Shurgard Associates L.P. II, a Washington
limited partnership and the general partner of IDS2.
"IDS2 MERGER" means the merger of IDS2 with and into the Company.
"IDS2 OFFER" means a cash tender offer by the Company for up to 49,000 of
the outstanding IDS2 Units at $222 net per IDS2 Unit.
"IDS2 SPECIAL MEETING" means the special meeting of holders of the IDS2
Units to be held on , 1996, at 10:00 a.m., local time, at 1201 Third
Avenue, Suite 2200, Seattle, Washington.
"IDS2 UNITHOLDERS" means the holders of IDS2 Units.
"IDS2 UNITS" means units of limited partnership interest in IDS2.
"IDS3" means IDS/Shurgard Income Growth Partners L.P. III, a Washington
limited partnership.
"IDS3 GENERAL PARTNER" means Shurgard Associates L.P. III, a Washington
limited partnership and the general partner of IDS3.
"IDS3 MERGER" means the merger of IDS3 with and into the Company.
"IDS3 OFFER" means a cash tender offer by the Company for up to 52,000 of
the outstanding IDS3 Units at $308 net per IDS3 Unit.
"IDS3 SPECIAL MEETING" means the special meeting of holders of the IDS3
Units to be held on , 1996, at 10:00 a.m., local time, at 1201 Third
Avenue, Suite 2200, Seattle, Washington.
"IDS3 UNITHOLDERS" means the holders of IDS3 Units.
"IDS3 UNITS" means units of limited partnership interest in IDS3.
"INDIVIDUAL EXPENSES" means expenses, including legal fees and expenses,
fees and expenses of investment bankers and other financial advisors, the costs
of the Appraisals and transfer fees payable by the Company for the Units
acquired through the Offers. Individual Expenses incurred by the Company will be
paid by the Company and Individual Expenses incurred by a Partnership will be
paid by the Partnership.
"IPSC" means IDS Partnership Services Corporation, a Minnesota corporation
and a limited partner of each of the General Partners.
"IRS" means the Internal Revenue Service.
"MANAGEMENT COMPANY" means Shurgard Incorporated, which was merged with and
into the Company on March 24, 1995.
"MANAGEMENT COMPANY MERGER" means the merger of the Management Company with
and into the Company on March 24, 1995.
"MANAGEMENT SERVICES AGREEMENTS" means the Management Services Agreements
between each of the Partnerships and the Company.
"MERGER CONSIDERATION" means the Shares to be issued and the cash to be paid
in lieu of fractional shares of Common Stock and as Additional Consideration, if
any, in the applicable Merger.
"MERGERS" means the merger of the Partnerships with and into the Company
pursuant to the Acquisition Agreement.
"NASDAQ" means the Nasdaq National Market.
135
<PAGE>
"NET ASSET VALUE" with respect to each Partnership means (i) the sum of (a)
the Appraised Value and (b) the book values of the non-real estate assets,
except for amortizable assets, of the Partnership as of March 31, 1996, less
(ii) the sum of (x) the Partnership's liabilities as of March 31, 1996, (y) the
estimated cost remaining to be incurred as of March 31, 1996 to complete
in-progress buildouts and unit conversions (the value of which were included in
the Appraised Value) and (z) the estimated costs of the Offers and the Mergers
that would be borne by the Partnership pursuant to the Acquisition Agreement,
assuming the applicable Merger is consummated.
"NONQUALIFYING INCOME" means income from ancillary services which does not
qualify under gross income tests for a REIT.
"NYSE" means the New York Stock Exchange, Inc.
"OFFERS" means the IDS1 Offer, the IDS2 Offer and the IDS3 Offer,
collectively.
"PARTICIPATING PARTNERSHIP" means each Partnership as to which the
conditions to closing have been satisfied or waived.
"PARTNERSHIP AGREEMENT" means the applicable Partnership's Amended and
Restated Agreement of Limited Partnership.
"PARTNERSHIPS" means IDS1, IDS2 and IDS3, collectively.
"PS" means Public Storage, Inc.
"REGISTRATION STATEMENT" means the Registration Statement on Form S-4 filed
by the Company with the Commission under the Securities Act with respect to the
shares to be issued upon consummation of the Mergers.
"REIT" means a real estate investment trust.
"REIT TAXABLE INCOME" means taxable income of the REIT computed without
regard to the dividends paid deduction and the Company's net capital gain as
defined in Code Section 857(b)(2).
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SGPI" means Shurgard General Partner, Inc.
"SHARE PRICE" means the average of the per share closing prices of the
Common Stock on the NYSE during the 20 consecutive trading days ending on the
fifth trading day prior to the Vote Date.
"SHARE PRICE RANGE" means the price range between the lower limit ($22.25)
and the upper limit ($27.75) of the Share Price.
"SHARED EXPENSES" means those expenses, excluding the Individual Expenses,
that will be shared by the Company and the Partnerships.
"SHARES" means the shares of Common Stock issuable by the Company in the
Mergers.
"SJP II" means Shurgard Joint Partners II, a joint venture in which IDS1
holds a 70% interest and the Company holds a 30% interest.
"SPECIAL COMMITTEE" means a special committee of the Company's board of
directors consisting of two independent directors, Donald W. Lusk and Wendell J.
Smith.
"SPECIAL MEETINGS" means the meeting of Unitholders to be held on ,
, 1996, at 10:00 a.m., local time, at 1201 Third Avenue, Suite 2200,
Seattle, Washington.
"SRA" means Shurgard Realty Advisors, Inc.
"SSCI" means Shurgard Storage Centers, Inc., a Delaware corporation.
"STANGER" means Robert A. Stanger & Co., Inc., the financial advisor to each
of the Partnerships.
136
<PAGE>
"STANGER FAIRNESS OPINION" means the written opinion dated July 1, 1996
rendered by Stanger as to the fairness to Unitholders, from a financial point of
view, of the Merger Consideration.
"TENDERED UNITS" means the Units of a Partnership that were purchased by the
Company in the applicable Offer.
"UBTI" means unrelated business taxable income as defined in Code Section
512.
"UNITHOLDERS" means, collectively, the IDS1 Unitholders, the IDS2
Unitholders and the IDS3 Unitholders.
"UNITHOLDERS' PREFERENCE" means a cumulative amount of Partnership
distributions equal to their collective capital contributions plus a cumulative
noncompounded return of 9% per annum on capital contributions received by
Unitholders of a Partnership.
"UNITS" means units of limited partnership interest in the Partnerships.
"VOTE DATE" means the date the General Partner of a Partnership actually
calls for the vote to approve the applicable Merger.
"WULPA" means the Washington Uniform Limited Partnership Act.
137
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
IDS/SHURGARD INCOME GROWTH PARTNERS L.P.
Independent Auditors' Report..................................................... F-2
Consolidated Balance Sheets...................................................... F-3
Consolidated Statements of Earnings.............................................. F-4
Consolidated Statements of Partners' Equity (Deficit)............................ F-5
Consoldiated Statements of Cash Flows............................................ F-6
Notes to Consolidated Financial Statements....................................... F-7
IDS/SHURGARD INCOME GROWTH PARTNERS L.P. II
Independent Auditors' Report..................................................... F-9
Balance Sheets................................................................... F-10
Statements of Earnings........................................................... F-11
Statements of Partners' Equity (Deficit)......................................... F-12
Statements of Cash Flows......................................................... F-13
Notes to Financial Statements.................................................... F-14
IDS/SHURGARD INCOME GROWTH PARTNERS L.P. III
Independent Auditors' Report..................................................... F-17
Balance Sheets................................................................... F-18
Statements of Earnings........................................................... F-19
Statements of Partners' Equity (Deficit)......................................... F-20
Statements of Cash Flows......................................................... F-21
Notes to Financial Statements.................................................... F-22
</TABLE>
F-1
<PAGE>
IDS/SHURGARD INCOME GROWTH PARTNERS L.P.
INDEPENDENT AUDITORS' REPORT
General Partner and Limited Partners
IDS/Shurgard Income Growth Partners L.P.
Seattle, Washington
We have audited the accompanying consolidated balance sheets of IDS/Shurgard
Income Growth Partners L.P. and subsidiary as of December 31, 1995 and 1994, and
the related consolidated statements of earnings, partners' equity (deficit), and
cash flows for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of IDS/Shurgard Income Growth
Partners L.P. and subsidiary as of December 31, 1995 and 1994, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995 in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Seattle, Washington
March 1, 1996
F-2
<PAGE>
IDS/SHURGARD INCOME GROWTH PARTNERS L.P.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1995 1994
MARCH 31, 1996 -------------- --------------
--------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents...................................... $ 702,060 $ 668,672 $ 1,877,311
Storage centers, net........................................... 28,500,759 28,760,097 29,770,641
Other assets................................................... 386,226 294,954 280,497
Amortizable assets, less accumulated amortization of
$1,155,366, $1,154,322 and $1,150,148......................... 13,913 14,957 19,131
-------------- -------------- --------------
Total Assets............................................... $ 29,602,958 $ 29,738,680 $ 31,947,580
-------------- -------------- --------------
-------------- -------------- --------------
LIABILITIES AND PARTNERS' EQUITY (DEFICIT):
Liabilities:
Accounts payable............................................. 36,644 105,669 59,496
Other accrued expenses....................................... 115,680 44,953 40,790
Due to affiliates............................................ 39,694 39,082 40,208
Unearned rent and tenant deposits............................ 168,288 174,935 172,231
Note payable................................................. -- -- 1,451,399
-------------- -------------- --------------
Total Liabilities.......................................... 360,306 364,639 1,764,124
Minority interest in joint partnership......................... 2,472,065 2,481,862 2,795,612
Partners' equity (deficit):
Limited partners............................................. 27,070,728 27,186,240 27,657,121
General partner.............................................. (300,141) (294,061) (269,277)
-------------- -------------- --------------
Total Partners' Equity..................................... 26,770,587 26,892,179 27,387,844
-------------- -------------- --------------
Total Liabilities and Partners' Equity..................... $ 29,602,958 $ 29,738,680 $ 31,947,580
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
IDS/SHURGARD INCOME GROWTH PARTNERS L.P.
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
---------------------------- -------------------------------------------
1996 1995 1995 1994 1993
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
Rental.............................. $ 1,622,101 $ 1,540,861 $ 6,465,170 $ 5,995,824 $ 5,462,738
Interest income..................... 10,257 22,022 107,234 60,204 28,570
------------- ------------- ------------- ------------- -------------
Total Revenue..................... 1,632,358 1,562,883 6,572,404 6,056,028 5,491,308
EXPENSES:
Operating........................... 394,413 379,324 1,493,285 1,383,594 1,325,571
Property management fees............ 97,345 92,396 387,904 359,655 327,766
Depreciation and amortization....... 260,382 285,866 1,113,748 1,126,049 1,119,109
Real estate taxes................... 126,550 119,936 465,662 490,913 502,219
Interest............................ 33,091 130,022 96,731 94,915
Administrative...................... 54,421 62,597 215,529 179,596 172,236
------------- ------------- ------------- ------------- -------------
Total Expenses.................... 933,111 973,210 3,806,150 3,636,538 3,541,816
Minority interest in joint partnership
earnings............................. (65,203) (54,828) (263,750) (195,781) (128,767)
------------- ------------- ------------- ------------- -------------
EARNINGS.............................. $ 634,044 $ 534,845 $ 2,502,504 $ 2,223,709 $ 1,820,725
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
EARNINGS PER UNIT OF LIMITED
PARTNERSHIP INTEREST................. $ 4.06 $ 3.43 $ 16.04 $ 14.25 $ 11.67
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
DISTRIBUTIONS PER UNIT OF LIMITED
PARTNERSHIP INTEREST................. $ 4.84 $ 4.69 $ 19.22 $ 17.03 $ 15.16
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
IDS/SHURGARD INCOME GROWTH PARTNERS L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
LIMITED
PARTNERS GENERAL PARTNER TOTAL
--------------- --------------- --------------
<S> <C> <C> <C>
Balance, January 1, 1993....................................... $ 28,585,167 $ (220,433) $ 28,364,734
Distributions.................................................. (2,246,190) (118,219) (2,364,409)
Earnings....................................................... 1,729,689 91,036 1,820,725
--------------- --------------- --------------
Balance, December 31, 1993..................................... 28,068,666 (247,616) 27,821,050
Distributions.................................................. (2,524,069) (132,846) (2,656,915)
Earnings....................................................... 2,112,524 111,185 2,223,709
--------------- --------------- --------------
Balance, December 31, 1994..................................... 27,657,121 (269,277) 27,387,844
Distributions.................................................. (2,848,260) (149,909) (2,998,169)
Earnings....................................................... 2,377,379 125,125 2,502,504
--------------- --------------- --------------
Balance, December 31, 1995..................................... 27,186,240 (294,061) 26,892,179
Distributions (unaudited)...................................... (717,854) (37,782) (755,636)
Earnings (unaudited)........................................... 602,342 31,702 634,044
--------------- --------------- --------------
Balance, March 31, 1996 (unaudited)............................ $ 27,070,728 $ (300,141) $ 26,770,587
--------------- --------------- --------------
--------------- --------------- --------------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
IDS/SHURGARD INCOME GROWTH PARTNERS L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31, YEAR ENDED DECEMBER 31,
--------------------------- -------------------------------------------
1996 1995 1995 1994 1993
------------ ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Earnings...................................... $ 634,044 $ 534,845 $ 2,502,504 $ 2,223,709 $ 1,820,725
Adjustments to reconcile earnings to net
cash provided by operating activities:
Minority interest in joint partnership
earnings................................... 65,203 54,828 263,750 195,781 128,767
Depreciation and amortization............... 260,382 285,866 1,113,748 1,126,049 1,119,109
Changes in operating accounts:
Other assets.............................. (91,272) 15,856 (14,457) (62,984) 85,209
Accounts payable.......................... (69,025) (41,310) 46,173 14,142 (3,626)
Other accrued expenses.................... 70,727 55,502 4,163 (5,805) 10,837
Due to affiliates......................... 612 725 (1,126) 12,689 (4,786)
Unearned rent and tenant deposits............. (6,647) 9,314 2,704 5,395 13,947
------------ ------------- ------------- ------------- -------------
Net cash provided by operating activities....... 864,024 915,626 3,917,459 3,508,976 3,170,182
------------ ------------- ------------- ------------- -------------
INVESTING ACTIVITIES:
Proceeds from grant of easements.............. 7,599
Improvements to storage centers............... -- -- (99,030) (136,846) (118,994)
------------ ------------- ------------- ------------- -------------
Net cash used in investing activities....... -- -- (99,030) (136,846) (111,395)
------------ ------------- ------------- ------------- -------------
FINANCING ACTIVITIES:
Payments on note payable...................... (6,085) (1,451,399) (44,587) (41,096)
Distributions to partners..................... (755,636) (731,261) (2,998,169) (2,656,915) (2,364,409)
Distributions to minority partners in joint
partnership.................................. (75,000) (160,500) (577,500) (75,000) (225,000)
------------ ------------- ------------- ------------- -------------
Net cash used in financing activities....... (830,636) (897,846) (5,027,068) (2,776,502) (2,630,505)
------------ ------------- ------------- ------------- -------------
Increase (decrease) in cash and cash
equivalents.................................... 33,388 17,780 (1,208,639) 595,628 428,282
Cash and cash equivalents at beginning of
year........................................... 668,672 1,877,311 1,877,311 1,281,683 853,401
------------ ------------- ------------- ------------- -------------
Cash and cash equivalents at end of year........ $ 702,060 $ 1,895,091 $ 668,672 $ 1,877,311 $ 1,281,683
------------ ------------- ------------- ------------- -------------
------------ ------------- ------------- ------------- -------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during year for interest............ $ -- $ 33,091 $ 130,022 $ 96,731 $ 94,915
------------ ------------- ------------- ------------- -------------
------------ ------------- ------------- ------------- -------------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
IDS/SHURGARD INCOME GROWTH PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL: IDS/Shurgard Income Growth Partners L.P. (the "Partnership") was
organized under the laws of the State of Washington on September 29, 1987, to
serve as a vehicle for investments in and ownership of a professionally managed
real estate portfolio consisting of self storage properties which provide
month-to-month leases for business and personal use. The Partnership will
terminate December 31, 2030, unless terminated at an earlier date. The general
partner is Shurgard Associates L.P., a Washington limited partnership.
As of March 31, 1996, there were approximately 5,750 limited partners in the
Partnership. There were approximately 148,202 units of limited partnership
interest outstanding at a contribution of $250 per unit.
CONSOLIDATED FINANCIAL STATEMENTS: In 1988, the Partnership and Shurgard
Income Properties -- Fund 18 ("Shurgard 18"), an affiliated partnership, formed
a joint venture, Shurgard Joint Partners II ("SJP II"), which purchased four
self storage facilities located in Detroit, Michigan. The Partnership
contributed 70% of the funds needed for the organization of SJP II, with
Shurgard 18 contributing the remaining 30%.
On March 1, 1994, Shurgard 18 was merged into Shurgard Storage Centers, Inc.
("SSCI") as part of the consolidation of 17 Shurgard-sponsored limited
partnerships. As a result of the merger, SSCI succeeded to all of Shurgard 18's
interest in SJP II, and assumed its obligations as a partner. The Partnership
consented to SSCI's admission as a successor partner in SJP II. SSCI granted to
the Partnership the right to sell its interest in SJP II at any time in the
future to either SSCI or, at SSCI's request, to any wholly owned subsidiary
thereof, at a price mutually agreeable to the parties or, if no mutual agreement
could be reached, at a price determined through an appraisal process.
The Partnership and SSCI receive cash distributions from SJP II and are
allocated all income, gain, loss and credit in proportion to their respective
capital contributions to SJP II.
The consolidated financial statements include the accounts of the
Partnership and SJP II. All material interpartnership transactions and balances
have been eliminated. The minority partner's interests in the joint partnership
are shown separately on the accompanying consolidated financial statements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenue and expenses during the
reporting period. Actual results can differ from those estimates.
The consolidated interim financial statements included in this report are
unaudited. In the opinion of the Partnership, all adjustments necessary for a
fair presentation of such financial statements have been included. Such
adjustments consisted only of normal recurring items. Interim results are not
necessarily indicative of results for a full year.
CASH EQUIVALENTS: Cash equivalents consist of money market instruments with
original maturities of 90 days or less.
STORAGE CENTERS: Storage centers, including land, buildings and equipment,
are recorded at cost. Depreciation on buildings and equipment is recorded on a
straight-line basis over their estimated useful lives which range from three to
thirty years.
AMORTIZABLE ASSETS: Amortizable assets, which consist primarily of
noncompete covenants and loan costs, are amortized over their expected useful
lives of two to five years.
RENTAL REVENUE: Rental revenue is recognized as earned under accrual
accounting principles.
F-7
<PAGE>
IDS/SHURGARD INCOME GROWTH PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TAXES ON INCOME: The consolidated financial statements do not reflect a
provision for federal income taxes because such taxes, including a proportionate
interest in any SJP II taxes, are the responsibility of the individual partners.
LITIGATION: The Partnership has a policy of accruing for probable losses,
which, if any, could be material to the future financial position or results of
operations. As of March 31, 1996, there are currently no known probable losses;
therefore, no such accruals have been made.
EARNINGS PER UNIT OF LIMITED PARTNERSHIP INTEREST: Earnings per unit of
limited partnership interest is based on earnings allocated to the limited
partners divided by the number of limited partnership units outstanding during
the year (148,202 units for each of the three years ended December 31, 1995 and
the three months ended March 31, 1995 and 1996).
DISTRIBUTIONS PER UNIT OF LIMITED PARTNERSHIP INTEREST: Distributions per
unit of limited partnership interest is based on the total amount distributed to
limited partners divided by the number of limited partnership units outstanding
during the year (148,202 units for each of the three years ended December 31,
1995 and the three months ended March 31, 1995 and 1996).
VALUATION OF LONG LIVED ASSETS: The Partnership, using its best estimates
based on reasonable and supportable assumptions and projections, reviews storage
centers and other assets for impairment whenever events or changes in
circumstances have indicated that the carrying amounts of its assets might not
be recoverable. Impaired assets are reported at the lower of cost or fair value.
At March 31, 1996, no assets had been written down.
RECLASSIFICATION: Certain items in the 1993 and 1994 consolidated financial
statements have been reclassified to conform with the current year presentation.
NOTE B -- STORAGE CENTERS
Storage centers consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1995 1994
MARCH 31, 1996 -------------- --------------
--------------
(UNAUDITED)
<S> <C> <C> <C>
Land......................................... $ 6,429,852 $ 6,429,852 $ 6,429,852
Buildings.................................... 28,463,189 28,463,189 28,390,139
Equipment.................................... 1,200,005 1,200,005 1,174,025
-------------- -------------- --------------
36,093,046 36,093,046 35,994,016
Less accumulated depreciation................ (7,592,287) (7,332,949) (6,223,375)
-------------- -------------- --------------
$ 28,500,759 $ 28,760,097 $ 29,770,641
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
NOTE C -- NOTE PAYABLE
At December 31, 1994, the Partnership held a seven-year note payable to a
commercial bank bearing interest at 7.75% per annum. On December 6, 1995, the
Partnership repaid the balance of this note.
NOTE D -- TRANSACTIONS WITH AFFILIATES
In connection with the management of both the storage centers and the
Partnership, the Partnership has paid or accrued a monthly property management
fee equal to 6% of the properties' gross revenue to SSCI, an affiliate of the
general partner. On March 24, 1995, Shurgard Incorporated merged with SSCI.
Prior to the merger date such fees were paid to Shurgard Incorporated.
F-8
<PAGE>
IDS/SHURGARD INCOME GROWTH PARTNERS L.P. II
INDEPENDENT AUDITORS' REPORT
General Partner and Limited Partners
IDS/Shurgard Income Growth Partners L.P. II
Seattle, Washington
We have audited the accompanying balance sheets of IDS/Shurgard Income
Growth Partners L.P. II as of December 31, 1995 and 1994, and the related
statements of earnings, partners' equity (deficit), and cash flows for each of
the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Partnership as of December 31, 1995 and
1994, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Seattle, Washington
March 1, 1996
F-9
<PAGE>
IDS/SHURGARD INCOME GROWTH PARTNERS L.P. II
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1995 1994
MARCH 31, 1996 -------------- --------------
--------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents...................................... $ 367,914 $ 455,167 $ 384,867
Storage centers, net........................................... 24,748,826 24,965,503 25,126,512
Other assets................................................... 193,561 155,712 174,768
Amortizable assets, less accumulated amortization of $368,442,
$350,718 and $279,821......................................... 91,253 108,977 179,874
-------------- -------------- --------------
Total Assets............................................... $ 25,401,554 $ 25,685,359 $ 25,866,021
-------------- -------------- --------------
-------------- -------------- --------------
LIABILITIES AND PARTNERS' EQUITY (DEFICIT):
Liabilities:
Accounts payable and other accrued expenses.................. $ 270,026 $ 256,049 $ 169,033
Construction payable......................................... 173,572
Unearned rent and tenant deposits............................ 132,881 118,132
Line of credit............................................... 470,000 470,000
Notes payable................................................ 2,849,503 2,867,661 2,938,331
-------------- -------------- --------------
Total Liabilities.......................................... 3,589,529 3,726,591 3,399,068
Partners' equity (deficit):
Limited partners............................................. 22,001,034 22,140,440 22,623,217
General partner.............................................. (189,009) (181,672) (156,264)
-------------- -------------- --------------
Total Partners' Equity..................................... 21,812,025 21,958,768 $ 22,466,953
-------------- -------------- --------------
Total Liabilities and Partners' Equity..................... $ 25,401,554 $ 25,685,359 $ 25,866,021
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See notes to financial statements.
F-10
<PAGE>
IDS/SHURGARD INCOME GROWTH PARTNERS L.P. II
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
YEAR ENDED DECEMBER 31,
---------------------------- -------------------------------------------
1996 1995 1995 1994 1993
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
Rental.............................. $ 1,092,790 $ 1,013,765 $ 4,308,603 $ 4,037,720 $ 3,617,849
Interest Income..................... 5,234 2,041 11,044 19,765 3,549
------------- ------------- ------------- ------------- -------------
Total Revenue..................... 1,098,024 1,015,806 4,319,647 4,057,485 3,621,398
EXPENSES:
Operating........................... 249,832 230,097 943,532 875,926 786,459
Property management fees............ 65,568 60,791 258,253 242,259 217,121
Depreciation........................ 216,677 209,318 848,364 832,554 814,883
Real estate taxes................... 89,667 92,368 324,450 327,337 337,741
Interest............................ 69,817 65,103 254,026 237,962 166,036
Amortization........................ 17,724 17,725 70,897 70,835 78,580
Administrative...................... 43,236 45,305 159,326 130,467 126,103
------------- ------------- ------------- ------------- -------------
Total Expenses.................... 752,521 720,707 2,858,848 2,717,340 2,526,923
EARNINGS.............................. $ 345,503 $ 295,099 $ 1,460,799 $ 1,340,145 $ 1,094,475
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
EARNINGS PER UNIT OF LIMITED
PARTNERSHIP INTEREST................. $ 2.85 $ 2.44 $ 12.06 $ 11.06 $ 9.03
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
DISTRIBUTIONS PER UNIT OF LIMITED
PARTNERSHIP INTEREST................. $ 4.06 $ 4.06 $ 16.25 $ 15.78 $ 15.62
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
See notes to financial statements.
F-11
<PAGE>
IDS/SHURGARD INCOME GROWTH PARTNERS L.P. II
STATEMENTS OF PARTNERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
LIMITED GENERAL
PARTNERS PARTNER TOTAL
-------------- ------------ --------------
<S> <C> <C> <C>
Balance, January 1, 1993........................................... $ 23,925,497 $ (87,721) $ 23,837,776
Distributions...................................................... (1,798,591) (94,664) (1,893,255)
Earnings........................................................... 1,039,751 54,724 1,094,475
-------------- ------------ --------------
Balance, December 31, 1993......................................... 23,166,657 (127,661) 23,038,996
Distributions...................................................... (1,816,578) (95,610) (1,912,188)
Earnings........................................................... 1,273,138 67,007 1,340,145
-------------- ------------ --------------
Balance, December 31, 1994......................................... 22,623,217 (156,264) 22,466,953
Distributions...................................................... (1,870,536) (98,448) (1,968,984)
Earnings........................................................... 1,387,759 73,040 1,460,799
-------------- ------------ --------------
Balance, December 31, 1995......................................... 22,140,440 (181,672) 21,958,768
Distributions (unaudited).......................................... (467,634) (24,612) (492,246)
Earnings (unaudited)............................................... 328,228 17,275 345,503
-------------- ------------ --------------
Balance, March 31, 1996 (unaudited)................................ $ 22,001,034 $ (189,009) $ 21,812,025
-------------- ------------ --------------
-------------- ------------ --------------
</TABLE>
See notes to financial statements.
F-12
<PAGE>
IDS/SHURGARD INCOME GROWTH PARTNERS L.P. II
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31, YEAR ENDED DECEMBER 31,
-------------------------- ----------------------------------------------
1996 1995 1995 1994 1993
------------ ------------ -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Earnings.................................... $ 345,503 $ 295,099 $ 1,460,799 $ 1,340,145 $ 1,094,475
Adjustments to reconcile earnings to net
cash provided by operating activities:
Depreciation and amortization............. 234,401 227,043 919,261 903,389 893,463
Changes in operating accounts:
Other assets............................ (37,849) 17,474 19,056 (41,692) (22,696)
Accounts payable and other accrued
expenses............................... (119,524) 12,185 87,016 (1,861) (212,815)
Unearned rent and tenant deposits....... 620 6,696 14,749 11,414 (1,796)
------------ ------------ -------------- -------------- --------------
Net cash provided by operating activities... 423,151 558,497 2,500,881 2,211,395 1,750,631
INVESTING ACTIVITIES:
Construction of and improvements to storage
centers.................................... -- (497,809) (860,927) (430,410) (809,619)
------------ ------------ -------------- -------------- --------------
FINANCING ACTIVITIES:
Proceeds from (payments on) line of
credit..................................... 185,000 470,000 (1,250,000) 1,250,000
Payment of loan costs....................... (38,021) (2,671)
Payment on notes payable.................... (18,158) (16,318) (70,670) (66,982) (38,555)
Proceeds from notes payable................. 1,250,000
Distributions to partners................... (492,246) (492,246) (1,968,984) (1,912,188) (1,893,255)
------------ ------------ -------------- -------------- --------------
Net cash used in financing activities....... (510,404) (323,564) (1,569,654) (2,017,191) (684,481)
------------ ------------ -------------- -------------- --------------
(Decrease) increase in cash and cash
equivalents.................................. (87,253) (262,876) 70,300 (236,206) 256,531
Cash and cash equivalents at beginning of
year......................................... 455,167 384,867 384,867 621,073 364,542
------------ ------------ -------------- -------------- --------------
Cash and cash equivalents at end of year...... $ 367,914 $ 121,991 $ 455,167 $ 384,867 $ 621,073
------------ ------------ -------------- -------------- --------------
------------ ------------ -------------- -------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during year for interest.......... $ 69,817 $ 65,103 $ 254,026 $ 237,962 $ 166,036
------------ ------------ -------------- -------------- --------------
------------ ------------ -------------- -------------- --------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
ACTIVITIES:
Liabilities incurred in connection with the
improvement and construction of storage
centers.................................... $ -- $ -- $ -- $ 173,572 $ --
------------ ------------ -------------- -------------- --------------
------------ ------------ -------------- -------------- --------------
</TABLE>
See notes to financial statements.
F-13
<PAGE>
IDS/SHURGARD INCOME GROWTH PARTNERS L.P. II
NOTES TO FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL: IDS/Shurgard Income Growth Partners L.P. II (the "Partnership")
was organized under the laws of the State of Washington on November 15, 1988, to
serve as a vehicle for investments in and ownership of a professionally managed
real estate portfolio consisting of self storage properties which provide
month-to-month leases for business and personal use. The Partnership will
terminate December 31, 2030, unless terminated at an earlier date. The general
partner is Shurgard Associates L.P. II, a Washington limited partnership.
As of March 31, 1996, there were approximately 4,200 limited partners in the
Partnership. There were approximately 115,100 units of limited partnership
interest outstanding at a contribution of $250 per unit.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenue and expenses during the
reporting period. Actual results can differ from those estimates.
The interim financial statements included in this report are unaudited. In
the opinion of the Company, all adjustments necessary for a fair presentation of
such financial statements have been included. Such adjustments consisted only of
normal recurring items. Interim results are not necessarily indicative of
results for a full year.
CASH EQUIVALENTS: Cash equivalents consist of money market instruments with
original maturities of 90 days or less.
STORAGE CENTERS: Storage centers, including land, buildings and equipment,
are recorded at cost. Depreciation on buildings and equipment is recorded on a
straight-line basis over their estimated useful lives which range from three to
thirty years.
AMORTIZABLE ASSETS: Amortizable assets, consisting of loan costs and
non-compete covenants, are amortized over their expected useful lives of three
to eight years.
RENTAL REVENUE: Rental revenue is recognized as earned under accrual
accounting principles.
TAXES ON INCOME: The financial statements do not reflect a provision for
Federal income taxes because such taxes are the responsibility of the individual
partners.
LITIGATION: The Partnership has a policy of accruing for probable losses,
which if any, could be material to the future financial position or results of
operations. As of March 31, 1996, there are currently no known probable losses,
therefore, no such accruals have been made.
EARNINGS PER UNIT OF LIMITED PARTNERSHIP INTEREST: Earnings per unit of
limited partnership interest is based on earnings allocated to the limited
partners divided by the number of limited partnership units outstanding during
the year (115,110 units for each of the three years ended December 31, 1995 and
three months ended March 31, 1996 and 1995).
DISTRIBUTIONS PER UNIT OF LIMITED PARTNERSHIP INTEREST: Distributions per
unit of limited partnership interest is based on the total amount distributed to
limited partners divided by the number of limited partnership units outstanding
during the year (115,110 units for each of the three years ended December 31,
1995 and three months ended March 31, 1996 and 1995).
VALUATION OF LONG LIVED ASSETS: The Partnership, using its best estimates
based on reasonable and supportable assumptions and projections, reviews storage
centers and other assets for impairment whenever events or changes in
circumstances have indicated that the carrying amounts of its assets might not
be recoverable. Impaired assets are reported at the lower of cost or fair value.
At March 31, 1996, no assets had been written down.
F-14
<PAGE>
IDS/SHURGARD INCOME GROWTH PARTNERS L.P. II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE B -- STORAGE CENTERS
Storage centers consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1995 1994
MARCH 31, 1996 -------------- --------------
--------------
(UNAUDITED)
<S> <C> <C> <C>
Land......................................... $ 6,014,514 $ 6,014,514 $ 5,848,181
Building..................................... 22,762,245 22,762,245 22,381,990
Equipment.................................... 872,980 872,980 732,213
-------------- -------------- --------------
29,649,739 29,649,739 28,962,384
Less accumulated depreciation................ (4,900,913) (4,684,236) (3,835,872)
-------------- -------------- --------------
$ 24,748,826 $ 24,965,503 $ 25,126,512
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
Construction in progress was $625,437 at December 31, 1994 and is included
in buildings.
NOTE C -- TRANSACTIONS WITH AFFILIATES
In connection with the management of both the storage centers and the
Partnership, the Partnership has paid or accrued management expenses,
reimbursements and a monthly property management fee equal to 6% of the
properties gross revenue to Shurgard Storage Centers, Inc., an affiliate of the
general partner. On March 24, 1995 Shurgard Incorporated merged with Shurgard
Storage Centers, Inc. Prior to the merger date such fees were paid to Shurgard
Incorporated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
MARCH 31, ----------- ----------- -----------
1996
-----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Partnership management expenses and
reimbursement at cost................... $ 13,300 $ 54,700 $ 64,800 $ 83,700
Property management fees................. 65,568 258,253 242,259 217,121
</TABLE>
NOTE D -- NOTES PAYABLE
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1994
MARCH 31, ------------- -------------
1996
-------------
(UNAUDITED)
<S> <C> <C> <C>
Note payable to a commercial bank. Secured by
real estate and payable in monthly installments
of $15,056, including principal and interest at
8%, due October 1999. The note reprices in
September 1997 and can be fixed for various
periods at the Partnership's option............. $ 1,656,457 $ 1,668,337 $ 1,713,603
Note payable to a commercial bank. Secured by
real estate and payable in monthly installments
of $10,837, including principal and interest at
8.25%, due March 2001. The note reprices in
September 1996 and can be fixed for various
periods at the Partnership's option............. 1,193,046 1,199,324 1,224,728
------------- ------------- -------------
$ 2,849,503 $ 2,867,661 $ 2,938,331
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-15
<PAGE>
IDS/SHURGARD INCOME GROWTH PARTNERS L.P. II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Based on the borrowing rates currently available to the Partnership for bank
loans with similar terms and average maturities, the fair value of the fixed
rate long-term debt which matures October, 1999 is estimated to be $1,765,000.
The note maturing March 2001 reprices to market every six months, accordingly,
the recorded value approximates fair value.
The approximate maturities of principal on these notes payable over the next
five years are as follows:
<TABLE>
<S> <C>
1996................................. $ 78,207
1997................................. 84,856
1998................................. 92,071
1999................................. 99,899
2000................................. 108,395
thereafter........................... 2,404,233
-----------
$ 2,867,661
-----------
-----------
</TABLE>
On May 1, 1995, the Partnership obtained an $850,000 non-revolving line of
credit with interest rate of prime plus one half percent (9% at December 31,
1995), maturing May 1, 1997. During the year, the Partnership drew $470,000 on
the line of credit in order to fund the Chesapeake expansion.
NOTE E -- LEASE
The Partnership leases retail space at the Kennydale storage center to a
single tenant under a noncancellable operating lease which expires October 31,
2003. The lease is renewable at current market rates at that time. Future
minimum lease receipts are as follows:
<TABLE>
<S> <C>
1996................................. $ 131,818
1997................................. 136,948
1998................................. 137,938
1999................................. 126,084
2000................................. 126,084
2001 to 2003......................... 378,252
-----------
$ 1,037,124
-----------
-----------
</TABLE>
F-16
<PAGE>
IDS/SHURGARD INCOME GROWTH PARTNERS L.P. III
INDEPENDENT AUDITORS' REPORT
General Partner and Limited Partners
IDS/Shurgard Income Growth Partners L.P. III
Seattle, Washington
We have audited the accompanying balance sheets of IDS/Shurgard Income Growth
Partners L.P. III as of December 31, 1995 and 1994, and the related statements
of earnings, partners equity (deficit), and cash flows for each of the three
years in the period ended December 31, 1995. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Partnership as of December 31, 1995 and
1994 and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Seattle, Washington
March 1, 1996
F-17
<PAGE>
IDS/SHURGARD INCOME GROWTH PARTNERS L.P. III
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1995 1994
MARCH 31, 1996 -------------- --------------
--------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents...................................... $ 395,166 $ 673,130 $ 602,285
Storage centers, net........................................... 33,903,059 34,146,500 35,121,146
Other assets................................................... 358,552 250,621 258,242
Amortizable assets, less accumulated amortization of
$1,190,330, $1,131,762 and $749,074........................... 305,533 364,101 746,789
Land held for resale........................................... 201,835 201,835 201,835
-------------- -------------- --------------
Total Assets................................................. $ 35,164,145 $ 35,636,187 $ 36,930,297
-------------- -------------- --------------
-------------- -------------- --------------
LIABILITIES AND PARTNERS' EQUITY (DEFICIT):
Liabilities:
Accounts payable and other accrued expenses.................... $ 422,533 $ 476,306 428,900
Notes payable.................................................. 10,384,296 10,745,854 11,619,725
-------------- -------------- --------------
Total Liabilities............................................ 10,806,829 11,222,160 12,048,625
Partners' equity (deficit):
Limited partners............................................. 24,464,765 24,518,638 24,962,899
General partner.............................................. (107,449) (104,611) (81,227)
-------------- -------------- --------------
Total Partners' Equity..................................... 24,357,316 24,414,027 24,881,672
-------------- -------------- --------------
Total Liabilities and Partners' Equity..................... $ 35,164,145 $ 35,636,187 $ 36,930,297
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See notes to financial statements.
F-18
<PAGE>
IDS/SHURGARD INCOME GROWTH PARTNERS L.P. III
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31 YEAR ENDED DECEMBER 31,
---------------------------- -------------------------------------------
1996 1995 1995 1994 1993
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
Rental.............................. $ 1,806,553 $ 1,720,373 $ 7,224,762 $ 6,608,932 $ 4,109,845
Interest and other income........... 9,343 6,928 36,378 56,948 230,099
------------- ------------- ------------- ------------- -------------
Total Revenue..................... 1,815,896 1,727,301 7,261,140 6,665,880 4,339,944
EXPENSES:
Operating........................... 460,398 440,234 1,799,970 1,625,933 1,183,446
Property management fees............ 108,093 103,223 433,316 393,684 246,650
Depreciation........................ 282,034 280,622 1,122,039 1,052,532 661,921
Real estate taxes................... 134,821 126,333 506,460 504,422 361,790
Interest............................ 194,032 214,039 960,964 820,083 122,691
Amortization........................ 58,568 118,821 382,688 465,348 211,138
Administrative...................... 46,430 57,760 170,424 148,544 125,635
------------- ------------- ------------- ------------- -------------
Total Expenses.................... 1,284,376 1,341,032 5,375,861 5,010,546 2,913,271
EARNINGS.............................. $ 531,520 $ 386,269 $ 1,885,279 $ 1,655,334 $ 1,426,673
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
EARNINGS PER UNIT OF LIMITED
PARTNERSHIP INTEREST................. $ 4.24 $ 3.08 $ 15.02 $ 13.19 $ 11.37
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
DISTRIBUTIONS PER UNIT OF LIMITED
PARTNERSHIP INTEREST................. $ 4.69 $ 4.69 $ 18.75 $ 17.81 $ 15.31
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
See notes to financial statements.
F-19
<PAGE>
IDS/SHURGARD INCOME GROWTH PARTNERS L.P. III
STATEMENTS OF PARTNERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
LIMITED
PARTNERS GENERAL PARTNER TOTAL
--------------- --------------- --------------
<S> <C> <C> <C>
Balance, January 1, 1993....................................... $ 25,983,981 $ (27,488) $ 25,956,493
Distributions.................................................. (1,825,475) (96,077) (1,921,552)
Earnings....................................................... 1,355,338 71,335 1,426,673
--------------- --------------- --------------
Balance, December 31, 1993..................................... 25,513,844 (52,230) 25,461,614
Distributions.................................................. (2,123,512) (111,764) (2,235,276)
Earnings....................................................... 1,572,567 82,767 1,655,334
--------------- --------------- --------------
Balance, December 31, 1994..................................... 24,962,899 (81,227) 24,881,672
Distributions.................................................. (2,235,276) (117,648) (2,352,924)
Earnings....................................................... 1,791,015 94,264 1,885,279
--------------- --------------- --------------
Balance, December 31, 1995..................................... 24,518,638 (104,611) 24,414,027
Distributions (unaudited)...................................... (558,819) (29,412) (588,231)
Earnings (unaudited)........................................... 504,944 26,576 531,520
--------------- --------------- --------------
Balance, March 31, 1996 (unaudited)............................ $ 24,464,763 $ (107,447) $ 24,357,316
--------------- --------------- --------------
--------------- --------------- --------------
</TABLE>
See notes to financial statements.
F-20
<PAGE>
IDS/SHURGARD INCOME GROWTH PARTNERS L.P. III
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31, YEAR ENDED DECEMBER 31,
--------------------------- -------------------------------------------
1996 1995 1995 1994 1993
------------ ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Earnings.................................... $ 531,520 $ 386,269 $ 1,885,279 $ 1,655,334 $ 1,426,673
Adjustments to reconcile earnings to net
cash provided by operating activities:
Depreciation and amortization........... 340,602 399,443 1,504,727 1,517,880 873,059
Changes in operating accounts:
Other assets.......................... (107,931) (4,414) 7,621 (50,866) (41,318)
Accounts payable and other accrued
expenses............................. (53,773) (42,628) 47,406 (14,540) 129,143
------------ ------------- ------------- ------------- -------------
Net cash provided by operating
activities............................... 710,418 738,670 3,445,033 3,107,808 2,387,557
------------ ------------- ------------- ------------- -------------
INVESTING ACTIVITIES:
Purchase of and improvements to storage
centers.................................... (38,593) (7,659) (147,393) (588,910) (15,476,979)
Consideration for amortizable assets........ (286,950) (670,804)
------------ ------------- ------------- ------------- -------------
Net cash used in investing activities..... (38,593) (7,659) (147,393) (875,860) (16,147,783)
------------ ------------- ------------- ------------- -------------
FINANCING ACTIVITIES:
Proceeds from notes payable................. 600,000 9,500,000 8,865,000
Payments on notes payable................... (961,558) (429,333) (873,871) (9,375,275) (865,000)
Payments of loan costs...................... (242,226) (127,846)
Distributions to partners................... (588,231) (588,231) (2,352,924) (2,235,276) (1,921,552)
------------ ------------- ------------- ------------- -------------
Net cash (used in) provided by financing
activities............................... (949,789) (1,017,564) (3,226,795) (2,352,777) 5,950,602
------------ ------------- ------------- ------------- -------------
(Decrease) increase in cash and cash
equivalents................................ (277,964) (286,553) 70,845 (120,829) (7,809,624)
Cash and cash equivalents at beginning of
year....................................... 673,130 602,285 602,285 723,114 8,532,738
------------ ------------- ------------- ------------- -------------
Cash and cash equivalents at end of year.... $ 395,166 $ 315,732 $ 673,130 $ 602,285 $ 723,114
------------ ------------- ------------- ------------- -------------
------------ ------------- ------------- ------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during year for interest.......... $ 194,032 $ 214,039 $ 940,442 $ 776,498 $ 113,247
------------ ------------- ------------- ------------- -------------
------------ ------------- ------------- ------------- -------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
ACTIVITIES:
Liabilities incurred in connection with the
purchase of storage centers................ $ -- $ -- $ -- $ 674,000 $ 2,821,000
------------ ------------- ------------- ------------- -------------
------------ ------------- ------------- ------------- -------------
</TABLE>
See notes to financial statements.
F-21
<PAGE>
IDS/SHURGARD INCOME GROWTH PARTNERS L.P. III
NOTES TO FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL: IDS/Shurgard Income Growth Partners L.P. III (the "Partnership")
was organized under the laws of the State of Washington on November 15, 1988, to
serve as a vehicle for investments in and ownership of a professionally managed
real estate portfolio consisting of self storage properties which provide
month-to-month leases for business and personal use. The Partnership will
terminate December 31, 2030, unless terminated at an earlier date. The general
partner is Shurgard Associates L.P. III, a Washington limited partnership.
As of March 31, 1996, there were approximately 4,100 limited partners in the
Partnership. There were approximately 119,215 units of limited partnership
interest outstanding at a contribution of $250 per unit.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenue and expenses during the
reporting period. Actual results can differ from those estimates.
The interim financial statements included in this report are unaudited. In
the opinion of the Partnership, all adjustments necessary for a fair
presentation of such financial statements have been included. Such adjustments
consisted only of normal recurring items. Interim results are not necessarily
indicative of results for a full year.
CASH EQUIVALENTS: Cash equivalents consist of money market instruments with
original maturities of 90 days or less.
STORAGE CENTERS: Storage centers, including land, buildings and equipment
are recorded at cost. Depreciation on buildings and equipment is recorded on a
straight-line basis over their estimated useful lives which range from three to
thirty years.
AMORTIZABLE ASSETS: Amortizable assets, consisting primarily of non-compete
covenants and loan costs, are amortized over their expected useful lives of two
to eight years.
RENTAL REVENUE: Rental revenue is recognized as earned under accrual
accounting principles.
TAXES ON INCOME: The financial statements do not reflect a provision for
Federal income taxes because such taxes are the responsibility of the individual
partners.
LITIGATION: The Partnership has a policy of accruing for probable losses,
which if any, could be material to the future financial position or results of
operations. As of March 31, 1996, there are currently no known probable losses,
therefore, no such accruals have been made.
EARNINGS PER UNIT OF LIMITED PARTNERSHIP INTEREST: Earnings per unit of
limited partnership interest is based on earnings allocated to the limited
partners divided by the number of limited partnership units outstanding during
the year (119,215 units for each of the three years ended December 31, 1995 and
the three months ended March 31, 1996 and 1995).
DISTRIBUTIONS PER UNIT OF LIMITED PARTNERSHIP INTEREST: Distributions per
unit of limited partnership interest is based on the total amount distributed to
limited partners divided by the number of limited partnership units outstanding
during the year (119,215 units for each of the three years ended December 31,
1995 and the three months ended March 31, 1996 and 1995).
VALUATION OF LONG LIVED ASSETS: The Partnership, using its best estimates
based on reasonable and supportable assumptions and projections, reviews storage
centers and other assets for impairment whenever events or changes in
circumstances have indicated that the carrying amounts of its assets might not
be recoverable. Impaired assets are reported at the lower of cost or fair value.
Assets to be disposed of are reported at the lower of cost or net realizable
value. At March 31, 1996, no assets had been written down.
F-22
<PAGE>
IDS/SHURGARD INCOME GROWTH PARTNERS L.P. III
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE B -- STORAGE CENTERS
Storage centers consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1995 1994
MARCH 31, 1996 -------------- --------------
--------------
(UNAUDITED)
<S> <C> <C> <C>
Land................................................... $ 7,503,081 $ 7,503,081 $ 7,515,406
Buildings.............................................. 29,277,560 29,238,967 29,110,884
Equipment.............................................. 699,802 699,802 668,167
-------------- -------------- --------------
37,480,443 37,441,850 37,294,457
Less accumulated depreciation.......................... (3,577,384) (3,295,350) (2,173,311)
-------------- -------------- --------------
$ 33,903,059 $ 34,146,500 $ 35,121,146
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
NOTE C -- NOTES PAYABLE
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1995 1994
MARCH 31, 1996 -------------- --------------
--------------
(UNAUDITED)
<S> <C> <C> <C>
Notes payable to sellers............................... $ 674,000 $ 1,583,653 $ 2,264,000
Note payable to bank................................... 9,710,296 9,162,201 9,355,725
-------------- -------------- --------------
$ 10,384,296 $ 10,745,854 $ 11,619,725
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
On March 31, 1994, the Partnership consolidated outstanding notes payable
totaling $8 million and borrowed an additional $1.5 million. The new terms of
this note provide the Partnership the option to borrow an additional $3 million.
This note is secured by real estate and bears interest at 8%. The note matures
April 1, 2001 and requires monthly payments of principal and interest based on a
twenty-year amortization. The note reprices to market every six months,
accordingly, the recorded value approximates fair value.
Notes to sellers, which mature December 31, 1996, are secured by certain
storage centers of the Partnership. The recorded value of these seller's notes
approximates fair value. Annual payments of principal are due 90 days after year
end under conditions provided in the note agreement based on each center's
performance. Quarterly interest is payable to the extent any center's net
operating income, as defined, exceeds 10% of the Partnership's investment in the
related center. In 1994 and 1995, the Partnership made principal payments of
$651,000 and $680,347 respectively, on these notes. On February 29, 1996, the
Partnership borrowed $600,000 on its bank note to partially fund the final
payment of $909,653 on the seller's note that originated with the purchase of
the Castro Valley storage center and to replenish cash reserves. Maturities of
notes payable include this final payment made February 29, 1996.
Maturities of notes payable at December 31, 1995, are as follows:
<TABLE>
<S> <C>
1996.......................................................... $ 1,798,135
1997.......................................................... 233,730
1998.......................................................... 254,705
1999.......................................................... 277,563
2000.......................................................... 302,472
Thereafter.................................................... 7,879,249
-----------
$10,745,854
-----------
-----------
</TABLE>
F-23
<PAGE>
IDS/SHURGARD INCOME GROWTH PARTNERS L.P. III
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE D -- ACQUISITION
During the years ended December 31, 1993 and 1994, the Partnership acquired
existing storage centers from unaffiliated parties. These acquisitions were
funded through a combination of bank notes, seller notes and cash. Certain
information about these acquisitions is as follows:
<TABLE>
<CAPTION>
PROPERTY ACQUISITION
FACILITY LOCATION PRICE DATE
- ----------------------------------- --------------------------- ----------- -----------------------
<S> <C> <C> <C>
Castro Valley (1) Castro Valley, CA 5,000,000 August, 1993
Newark (1) Newark, CA 3,340,000 August, 1993
San Leandro (1) San Leandro, CA 2,671,000 August, 1993
Tracy (1) Tracy, CA 2,250,000 August, 1993
Sacramento (1) Sacramento, CA 2,834,000 February, 1994
San Lorenzo (1) San Lorenzo, CA 2,905,000 February, 1994
Castro Valley Office Bldg. (2) Castro Valley, CA 500,000 May, 1994
</TABLE>
- ------------------------
(1) These purchases were funded with cash, an $8 million bank note, and $3.495
million in seller notes.
(2) This purchase was funded with cash.
The transactions were accounted for as purchases, and the results of
operations for each of the storage centers from their respective acquisition
date have been included in the financial statements. The general partner
estimates that if these properties had been acquired on January 1, 1994 and
1993, the pro forma combined results of operations for the year would have been
as follows:
<TABLE>
<CAPTION>
1994 1993
------------- -------------
(UNAUDITED)
<S> <C> <C>
Total revenue............................................................. $ 6,773,234 $ 6,237,005
Earnings.................................................................. $ 1,613,010 $ 1,331,884
Earnings per unit of limited partnership interest......................... $ 12.85 $ 10.61
</TABLE>
These pro forma operating results include the Partnership's results of
operations, less increased depreciation and amortization on storage centers and
other assets, respectively, and increased interest expense on the bank loans.
The pro forma information does not purport to be indicative of the results
that actually would have been obtained if the combined operations had been
conducted for the full year and is not intended to be a projection of future
results.
NOTE E -- TRANSACTIONS WITH AFFILIATES
In connection with the management of the centers, the Partnership has paid
or accrued a monthly property management fee equal to 6% of the properties gross
revenue to Shurgard Storage Centers, Inc., an affiliate of the general partner.
On March 24, 1995 Shurgard Incorporated merged with Shurgard Storage Centers,
Inc. Prior to the merger date such fees were paid to Shurgard Incorporated.
F-24
<PAGE>
APPENDIX A
ACQUISITION AGREEMENT
BY AND AMONG
IDS/SHURGARD INCOME GROWTH PARTNERS L.P.,
IDS/SHURGARD INCOME GROWTH PARTNERS L.P. II
AND
IDS/SHURGARD INCOME GROWTH PARTNERS L.P. III
(TOGETHER, THE "PARTNERSHIPS")
AND
SHURGARD STORAGE CENTERS, INC.
(THE "COMPANY")
JULY 1, 1996
A-i
<PAGE>
CONTENTS
<TABLE>
<C> <S> <C>
ARTICLE I. THE OFFERS.................................................................. 1
1.1 The Offers................................................................... 1
1.2 Conditions to Commencement of the Offers..................................... 1
1.3 Actions and Agreements of the Partnerships and the Company................... 2
1.4 Offer Documents.............................................................. 2
1.5 General Partner Recommendation............................................... 3
3
ARTICLE II. THE MERGER.................................................................
2.1 The Merger................................................................... 3
2.2 Effective Time of the Merger................................................. 3
2.3 Certificate of Incorporation of the Surviving Corporation.................... 3
2.4 Bylaws of the Surviving Corporation.......................................... 4
2.5 Board of Directors and Officers of the Surviving Corporation................. 4
4
ARTICLE III. CONVERSION OF PARTNERSHIP INTERESTS IN THE MERGER.......................
3.1 Merger Consideration......................................................... 4
3.2 Certain Definitions.......................................................... 4
3.3 Distribution of Merger Consideration......................................... 5
3.4 No Fractional Shares......................................................... 5
3.5 Dissenting Units............................................................. 5
3.6 Issuance of Certificates for REIT Shares..................................... 6
3.7 Transfer of Units............................................................ 6
6
ARTICLE IV. REPRESENTATIONS AND WARRANTIES.............................................
4.1 Representations and Warranties of the Partnerships........................... 6
4.2 Representations and Warranties of the Company................................ 9
11
ARTICLE V. COVENANTS AND AGREEMENTS....................................................
5.1 Ordinary Course; No Acquisitions or Dispositions............................. 11
5.2 Distributions................................................................ 11
5.3 Amendment of Governing Documents............................................. 12
5.4 Exclusivity.................................................................. 12
5.5 Other Actions................................................................ 12
5.6 Advise of Changes............................................................ 13
5.7 Meetings of Limited Partner.................................................. 13
5.8 Registration and Listing of REIT Shares...................................... 13
5.9 S-4 Registration Statement and Proxy Statement/Prospectus.................... 13
5.10 Consents and Approvals....................................................... 13
5.11 Limitation on Number of REIT Shares Issued................................... 14
14
ARTICLE VI. CLOSING....................................................................
6.1 Closing Date................................................................. 14
6.2 Additional Closings.......................................................... 14
6.3 Further Acts................................................................. 14
14
ARTICLE VII. CONDITIONS................................................................
7.1 Conditions to Each Party's Obligations....................................... 14
7.2 Conditions to the Obligations of the Company................................. 15
7.3 Conditions to the Obligations of the Partnerships............................ 15
16
ARTICLE VIII. TERMINATION AND WAIVER...................................................
8.1 Termination.................................................................. 16
8.2 Effect of Termination........................................................ 17
8.3 Fees and Expenses............................................................ 17
8.4 Extension; Waiver............................................................ 19
</TABLE>
A-ii
<PAGE>
<TABLE>
<C> <S> <C>
8.5 No Survival of Representations and Warranties................................ 19
19
ARTICLE IX. MISCELLANEOUS..............................................................
9.1 Assignment of Contract....................................................... 19
9.2 Risk of Loss................................................................. 19
9.3 Entire Agreement; Modifications.............................................. 19
9.4 Notices...................................................................... 19
9.5 Interpretation............................................................... 20
9.6 Captions..................................................................... 20
9.7 Multiple Counterparts........................................................ 20
9.8 Binding Effect............................................................... 20
9.9 Attorneys' Fees.............................................................. 20
9.10 No Waiver; Severability...................................................... 21
9.11 No Joint and Several Liability............................................... 21
9.12 Applicable Law............................................................... 21
</TABLE>
Exhibit A General Partner Undertaking
Exhibit B Opinion of Counsel to the Partnerships
Exhibit C Opinion of Special Counsel to the Company
A-iii
<PAGE>
GLOSSARY
The following is a list of the defined terms used in this Agreement and the
Sections in which such terms are defined:
<TABLE>
<CAPTION>
TERM SECTION
<S> <C>
Additional Consideration Section 3.2(c)
Agreement Preamble
Alternative Transaction Section 8.3(c)
Appraised Value Section 3.2(a)
Appraiser Section 3.2(a)
Assets Recital A
Balance Sheet Section 4.1(i)
Closing Section 6.1
Closing Date Section 6.1
Closing Net Asset Value Section 5.2
Commission Section 1.4
Company Preamble
Company SEC Documents Section 4.2(f)
Constituent Entities Section 2.1
DGCL Section 2.1
Dissenting Units Section 3.5
Dissolution Section 3.1(a)
Effective Time Section 2.2
Exchange Act Section 1.1
Exchange Agent Section 3.3
Exchange Fund Section 3.3
General Partner Recital B
General Partner Recommendation Section 1.5
General Partner Undertaking Recital C
Governmental Regulations Section 4.1(l)
GP Interest Section 3.1(b)
Hazardous Materials Section 4.1(l)
IDS1 Preamble
IDS2 Preamble
IDS3 Preamble
Individual Transaction Expenses Section 8.3(a)
LP Units Section 1.1
Merger Section 2.1
Merger Consideration Section 3.1
Net Asset Value Section 3.2(a)
NYSE Section 3.2(b)
Offer Section 1.1
Offer Documents Section 1.4
Offer Price Section 1.1
Participating Partnership Section 2.1
Partnership Preamble
Partnership Agreement Section 4.1(a)
Partnership Financial Statements Section 4.1(e)
Partnership SEC Documents Section 4.1(d)
Property Recital A
Proxy Statement/Prospectus Section 5.9
REIT Share Price Section 3.2(b)
REIT Share Price Range Section 3.2(b)
</TABLE>
A-iv
<PAGE>
<TABLE>
<CAPTION>
TERM SECTION
REIT Shares Section 3.1(a)
<S> <C>
S-4 Registration Statement Section 4.1(f)
Schedules Section 1.4
Schedules 13E-3 Section 1.4
Schedules 14D-1 Section 1.4
Schedules 14D-9 Section 1.4
Securities Act Section 4.1(d)
Shared Transaction Expenses Section 8.3(a)
Special Committee Section 1.2
Standstill Section 1.3(d)
Surviving Corporation Section 2.1
Terminating Breach Section 8.1(f)
Third Party Section 8.3(c)
WULPA Section 2.1
</TABLE>
A-v
<PAGE>
ACQUISITION AGREEMENT
This ACQUISITION AGREEMENT (this "Agreement") is entered into as of July 1,
1996 by IDS/ Shurgard Income Growth Partners L.P. ("IDS1"), IDS/Shurgard Income
Growth Partners L.P. II ("IDS2") and IDS/Shurgard Income Growth Partners L.P.
III ("IDS3"), each a Washington limited partnership (individually, a
"Partnership" and together, the "Partnerships"), and Shurgard Storage Centers,
Inc., a Delaware corporation (the "Company").
RECITALS
A. The Partnerships are the owners of certain self storage and other
properties (which properties, including any buildings, structures or other
improvements situated thereon are herein referred to as the "Property") and
related personal property and other assets (together with the Property, the
"Assets").
B. Shurgard Associates L.P., Shurgard Associates L.P. II and Shurgard
Associates L.P. III (each, a "General Partner" and together, the "General
Partners") and the Board of Directors of the Company believe that it is in the
best interests of the Partnerships and the Company, respectively, and their
respective limited partners and stockholders to enter into and consummate this
Agreement.
C. Concurrently with the execution of this Agreement, the General Partners
and the Company are entering into a General Partner Undertaking, dated as of
July 1, 1996 (the "General Partner Undertaking"), in the form attached hereto as
Exhibit A.
AGREEMENTS
NOW, THEREFORE, in consideration of the mutual representations, warranties,
covenants and agreements set forth herein, the parties hereto agree as follows:
ARTICLE I. THE OFFERS
1.1 THE OFFERS
As soon as practicable after the date hereof, the Company shall commence
(within the meaning of Rule 14d-2(a) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")), a tender offer for up to 65,000 units of limited
partner interests (the "LP Units") of IDS1, 49,000 LP Units of IDS2 and 52,000
LP Units of IDS3 (each, an "Offer" and together the "Offers"), at a net cash
price per LP Unit equal to the Net Asset Value (as defined in Section 3.2(a)
hereof) of the applicable Partnership that would be allocated to one LP Unit if
the Partnership's Net Asset Value were distributed in a dissolution of such
Partnership in accordance with its Partnership Agreement (as defined in Section
4.1(a) hereof). The parties hereto acknowledge that the Net Asset Value per LP
Unit is equal to $257, $222 and $308 for IDS1, IDS2 and IDS3, respectively
(each, the "Offer Price" and together the "Offer Prices"). The Company may not
change the form of consideration, reduce the Offer Price or amend any material
term of an Offer in a manner adverse to the interests of the limited partners of
the applicable Partnership without the prior written consent of the General
Partner of such Partnership. The Company agrees to use its reasonable best
efforts to consummate the Offers as soon as legally permissible and, subject to
the terms and conditions of the Offers, to accept for payment and pay for all LP
Units tendered pursuant to the Offers promptly following the expiration of the
Offers.
1.2 CONDITIONS TO COMMENCEMENT OF THE OFFERS
The commencement of the Offers is conditioned upon:
(a) the receipt by the Special Committee of the Board of Directors of the
Company appointed to review the transactions contemplated by this Agreement (the
"Special Committee") of an opinion from Alex. Brown & Sons Incorporated as to
the fairness to the Company, from a financial point of view, of the Offer
Prices;
A-1
<PAGE>
(b) the receipt by each of the Partnerships of an opinion from Robert A.
Stanger & Co., Inc., as to the fairness to the limited partners of such
Partnership, from a financial point of view, of the applicable Offer Price; and
(c) the General Partners shall have executed and delivered to the Company
the General Partner Undertaking and shall have performed their obligations
thereunder that are capable of being performed prior to commencement of the
Offers.
1.3 ACTIONS AND AGREEMENTS OF THE PARTNERSHIPS AND THE COMPANY
(a) The Partnerships hereby consent to the making of the Offers.
(b) The Partnerships shall promptly cause to be furnished to the Company a
list containing the names and addresses of all record holders and beneficial
owners known to them of LP Units as of a recent date, and shall promptly furnish
the Company with such additional information and such other assistance as the
Company or its agents may reasonably request in connection with the Offers.
(c) The Partnerships and the Company will take such actions as are required
under the applicable Partnership Agreement to effect the admission of the
Company as a limited partner of the Partnership with respect to all LP Units
acquired by it pursuant to the applicable Offer in accordance with the terms of
the Partnership Agreement.
(d) The Company agrees that if it is admitted as a substitute limited
partner in a Partnership and except as otherwise contemplated by this Agreement,
it will not, directly or indirectly, without the prior written consent of a
majority of the general partners of the General Partner of that Partnership (i)
acquire any additional LP Units of that Partnership, (ii) propose any merger or
other business combination involving that Partnership, or (iii) propose any
other transaction pursuant to which it would control or acquire any of the
assets of that Partnership (this agreement being referred to as the
"Standstill").
1.4 OFFER DOCUMENTS
On the date of commencement of the Offers, (a) the Company shall file with
the Securities and Exchange Commission (the "Commission") with respect to the
Offers, (i) a Tender Offer Statement on Schedule 14D-1 with respect to each of
the Partnerships (together with any supplements or amendments thereto, the
"Schedules 14D-1") and (ii) jointly with each of the Partnerships (if required
by the Exchange Act), a Transaction Statement on Schedule 13E-3 (together with
any supplements or amendments thereto, the "Schedules 13E-3") and (b) each
Partnership shall file with the Commission with respect to the Offer a
Solicitation/Recommendation Statement on Schedule 14D-9 (together with any
supplements or amendments thereto, the "Schedules 14D-9"; the Schedules 14D-1,
the Schedules 13E-3 and the Schedules 14D-9 are referred to collectively as the
"Schedules") and, jointly with the Company (if required by the Exchange Act),
shall file with the Commission the applicable Schedule 13E-3. The Schedules
14D-1 and the Schedules 13E-3 will contain (including as an exhibit) or will
incorporate by reference an offer to purchase (or portions thereof) and a form
of the related letter of transmittal (which documents, together with any
supplements or amendments thereto and any other documents filed with the
Commission or disseminated to holders of LP Units by the Company pursuant to
which the Offers are made, are referred to collectively as the "Offer
Documents").
The Partnerships and the Company shall cooperate with each other and shall
supply each other with any assistance that the other shall reasonably request in
preparing and filing the Schedules and distributing the Offer Documents,
including, without limitation, supplying each other with any and all information
that is required to be furnished in the Schedules. The Company may include in
the Offer Documents any information with respect to the Partnerships that the
Company shall reasonably determine is required under the Exchange Act and the
rules promulgated thereunder to be included in the Offer Documents, with such
qualifications and disclaimers as are reasonably acceptable to the
A-2
<PAGE>
applicable Partnership. The Company represents and warrants to the Partnerships,
and each Partnership represents and warrants to the Company, that the
information provided by it, and to be provided by it for use in the Schedules,
shall not, on the date the Schedules are filed with the Commission, and on the
date the Offer Documents are first published, sent or given to holders of LP
Units, as the case may be, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The Company shall promptly notify the
Partnerships of, and shall promptly correct, and the Partnerships shall promptly
notify the Company of, and shall promptly correct, any information provided by
it for use in the Schedules that shall have become untrue or misleading in any
material respect and shall take all steps necessary to cause the Schedules as so
corrected to be filed with the Commission and disseminated to holders of LP
Units, in each case to the extent required by applicable federal securities
laws.
1.5 GENERAL PARTNER RECOMMENDATION
The Offer Documents, the Schedules 14D-9 and the Schedules 13E-3 shall
contain, to the extent applicable, at all times from the commencement of the
Offers through the consummation of the Offers the recommendation of the General
Partner set forth in Section 1.2 of the General Partner Undertaking (the
"General Partner Recommendation"), unless the General Partner has withdrawn or
changed such recommendation in accordance with the exercise of its fiduciary
duties or as otherwise required by law.
ARTICLE II. THE MERGER
2.1 THE MERGER
Upon the terms and subject to the conditions hereof, at the Effective Time
(as defined in Section 2.2 hereof), each Partnership as to which the conditions
to closing set forth in Article VII hereof have been met (each such Partnership,
a "Participating Partnership") shall be merged (the "Merger") with and into the
Company in accordance with the applicable provisions of the Delaware General
Corporation Law (the "DGCL") and the Washington Uniform Limited Partnership Act
(the "WULPA"). When the Merger has been effected the Participating Partnerships
and the Company (together, the "Constituent Entities") will be a single
corporation; the separate existence of each of the Participating Partnerships
will cease; the Company, as the corporation surviving the Merger (the "Surviving
Corporation"), will continue its corporate existence under the DGCL; all Assets
and every other interest of or belonging to or due to each of the Participating
Partnerships will be deemed to be transferred to and vested in the Surviving
Corporation without further act or deed; the title to the Property, or any
interest therein, vested in any of the Constituent Entities will not revert or
be in any way impaired by reason of the Merger; and the Surviving Corporation
will thenceforth be responsible and liable for all the liabilities and
obligations of each of the Constituent Entities.
2.2 EFFECTIVE TIME OF THE MERGER
The Merger will become effective when a properly executed Certificate of
Merger is duly filed with the Secretary of State of Delaware and the Secretary
of State of Washington, which filing will be made as soon as practicable after
the closing of the transactions contemplated by this Agreement in accordance
with Section 6.1 hereof. When used in this Agreement, the term "Effective Time"
means the date and time on which such Certificate is so filed.
2.3 CERTIFICATE OF INCORPORATION OF THE SURVIVING CORPORATION
At the Effective Time, and without any further action on the part of the
Constituent Entities, the Certificate of Incorporation of the Company will
continue in effect and will be the Certificate of Incorporation of the Surviving
Corporation and thereafter may be amended in accordance with its terms and as
provided by law.
A-3
<PAGE>
2.4 BYLAWS OF THE SURVIVING CORPORATION
At the Effective Time, and without any further action on the part of the
Constituent Entities, the Bylaws of the Company will continue in effect without
amendment and will be the Bylaws of the Surviving Corporation and thereafter may
be amended or repealed in accordance with their terms and the Certificate of
Incorporation of the Surviving Corporation and as provided by law.
2.5 BOARD OF DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION
At the Effective Time, the persons serving as directors of the Company will
be the directors of the Surviving Corporation, each of such directors to hold
office, subject to the applicable provisions of the Certificate of Incorporation
and Bylaws of the Surviving Corporation, until the expiration of the current
term for which they are serving as a director and until their successors are
duly elected or appointed and qualified. The officers of the Company immediately
prior to the Effective Time will be the officers of the Surviving Corporation
until their respective successors are duly elected or appointed and qualified.
ARTICLE III. CONVERSION OF PARTNERSHIP INTERESTS IN THE MERGER
3.1 MERGER CONSIDERATION
At the Effective Time, and subject to Sections 3.4 and 3.5 hereof, by virtue
of the Merger and without any further action by the limited partners or General
Partners of the Participating Partnerships,
(a) each LP Unit (other than LP Units owned by the Company) of each of the
Participating Partnerships will be converted into the right to receive (i) that
number of shares of Class A Common Stock of the Company, par value $.001 per
share (the "REIT Shares"), derived by dividing the Net Asset Value (as defined
in Section 3.2(a) hereof) of the applicable Participating Partnership that would
be allocated to one LP Unit if such Partnership's Net Asset Value were
distributed in a dissolution of such Partnership in accordance with its
Partnership Agreement, taking into account all outstanding LP Units, including
those owned by the Company (a "Dissolution"), by the REIT Share Price (as
defined in Section 3.2(b) hereof) and (ii) if any is payable, the amount of the
Additional Consideration (as defined in Section 3.2(c) hereof) that would be
allocated to one LP Unit if the Additional Consideration were distributed in a
Dissolution;
(b) the General Partner interest (the "GP Interest") of each of the
Participating Partnerships will be converted into the right to receive (i) that
number of REIT Shares derived by dividing the Net Asset Value of the applicable
Participating Partnership that would be allocated to the GP Interest if such
Partnership's Net Asset Value was distributed in a Dissolution by the REIT Share
Price and (ii) if any is payable, the amount of the Additional Consideration
that would be allocated to the GP Interest if the Additional Consideration were
distributed in a Dissolution; and
(c) the LP Units owned by the Company shall be canceled.
(The REIT Shares issuable pursuant to the Merger, together with cash paid in
lieu of fractional REIT Shares as provided in Section 3.4 hereof and any
Additional Consideration, if any, that is payable, are referred to herein as the
"Merger Consideration.") If, prior to the Effective Time, the Company should
split or combine the REIT Shares, or pay a stock dividend, the number of REIT
Shares issuable in the Merger will be appropriately adjusted to reflect such
action.
3.2 CERTAIN DEFINITIONS
(a) As used herein, "Net Asset Value" means, with respect to each of the
Partnerships, (i) the sum of (A) the appraised fair market values of the real
estate assets of the Partnership as of December 31, 1995 set forth in the
Portfolio Appraisal Reports dated June 26, 1996 (the "Appraised Value") prepared
by Robert A. Stanger & Co., Inc. (the "Appraiser"), which Appraised Value
reflected the value of in-progress unit conversions and buildouts, and (B) the
book values of the non-real estate assets, except for amortizable assets, of the
Partnership as of March 31, 1996, less (ii) the sum of (X) such Partnership's
liabilities as of March 31, 1996, (Y) the estimated cost remaining to be
incurred
A-4
<PAGE>
as of March 31, 1996 to complete in-progress unit conversions and buildouts, the
value of which was included in the Appraised Value and (Z) the estimated costs
of the Offer and the Merger that would be borne by the Partnership in accordance
with Article VIII hereof, assuming the Merger is consummated.
(b) As used herein, "REIT Share Price" means, with respect to each of the
Partnerships, the average of the per share closing prices on the New York Stock
Exchange, Inc. (the "NYSE") of REIT Shares during the 20 consecutive trading
days ending on the fifth trading day prior to the day of the meeting of limited
partners of the applicable Partnership on which the General Partner actually
calls for the vote of the limited partners to approve of the Merger.
Notwithstanding the foregoing, in the event the REIT Share Price exceeds $27.75,
then for purposes of calculating the number of REIT Shares to be issued pursuant
to Section 3.1 hereof the REIT Share Price shall be deemed to equal $27.75; and,
in the event the REIT Share Price is less than $22.25, then for purposes of
calculating the number of REIT Shares to be issued pursuant to this Section 3.2
the REIT Share Price shall be deemed to equal $22.25 (the range of prices from
the upper to the lower limit on the REIT Share Price is referred to as the "REIT
Share Price Range"). The parties hereto acknowledge that in the event the REIT
Share Price exceeds $28.50, the Company may terminate this Agreement as provided
in Section 8.1(e)(iv) hereof, and in the event the REIT Share Price is less than
$21.50, the Partnership may terminate this Agreement as provided in Section
8.1(h) hereof unless the Company agrees to pay the Additional Consideration.
(c) As used herein, "Additional Consideration" means, with respect to each
of the Partnerships, that amount of cash equal to the difference between the
REIT Share Price calculated without regard to the REIT Share Price Range and
$21.50, multiplied by the number of REIT Shares issuable pursuant to the Merger.
3.3 DISTRIBUTION OF MERGER CONSIDERATION
Prior to the Effective Time, the Company shall deposit (or cause to be
deposited) with Gemisys Corporation, as exchange agent (the "Exchange Agent"),
for the benefit of the General Partners and the limited partners of the
Participating Partnerships for exchange in accordance with this Article III, a
number of REIT Shares and that amount of cash as is sufficient to pay the Merger
Consideration (such REIT Shares and cash being hereinafter referred to as the
"Exchange Fund"). The REIT Shares into which LP Units and GP Interests shall be
converted in the Merger shall be deemed to have been issued at the Effective
Time.
3.4 NO FRACTIONAL SHARES
No fractional REIT Shares will be issued in the Merger. In the event that,
as a result of the conversion of LP Units or GP Interests into REIT Shares, a
limited partner or General Partner, as the case may be, would be entitled to
receive a fractional REIT Share, a cash adjustment will be paid in lieu of any
fractional REIT Share that would otherwise be issuable, and the amount of such
cash adjustment shall equal the product of such fractional amount and the REIT
Share Price. The determination under this Section 3.4 as to whether a limited
partner would otherwise be entitled to receive a fractional REIT Share will be
based on the aggregate number of LP Units such limited partner holds in the
applicable Partnership, not on a per LP Unit basis.
3.5 DISSENTING UNITS
Notwithstanding anything in this Agreement to the contrary, LP Units held by
a limited partner who has properly exercised dissenters' rights with respect
thereto ("Dissenting Units") in accordance with Section 25.10.900 ET SEQ. of the
WULPA will not be converted into the right to receive the Merger Consideration,
but the holder thereof will instead be entitled to receive payment of the fair
value of such LP Units in accordance with the provisions of the WULPA unless and
until such holder fails to perfect or has effectively withdrawn or lost such
holder's rights to receive fair value under the WULPA. If, after the Effective
Time, any holder of Dissenting Units withdraws or loses (through a failure to
perfect or otherwise) such holder's right to receive fair value with respect to
the Dissenting Units, such Dissenting Units will automatically be converted into
the right to receive the Merger
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Consideration pursuant to Section 3.1 hereof. The Partnerships shall give the
Company prompt notice of any demands received by them for the receipt of fair
value for LP Units and, prior to the Effective Time, the Company will have the
right to participate in all negotiations and proceedings with respect to such
demands. Prior to the Effective Time, the Partnerships may not, except with the
Company's prior written consent, make any payment with respect to, or settle or
offer to settle, any such demands.
3.6 ISSUANCE OF CERTIFICATES FOR REIT SHARES
As soon as practicable after the Effective Time, the Exchange Agent will
advise the beneficial owners of LP Units of a Participating Partnership of the
effectiveness of the Merger and will distribute the Merger Consideration in
accordance with instructions given by such beneficial owners. None of the
Company, the Partnerships, the Surviving Corporation, the Exchange Agent or any
other person shall be liable to any former holder of LP Units or GP Interests
for any amount properly delivered to a public official pursuant to applicable
abandoned property, escheat or similar laws.
Any portion of the Exchange Fund (including the proceeds from any
investments thereof and any REIT Shares) that remains unclaimed by the former
partners of the Participating Partnerships six months after the Effective Time
shall be delivered to the Surviving Corporation. Any former partner of the
Participating Partnerships who has not theretofore complied with this Article
III shall thereafter look only to the Surviving Corporation for payment of the
applicable Merger Consideration and unpaid dividends and distributions payable
with respect thereto, in each case without any interest thereon.
3.7 TRANSFER OF UNITS
There will be no further registration of transfers of LP Units on the
Partnerships' records after the commencement of the Offers and until the Closing
(as defined in Section 6.1 hereof) or termination of this Agreement, except for
the transfer of LP Units to the Company pursuant to the Offers and custodial
transfers, intrafamily transfers, including transfers to trusts, transfers
pursuant to divorce decrees and transfers relating to deaths or settlements of
estates.
ARTICLE IV. REPRESENTATIONS AND WARRANTIES
4.1 REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIPS
For the purposes of inducing the Company to enter into this Agreement and to
consummate the Merger, each of the Partnerships severally represents and
warrants to the Company as follows with respect to itself and its Assets:
(a) ORGANIZATION. The Partnership is a limited partnership duly organized
and validly existing under the laws of the state of Washington. The Partnership
has provided the Company with a true and complete copy of its Amended and
Restated Agreement of Limited Partnership and all amendments thereto (as
amended, the "Partnership Agreement"). The Partnership has no direct or indirect
equitable or beneficial ownership interest in any other entity, except as may be
disclosed in the Partnership SEC Documents (as defined hereof).
(b) POWER AND AUTHORITY. The Partnership (i) has the authority to conduct
its business as currently conducted and to own and operate the properties that
it now owns and operates, (ii) is qualified to do business in all jurisdictions
in which such qualification is necessary, except where the failure to be so
qualified would not have a material adverse effect on the Partnership, and (iii)
has all requisite power, authority and legal right to enter into this Agreement
and to consummate the Merger. The execution and delivery of this Agreement by
the Partnership and, subject to the approval of this Agreement by the limited
partners of the Partnership, the consummation by the Partnership of the Merger
have been duly authorized by all necessary partnership action on the part of the
Partnership, and this Agreement is a legal, valid and binding obligation of the
Partnership, enforceable against the Partnership in accordance with its terms.
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(c) NO VIOLATIONS. Except to the extent that lender consents may be
required from mortgagees having liens against the Property and except for such
other consents as have been obtained or will be obtained prior to the Closing,
and assuming approval of this Agreement by the limited partners of the
Partnership, the execution and delivery of this Agreement do not, and the
consummation of the Merger and compliance with the provisions hereof will not,
result in any breach or violation of any (i) agreement to which the Partnership
is a party or by which it or any of its Assets may be bound, (ii) permit,
license or other governmental authorization applicable to the Partnership or its
Assets, or (iii) judgment, order, law, rule or regulation applicable to the
Partnership or its Assets, other than any such items that in the aggregate do
not have a material adverse effect on the Partnership's ability to perform its
obligations under this Agreement or a material adverse effect on the financial
condition of the Partnership.
(d) SEC DOCUMENTS. The Partnership has furnished and will continue to
furnish the Company with a true and complete copy of each report, schedule,
registration statement and definitive proxy statement filed by the Partnership
with the Commission since January 1, 1994 (the "Partnership SEC Documents"). The
Partnership SEC Documents furnished to the Company as of the date of this
Agreement are all the documents (other than preliminary material) that the
Partnership has been required to file with the Commission since such date. As of
their respective dates, the Partnership SEC Documents complied as to form in all
material respects with the requirements of the Securities Act of 1933, as
amended (the "Securities Act"), and the Exchange Act, as applicable, and the
applicable rules and regulations of the Commission thereunder, and none of the
Partnership SEC Documents contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading.
(e) FINANCIAL STATEMENTS. The financial statements of the Partnership
included in the Partnership SEC Documents (the "Partnership Financial
Statements") complied, as of the date of the applicable document, as to form in
all material respects with applicable accounting requirements and published
rules and regulations of the Commission with respect thereto, have been prepared
in accordance with generally accepted accounting principles, applied on a basis
consistent with prior periods (except as otherwise noted therein), and present
fairly the financial position and results of operations of the Partnership as of
their respective dates and for the periods presented therein (subject, in the
case of unaudited interim financial statements, to normal year-end adjustments).
(f) FULL DISCLOSURE; NO MISSTATEMENTS. The representations of the
Partnership contained in this Agreement do not contain any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements made herein not misleading, and none of the information supplied or
to be supplied by the Partnership for inclusion in the Offer Documents or
registration statement on Form S-4 provided for in Section 5.9 hereof (the "S-4
Registration Statement") or the Proxy Statement/Prospectus (as defined in
Section 5.9 hereof) contains any untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading. If at any time prior to the termination of the Offer or,
with respect to the S-4 Registration Statement or the Proxy
Statement/Prospectus, prior to the Closing Date (as defined in Section 6.1
hereof), any event relating to the Partnership should occur that is required to
be described in an amendment of or supplement to the Offer Documents, S-4
Registration Statement or the Proxy Statement/Prospectus, the Partnership
promptly shall inform the Company and assist in the preparation, filing and, if
necessary, dissemination of such amendment or supplement.
(g) NO DEFAULTS. The Partnership is not in default or violation of any
term, condition or provision of any agreement to which the Partnership is a
party or by which it or any of its Assets may be bound that would materially
interfere with the Partnership's participation in the Merger or that would
result in a material liability not reflected in the Partnership Financial
Statements.
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(h) ABSENCE OF LITIGATION. There is no suit, action or proceeding pending
or, to the Partnership's knowledge, threatened against the Partnership that
might materially adversely affect the Partnership's ability to perform this
Agreement or to consummate the transactions contemplated hereby.
(i) NO MATERIAL ADVERSE CHANGES. Except as disclosed in writing to the
Special Committee concurrently with the execution of this Agreement, there have
been no material adverse changes in the business, operations, properties, assets
or condition, financial or otherwise, of the Partnership from that set forth in
the Partnership's Annual Report on Form 10-K for the year ended December 31,
1995, as supplemented by the Partnership's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996, both as filed with the Commission.
(j) TITLE TO ASSETS. The Partnership has good and marketable title to the
assets reflected in the most recent balance sheet (the "Balance Sheet") included
in the Partnership Financial Statements and reflected in its Net Asset Value and
will hold good and marketable title to such assets, and any assets acquired by
the Partnership prior to the Effective Time, except for assets disposed of in
the ordinary course of business (which assets do not include any of the
Property) and except as the failure of the Partnership to have such good and
marketable title is not, in the aggregate, material to the Partnership. The
assets reflected on the Balance Sheet include the Property. Except as otherwise
disclosed in the Balance Sheet or related notes accompanying it, all the assets
referred to in the preceding sentence are owned free and clear of any and all
material adverse claims, security interests, charges or other encumbrances or
restrictions of every nature, except liens for current taxes not yet due and
payable or landlords' liens as provided for in the relevant leases, or by
applicable law.
(k) LIABILITIES OF THE PARTNERSHIP. The Partnership has no material
liabilities, contingent or otherwise, except to the extent reflected, reserved
against or provided for in the Balance Sheet, and except for any material
liabilities disclosed in writing to the Special Committee concurrently with the
execution of this Agreement or any other obligations incurred after the date of
the Balance Sheet in the ordinary course of business, which subsequently
incurred obligations are of an amount and nature as to be capable of being
discharged from the operations of the Partnership without requiring additional
equity or borrowing.
(l) PROPERTY.
(i) Materially complete and correct legal descriptions of the Property
have been delivered to the Company concurrently with the execution of this
Agreement.
(ii) All information provided by the Partnership to the Appraiser with
respect to the Property for use in preparing the appraisals of the Property
was true and correct in all material respects as of the date given.
(iii) Except as disclosed in writing to the Special Committee
concurrently with the execution of this Agreement, to the best knowledge of
those representatives and agents of the Partnership to whom notice should
have been given, there is no material violation of any law, ordinance, rule,
requirement, resolution, policy statement or regulation (including, without
limitation, those relating to land use, subdivision, zoning, environmental,
occupational health and safety, water, and building and fire codes) of any
governmental authority (collectively, "Governmental Regulations") applicable
to the construction, alteration, rehabilitation, maintenance, use, operation
or sale of any of the Property, which violation would have a material
adverse effect on the use of the Property. The Partnership has neither
received notice nor has knowledge that any governmental authority, or any
employee or agent thereof, considers the operations, use or ownership of any
of the Property to violate or have violated in a material manner any
Governmental Regulations, or that any investigation has been commenced or is
contemplated regarding such possible violation.
(iv) To the best knowledge of those representatives and agents of the
Partnership to whom notice should have been given, the Partnership has
neither received notice nor has knowledge of any plan or study of any
governmental authority that would materially adversely affect the use of
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the Property for its intended uses, or result in any public improvements
that will result in any material charge being levied against, or any
material lien assessed upon, all or any portion of such Property.
(v) Except as disclosed in writing to the Special Committee
concurrently with the execution of this Agreement, to the best knowledge of
those representatives and agents of the Partnership to whom notice should
have been given, there are no delinquent taxes, assessments, charges, debts,
liabilities, claims or obligations arising from the construction, design,
development, ownership, maintenance or operation of, or otherwise relating
to, the Property, which matters could give rise to any mechanics' or
materialmen's or other statutory or common-law lien against such Property or
any party thereof that, individually or in the aggregate, would have a
material adverse effect on the value of the Property, taken as a whole.
(vi) Except as disclosed in writing to the Special Committee
concurrently with the execution of this Agreement, to the best knowledge of
those representatives and agents of the Partnership to whom notice should
have been given or who, by virtue of his or her position, could be expected
to have knowledge of any of the following matters, (A) none of the Property,
which for purposes of this paragraph shall include, without limitation,
subsurface soil and ground water, contains any substance, including, without
limitation, any asbestos, formaldehyde, radioactive substance, hydrocarbons,
industrial solvents, flammables, explosives and any hazardous substance or
toxic material (collectively, "Hazardous Materials"), that could presently
or at any time in the future cause a material detriment to or materially
impair the value or beneficial use of the Property or constitute or cause a
health, safety or environmental hazard on or relating to the Property or to
any person who may enter onto the Property or require remediation at the
behest of any governmental agency, which health, safety or environmental
hazard or remediation could have a material adverse effect on the
Partnership; (B) there are no environmental conditions relating to any of
the Property giving rise to material liability, and the Property is in
compliance in all material respects with existing applicable federal, state
and local environmental laws and regulations; and (C) the Partnership has
not received notice that the ownership, operation, use and condition of any
of the Property is in violation of any federal, state or local law,
ordinance or regulation pertaining to industrial hygiene, Hazardous
Materials or environmental protection. To the best knowledge of the
Partnership, there is no proceeding or action pending or, to its actual
knowledge, threatened by any person or governmental agency regarding the
environmental condition of any of the Property.
(vii) The Partnership has not entered into any contracts for the sale
of all or any portion of the Property.
(m) TAXES. The Partnership has filed all federal, state and local tax
returns that it is required to file, has provided to its limited partners all
required Forms K-1 and such other tax forms as may be required by federal, state
or local authorities, and has no outstanding material liability for any federal,
state or local taxes or interest or penalties thereon, whether disputed or not,
except taxes disputed or not yet payable that have been provided for in
accordance with generally accepted accounting principles and are disclosed in
the Partnership Financial Statements; the Partnership is taxable as a
partnership (and not as an association taxable as a corporation) for federal and
applicable state income tax purposes.
4.2 REPRESENTATIONS AND WARRANTIES OF THE COMPANY
For the purposes of inducing each of the Partnerships to enter into this
Agreement and to consummate the Merger, the Company represents and warrants to
each Partnership as follows:
(a) ORGANIZATION; POWER AND AUTHORITY. The Company is duly organized,
validly existing and in good standing under the laws of the state of Delaware.
The Company (i) has the authority to conduct its business as currently conducted
and to own and operate the properties that it now owns and operates, (ii) is
qualified to do business in all jurisdictions in which such qualification is
necessary,
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except where the failure to be so qualified would not have a material adverse
effect on the Company, and (iii) has all requisite power, authority and legal
right to enter into this Agreement and to consummate the Merger. The execution
and delivery of this Agreement by the Company and the consummation by the
Company of the Merger have been duly authorized by all necessary corporate
action on the part of the Company, and this Agreement is a legal, valid and
binding obligation of the Company, enforceable against the Company in accordance
with its terms.
(b) CONSENTS. Except as expressly contemplated by this Agreement, no other
action is required to be taken by the Company to permit the execution, delivery
and performance of this Agreement, all other documents and certificates
expressly contemplated hereby, and the Merger, and no consent or approval of any
third party or governmental authority is or was required or appropriate in
connection with the execution of this Agreement, or to consummate the
transactions expressly contemplated hereunder, except such as have been obtained
or will be obtained prior to the Closing.
(c) NO VIOLATIONS. The execution and delivery of this Agreement do not,
and the consummation of the Merger and compliance with the provisions hereof
will not, result in any breach or violation of any (i) agreement (including,
without limitation, the organizational documents under which the Company is
organized) to which the Company is a party or by which it or any of its
properties may be bound, (ii) permit, license or other governmental
authorization applicable to the Company or its properties, or (iii) judgment,
order, law, rule or regulation applicable to the Company, other than any such
items that in the aggregate do not have a material adverse effect on the
Company's ability to perform its obligations under this Agreement or a material
adverse effect on the value of the Merger Consideration.
(d) CAPITALIZATION. The authorized capital stock of the Company consists
of (i) 120,000,000 REIT Shares, (ii) 500,000 shares of Class B Common Stock,
$.001 par value per share, (iii) 160,000,000 shares of Excess Stock, $.001 par
value per share, and (iv) 80,000,000 shares of Preferred Stock, $.001 par value
per share. All outstanding REIT Shares are duly authorized, validly issued,
fully paid and nonassessable, and no class of capital stock of the Company is
entitled to preemptive or cumulative voting rights. As of March 31, 1996,
23,046,517 REIT Shares, 154,605 shares of Class B Common Stock, no shares of
Excess Stock, and no shares of Preferred Stock were issued and outstanding.
(e) AUTHORIZATION OF REIT SHARES. Prior to the Effective Time, the Company
will have taken all necessary action to permit it to issue the number of REIT
Shares required to be issued pursuant to Article III hereof. Such REIT Shares
will, when issued pursuant to this Agreement, be duly authorized, validly
issued, fully paid and nonassessable, and no stockholder of the Company will
have any preemptive right of subscription or purchase in respect thereof. The
REIT Shares will, when issued pursuant to this Agreement, be registered under
the Securities Act and the Exchange Act, will be registered or exempt from
registration under all applicable state securities laws and will be listed for
quotation on the NYSE.
(f) SEC DOCUMENTS. The Company has furnished and will continue to furnish
the Partnerships with a true and complete copy of each report, schedule,
registration statement and definitive proxy statement filed by the Company with
the Commission since January 1, 1994 (the "Company SEC Documents"). The Company
SEC Documents furnished to the Partnerships as of the date of this Agreement are
all the documents (other than preliminary material) that the Company has been
required to file with the Commission since such date. As of their respective
dates, the Company SEC Documents complied as to form in all material respects
with the requirements of the Securities Act and the Exchange Act, as applicable,
and the applicable rules and regulations of the Commission thereunder, and none
of the Company SEC Documents contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(g) FINANCIAL STATEMENTS. The financial statements of the Company included
in the Company SEC Documents complied, as of the date of the applicable
document, as to form in all material respects with applicable accounting
requirements and published rules and regulations of the Commission with
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respect thereto, have been prepared in accordance with generally accepted
accounting principles, applied on a basis consistent with prior periods (except
as otherwise noted therein), and present fairly the financial position and
results of operations of the Company as of their respective dates and for the
periods presented therein (subject, in the case of unaudited interim financial
statements, to normal year-end adjustments).
(h) FULL DISCLOSURE; NO MISSTATEMENTS. The representations of the Company
contained in this Agreement do not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made
herein not misleading, and none of the information supplied or to be supplied by
the Company for inclusion or incorporation by reference in the S-4 Registration
Statement, the Offer Documents or the Proxy Statement/Prospectus relating to the
Company contains any untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
misleading. If at any time prior to the termination of the Offer or, with
respect to the S-4 Registration Statement or the Proxy Statement/Prospectus, the
Closing Date, any event relating to the Company should occur that is required to
be described in an amendment of or supplement to the Offer Documents or the
Proxy Statement/Prospectus, the Company promptly shall inform the Partnerships
and prepare, file and, if necessary, disseminate such amendment or supplement.
(i) ABSENCE OF LITIGATION. There is no suit, action or proceeding pending
or, to the Company's knowledge, threatened against the Company that might
materially adversely affect the Company's ability to perform this Agreement or
to consummate the transactions contemplated hereby.
(j) NO MATERIAL ADVERSE CHANGES. There have been no material adverse
changes in the business, operations, properties, assets or condition, financial
or otherwise, of the Company from that set forth in the Company's Annual Report
on Form 10-K for the year ended December 31, 1995, as supplemented by the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996,
both as filed with the Commission.
ARTICLE V. COVENANTS AND AGREEMENTS
During the period from the date of this Agreement and continuing until the
Closing Date or the termination of this Agreement, the Company and each of the
Partnerships agree to act in accordance with the following covenants:
5.1 ORDINARY COURSE; NO ACQUISITIONS OR DISPOSITIONS
Except as provided in Section 5.2 hereof, each Partnership shall carry on
its business in the ordinary course in substantially the same manner as
heretofore conducted and use all reasonable efforts to (a) preserve intact its
present business, organization and goodwill, (b) maintain all permits, licenses
and authorizations required by applicable laws, and (c) preserve its
relationships with customers, suppliers, lenders, lessors, governmental entities
and others having business or regulatory dealings with it. No Partnership shall
acquire or agree to acquire by any manner any business or business organization
or division thereof or otherwise acquire or agree to acquire any assets that are
material, individually or in the aggregate, to such Partnership, other than
high-quality, short-term investments made in the ordinary course of business. No
Partnership shall sell, lease or otherwise dispose of, or agree to sell, lease
or otherwise dispose of, any of its Assets, except in the ordinary course of
business and consistent with past practice, and except as required by law. Each
Partnership shall promptly notify the Company of any event or occurrence not in
the ordinary course of business or that may have a material adverse effect on
such Partnership's financial condition.
5.2 DISTRIBUTIONS
Each Partnership shall use its best efforts to manage its business,
including, but not limited to, suspending cash distributions to its partners if
the General Partner deems it advisable to do so, such that such Partnership's
Closing Net Asset Value (as defined in Section 5.2 hereof) will equal such
Partnership's Net Asset Value. Immediately prior to the Closing, each
Partnership will declare a cash
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distribution payable to those who are partners of the Partnership at such time
in an aggregate amount equal to the amount, if any, by which such Partnership's
Closing Net Asset Value exceeds its Net Asset Value. As soon as reasonably
practicable following the Closing, the Company, as the Surviving Corporation,
will take all actions necessary to transfer the amount necessary to pay such
distribution to Gemisys Corporation, the transfer and distribution agent for the
Partnership, for distribution in accordance with the terms of the Partnership
Agreement.
As used herein, "Closing Net Asset Value" means, with respect to each of the
Partnerships, (i) the sum of (a) the Appraised Value (b) the cost incurred to
the Closing Date of buildouts and unit conversions, if any, that were not
reflected in the Appraised Value and (c) the book values of the non-real estate
assets, except for amortizable assets, of the Partnership as of the Closing
Date, less (ii) the sum of (x) such Partnership's liabilities as of the Closing
Date, (y) the estimated cost remaining to be incurred, if any, as of the Closing
Date to complete the buildouts and unit conversions that were included in the
Appraised Value, and (z) such Partnership's Individual Transaction Expenses and
pro rata share of Shared Transaction Expenses (as such terms are defined in
Section 8.3(a) hereof).
5.3 AMENDMENT OF GOVERNING DOCUMENTS
The IDS2 and IDS3 Partnerships shall take all actions necessary to amend
their respective Partnership Agreements to add the following subsection to
Section 13.3(c) of those agreements, it being understood that the approval of
such amendment by limited partners will be a part of their approval of this
Agreement and the transactions contemplated hereby:
(iii) Notwithstanding any provision of this Agreement, the Partnership
may merge with and into Shurgard Storage Centers, Inc. (the "Company")
pursuant to, and consummate all other transactions contemplated by, the
terms of the Acquisition Agreement dated July 1, 1996, between the
Company, the Partnership, IDS/Shurgard Income Growth Partners L.P.,
IDS/Shurgard Income Growth Partners L.P. II and IDS/Shurgard Income
Growth Partners L.P. III.
Except as provided above, no Partnership shall amend or propose to amend any
of its organizational documents, including its Certificate of Limited
Partnership or Partnership Agreement, without the prior written consent of the
Company.
5.4 EXCLUSIVITY
No Partnership will, nor will it permit its partners (including any general
or limited partner of its General Partner), agents or other representatives
(including, without limitation, any investment banker, attorney or accountant
retained by it) to, directly or indirectly, initiate, solicit or encourage or,
except as required by law, including fiduciary duties required by law as
determined by the General Partner in good faith, engage in discussions or
negotiations with or provide any information to any entity or group (other than
the Company or an affiliate of the Company) concerning any acquisition proposal,
tender offer, exchange offer, merger, consolidation, sale of a substantial
amount of assets, or sale of securities or equity interests, or in connection
with a liquidation, dissolution or similar transaction involving such
Partnership. Each Partnership will notify the Company immediately if any such
inquiries or proposals are received by, any such information is requested from,
or any such negotiations or discussions are sought to be initiated or continued
with, the Partnership, and will keep the Company informed of the status and
terms of any such proposals and any such negotiations or discussions.
5.5 OTHER ACTIONS
The Partnerships and the Company shall not take or omit to take any action
that would result in any of the representations and warranties of the
Partnerships or the Company, respectively, made in or pursuant to this Agreement
becoming untrue or incomplete, in any of the covenants and agreements of the
Partnerships or the Company, respectively, being breached, or in any of the
conditions to the Closing not being satisfied.
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5.6 ADVISE OF CHANGES
Each Partnership promptly shall advise the Company in writing, and the
Company promptly shall advise the Partnerships in writing, of any change or
event that has made, or could be reasonably expected to make, untrue or
inaccurate any representation or warranty made by such party in or pursuant to
this Agreement or that has prevented or may prevent the performance by such
party of any covenant or agreement made in or pursuant to this Agreement.
5.7 MEETINGS OF LIMITED PARTNER
Each Partnership will take all action necessary in accordance with
applicable law and its Partnership Agreement to convene a meeting of its limited
partners as promptly as practicable to consider and vote upon approval of this
Agreement and the consummation of the Merger.
5.8 REGISTRATION AND LISTING OF REIT SHARES
The Company will use its best efforts to register the REIT Shares under the
Securities Act and to cause the REIT Shares to be listed for trading on the NYSE
upon official notice of issuance.
5.9 S-4 REGISTRATION STATEMENT AND PROXY STATEMENT/PROSPECTUS
The Company and the Partnerships will promptly prepare and file with the
Commission a preliminary proxy statement/prospectus in connection with the vote
of the limited partners of the Partnerships on the approval of this Agreement
and the consummation of the transactions contemplated hereby (such proxy
statement/prospectus, together with any amendments thereof or supplements
thereto, in each case in the form or forms to be mailed to the limited partners
of the Partnerships, being called herein the "Proxy Statement/Prospectus"). The
Company will, as promptly as practicable, prepare and file with the Commission
the S-4 Registration Statement, containing the Proxy Statement/Prospectus, in
connection with the registration under the Securities Act of the REIT Shares to
be issued in the Merger. The Company and the Partnerships will each use their
best efforts to have the S-4 Registration Statement declared effective by the
Commission as promptly as practicable, and also will take any other action
required to be taken under federal or state securities laws, and each of the
Partnerships will use its best efforts to cause the Proxy Statement/Prospectus
to be mailed to the record and beneficial owners of LP Units at the earliest
practicable date. The Company agrees that (a) if at any time prior to the
Effective Time any event with respect to the Company should occur that is
required to be described in an amendment of, or a supplement to, the Proxy
Statement/ Prospectus or the S-4 Registration Statement, such event shall be so
described, and such amendment or supplement shall be promptly filed with the
Commission and, as required by law, the Partnership will cause the amendment or
supplement to be disseminated to the record and beneficial owners of LP Units
and (b) the S-4 Registration Statement and the Proxy Statement/Prospectus will
(with respect to the Company) comply as to form in all material respects with
the requirements of the federal securities laws. Each of the Partnerships agrees
that (i) if at any time prior to the Effective Time any event with respect to
the Partnership should occur that is required to be described in an amendment
of, or a supplement to, the Proxy Statement/Prospectus or the S-4 Registration
Statement, such event shall be so described, and such amendment or supplement
shall be promptly filed with the Commission and, as required by law,
disseminated to the record and beneficial owners of LP Units and (ii) the Proxy
Statement/Prospectus will (with respect to the Partnership) comply as to form in
all material respects with the requirements of the federal securities laws. The
Proxy Statement/Prospectus shall include the recommendation and consent
described in Section 2.1 of the General Partner Undertaking.
5.10 CONSENTS AND APPROVALS
The Company and the Partnerships shall each use all reasonable efforts to
take, or cause to be taken, all actions and to do, or cause to be done, all
other things necessary, proper or advisable to consummate and make effective as
promptly as practicable the transactions contemplated by this Agreement, to
obtain in a timely manner all necessary consents, waivers, approvals,
authorizations and orders and to make all necessary registrations and filings,
and otherwise to satisfy or cause to be satisfied all conditions precedent to
its obligations under this Agreement.
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5.11 LIMITATION ON NUMBER OF REIT SHARES ISSUED
Notwithstanding any other provision of this Agreement, in the event that the
payment of Merger Consideration in the Merger would result in the issuance by
the Company of more than 20% of the total number of REIT Shares then
outstanding, then the Company may elect to pay cash in lieu of such REIT Shares
in excess of 20% of the total number of REIT Shares then outstanding (with the
cash amount to be paid in lieu of such REIT Shares to be based on the REIT Share
Price), and such cash in lieu of REIT Shares shall, to the extent reasonably
practicable, be allocated proportionately to all partners in the Partnerships
receiving Merger Consideration.
ARTICLE VI. CLOSING
6.1 CLOSING DATE
The consummation of the transactions contemplated hereby (the "Closing")
shall be held within five business days of the satisfaction or waiver of the
conditions to closing set forth in Article VII hereof. The Closing shall be held
at the offices of Perkins Coie, 1201 Third Avenue, 40th Floor, Seattle,
Washington, or at such other place as may be agreed upon in writing by the
Participating Partnerships and the Company. The date and hour of the Closing are
referred to as the "Closing Date." At the Closing each of the parties shall take
all such action and deliver all such documents, instruments, certificates and
other items as may be required under this Agreement or otherwise in order to
perform or fulfill all covenants, conditions and agreements on its part to be
performed or fulfilled on or prior to the Closing Date and to cause all
conditions precedent to the other parties' obligations under this Agreement to
be satisfied in full.
6.2 ADDITIONAL CLOSINGS
Notwithstanding any other provision of this Agreement, if the conditions
precedent to Closing set forth in Article VII hereof have been satisfied or
waived with respect to the Closing of this Agreement as to one or two
Participating Partnerships, this Agreement may be closed with respect to such
Participating Partnership(s) and, in the event the conditions precedent to
Closing set forth in Article VII hereof are subsequently satisfied or waived
with respect to any additional Participating Partnership(s), there may be an
additional Closing or Closings with respect to such Participating
Partnership(s). All references herein to the Closing and the Closing Date shall
mean the original Closing or such additional Closing(s), as applicable, and all
references herein to Effective Time shall mean the Effective Time of the Merger
of the applicable Participating Partnership; provided, however, that the
determination of the amount of Shared Transaction Expenses pursuant to Section
8.3 hereof shall be made prior to the initial Closing and shall not be further
adjusted at any subsequent Closing.
6.3 FURTHER ACTS
If at any time after the Closing Date any further action by any of the
parties to this Agreement is necessary or desirable to carry out the purposes of
this Agreement and/or to vest in the Company full title to all Assets and rights
of the Participating Partnerships, such party shall take all such necessary or
desirable action or use its best efforts to cause such action to be taken.
ARTICLE VII. CONDITIONS
The respective obligations of the parties hereto to consummate the Merger
pursuant to the terms of this Agreement are subject to satisfaction of the
following conditions precedent on or prior to the Closing Date. In the event
that one or more of these conditions are not satisfied on or prior to the
Closing Date, the party or parties whose obligations hereunder are subject to
the satisfaction of such condition or conditions may either elect to terminate
this Agreement or waive the satisfaction of such condition. The consummation of
the Merger as to any Partnership is not conditioned upon the consummation of the
Merger as to any other Partnership.
7.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS
The respective obligations of each party to consummate the Mergers are
subject to the fulfillment on or prior to the Closing Date of the following
conditions:
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(a) APPROVAL OF LIMITED PARTNERS. This Agreement and the consummation of
the Merger shall have been duly approved by the requisite vote of the limited
partners of the Partnership in accordance with the applicable provisions of its
Partnership Agreement and the WULPA.
(b) ABSENCE OF INJUNCTIONS. No injunctions relating to the transactions
contemplated by this Agreement or any of the parties hereto that would have a
material adverse effect on the Company or on the business or Property of the
Partnerships, taken as a whole or individually, or that would prevent
consummation of the Merger, shall have been issued and remain outstanding.
(c) EFFECTIVENESS OF S-4 REGISTRATION STATEMENT. The S-4 Registration
Statement shall have been declared effective by the Commission under the
Securities Act. No stop order suspending the effectiveness of the S-4
Registration Statement shall have been issued by the Commission and no
proceeding for that purpose and no similar proceeding in respect of the Proxy
Statement/Prospectus shall have been initiated or threatened by the Commission.
(d) LISTING OF REIT SHARES. The REIT Shares issuable in the Merger shall
have been authorized for listing on the NYSE upon official notice of issuance.
7.2 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY
The obligation of the Company to consummate the Merger as to each
Partnership shall be subject to the fulfillment on or prior to the Closing Date
of the following conditions, unless waived in writing by the Company:
(a) FAIRNESS OPINION. The Company shall have received an opinion from
Alex. Brown & Sons Incorporated as to the fairness to the Company, from a
financial point of view, of the Offer Prices and the Merger Consideration.
(b) CLOSING NET ASSET VALUE. The Company shall have received a certificate
from the General Partner dated the Closing Date certifying that the Closing Net
Asset Value of each Partnership is no less than its Net Asset Value of the
Partnership.
(c) ABSENCE OF ADVERSE CHANGE. Subsequent to the date hereof, there has
not been any material adverse change in the Partnership's ability to consummate
the Merger, or in the Partnership's business, operations, properties, assets or
condition, financial or otherwise.
(d) REPRESENTATIONS AND WARRANTIES TRUE AS OF BOTH PRESENT DATE AND CLOSING
DATE. The representations and warranties of the Partnership contained herein
shall be true in all material respects as of the date of this Agreement and on
the Closing Date.
(e) COMPLIANCE WITH COVENANTS. The Partnership shall have performed or
complied with in all material respects all obligations, agreements and covenants
contained in this Agreement to be performed and complied with by it on or prior
to the Closing Date.
(f) THIRD-PARTY CONSENTS. All necessary consents and approvals from third
parties to the transfers, conveyances and transactions set forth herein shall
have been obtained.
(g) OPINION. The Company shall have received an opinion from counsel to
the Partnership in the form attached hereto as Exhibit B.
(h) ACCOUNTANT'S LETTER. The Special Committee shall have received from
Deloitte & Touche LLP a letter, in form and substance satisfactory to the
Special Committee, acting in good faith, applying certain agreed-upon procedures
to designated information contained in the S-4 Registration Statement and the
Offer Documents.
7.3 CONDITIONS TO THE OBLIGATIONS OF THE PARTNERSHIPS
The obligation of each of the Partnerships to consummate the Merger is
subject to the fulfillment on or prior to the Closing Date of the following
conditions, unless waived in writing by the applicable Partnership:
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(a) FAIRNESS OPINION. The Partnership shall have received opinions from
Robert A. Stanger & Co., Inc. as to the fairness to the limited partners of the
Partnership, from a financial point of view, of the Offer Price and the Merger
Consideration.
(b) ABSENCE OF ADVERSE CHANGE. Subsequent to the date hereof, there has
not been any material adverse change in the Company's ability to pay the Merger
Consideration, or in the Company's business, operations, properties, assets or
condition, financial or otherwise.
(c) REPRESENTATIONS AND WARRANTIES TRUE AS OF BOTH PRESENT DATE AND CLOSING
DATE. The representations and warranties of the Company contained herein shall
be true in all material respects as of the date of this Agreement and on the
Closing Date.
(d) COMPLIANCE WITH COVENANTS. The Company shall have performed or
complied with in all material respects all obligations, agreements and covenants
contained in this Agreement to be performed and complied with by it on or prior
to the Closing Date.
(e) THIRD-PARTY CONSENTS. All necessary consents and approvals from third
parties to the transfers, conveyances and transactions set forth herein shall
have been obtained.
(f) OPINION. The Partnership shall have received an opinion from special
counsel to the Company in the form attached hereto as Exhibit C.
ARTICLE VIII. TERMINATION AND WAIVER
8.1 TERMINATION
With respect to any Partnership, this Agreement may be terminated at any
time prior to the Effective Time, notwithstanding approval thereof by the
limited partners of such Partnership:
(a) by mutual consent duly authorized by the Board of Directors of the
Company and the General Partner of the Partnership; or
(b) by either the Company or the Partnership if the Merger has not been
consummated by March 31, 1997, or such later date as mutually agreed upon by the
parties; provided, however, that the right to terminate this Agreement under
this Section 8.1(b) shall not be available to any party whose failure to fulfill
any obligation under this Agreement has been the cause of or resulted in the
failure of such Merger to occur on or before such date; or
(c) by either the Company or the Partnership if a court of competent
jurisdiction or governmental, regulatory or administrative agency or commission
shall have issued a nonappealable final order, decree or ruling or taken any
other action having the effect of permanently restraining, enjoining or
otherwise prohibiting the Merger between the Company and the Partnership;
provided, however, that the right to terminate this Agreement under this Section
8.1(c) shall not be available to any party who has not complied with its
obligations under Sections 5.9 and 5.10 hereof and such noncompliance materially
contributed to the issuance of any such order, decree or ruling or the taking of
such action; or
(d) by either the Company or the Partnership if the requisite vote of the
limited partners of the Partnership shall not have been obtained by March 31,
1997; or
(e) by the Company if (i) the General Partner of the Partnership shall
withdraw or change its approval of this Agreement or the General Partner
Recommendation in a manner determined by the Company in good faith to be adverse
to the Company or shall have resolved to do so; or (ii) the General Partner of
the Partnership, shall have recommended to the limited partners of the
Partnership an Alternative Transaction (as defined in Section 8.3(c) hereof); or
(iii) any person (other than the Company or an affiliate of the Company) shall
have acquired voting rights to, or the right to acquire voting rights to, or any
"group" (as such term is defined in Section 14(d) of the Exchange Act and the
rules and regulations promulgated thereunder) shall have been formed which has
voting rights to, or
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the right to acquire voting rights to, 20% or more of the then-outstanding LP
Units of such Partnership; or (iv) if the REIT Share Price, without taking into
account the application of the REIT Share Price Range, exceeds $28.50; or
(f) by the Company or the Partnership if (i) any representation or warranty
of the Partnership or the Company, respectively, set forth in this Agreement
shall be materially untrue when made or shall become materially untrue or (ii)
upon a breach of any covenant or agreement on the part of the Partnership or the
Company, respectively, set forth in this Agreement, such that the conditions set
forth in Section 7.2(e) or 7.3(d) hereof, as the case may be, would not be
satisfied (either (i) or (ii) above being a "Terminating Breach"); provided,
however, that if such Terminating Breach is curable prior to March 31, 1997 by
the Company or the Partnership, as the case may be, through the exercise of its
reasonable best efforts and for so long as the Company or the Partnership, as
the case may be, continues to exercise such reasonable best efforts, neither the
Partnership nor the Company, respectively, may terminate this Agreement under
this Section 8.1(f); or
(g) by the Partnership or the Company if the Partnership enters into a
definitive agreement accepting an Alternative Transaction; or
(h) by the Partnership if the REIT Share Price, without taking into account
the application of the REIT Share Price Range, is less the $21.50 and the
Company has not agreed to pay the Additional Consideration in accordance with
Section 2.2 of the General Partner Undertaking.
The right of any party hereto to terminate this Agreement pursuant to this
Section 8.1 shall remain operative and in full force and effect regardless of
any investigation made by or on behalf of any party hereto, any person
controlling any such party or any of their respective officers, directors,
partners or stockholders, whether prior to or after the execution of this
Agreement.
8.2 EFFECT OF TERMINATION
In the event of termination of this Agreement as provided in Section 8.1
hereof, this Agreement shall become void and there shall be no liability or
obligation on the part of any party hereto or its respective affiliates,
partners, officers, directors or stockholders except (a) for the provisions of
Section 1.3(d) (if, and only if, an Offer has been consummated and the Company
has been admitted as a limited partner of the applicable Partnership with
respect to the LP Units purchased in the Offer) and Section 8.3 hereof, which
provisions shall survive the termination of this Agreement, and (b) to the
extent that such termination results from the willful breach of a party hereto
of any of its representations, warranties, covenants or agreements made in or
pursuant to this Agreement.
8.3 FEES AND EXPENSES
(a) The costs and expenses that have been and will be incurred by the
Partnerships and the Company in connection with the preparation and negotiation
of this Agreement, the making of the Offers and the solicitation of the approval
of the limited partners of each of the Partnerships to the Merger, except those
costs and expenses identified below as "Individual Transaction Expenses" will be
shared by the Partnerships and the Company (the "Shared Transaction Expenses").
The Shared Transaction Expenses include, without limitation, accounting fees and
expenses, filing, printing and mailing costs of the Offer Documents, the S-4
Registration Statement, the Proxy Statement/Prospectus and other soliciting
materials, proxy solicitation fees, depositary fees and closing costs. Except as
otherwise provided in this Section 8.3, the Shared Transaction Expenses will be
shared by the Company and the Partnerships as follows: (a) 50% of the Shared
Transaction Expenses will be borne by the Company and (b) 50% of the Shared
Transaction Expenses will be borne by the Partnerships, with the amount of
Shared Transaction Expenses to be borne by the Partnerships to be allocated to
each Partnership pro rata based on its relative Net Asset Value. "Individual
Transaction Expenses" consist of (i) legal fees and expenses; (ii) fees and
expenses of investment bankers and other financial advisors; (iii) the cost of
the Partnerships' real estate portfolio appraisals and (iv) the transfer fees
payable by the Company for the LP Units acquired through the Offers. Individual
Transaction
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Expenses that are incurred by the Company will be borne by the Company.
Individual Transaction Expenses that are incurred by the Partnerships will be
allocated to each Partnership pro rata based on the relative Net Asset Value of
each Partnership.
The Partnerships and the Company agree to contribute their share of the
Shared Transaction Expenses to the party that has incurred such Shared
Transaction Expenses as they are incurred if requested by the Other Party. In
the event that the amount of such Shared Transaction Expenses is not finally
determined prior to the Closing, the parties hereto will agree on a reasonable
estimate of the final amount of such Shared Transaction Expenses, and such
estimated amount, together with the amount of expenses already incurred, will be
the total Shared Transaction Expenses. The Company shall pay to each of the
Partnerships, or each of the Partnerships shall pay to the Company or shall
accrue to the extent not already accrued as of the Closing Date, as the case may
be, its allocated portion of Shared Transaction Expenses that have not already
been paid, in full satisfaction of its obligations under this Section 8.3. No
adjustments will be made following the Closing if the total amount of the Shared
Transaction Expenses estimated by the parties hereto prior to the Closing is
different from the amount actually incurred.
(b) Except for IDS1, as to whom this Section 8.3(b) is not applicable, a
Partnership shall pay the Company a pro rata portion (based on such
Partnership's relative Net Asset Value, taking into account all three
Partnerships) of the Shared Transaction Expenses and Individual Transaction
Expenses that would otherwise be borne by the Company pursuant to Section 8.3(a)
hereof, upon the first to occur of any of the following events:
(i) the termination of this Agreement by the Company or the Partnership
pursuant to Section 8.1(d) hereof or the termination of this Agreement by
the Company pursuant to Section 8.1(f) hereof and, in either such case, the
Partnership has furnished information to, or entered into discussions or
negotiations with, any person or entity with respect to an Alternative
Transaction and the General Partner Recommendation shall not have been
reaffirmed to the limited partners of the Partnership by the date of the
meeting of limited partners and remain effective on that date; or
(ii) the termination of this Agreement by the Company pursuant to
Section 8.1(e)(i), (ii), or (iii) hereof; or
(iii) the termination of this Agreement by the Partnership or the
Company pursuant to Section 8.1(g) hereof.
(c) "Alternative Transaction" means any (i) transaction pursuant to which
any person or group of persons other than the Company or any affiliate of the
Company (a "Third Party") acquires or would acquire more than 25% of the
outstanding LP Units of the Partnership, whether from the Partnership or
pursuant to a tender offer or exchange offer or otherwise, (ii) merger or other
business combination involving the Partnership pursuant to which any Third Party
acquires more than 25% of the LP Units or other equity securities of the
Partnership or the entity surviving such merger or business combination, or
(iii) any other transaction pursuant to which any Third Party acquires or would
acquire control of the assets of the Partnership having a fair market value (as
determined by the General Partner of the Partnership in good faith) equal to
more than 25% of the fair market value of all the assets of the Partnership
immediately prior to such transaction.
(d) In the event of the termination of this Agreement by the Company or the
Partnership pursuant to Section 8.1(d) hereof following the vote of limited
partners of the Partnership and if Section 8.3(b)(i) hereof is not applicable,
then the Partnership shall bear a percentage of the Shared Merger Expenses that
the Partnership would otherwise have borne pursuant to Section 8.3(a) hereof
equal to the percentage of outstanding LP Units of the Partnership that were
voted in favor of the Merger. Any Shared Merger Expenses not paid by a
Partnership pursuant to this paragraph shall be paid by the Company (and not
paid by the other Partnerships).
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8.4 EXTENSION; WAIVER
At any time prior to the Closing, the parties hereto may, to the extent
legally allowed, (a) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties of the other parties hereto
contained herein or made in connection herewith, and (c) waive compliance with
any of the agreements of the other parties hereto contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party.
8.5 NO SURVIVAL OF REPRESENTATIONS AND WARRANTIES
None of the representations and warranties in this Agreement shall survive
the Closing Date.
ARTICLE IX. MISCELLANEOUS
9.1 ASSIGNMENT OF CONTRACT
The Company may not assign its rights under this Agreement without the
consent of the applicable Partnership. None of the Partnerships may assign their
rights under this Agreement.
9.2 RISK OF LOSS
(a) Risk of loss or damage to the Assets by condemnation, eminent domain or
similar proceedings (or deed in lieu thereof), or by fire or any other casualty,
from the date hereof through the Effective Time will be on the Partnership
owning such Assets and thereafter will be on the Company.
(b) In the event of loss or damage to the Assets that occurs prior to the
Effective Time, if the Partnership elects not to or is unable to effect a timely
cure of such loss or damage prior to Closing, the monetary value of such loss or
damage shall be reflected on the Closing Balance Sheet and if, as of the
Effective Time, the reduction in the Partnership's Closing Net Asset Value
resulting from such loss or damage is not offset by an increase in other Assets
of the Partnership (including insurance proceeds payable with respect to such
loss or damage or condemnation awards received) to the extent necessary to
satisfy the condition to Closing set forth in Section 7.2(b) hereof, the Company
may, at its option, elect to terminate this Agreement as to such Partnership, or
the Company may elect to extend the term of this Agreement and resolicit the
limited partners of such Partnership with respect to participation in the Merger
with the Net Asset Value of the Partnership suffering such loss or damage
adjusted to reflect such loss or damage.
9.3 ENTIRE AGREEMENT; MODIFICATIONS
This Agreement, together with the General Partner Undertaking, embodies and
constitutes the entire understanding between the parties with respect to the
transactions contemplated herein, and all prior or contemporaneous agreements,
understandings, representations and statements, oral or written, are merged into
this Agreement. Neither this Agreement, the General Partner Undertaking nor any
provision hereof or thereof may be waived, modified, amended, discharged or
terminated except by an instrument in writing signed by the party against which
the enforcement of such waiver, modification, amendment, discharge or
termination is sought, and then only to the extent set forth in such instrument.
9.4 NOTICES
All notices, demands or other writings in this Agreement provided to be
given or made or sent, or which may be given or made or sent, by either party
hereto to the other may be given personally or may be delivered by depositing
the same in the U.S. mail, certified, return receipt requested, postage prepaid
or by delivering the same to an air courier service, postage prepaid, properly
addressed and sent to the address of such party as set forth below, or such
other address as either party may from
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time to time designate by written notice to the other. Notice given by mail
shall be considered effective upon the expiration of five business days after
deposit. Notice given in any other manner shall be effective only if and when
received by the addressee.
<TABLE>
<S> <C>
To the Company: Shurgard Storage Centers, Inc.
Attn: Harrell Beck
1201 Third Avenue, Suite 2200
Seattle, Washington 98101
with a copy to: Latham & Watkins
Attn: Scott R. Haber
505 Montgomery Street, 19th Floor
San Francisco, California 94111
To the Partnerships: Shurgard Associates L.P.
Shurgard Associates L.P. II
Shurgard Associates L.P. III
Attn: Charles K. Barbo
1201 Third Avenue, Suite 2200
Seattle, Washington 98101
with a copy to: Perkins Coie
Attn: Linda A. Schoemaker
1201 Third Avenue, 40th Floor
Seattle, Washington 98101-3099
</TABLE>
9.5 INTERPRETATION
Words of any gender used in this Agreement shall be held and construed to
include any other gender, and words of a singular number shall be held to
include the plural and vice versa, unless the context requires otherwise.
9.6 CAPTIONS
The captions used in this Agreement are for convenience only and shall not
be deemed to construe or to limit the meaning of the language of this Agreement.
9.7 MULTIPLE COUNTERPARTS
This Agreement may be executed in any number of identical counterparts. If
so executed, each of such counterparts is to be deemed an original for all
purposes, and all such counterparts shall collectively constitute one agreement,
but in making proof of this Agreement it shall not be necessary to produce or
account for more than one such counterpart.
9.8 BINDING EFFECT
Subject to the restrictions on assignment contained in Section 9.1 hereof,
this Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective heirs, legal representatives, successors and
assigns.
9.9 ATTORNEYS' FEES
Subject to the requirements of Section 9.11 hereof, should any party hereto
employ an attorney or attorneys to enforce any of the provisions hereof or to
protect its interest in any manner arising under this Agreement, or to recover
damages for the breach hereof, the nonprevailing party or parties in any action
pursued in courts of competent jurisdiction (the finality of which action is not
legally contested) agrees to pay to the prevailing party or parties all
reasonable costs, damages and expenses, including attorneys' fees, expended or
incurred in connection therewith; provided, however, that if more than one item
is disputed and the final decision is against each party as to one or more of
the disputed items, then such costs, expenses and attorneys' fees shall be
apportioned in accordance with the monetary values of the items decided against
each party.
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9.10 NO WAIVER; SEVERABILITY
The failure of any party hereto to enforce at any time any of the provisions
of this Agreement shall in no way be construed to be a waiver of any such
provision, and shall in no way affect the validity of this Agreement or any part
hereof or the right of any party thereafter to enforce each and every such
provision. No waiver of any breach of this Agreement shall be held to be a
waiver of any other or subsequent breach. If any provision of this Agreement, or
the application thereof to any person or circumstances shall, for any reason and
to any extent, be invalid or unenforceable, but the extent of the invalidity or
unenforceability does not destroy the basis of the bargain between the parties
as contained herein, the remainder of this Agreement and the application of such
provision to other persons or circumstances shall not be affected thereby but
rather shall be enforced to the greatest extent permitted by law.
9.11 NO JOINT AND SEVERAL LIABILITY
If one of the Partnerships defaults under, or is in breach of, any of its
representations, warranties or covenants contained in this Agreement, such
Partnership shall be accountable to the Company and shall be liable for the
damages caused by such default or breach as provided in this Agreement. Each
Partnership hereunder has undertaken obligations and made representations,
warranties, disclosures and covenants herein and in and pursuant to the exhibits
hereto solely with respect to itself and the Property owned by it. Nothing
contained herein, however, is intended to make any of the Partnerships jointly
and severally liable for the default or breach by any of the other Partnerships,
and with respect to any such default and breach such shall be solely the
obligation and responsibility of the Partnership responsible for the default or
breach.
9.12 APPLICABLE LAW
This Agreement shall be governed by and construed in accordance with the
laws of the state of Washington.
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IN WITNESS WHEREOF, this Agreement has been executed by each of the parties
as of the date first set forth above.
COMPANY:
SHURGARD STORAGE CENTERS, INC.
By /s/_HARRELL BECK___________________
Harrell Beck, Chief Financial
Officer
PARTNERSHIPS:
IDS/SHURGARD INCOME GROWTH PARTNERS
L.P.
By Shurgard Associates L.P.
Its General Partner
By /s/_CHARLES K. BARBO_______________
Charles K. Barbo,
General Partner
/s/_ARTHUR W. BUERK_________________
Arthur W. Buerk,
General Partner
Shurgard General Partner, Inc.
By /s/_CHARLES K. BARBO_______________
Charles K. Barbo, President
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IDS/SHURGARD INCOME GROWTH PARTNERS
L.P. II
By Shurgard Associates L.P. II
Its General Partner
By /s/_CHARLES K. BARBO_______________
Charles K. Barbo,
General Partner
/s/_ARTHUR W. BUERK_________________
Arthur W. Buerk,
General Partner
Shurgard General Partner, Inc.
By /s/_CHARLES K. BARBO_______________
Charles K. Barbo, President
IDS/SHURGARD INCOME GROWTH PARTNERS
L.P. III
By Shurgard Associates L.P. III
Its General Partner
By /s/_CHARLES K. BARBO_______________
Charles K. Barbo,
General Partner
/s/_ARTHUR W. BUERK_________________
Arthur W. Buerk,
General Partner
Shurgard General Partner, Inc.
By /s/_CHARLES K. BARBO_______________
Charles K. Barbo, President
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EXHIBIT A TO ACQUISITION AGREEMENT
GENERAL PARTNER UNDERTAKING
This GENERAL PARTNER UNDERTAKING (this "Agreement") is entered into as of
July 1, 1996 by Shurgard Associates L.P. ("GP1"), the general partner of
IDS/Shurgard Income Growth Partners L.P. ("IDS1"), Shurgard Associates L.P. II
("GP2"), the general partner of IDS/Shurgard Income Growth Partners L.P. II
("IDS2"), and Shurgard Associates L.P. III ("GP3"), the general partner of
IDS/Shurgard Income Growth Partners L.P. III ("IDS3"), and Shurgard Storage
Centers, Inc., a Delaware corporation (the "Company"). GP1, GP2 and GP3 are
individually referred to herein as a "General Partner" and collectively as the
"General Partners." IDS1, IDS2 and IDS3 are individually referred to herein as a
"Partnership" and collectively as the "Partnerships."
RECITALS
A. Concurrently with the execution of this Agreement, the Partnerships and
the Company are entering into an Acquisition Agreement, dated as of July 1, 1996
(the "Acquisition Agreement"), pursuant to which (i) the Company will commence a
tender offer to purchase up to a specified percentage of the limited partnership
units of each of the Partnerships (each, an "Offer" and together the "Offers")
and (ii) the Partnerships will merge with and into the Company upon the
satisfaction or waiver of the conditions to closing contained therein (each, a
"Merger" and together, the "Mergers").
B. The General Partners believe that it is in the best interests of the
Partnerships and their limited partners for the Partnerships to enter into and
consummate the Acquisition Agreement and the General Partners intend to
recommend to the limited partners of the Partnerships that they vote for
approval of the Acquisition Agreement.
C. Capitalized terms used but not defined in this Agreement have the
meanings assigned to such terms in the Acquisition Agreement.
AGREEMENTS
NOW, THEREFORE, in consideration of the mutual representations, warranties,
covenants and agreements set forth herein, the parties hereto agree as follows:
ARTICLE I. THE OFFERS
1.1 CONSENT TO OFFERS
The General Partners hereby consent to the making of the Offers.
1.2 GENERAL PARTNER FAIRNESS DETERMINATION AND RECOMMENDATION
With respect to each Offer, the Offer Documents and the Schedules 14D-9 or
the Schedules 13E-3 shall contain, to the extent applicable, (a) the statement
by the General Partner that the terms of the Offers and the Merger are fair to
limited partners and (b) the recommendation by the General Partner that holders
of LP Units who desire immediate liquidity tender their LP Units pursuant to the
Offer and that all other holders of LP Units retain their LP Units and
participate in the Merger.
1.3 ADMISSION OF COMPANY AS SUBSTITUTE LIMITED PARTNER
Each of the General Partners agrees to take such actions as are required
under the applicable Partnership Agreement to effect the admission of the
Company as a limited partner of the Partnership with respect to all LP Units
acquired by it pursuant to the Offer in accordance with the terms of the
Partnership Agreement.
ARTICLE II. THE MERGERS
2.1 MEETINGS OF LIMITED PARTNERS; RECOMMENDATION OF GENERAL PARTNERS
Each General Partner will take all action necessary in accordance with
applicable law and its Partnership's Partnership Agreement to convene a meeting
of its limited partners as promptly as
A(A-1)
<PAGE>
practicable to consider and vote upon approval of the Acquisition Agreement and
consummation of the transactions contemplated thereby. Except as may be required
for the discharge of their fiduciary duties or as otherwise required by law, (a)
the General Partner shall recommend that the limited partners vote in favor of
approval of the Acquisition Agreement and consummation of the transactions
contemplated thereby and shall solicit the vote of the limited partners of such
Partnership in favor of such approval and take all other action necessary or
advisable to secure the vote of such limited partners in favor of such approval
and (b) IDS Partnership Services Corporation ("IPSC") will consent to the
transactions contemplated by the Acquisition Agreement.
2.2 WITHDRAWAL OF RECOMMENDATION IF REIT SHARE PRICE IS LESS THAN $21.50
It is understood that the General Partner of each Partnership may elect to
withdraw or change its recommendation that limited partners vote in favor of
this Agreement if the REIT Share Price calculated without regard to the REIT
Share Price Range in respect of the meeting (the "Meeting") at which limited
partners are expected to vote on the Merger is less than $21.50. Before it does
so, however, the General Partner shall notify the Company of its intent to
withdraw its recommendation not later than the end of the second business day
following the day the REIT Share Price is determined, and the General Partner
shall postpone or adjourn the meeting for such period or periods of time, not to
exceed ten business days, as the Company may reasonably request. The General
Partner shall not withdraw its recommendation if the Company agrees to pay the
Additional Consideration at least two business days prior to the date of such
postponed or adjourned meeting.
ARTICLE III. OTHER AGREEMENTS
3.1 STANDSTILL
The Company agrees that if it is admitted as a substitute limited partner in
a Partnership and except as otherwise contemplated by this Agreement, it will
not, directly or indirectly, without the prior written consent of a majority of
the general partners of the General Partner of that Partnership (a) acquire any
additional LP Units of that Partnership, (b) propose any merger or other
business combination involving that Partnership, or (c) propose any other
transaction pursuant to which it would control or acquire any of the assets of
that Partnership.
3.2 EXCLUSIVITY
Until the termination of the Acquisition Agreement or the Closing of the
Merger, no General Partner will, nor will it permit its partners (including any
general or limited partner), agents or other representatives (including, without
limitation, any investment banker, attorney or accountant retained by it) to,
directly or indirectly, initiate, solicit or encourage or, except as required by
law, including fiduciary duties required by law as determined by the General
Partner in good faith, engage in discussions or negotiations with or provide any
information to any entity or group (other than the Company or an affiliate of
the Company) concerning any acquisition proposal, tender offer, exchange offer,
merger, consolidation, sale of a substantial amount of assets, or sale of
securities or equity interests, or in connection with a liquidation, dissolution
or similar transaction involving such Partnership. Each General Partner will
notify the Company immediately if any such inquiries or proposals are received
by, any such information is requested from, or any such negotiations or
discussions are sought to be initiated or continued with, the Partnership, and
will keep the Company informed of the status and terms of any such proposals and
any such negotiations or discussions.
3.3 INDEMNIFICATION
From and after the Effective Time, the Company will indemnify and hold
harmless the General Partner of each of the Partnerships, that shall have merged
with and into the Company pursuant to a Merger and its general and limited
partners to the same extent that such persons are entitled to be indemnified by
the Partnership under its Partnership Agreement.
A(A-2)
<PAGE>
ARTICLE IV. MISCELLANEOUS
4.1 NOTICES
All notices, demands or other writings in this Agreement provided to be
given or made or sent, or which may be given or made or sent, by either party
hereto to the other may be given personally or may be delivered by depositing
the same in the U.S. mail, certified, return receipt requested, postage prepaid
or by delivering the same to an air courier service, postage prepaid, properly
addressed and sent to the address of such party as set forth below, or such
other address as either party may from time to time designate by written notice
to the other. Notice given by mail shall be considered effective upon the
expiration of five business days after deposit. Notice given in any other manner
shall be effective only if and when received by the addressee.
<TABLE>
<S> <C>
To the Company: Shurgard Storage Centers, Inc.
Attn: Harrell Beck
1201 Third Avenue, Suite 2200
Seattle, Washington 98101
with a copy to: Latham & Watkins
Attn: Scott R. Haber
505 Montgomery Street, 19th Floor
San Francisco, California 94111
To the General Partners: Shurgard Associates L.P.
Shurgard Associates L.P. II
Shurgard Associates L.P. III
Attn: Charles K. Barbo
1201 Third Avenue, Suite 2200
Seattle, Washington 98101
with a copy to: Perkins Coie
Attn: Linda A. Schoemaker
1201 Third Avenue, 40th Floor
Seattle, Washington 98101-3099
</TABLE>
4.2 INTERPRETATION
Words of any gender used in this Agreement shall be held and construed to
include any other gender, and words of a singular number shall be held to
include the plural and vice versa, unless the context requires otherwise.
4.3 CAPTIONS
The captions used in this Agreement are for convenience only and shall not
be deemed to construe or to limit the meaning of the language of this Agreement.
4.4 MULTIPLE COUNTERPARTS
This Agreement may be executed in any number of identical counterparts. If
so executed, each of such counterparts is to be deemed an original for all
purposes, and all such counterparts shall collectively constitute one agreement,
but in making proof of this Agreement it shall not be necessary to produce or
account for more than one such counterpart.
4.5 APPLICABLE LAW
This Agreement shall be governed by and construed in accordance with the
laws of the state of Washington.
A(A-3)
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed by each of the parties
as of the date first set forth above.
COMPANY:
SHURGARD STORAGE CENTERS, INC.
By /s/_HARRELL BECK___________________
Harrell Beck, Chief Financial
Officer
GENERAL PARTNERS:
Shurgard Associates L.P.
By /s/_CHARLES K. BARBO_______________
Charles K. Barbo,
General Partner
/s/_ARTHUR W. BUERK_________________
Arthur W. Buerk,
General Partner
Shurgard General Partner, Inc.
By /s/_CHARLES K. BARBO_______________
Charles K. Barbo, President
A(A-4)
<PAGE>
Shurgard Associates L.P. II
By /s/_CHARLES K. BARBO_______________
Charles K. Barbo,
General Partner
/s/_ARTHUR W. BUERK_________________
Arthur W. Buerk,
General Partner
Shurgard General Partner, Inc.
By /s/_CHARLES K. BARBO_______________
Charles K. Barbo, President
Shurgard Associates L.P. III
By /s/_CHARLES K. BARBO_______________
Charles K. Barbo,
General Partner
/s/_ARTHUR W. BUERK_________________
Arthur W. Buerk,
General Partner
Shurgard General Partner, Inc.
By /s/_CHARLES K. BARBO_______________
Charles K. Barbo, President
A(A-5)
<PAGE>
APPENDIX B
SUMMARY PORTFOLIO APPRAISAL REPORT
IDS/SHURGARD INCOME GROWTH PARTNERS L.P.
IDS/SHURGARD INCOME GROWTH PARTNERS L.P. II
IDS/SHURGARD INCOME GROWTH PARTNERS L.P. III
B-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Letter of Transmittal..................................................................................... B-3
Identification of Subject Portfolios...................................................................... B-5
Property Ownership and History............................................................................ B-5
Purpose of Appraisals..................................................................................... B-5
Function of Appraisals.................................................................................... B-5
Scope of Appraisals....................................................................................... B-5
Date of Valuation......................................................................................... B-6
Value Definition.......................................................................................... B-6
Valuation Methodology..................................................................................... B-7
Site Inspections and Data Gathering..................................................................... B-8
Income and Expense Analysis............................................................................. B-8
Income Approach Analysis................................................................................ B-9
Sales Comparison Analysis............................................................................... B-10
Sales Comparison Approach and Income Approach Reconciliation............................................ B-10
Portfolio Value Conclusions............................................................................... B-11
Portfolio Summary--IDS/Shurgard Income Growth Partners L.P................................................ B-12
Portfolio Summary--IDS/Shurgard Income Growth Partners L.P. II............................................ B-13
Portfolio Summary--IDS/Shurgard Income Growth Partners L.P. III........................................... B-14
Assumptions and Limiting Conditions....................................................................... B-16
</TABLE>
B-2
<PAGE>
- --------------------------------------------------------------------------------
1129 Broad Street
Shrewsbury, NJ 07702-4314
ROBERT A. STANGER & CO., INC.
(908) 389-3600
FAX: (908) 389-1751
FINANCIAL AND MANAGEMENT CONSULTANTS
(908) 544-0779
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
June 26, 1996
IDS/Shurgard Income Growth Partners L.P.
IDS/Shurgard Income Growth Partners L.P. II
IDS/Shurgard Income Growth Partners L.P. III
1201 Third Avenue, Suite 2200
Seattle, Washington 98101
Gentlemen:
IDS/Shurgard Income Growth Partners L.P., IDS/Shurgard Income Growth
Partners L.P. II, and IDS/Shurgard Income Growth Partners L.P. III (the
"Partnerships") have engaged Robert A. Stanger & Co., Inc. ("Stanger") to
estimate the market value of the portfolios of self-storage facilities (the
"Portfolios") owned by each Partnership. Such appraisals reflect the estimated
market value of the fee simple interests or, where appropriate, leased fee
interests in each Portfolio as of December 31, 1995, assuming each Portfolio to
be free and clear of any existing debt or other encumbrances (the "Portfolio
Valuations").
This summary appraisal report is prepared in accordance with agreements
between Robert A. Stanger & Co., Inc. and each of the Partnerships dated March
8, 1996. In accordance with the agreements, Stanger has been engaged to perform
the appraisals on a limited scope basis in conformity with the departure
provisions of the Uniform Standards of Professional Appraisal Practice and the
standards of the Appraisal Institute as they relate to limited scope appraisal
reports. We have relied upon the Income Approach and Sales Comparison Approach
to value and have been engaged to deliver to the Partnerships a summary
appraisal report that is not designed to meet the requirements of Title XI of
the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA").
Each Portfolio Valuation is based in part upon information supplied to us by
the Partnerships and the property manager, including, but not limited to:
descriptions of the subject properties (the "Properties"), unit mix, operating
statements of the Properties, property tax bills, expense details, occupancy
reports, rent rolls and other supporting data. We have also received information
from interviews of property and Partnership management personnel. We have relied
upon such information and have assumed that the information provided is accurate
and complete. We have not attempted to independently verify such information.
We are advised by the Partnerships that the purpose of the appraisals is to
estimate the value of the fee interests in each Portfolio under market
conditions as of the appraisal date, and that the Portfolio Valuations will be
used solely in connection with a proposed tender offer for Partnership interests
and merger of each Partnership with Shurgard Storage Centers, Inc. ("SSCI").
Stanger understands that the Portfolio Valuations will be reviewed and utilized
by the Partnerships in connection with the above transactions, and Stanger
agrees to the use of the Portfolio Valuations for this purpose subject to the
terms and conditions of the agreements related thereto. For these purposes, this
summary appraisal report was prepared stating our opinion as to the aggregate
fair market value of each Partnership's interests in the respective Portfolios
as of December 31, 1995. Portions of this
B-3
<PAGE>
report may be summarized and referenced in a proxy statement or other offering
materials relating to the transactions, subject to prior review by Stanger.
However, the attached summary appraisal report should be reviewed in its
entirety and is subject to the assumptions and limiting conditions contained
herein. Background information and analysis upon which value conclusions are
based has been retained in our files.
Our review was undertaken solely for the purpose of providing an opinion of
market value, and we make no representation as to the adequacy of such review
for any other purpose. Our opinion is expressed with respect to the total market
value of each of the Portfolios. Neither Stanger nor the undersigned have any
present or contemplated future financial or ownership interest in the
Properties, the Partnerships or SSCI.
The Portfolio Valuations have been prepared on a limited scope basis in
conformity with the departure provisions of the Uniform Standards of
Professional Appraisal Practice of the Appraisal Institute, in accordance with
agreements between Robert A. Stanger & Co., Inc. and the Partnerships dated
March 8, 1996. Pursuant to those agreements, Stanger has relied upon the Income
Approach and Sales Comparison Approach to value and did not employ the Cost
Approach.
The appraisals are only an estimate of the market value of the fee simple
interests or, where appropriate, leasehold interests in each of the Portfolios
as of the date of valuation and should not be relied upon as being the
equivalent of the price that would necessarily be received in the event of a
sale or other disposition of the Portfolios. Changes in corporate financing
rates or changes in real estate property markets may result in higher or lower
values of real property. The use of other valuation methodologies might produce
a higher or lower value. Our opinion is subject to the assumptions and limiting
conditions set forth herein. We have used methods and assumptions deemed
appropriate in our professional judgment; however, future events may demonstrate
that the assumptions were incorrect or that other, different methods or
assumptions may have been more appropriate.
This summary appraisal report provides our value conclusion with respect to
the Portfolios, definitions of value, discussions of the valuation methodology
employed, assumptions, and limiting conditions. The attached exhibits are an
integral part of this report.
Based upon the review described herein, it is our opinion that the market
value of the fee simple interests or, where appropriate, the leased fee
interests in each Portfolio as of December 31, 1995 is as follows:
<TABLE>
<S> <C>
IDS/Shurgard Income Growth Partners L.P.
Forty Million, Three Hundred and Seventy Thousand Dollars ($40,370,000)
IDS/Shurgard Income Growth Partners L.P. II
Thirty Million, Five Hundred and Twenty Thousand Dollars ($30,520,000)
IDS/Shurgard Income Growth Partners L.P. III
Fifty Million, Eight Hundred and Ninety Thousand Dollars ($50,890,000)
</TABLE>
Sincerely,
Robert A. Stanger & Co., Inc.
Shrewsbury, New Jersey
B-4
<PAGE>
IDENTIFICATION OF SUBJECT PORTFOLIOS
The subjects of this summary appraisal report are the portfolios of real
properties (the "Portfolios") in which IDS/Shurgard Income Growth Partners L.P.,
IDS/Shurgard Income Growth Partners L.P. II, and IDS/Shurgard Income Growth
Partners L.P. III own interests.
The Portfolio of IDS/Shurgard Income Growth Partners L.P. is comprised of
twelve self-storage properties, aggregating approximately 684,000 square feet
(as adjusted for certain joint venture interests), located in six states.
The Portfolio of IDS/Shurgard Income Growth Partners L.P. II is comprised of
eight self-storage properties, aggregating approximately 534,000 square feet,
located in five states.
The Portfolio of IDS/Shurgard Income Growth Partners L.P. III is comprised
of sixteen self-storage properties and one office property aggregating
approximately 1,004,000 square feet, located in seven states. (A summary
description of each Portfolio is provided elsewhere in this report.)
PROPERTY OWNERSHIP AND HISTORY
All the properties in the IDS/Shurgard Income Growth Partners L.P. Portfolio
are owned by IDS/ Shurgard Income Growth Partners L.P., with the exception of
four properties located in Michigan (the "JV Properties") which are owned by
Shurgard Joint Partners II, a joint venture in which IDS/ Shurgard Income Growth
Partners L.P. owns a 70% interest. The IDS/Shurgard Income Growth Partners L.P.
Properties were purchased by the Partnership and/or the Joint Venture between
1988 and 1990.
All the properties in the IDS/Shurgard Income Growth Partners L.P. II
Portfolio are owned by IDS/Shurgard Income Growth Partners L.P. II and were
purchased by the Partnership between 1988 and 1991.
All the properties in the IDS/Shurgard Income Growth Partners L.P. III
Portfolio are owned by IDS/Shurgard Income Growth Partners L.P. III and were
purchased by the Partnership between 1991 and 1994. Information concerning
properties purchased within the past three years has been reviewed and retained
in our files.
PURPOSE OF APPRAISALS
The purpose of the appraisals is to estimate the market value of the fee
simple interests or, where appropriate, leased fee interests in the Portfolios
under market conditions as of December 31, 1995.
FUNCTION OF APPRAISALS
The function of the appraisals is to provide a current estimate of market
value of the fee simple interests or, where appropriate, leased fee interests in
the Portfolios for use solely by the Partnerships in connection with a proposed
tender offer for interests in the Partnerships and merger of the Partnerships
with Shurgard Storage Centers, Inc. No representation is made as to the adequacy
of this appraisal for any other purpose.
SCOPE OF APPRAISALS
The Portfolio Valuations have been prepared on a limited scope basis in
conformity with the departure provisions of the Uniform Standards of
Professional Appraisal Practice of the Appraisal Institute, in accordance with
agreements between Robert A. Stanger & Co., Inc. and the Partnerships dated
March 8, 1996. Pursuant to those agreements, Stanger has relied upon the Income
Approach and Sales Comparison Approach to value and did not employ the Cost
Approach (as described below).
In estimating the value of a property, appraisers typically consider three
approaches to value: the Cost Approach, the Sales Comparison Approach and the
Income Approach. The type and age of a
B-5
<PAGE>
property, market conditions and the quantity and quality of data affect the
applicability of each approach in a specific appraisal situation. The value
estimated by the Cost Approach incorporates separate estimates of the value of
the unimproved site under its highest and best use and the value of the
improvements, less observed accrued depreciation resulting from physical wear
and tear and functional and/or economic obsolescence. The Market Data or Sales
Comparison Approach involves a comparative analysis of the subject property with
other similar properties that have sold recently or that are currently offered
for sale in the market. The Income Approach involves an economic analysis of the
property based on its potential to provide future net annual income.
Pursuant to the terms of our engagement, the Portfolio Valuations were
performed using the Income Approach and Sales Comparison Approach. Since a
primary buyer group for the type of property appraised herein is investors, the
Income Approach and Sales Comparison Approach were deemed appropriate valuation
methodologies. Further, given the primary criteria used by buyers of the type of
property appraised herein, the Cost Approach was considered less reliable than
either of the Income Approach or Sales Comparison Approach.
Changes in corporate financing rates generally or in real estate property
markets may result in higher or lower values of real property. The use of other
valuation methodologies might produce a higher or lower value. Our opinion is
subject to the assumptions and limiting conditions set forth herein.
Departures -- Uniform Standards of Professional Practice -- With respect to
the limited appraisals, the departure provisions of the Uniform Standards of
Professional Appraisal Practice permit departures from the specific guidelines
of Standard 1. In this report the following departures were taken:
<TABLE>
<C> <S>
Standard Rule 1-4 (b) Details relating to comparable sales and rental data and
reconciliations of value for each property are not
specifically described or set forth in this report but have
been retained in our files.
</TABLE>
DATE OF VALUATION
The date of valuation for the Portfolios is December 31, 1995.
VALUE DEFINITION
Market value, as used in this report and defined by the Appraisal Institute,
is the most probable price as of a specified date, in cash, in terms equivalent
to cash, or in other precisely revealed terms, for which the specified property
rights should sell after reasonable exposure in a competitive market under all
conditions requisite to a fair sale, with the buyer and seller each acting
prudently, knowledgeably and for self-interest, and assuming that neither is
under undue duress.
Implicit in this definition is the consummation of a sale as of a specified
date and the passing of title from seller to buyer under conditions whereby:
(a) buyer and seller are typically motivated;
(b) both parties are well informed or well advised, and each acts in a
manner he considers in his own best interest;
(c) a reasonable time is allowed for exposure in the open market;
(d) payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
(e) the price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions granted
by anyone associated with the sale.
(Source: THE APPRAISAL OF REAL ESTATE, Tenth Edition.)
B-6
<PAGE>
The property rights appraised in this report consist of fee simple interests
or, where appropriate, leased fee interests. Due to the generally short-term,
month to month tenancies in self-storage facilities, a fee simple interest was
deemed appropriate for such facilities. Fee simple interest is defined as
absolute ownership unencumbered by any other interest or estate subject only to
the limitations of eminent domain, escheat, police power and taxation.
Leased fee interest is defined as an ownership interest held by a landlord
with the right to use and occupancy conveyed by lease to others, and usually
consists of the right to receive rent and the right to repossession at the
termination of the lease.
In the case of the JV Properties, the property rights appraised are fee
simple interests and the values reported herein reflect a pro-rata interest of
IDS/Shurgard Income Growth Partners L.P. in such fee simple value based solely
on its 70% interest in the joint venture.
The appraisals include the value of land, land improvements such as paving,
fencing, on-site sewer and water lines, and the buildings as of December 31,
1995. The appraisals do not include supplies, materials on hand, inventories,
furniture, equipment or other personal property, company records, or current or
intangible assets that may exist. The appraisals pertain only to items
considered as real estate.
VALUATION METHODOLOGY
Pursuant to the terms of this engagement, Stanger has estimated the value of
the fee simple interests or, where appropriate, the leased fee interests in each
Portfolio's Properties based on the Income Approach and Sales Comparison
Approach to valuation. (Appraisers typically use up to three approaches in
valuing real property: the Cost Approach, the Income Approach, and the Sales
Comparison Approach. The type and age of a property, market conditions and the
quantity and quality of data affect the applicability of each approach in a
specific appraisal situation.)
The Income Approach is based on the assumption that the value of a property
or portfolio of properties is dependent upon the property's or portfolio's
ability to produce income. The Income Approach estimates a property's capacity
to produce income through an analysis of the rental market, operating expenses
and net operating income. Net income may then be processed into value through
either (or a combination of) two methods: direct capitalization or discounted
cash flow analysis. In these Portfolio Valuations, a direct capitalization
analysis and a discounted cash flow ("DCF") analysis are used to determine the
value of the fee simple interests or, where appropriate, leased fee interests in
each Portfolio Property. The indicated value by the Income Approach represents
the amount an investor may pay for the expectation of receiving the net cash
flow from the Portfolio Properties and proceeds from the ultimate sale of the
Portfolio Properties.
The direct capitalization analysis is based upon the estimated net operating
income of each Portfolio Property capitalized at an appropriate capitalization
rate based upon property characteristics and competitive position and market
conditions as of the date of the appraisal.
In applying the DCF analysis, Stanger utilized pro forma statements of
operations for each Portfolio Property including revenues and expenses projected
over a ten-year period. Each Portfolio Property is assumed to be sold at the end
of the ten-year holding period. The reversion value of each Portfolio Property
which can be realized upon sale at the end of the ten-year holding period is
estimated based on capitalization of the estimated net income of the property in
the year of sale, utilizing a capitalization rate deemed appropriate in light of
the age, anticipated functional and economic obsolescence and competitive
position of the property at the time of sale. Net proceeds to owners are
determined by deducting appropriate costs of sale. The discount rate selected
for the DCF analysis is based upon estimated target rates of return for buyers
of self-storage properties. Total estimated value for the Portfolio Properties
is arrived at by summing the discounted present value of the cash flow stream
from operations and net proceeds from sale for each property.
B-7
<PAGE>
The Sales Comparison Approach utilizes indices of value derived from actual
or proposed sales of comparable properties to estimate the value of the
Portfolio Property. Price per square foot -- a unit of comparison typically
analyzed for self-storage facilities -- was utilized in applying the Sales
Comparison Approach to the Portfolio Properties.
The following describes more fully the steps involved in the valuation
methodology utilized.
SITE INSPECTIONS AND DATA GATHERING
In conducting the Portfolio Valuations, representatives of Stanger performed
a site inspection of each Portfolio Property during March 1996. In the course of
these site visits, the physical facilities of each property were inspected,
current rental and occupancy information for the property was obtained, current
market rental rates for competing properties were investigated, primary
competing properties were visited, information on the local market was gathered,
and the on-site manager or assistant manager was interviewed concerning the
property and other factors. Information gathered during the site inspection was
supplemented by a review of published information concerning economic,
demographic and real estate trends in local or regional and national markets.
In conducting the appraisals, Stanger also interviewed and relied upon
Partnership and property management personnel to obtain information relating to
the condition of each property, including any deferred maintenance, capital
budgets, known environmental conditions, status of on-going or newly planned
property additions, reconfigurations, improvements, and other factors affecting
the physical condition of the property improvements.
In addition, Stanger interviewed district and/or regional managers of the
Portfolio Properties, SSCI management personnel and Partnership management
personnel. Such interviews included discussions of competitive conditions in
local markets, area economic and development trends affecting the subject
properties, historical and budgeted operating revenues and expenses and
occupancies. Stanger also reviewed historical operating statements and 1996
operating budgets for each Portfolio Property, and reviewed surveys of local
self-storage markets conducted by property management personnel.
To define the occupancy, rental rate and expense escalators to be used in
developing operating projections, Stanger reviewed the acquisition criteria and
projection parameters in use in the marketplace by major self-storage investors,
owners and operators. In addition, Stanger reviewed other published information
concerning acquisition criteria in use by property investors at or around the
valuation date. Further, Stanger interviewed various sources in local markets to
identify recent sales of self-storage properties and to derive certain valuation
indicators. Sources for transaction data included local appraisers, property
owners, real estate brokers, tax assessors, and real estate research firms.
In addition, Stanger reviewed the acquisition criteria and parameters used
by self-storage real estate investors. Such review included a search of real
estate data sources and publications concerning real estate buyer's criteria,
and direct telephonic interviews with major national investors, owners,
managers, brokers and appraisers of self-storage property portfolios to
investigate the interaction of such factors as required rates of return, initial
capitalization rate requirements, and property type or geographical preferences.
Stanger also compiled data on actual transactions involving self-storage
properties from which acquisition criteria and parameters were extracted.
Stanger reviewed publicly available information on acquisitions of self-storage
properties by certain publicly owned real estate companies and contacted various
industry sources for relevant data.
INCOME AND EXPENSE ANALYSIS
During the course of the site inspections, competing properties were
identified and data on local market rental rates and occupancy were obtained.
Such data was compared to national averages for self-storage properties and
posted rental rates, the rent roll and occupancy reports for each subject
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<PAGE>
property, as available. Historical and budgeted effective gross income and
income from ancillary sources was also reviewed for each subject property. In
addition, discussions were conducted with relevant Partnership and property
management personnel concerning property and market trends and competitive
conditions. After assessing the above factors, an effective gross income
estimate was prepared for each property based upon the unit configuration,
market rental rates, market occupancy rate and estimates of ancillary income.
Historical and budgeted data on expenses were obtained from each Partnership
for each property. In addition, property tax bills were obtained and tax
assessments were confirmed with local municipalities. Expenses for each
individual property were estimated based on historical and budgeted operating
expenses, discussions with management and certain industry expense guidelines.
Estimated expenses were then deducted from estimated income for each
property to arrive at each properties' estimated net operating income. Expenses
relating solely to investor reporting and accounting were excluded.
During the course of the site inspections, any deferred maintenance was
observed. Historical and budgeted capital expenditures were reviewed and
discussed with management, and appropriate capital expenditures were considered
in the analysis.
INCOME APPROACH ANALYSIS
Stanger then employed both direct capitalization and discounted cash flow
analysis to estimate the value of the subject properties. The direct
capitalization rate used was based on current acquisition criteria among
self-storage investors and reflected in specific sales transactions. Where
appropriate, the capitalization rate used for an individual property was
adjusted to reflect valuation factors unique to the property, such as overall
quality, recent buildouts, and other unique valuation facts affecting the
individual properties. Where deferred maintenance or extraordinary capital
expenditures were required the capitalized value was adjusted accordingly.
- DIRECT CAPITALIZATION ANALYSIS -- Based upon the net operating
income estimated in accordance with the analyses of effective
gross income and expenses described above, an estimate of value
was derived for each Portfolio Property by capitalizing the
estimated net operating income at a rate determined in
accordance with surveys of buyers of self-storage properties,
as confirmed by a review of comparable sales transactions, and
deemed appropriate given the characteristics of each property.
Capitalization rates ranging from 9.25% to 10.25% were applied
to the projected net operating income from each of the
Portfolio Properties which were considered to be at stabilized
occupancy during the twelve-month period following the
valuation date.
- DISCOUNTED CASH FLOW ANALYSIS -- In applying discounted cash
flow analysis, projections of cash flows from each property
(assuming no indebtedness thereon) for a ten-year period ending
December 31, 2005 were developed. The base year projection of
net operating income was prepared consistent with the direct
capitalization analysis based upon the analysis of effective
gross income and expenses described above. Income and expense
escalators used in developing the projections were based on
projection parameters in use as of the Valuation Date by
property investors, market factors, historical and budgeted
financial results for each property, and inflation rates.
Income escalators generally ranged from 3% to 3.5%. In highly
competitive markets or where a property's operations were below
stabilized levels, income escalators were adjusted as deemed
appropriate or until stabilized operations were achieved.
Effective expense escalators generally ranged from 2.7% to
3.5%.
To determine the residual value for each property at the end of the
projection period, the estimated net operating income of the property for the
twelve months ending December 2006 was
B-9
<PAGE>
capitalized at a rate deemed appropriate for the property. Terminal
capitalization rates generally ranged from 10.0% to 10.75% and for the office
property was 11.0%. The residual value was discounted to a present value after
deducting appropriate sales expenses using the same discount rate applied to the
stream of annual cash flows. The discount rate employed was based on current
acquisition criteria among self-storage investors, commercial/industrial
property investors' target rates of return, and the historical spread in rates
of return between real estate and other investments. Discount rates utilized
ranged from 12.0% to 12.5%.
The results of each analysis (direct capitalization and discounted cash
flow) then were correlated to arrive at a final income approach value
determination.
SALES COMPARISON ANALYSIS
In the course of performing the Portfolio Valuations, Stanger compiled data
on actual transactions involving properties similar in type to the Portfolio
Properties. To gather such data, Stanger interviewed various sources in local
markets to identify recent sales of self-storage or office/storage properties,
reviewed publicly available information on acquisitions of self-storage
properties by certain publicly owned real estate companies, reviewed information
provided by management, and contacted various industry sources for data.
For each Portfolio Property, the data was grouped into local and/or regional
transactions. Where local transactions sample sizes were small or dated,
regional and/or national data was relied upon.
Utilizing such data, an index of value was derived based upon price per
square foot. The index of value was applied to each property to estimate value.
Price per square foot as estimated by reference to comparable sales transactions
was multiplied by the rentable square footage of each property to derive an
estimated range of value.
In addition, Stanger conducted a statistical analysis of self-storage
property transaction data to determine value indicators reflective of recent
market conditions. Due to the relatively low number of recent transactions in
any specific local or regional market from which to extract reliable statistical
indicators, Stanger utilized a sample of recent national transactions. A
regression analysis was performed to determine the relationship between the
price per square foot paid in recent transactions and the net operating income
of the property acquired. Based on this analysis, a probable range of value per
square foot was derived for each property. The resulting indicated values were
reconciled.
In the case of the Stone Mountain and Forest Park properties owned by
IDS/Shurgard Income Growth Partners L.P. III, the valuation included
consideration of the value of excess land parcels currently held for resale.
Such values were determined utilizing the sales comparison approach based on
analysis of transactions involving land parcels in the local market of each
property.
SALES COMPARISON APPROACH AND INCOME APPROACH RECONCILIATION
The estimated values resulting from the Sales Comparison Approach were
reconciled with the values estimated resulting from the Income Approach (direct
capitalization and discounted cash flow analyses) for each Portfolio Property,
and the resulting values were summed to determine the estimated value of each of
the Portfolios.
The Income Approach reflects the quality, durability and risk of the
estimated income stream. Properties such as the subject Portfolio Properties are
typically purchased and sold based upon their income characteristics. The Income
Approach was given primary consideration based upon the income producing nature
of the Portfolio Properties and their appeal to investors. The Sales Comparison
Approach was given secondary consideration.
Where necessary, Stanger adjusted the value conclusion for each Portfolio
Property to reflect any deferred maintenance items, excess land associated with
the Property, and joint venture interests, if any.
B-10
<PAGE>
PORTFOLIO VALUE CONCLUSIONS
Based upon the review as described above, it is our opinion that the market
value of the fee simple interests or, where appropriate, the leased fee
interests in each Portfolio as of December 31, 1995 is as follows:
IDS/SHURGARD INCOME GROWTH PARTNERS L.P.
FORTY MILLION, THREE HUNDRED AND SEVENTY THOUSAND DOLLARS
$40,370,000
------------------------
IDS/SHURGARD INCOME GROWTH PARTNERS L.P. II
THIRTY MILLION, FIVE HUNDRED AND TWENTY THOUSAND DOLLARS
$30,520,000
------------------------
IDS/SHURGARD INCOME GROWTH PARTNERS L.P. III
FIFTY MILLION, EIGHT HUNDRED AND NINETY THOUSAND DOLLARS
$50,890,000
------------------------
B-11
<PAGE>
PORTFOLIO SUMMARY
IDS/SHURGARD INCOME GROWTH PARTNERS L.P.
DECEMBER 31, 1995
<TABLE>
<CAPTION>
RENTABLE
SQUARE
NUMBER PROPERTY ADDRESS TYPE FOOTAGE
- ----------- ----------------------------------------------- ---------------------- ------------
<C> <S> <C> <C>
1-1 Shurgard of Ontario Self-Storage 56,900
2249 South Grove Ave., Ontario, CA
1-2 Shurgard of Walnut Self-Storage 95,500
21035 East Washington St., Walnut, CA
1-3 Shurgard of Margate Self-Storage 75,300
5150 West Copans Road, Margate, FL
1-4 Shurgard Morgan Falls Self-Storage 75,700
7760 Roswell Road, Dunwoody, GA
1-5 Shurgard of Burke Self-Storage 31,900
5609 Guinea Road, Fairfax, VA
1-6 Shurgard of Midlothian Turnpike Self-Storage 43,500
10110 Midlothian Turnpike,
Richmond, VA
1-7 Shurgard of S. Military Hwy Self-Storage 48,300
788 South Military Hwy.,
Virginia Beach, VA
1-8 Shurgard of Factoria Square Self-Storage 70,200
4041 124th Avenue SE., Bellevue, WA
JP2-1 Shurgard of Canton Self-Storage 40,800(1)
2101 Haggerty Road, Canton, MI
JP2-2 Shurgard of Fraser Self-Storage 50,900(1)
32775 Groesbeck Road, Fraser, MI
JP2-3 Shurgard of Livonia Self-Storage 47,000(1)
30300 Plymouth Road, Livonia, MI
JP2-4 Shurgard of Warren Self-Storage 47,700(1)
2498 10 Mile Road, Warren, MI
</TABLE>
- ------------------------
(1) Rentable square footage of the property reflects the Partnership's 70%
interest in the joint venture which owns the Property.
B-12
<PAGE>
PORTFOLIO SUMMARY
IDS/SHURGARD INCOME GROWTH PARTNERS L.P. II
DECEMBER 31, 1995
<TABLE>
<CAPTION>
RENTABLE
SQUARE
NUMBER PROPERTY ADDRESS TYPE FOOTAGE
- ----------- ----------------------------------------------- ---------------------- -------------
<C> <S> <C> <C>
2-1 Shurgard of Orange Self-Storage 89,600
623 West Collins Ave., Orange, CA
2-2 Shurgard of Sterling Heights Self-Storage 103,800
36260 Van Dyke Ave.,
Sterling Heights, MI
2-3 Shurgard of T.C. Jester Self-Storage 64,000
2100 North Loop West, Houston, TX
2-4 Shurgard of Newport News North Self-Storage 59,100
13142 N. Jefferson Ave.,
Newport News, VA
2-5 Shurgard of Chesapeake Self-Storage 58,400
940 Professional Place, Chesapeake, VA
2-6 Shurgard of Leesburg Self-Storage 27,600
11 Lawson Road SE., Leesburg, VA
2-7 Shurgard of Kennydale Self-Storage/Retail 66,500
1755 NE 48th Street, Renton, WA
2-8 Shurgard of Bellefield Self-Storage 65,100
1111 118th Avenue SE., Bellevue, WA
</TABLE>
B-13
<PAGE>
PORTFOLIO SUMMARY
IDS/SHURGARD INCOME GROWTH PARTNERS L.P. III
DECEMBER 31, 1995
<TABLE>
<CAPTION>
RENTABLE
SQUARE
NUMBER PROPERTY ADDRESS TYPE FOOTAGE
- ----------- ----------------------------------------------- ---------------------- ------------
<C> <S> <C> <C>
3-1 Shurgard of Gilbert Self-Storage 65,800
405 North Gilbert, Gilbert, AZ
3-2 Shurgard of Dobson Ranch Self-Storage 58,500
2640 South Alma School Road,
Mesa, AZ
3-3 Shurgard of Castro Valley Self-Storage 69,300
21655 & 21082 Redwood Road,
Castro Valley, CA
3-4 Castro Valley Office Building Office 3,100
21663 Redwood Road,
Castro Valley, CA
3-5 Shurgard of Newark Self-Storage 61,500
37444 Cedar Boulevard, Newark, CA
3-6 Shurgard of Sacramento Self-Storage 53,100
8959 Pocket Road, Sacramento, CA
3-7 Shurgard of San Leandro Self-Storage 58,500
2011 Marina Boulevard,
San Leandro, CA
3-8 Shurgard of San Lorenzo Self-Storage 54,100
16025 Ashland Avenue,
San Lorenzo, CA
3-9 Shurgard of Delray Beach Self-Storage 77,300
6000 West Atlantic Avenue,
Delray Beach, FL
3-10 Shurgard of Norcross Self-Storage 61,800
5010 Jimmy Carter Boulevard, Norcross, GA
3-11 Shurgard of Stone Mountain Self-Storage 61,200(1)
840 Hambrick Road,
Stone Mountain, GA
3-12 Shurgard of Tucker Self-Storage/Office 60,000
2660 Mountain Industrial Boulevard, Tucker, GA
3-13 Shurgard of Forest Park Self-Storage 65,200(2)
5979 Old Dixie Road, Forest Park, GA
3-14 Shurgard of Rochester/Utica Self-Storage 56,600
2100 West Utica Road, Utica, MI
3-15 Shurgard of Allen Boulevard Self-Storage 42,500
11160 SW Allen Boulevard,
Beaverton, OR
</TABLE>
B-14
<PAGE>
<TABLE>
<CAPTION>
RENTABLE
SQUARE
NUMBER PROPERTY ADDRESS TYPE FOOTAGE
- ----------- ----------------------------------------------- ---------------------- ------------
3-16 Shurgard of Windcrest Self-Storage 86,200
10652 Interstate Hwy 35 N,
San Antonio, TX
<C> <S> <C> <C>
3-17 Shurgard of Tracy Self-Storage 69,600
400 West Larch Road, Tracy, CA
</TABLE>
- ------------------------
(1) Stone Mountain Property includes approximately 1.5 acres of excess land held
for resale.
(2) Forest Park Property includes approximately 1.99 acres of excess land held
for resale.
B-15
<PAGE>
ASSUMPTIONS AND LIMITING CONDITIONS
This summary appraisal report is subject to the assumptions and limiting
conditions as set forth below.
1. No responsibility is assumed for matters of a legal nature affecting the
Portfolio Properties or the titles thereto. Titles to the properties are assumed
to be good and marketable and the properties are assumed free and clear of all
liens unless otherwise stated.
2. The Portfolio Valuations assume (a) responsible ownership and competent
management of the properties; (b) there are no hidden or unapparent conditions
of the properties' subsoil or structures that render the properties more or less
valuable (no responsibility is assumed for such conditions or for arranging for
engineering studies that may be required to discover them); (c) full compliance
with all applicable federal, state and local zoning, access and environmental
regulations and laws, unless noncompliance is stated, defined and considered in
the Appraisal; and (d) all required licenses, certificates of occupancy and
other governmental consents have been or can be obtained and renewed for any use
on which the value estimates contained in the Portfolio Valuations are based.
3. The Appraiser shall not be required to give testimony or appear in court
because of having made the appraisal with reference to the portfolios in
question, unless arrangements have been previously made therefore.
4. The information contained in the Portfolio Valuations or upon which the
Portfolio Valuations are based has been provided by or gathered from sources
assumed to be reliable and accurate. Some of such information has been provided
by the owner of the properties. The Appraiser shall not be responsible for the
accuracy or completeness of such information, including the correctness of
estimates, opinions, dimensions, exhibits and other factual matters. The
Portfolio Valuations and the opinion of value stated therein are as of the date
stated in the Portfolio Valuations. Changes since that date in property,
external and market factors can significantly affect portfolio value.
5. Disclosure of the contents of the appraisal report is governed by the
Bylaws and Regulations of the professional appraisal organization with which the
Appraiser is affiliated.
6. Neither all, nor any part of the content of the report, or copy thereof
(including conclusions as to the portfolios' values, the identity of the
Appraiser, professional designations, reference to any professional appraisal
organizations, or the firm with which the Appraiser is connected) shall be used
for any purpose by anyone other than the client specified in the report,
including, but not limited to, the mortgagee or its successors and assignees,
mortgage insurers, consultants, professional appraisal organizations, any state
or federally approved financial institution, any department, agency or
instrumentality without the previous written consent of the Appraiser; nor shall
it be conveyed by anyone to the public through advertising, public relations,
news sales or other media, without the written consent and approval of the
Appraiser.
7. On all appraisals subject to completion, repairs or alterations, the
appraisal report and value conclusions are contingent upon completion of the
improvements in a workmanlike manner.
8. The physical condition of the improvements considered by the Portfolio
Valuations are based on visual inspection by the Appraiser or other
representatives of Stanger and on representations by the owner. Stanger assumes
no responsibility for the soundness of structural members or for the condition
of mechanical equipment, plumbing or electrical components. The Appraiser has
made no surveys of the Portfolio Properties.
9. The projections of income and expenses and the valuation parameters
utilized are not predictions of the future. Rather, they are the Appraiser's
best estimate of current market thinking relating to future income and expenses.
The Appraiser makes no warranty or representations that these projections will
materialize. The real estate market is constantly fluctuating and changing. It
is not the Appraiser's task to predict or in any way warrant the conditions of a
future real estate market; the Appraiser can only reflect what the investment
community, as of the date of the Appraisal,
B-16
<PAGE>
ASSUMPTIONS AND LIMITING CONDITIONS (CONTINUED)
envisions for the future in terms of rental rates, expenses, supply and demand.
We have used methods and assumptions deemed appropriate in our professional
judgment; however, future events may demonstrate that the assumptions were
incorrect or that other different methods or assumptions may have been more
appropriate.
10. The Portfolio Valuations represent a normal consideration for each
Portfolio's Properties based on a cash purchase and unaffected by special terms,
services, fees, costs, or credits incurred in the transaction.
11. Unless otherwise stated in the report, the existence of hazardous
materials, which may or may not be present on the Portfolio Properties, was not
disclosed to the Appraiser by the owner. The Appraiser has no knowledge of the
existence of such materials on or in the Portfolio Properties. However, the
Appraiser is not qualified to detect such substances. The presence of substances
such as asbestos, ureaformaldehyde foam insulation, oil spills, or other
potentially hazardous materials may affect the value of the Portfolios. The
Portfolio Value estimates are predicated on the assumption that there is no such
material on or in the Portfolio Properties that would cause a loss of value. No
responsibility is assumed for such conditions, or for any expertise or
engineering knowledge required to discover them. The client is urged to retain
an expert in this field, if desired.
12. For purposes of this report, it is assumed that each Portfolio Property
is free of any negative impact with regard to the Environmental Cleanup
Responsibility Act (ECRA) or any other environmental problems or with respect to
non-compliance with the Americans with Disabilities Act (ADA). No investigation
has been made by the Appraiser with respect to any potential environmental or
ADA problems. Environmental and ADA compliance studies are not within the scope
of this report.
13. Pursuant to the Engagement Agreements, the Portfolio Valuations have
been prepared on a limited scope basis using a summary report format in
conformity with the departure provisions of the Uniform Standards of
Professional Appraisal Practice and the Standards of Professional Appraisal
Practice of the Appraisal Institute, relying on the income approach and sales
comparison approach to value. Further, the engagements call for delivery of a
summary appraisal report in which the content has been limited to that data
presented herein. As such, the summary appraisal report is not designed to meet
the requirements of Title XI of the Federal Financial Institutions Reform,
Recovery and Enforcement Act of 1989. Therefore, federally regulated
institutions should not rely on this report for financing purposes.
14. The Portfolio Valuations reported herein may not reflect the premium or
discount a potential buyer may assign to an assembled portfolio of properties or
to a group of properties in a particular local market which provides
opportunities for enhanced market presence and penetration. In addition, where
properties are owned jointly with other entities affiliated with the general
partner, minority interest discounts were not applied.
15. The appraisals are solely for the purpose of providing our opinion of
the value of the Portfolios, and we make no representation as to the adequacy of
such reviews for any other purpose. The owner has directed that the Portfolio
Properties be valued assuming the properties are free and clear of any debt. The
use of other valuation methodologies might produce a higher or lower value.
16. In addition to these general assumptions and limiting conditions, any
assumptions or conditions applicable to specific properties have been retained
in our files.
B-17
<PAGE>
APPENDIX C
- --------------------------------------------------------------------------------
1129 Broad Street
Shrewsbury, NJ 07702-4314
ROBERT A. STANGER & CO., INC.
(908) 389-3600
FAX: (908) 389-1751
FINANCIAL AND MANAGEMENT CONSULTANTS
(908) 544-0779
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
IDS/Shurgard Income Growth Partners L.P.
IDS/Shurgard Income Growth Partners L.P. II
IDS/Shurgard Income Growth Partners L.P. III
1201 Third Avenue, Suite 2200
Seattle, Washington 98101
Gentlemen:
We have been advised that IDS/Shurgard Income Growth Partners L.P.,
IDS/Shurgard Income Growth Partners L.P. II, and IDS/Shurgard Income Growth
Partners L.P. III (collectively, the "Partnerships") are contemplating a
transaction (the "Merger") in which one or more of the Partnerships will be
merged with and into Shurgard Storage Centers, Inc. ("SSCI"), an affiliated,
publicly traded real estate investment trust, pursuant to an acquisition
agreement (the "Acquisition Agreement") between the Partnerships and SSCI. In
the Merger, the limited partners of the Partnerships (the "Limited Partners")
will be asked to approve the Merger with SSCI pursuant to which they will
receive as consideration newly issued shares of SSCI Class A Common Stock ( the
"Shares") and, in the case of fractional shares, cash. We have been further
advised that the Consideration to be received in the Merger by the partners of
each Partnership will be that number of Shares and cash such that the market
value of the Shares and cash will be equal to $40,066,700 for IDS/Shurgard
Income Growth Partners L.P., $26,861,846 for IDS/Shurgard Income Growth Partners
L.P. II, and $39,649,643 for IDS/Shurgard Income Growth Partners L.P. III, which
amounts represent the estimated net asset value of each Partnership as of March
31, 1996 (collectively, the "Consideration"). To the extent a Partnership's net
asset value as of the closing date of the Merger exceeds the net asset value
indicated above, the Partnership will distribute such excess amount in cash to
the partners of such Partnership as soon as practicable after the closing date
of the Merger. For the purposes of determining the number of Shares to be issued
to each Partnership in the Merger, we have been advised that the market value of
the Shares (the "Share Value") will be based on the average per share closing
prices on the New York Stock Exchange of the Shares during the twenty
consecutive trading days ending on the fifth trading day prior to the day of the
meeting of limited partners of the applicable Partnership on which day the
general partner of such Partnership actually calls for the vote of the Limited
Partners to approve the Merger, subject to the condition that such Share Value
falls within the range of $22.25 to $27.75 per Share (the "Share Value Range").
The general partners of the Partnerships have requested that Robert A.
Stanger & Co., Inc. ("Stanger") provide its opinion as to the fairness to the
Limited Partners of each Partnership, from a financial point of view, of the
Consideration to be received in the Merger by each respective Partnership.
In the course of our review to render this opinion, we have, among other
things:
- Reviewed a draft of (i) the Acquisition Agreement, (ii) Offer to Purchase
for each Partnership related to a tender offer by SSCI for interests in
each Partnership, and (iii) the Proxy Statement/Prospectus related to the
Merger, which drafts management of the Partnerships has indicated to be in
substantially the form intended to be finalized and filed with the
Securities and Exchange Commission (the "SEC");
C-1
<PAGE>
- Reviewed the Partnerships' and SSCI's annual reports filed with the SEC on
Form 10-K for the fiscal years ending December 31, 1993, 1994 and 1995,
and quarterly reports filed with the SEC on Form 10-Q for the period
ending March 31, 1996;
- Reviewed the SSCI pro forma financial statements and pro forma schedules
prepared by the Partnerships' management and SSCI's management;
- Performed appraisals of the portfolios of properties owned by each
Partnership as of December 31, 1995 (the "Portfolio Valuations") pursuant
to a separate engagement agreement to perform such services for the
Partnerships;
- Reviewed information regarding purchases and sales of self-storage
properties by SSCI or any affiliated entities during the prior 12-month
period and other information available relating to acquisition criteria
for self-storage properties;
- Reviewed internal financial analyses and forecasts prepared by the
Partnerships of the current net liquidation value of each Partnership and
projections of going-concern values for each Partnership, which were based
in part on the Portfolio Valuations;
- Discussed with members of senior management of the Partnerships and SSCI
conditions in self-storage property markets, conditions in the market for
sales/acquisitions of properties similar to those owned by the
Partnerships, current and projected operations and performance, and the
financial condition and future prospects of the properties owned by the
Partnerships, the Partnerships and SSCI;
- Reviewed historical market prices, trading volume and dividends for SSCI
Common Stock; and
- Conducted other studies, analyses, inquiries and investigations as we
deemed appropriate.
In rendering this fairness opinion, we have relied upon and assumed, without
independent verification, the accuracy and completeness in all material respects
of all financial and other information contained in each Offer to Purchase and
the Proxy Statement/Prospectus or that was furnished or otherwise communicated
to us by the Partnerships and SSCI. We have not performed an independent
appraisal of the non-real estate assets and liabilities of the Partnerships, and
we have relied upon the balance sheet value determinations and the adjustments
thereto made by the general partners to determine the net asset value of each
Partnership. We have also relied on the assurance of the Partnerships and SSCI
that the allocation of the Consideration within each Partnership between the
general partner and Limited Partners is consistent with the provisions of the
Partnership Agreements; that any pro forma financial statements, projections,
budgets, estimates of environmental liability, or value estimates or adjustments
contained in the Offers to Purchase and the Proxy Statement/Prospectus or
otherwise provided or communicated to us, were reasonably prepared on bases
consistent with actual historical experience and reflect the best currently
available estimates and good faith judgments; that no material changes have
occurred in the appraised value of the properties or the information reviewed
between the date of the Portfolio Valuations or the date of the other
information provided and the date of this letter; and that the Partnerships and
SSCI are not aware of any information or facts that would cause the information
supplied to us to be incomplete or misleading in any material respect.
We have not been requested to, and therefore did not: (i) select the method
of determining the Consideration offered in the Merger; (ii) make any
recommendation to the Limited Partners of the Partnerships with respect to
whether to approve or reject the Merger, or whether to select the cash tender
offer made by SSCI or the Shares offered in the Merger; or (iii) express any
opinion as to the business decision to effect the Merger, alternatives to the
Merger, tax factors resulting from the Merger, the fairness of the Consideration
to be received in the Merger at a Share Value outside of the low end of the
Share Value Range, the allocation of expenses associated with the Merger and
related tender offers between and among the Partnerships and SSCI, or any terms
of the Merger other than the Consideration. Our opinion is based on business,
economic, real estate and securities markets, and
C-2
<PAGE>
other conditions as of the date of our analysis and addresses the Merger in the
context of information available as of the date of our analysis. Events
occurring after that date may materially affect the assumptions used in
preparing the opinion.
Based upon and subject to the foregoing, and in reliance thereon, it is our
opinion that as of the date of this letter the Consideration to be received in
the Merger by the Limited Partners is fair to the Limited Partners of each
respective Partnership from a financial point of view.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. We have
advised each of the Partnerships that our entire analysis must be considered as
a whole and that selecting portions of our analysis and the factors considered
by us, without considering all analyses and facts, could create an incomplete
view of the evaluation process underlying this opinion.
Yours truly,
Robert A. Stanger & Co., Inc.
Shrewsbury, NJ
July 1, 1996
C-3
<PAGE>
APPENDIX D
[LOGO]
July 1, 1996
Special Committee of the Board of Directors
of Shurgard Storage Centers, Inc.
c/o Latham & Watkins
650 Town Center Drive, 20th Floor
Costa Mesa, California 92626-1925
Dear Sirs:
We understand that Shurgard Storage Centers, Inc. (the "Company") and IDS
Shurgard Income Growth Partners L.P. ("IDS I"), IDS/Shurgard Income Growth
Partners L.P. II ("IDS II") and IDS/ Shurgard Income Growth Partners L.P. III
("IDS III"; each of IDS I, IDS II and IDS III may be referred to separately as a
"Partnership" or collectively as the "Partnerships") intend to enter into an
Acquisition Agreement (the "Agreement") pursuant to which the Company will
commence a cash tender offer for (i) up to 65,000 of the outstanding units of
limited partnership of IDS I, (ii) up to 49,000 of the outstanding units of
limited partnership of IDS II, and (iii) up to 52,000 of the outstanding units
of limited partnership of IDS III (collectively, the "Tender Offers"). Upon
completion of the Tender Offers and if certain conditions have been satisfied or
waived, including the receipt of requisite approval by the holders of limited
partnership units of each Partnership, each Partnership will be merged with and
into the Company (the "Mergers") and the general and limited partnership
interests in each of the Partnerships will be converted into that number of
shares of Class A Common Stock, par value $.001 per share ("Common Stock"), of
the Company obtained by dividing (i) the Net Asset Value (as defined in the
Agreement) of the respective Partnerships allocable to such interests by (ii) a
20 trading day average of the per share closing prices for the Common Stock on
the New York Stock Exchange (subject to a minimum and maximum of $22.25 and
$27.75, respectively). You have requested our opinion, as investment bankers, as
to the fairness, from a financial point of view, of the consideration to be paid
in connection with the Tender Offers and the Mergers.
Alex. Brown & Sons Incorporated ("Alex. Brown"), as a customary part of its
investment banking business, is engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, private placements and valuations for estate, corporate and other
purposes. We have acted as financial advisor to the Special Committee of the
Board of Directors in connection with the Tender Offers and the Mergers and have
received a fee for our services. We have also acted as a managing underwriter of
a past offering of the Common Stock and advised a special committee of the Board
of Directors of the Company regarding its merger with Shurgard Incorporated.
Alex. Brown regularly publishes research reports regarding the real estate and
real estate investment trust industries and the businesses and securities of
publicly owned companies in those industries. In the ordinary course of our
business, we may actively trade the Common Stock of the Company for our own
account and for the account of our customers and, accordingly, may at any time
hold a long or short position in the Company's Common Stock.
In connection with our opinion, we have reviewed drafts of the Agreement,
the Offer to Purchase and the Registration Statement of the Company on Form S-4
(the "Registration Statement") with respect to the Tender Offers and the
Mergers, as well as certain publicly available information and
D-1
<PAGE>
certain internal financial and other information furnished to us by the Company
and the Partnerships. We have also held discussions with members of the senior
management of the Company and a general partner of each Partnership's general
partner regarding the business and prospects of the Company and the
Partnerships. In addition, we have (i) reviewed the reported price and trading
activity for the Common Stock and each Partnership's limited partnership units,
(ii) compared certain financial and stock market information for certain real
estate companies whose securities are publicly traded, (iii) reviewed the
financial terms of certain recent acquisitions in the public self-storage
industry and (iv) performed such other studies and analyses and considered such
other factors as we deemed appropriate.
In conducting our review and in rendering our opinion, we have assumed that
the definitive Agreement, Offer to Purchase and Registration Statement will not,
when executed or filed, as the case may be, differ in any material respect from
the drafts thereof which we have reviewed. We have not independently verified
the information described above and for purposes of this opinion have assumed
the accuracy, completeness and fairness thereof. With respect to information
relating to the prospects of the Company and the Partnerships, we have assumed
that such information reflects the best currently available estimates and
judgments of the Company's management and of a general partner of each of the
Partnership's general partner as to the likely future financial performance of
the Company and the Partnerships. In addition, we have not made or obtained an
independent evaluation of the assets of the Company, the assets of the
Partnerships or reviewed environmental issues relating to the Company, the
Partnerships, the Tender Offers or the Mergers. Our opinion is based on market,
economic and other conditions as they exist and can be evaluated as of the date
of this letter.
Based upon and subject to the foregoing, it is our opinion as investment
bankers that, as of the date of this letter, the consideration to be paid by the
Company in each of the Tender Offers and the Mergers is fair, from a financial
point of view, to the Company.
Very truly yours,
Alex. Brown & Sons Incorporated
D-2
<PAGE>
APPENDIX E
WASHINGTON UNIFORM LIMITED PARTNERSHIP ACT
(RCW TITLE 25.10, ARTICLE 14)
DISSENTERS' RIGHTS
25.10.900 DEFINITIONS.
As used in this article:
(1) "Limited partnership" means the domestic limited partnership in which
the dissenter holds or held a partnership interest, or the surviving limited
partnership or corporation by merger, whether foreign or domestic, of that
limited partnership.
(2) "Dissenter" means a partner who is entitled to dissent from a plan of
merger and who exercises that right when and in the manner required by this
article.
(3) "Fair value," with respect to a dissenter's partnership interest, means
the value of the partnership interest immediately before the effectuation of the
merger to which the dissenter objects, excluding any appreciation or
depreciation in anticipation of the merger unless exclusion would be
inequitable.
(4) "Interest" means interest from the effective date of the merger until
the date of payment, at the average rate currently paid by the limited
partnership on its principal bank loans or, if none, at a rate that is fair and
equitable under all the circumstances.
25.10.905 PARTNER -- DISSENT -- PAYMENT OF FAIR VALUE.
(1) Except as provided in RCW 25.10.915 or 25.10.925(2), a partner of a
domestic limited partnership is entitled to dissent from, and obtain payment of,
the fair value of the partner's partnership interest in the event of
consummation of a plan of merger to which the limited partnership is a party as
permitted by RCW 25.10.800 or 25.10.840.
(2) A partner entitled to dissent and obtain payment for the partner's
partnership interest under this article may not challenge the merger creating
the partner's entitlement unless the merger fails to comply with the procedural
requirements imposed by this title, Title 23B RCW, the partnership agreement, or
is fraudulent with respect to the partner or the limited partnership.
(3) The right of a dissenting partner to obtain payment of the fair value of
the partner's partnership interest shall terminate upon the occurrence of any
one of the following events:
(a) The proposed merger is abandoned or rescinded;
(b) A court having jurisdiction permanently enjoins or sets aside the
merger; or
(c) The partner's demand for payment is withdrawn with the written
consent of the limited partnership.
25.10.910 DISSENTERS' RIGHTS -- NOTICE -- TIMING.
(1) Not less than ten days prior to the approval of a plan of merger, the
limited partnership must send a written notice to all partners who are entitled
to vote on or approve the plan of merger that they may be entitled to assert
dissenters' rights under this article. Such notice shall be accompanied by a
copy of this article.
(2) The limited partnership shall notify in writing all partners not
entitled to vote on or approve the plan of merger that the plan of merger was
approved, and send them the dissenters' notice as required by RCW 25.10.920.
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<PAGE>
25.10.915 PARTNER -- DISSENT -- VOTING RESTRICTION.
A partner who is entitled to vote on or approve the plan of merger and who
wishes to assert dissenters' rights must not vote in favor of or approve the
plan of merger. A partner who does not satisfy the requirements of this section
is not entitled to payment for the partner's interest under this article.
25.10.920 PARTNERS -- DISSENTERS' NOTICE -- REQUIREMENTS.
(1) If the plan of merger is approved, the limited partnership shall deliver
a written dissenters' notice to all partners who satisfied the requirements of
RCW 25.10.915.
(2) The dissenters' notice required by RCW 25.10.910(2) or by subsection (1)
of this section must be sent within ten days after the approval of the plan of
merger, and must:
(a) State where the payment demand must be sent;
(b) Inform holders of the partnership interest as to the extent transfer
of the partnership interest will be restricted as permitted by RCW 25.10.930
after the payment demand is received;
(c) Supply a form for demanding payment;
(d) Set a date by which the limited partnership must receive the payment
demand, which date may not be fewer than thirty nor more than sixty days
after the date the notice under this section is delivered; and
(e) Be accompanied by a copy of this article.
25.10.925 PARTNER -- PAYMENT DEMAND -- ENTITLEMENT.
(1) A partner who demands payment retains all other rights of a partner
until the proposed merger becomes effective.
(2) A partner sent a dissenters' notice who does not demand payment by the
date set in the dissenters' notice is not entitled to payment for the partner's
partnership interest under this article.
25.10.930 PARTNERSHIP INTERESTS -- TRANSFER RESTRICTIONS.
The limited partnership may restrict the transfer of partnership interests
from the date the demand for their payment is received until the proposed merger
becomes effective or the restriction is released under this article.
25.10.935 PAYMENT OF FAIR VALUE -- REQUIREMENTS FOR COMPLIANCE.
(1) Within thirty days of the later of the date the proposed merger becomes
effective, or the payment demand is received, the limited partnership shall pay
each dissenter who complied with RCW 25.10.925 the amount the limited
partnership estimates to be the fair value of the partnership interest, plus
accrued interest.
(2) The payment must be accompanied by:
(a) Copies of the financial statements for the most recent fiscal year
maintained as required by RCW 25.10.050;
(b) An explanation of how the limited partnership estimated the fair
value of the partnership interest;
(c) An explanation of how the accrued interest was calculated;
(d) A statement of the dissenter's right to demand payment; and
(e) A copy of this article.
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<PAGE>
25.10.940 MERGER -- NOT EFFECTIVE WITHIN SIXTY DAYS -- TRANSFER RESTRICTIONS.
(1) If the proposed merger does not become effective within sixty days after
the date set for demanding payment, the limited partnership shall release any
transfer restrictions imposed as permitted by RCW 25.10.930.
(2) If, after releasing transfer restrictions, the proposed merger becomes
effective, the limited partnership must send a new dissenters' notice as
provided in RCW 25.10.910(2) and 25.10.920 and repeat the payment demand
procedure.
25.10.945 DISSENTER'S ESTIMATE OF FAIR VALUE -- NOTICE.
(1) A dissenter may notify the limited partnership in writing of the
dissenter's own estimate of the fair value of the dissenter's partnership
interest and amount of interest due, and demand payment of the dissenter's
estimate, less any payment under RCW 25.10.935, if:
(a) The dissenter believes that the amount paid is less than the fair
value of the dissenter's partnership interest or that the interest due is
incorrectly calculated;
(b) The limited partnership fails to make payment within sixty days
after the date set for demanding payment; or,
(c) The limited partnership, having failed to effectuate the proposed
merger, does not release the transfer restrictions imposed on partnership
interests as permitted by RCW 25.10.930 within sixty days after the date set
for demanding payment.
(2) A dissenter waives the right to demand payment under this section unless
the dissenter notifies the limited partnership of the dissenter's demand in
writing under subsection (1) of this section within thirty days after the
limited partnership made payment for the dissenter's partnership interest.
25.10.950 UNSETTLED DEMAND FOR PAYMENT -- PROCEEDING -- PARTIES -- APPRAISERS.
(1) If a demand for payment under RCW 25.10.945 remains unsettled, the
limited partnership shall commence a proceeding within sixty days after
receiving the payment demand and petition the court to determine the fair value
of the partnership interest and accrued interest. If the limited partnership
does not commence the proceeding within the sixty-day period, it shall pay each
dissenter whose demand remains unsettled the amount demanded.
(2) The limited partnership shall commence the proceeding in the superior
court. If the limited partnership is a domestic limited partnership, it shall
commence the proceeding in the county where its office is maintained as required
by RCW 25.10.040(1). If the limited partnership is a domestic corporation, it
shall commence the proceeding in the county where its principal office, as
defined in RCW 23B.01.400(17), is located, or if none is in this state, its
registered office under RCW 23B.05.010. If the limited partnership is a foreign
limited partnership or corporation without a registered office in this state, it
shall commence the proceeding in the county in this state where the office of
the domestic limited partnership maintained pursuant to RCW 25.10.040(1) merged
with the foreign limited partnership or foreign corporation was located.
(3) The limited partnership shall make all dissenters (whether or not
residents of this state) whose demands remain unsettled parties to the
proceeding as in an action against their partnership interests and all parties
must be served with a copy of the petition. Nonresidents may be served by
registered or certified mail or by publication as provided by law.
(4) The limited partnership may join as a party to the proceeding any
partner who claims to be a dissenter but who has not, in the opinion of the
limited partnership, complied with the provisions of this chapter. If the court
determines that such partner has not complied with the provisions of this
article, the partner shall be dismissed as a party.
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<PAGE>
(5) The jurisdiction of the court in which the proceeding is commenced is
plenary and exclusive. The court may appoint one or more persons as appraisers
to receive evidence and recommend decisions on the question of fair value. The
appraisers have the powers described in the order appointing them or in any
amendment to it. The dissenters are entitled to the same discovery rights as
parties in other civil proceedings.
(6) Each dissenter made a party to the proceeding is entitled to judgment
for the amount, if any, by which the court finds the fair value of the
dissenter's partnership interest, plus interest, exceeds the amount paid by the
limited partnership.
25.10.955 UNSETTLED DEMAND FOR PAYMENT -- COSTS -- FEES AND EXPENSES OF
COUNSEL.
(1) The court in a proceeding commenced under RCW 25.10.950 shall determine
all costs of the proceeding, including the reasonable compensation and expenses
of appraisers appointed by the court. The court shall assess the costs against
the limited partnership, except that the court may assess the costs against all
or some of the dissenters, in amounts the court finds equitable, to the extent
the court finds the dissenters acted arbitrarily, vexatiously, or not in good
faith in demanding payment.
(2) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable:
(a) Against the limited partnership and in favor of any or all
dissenters if the court finds the limited partnership did not substantially
comply with the requirements of this article; or
(b) Against either the limited partnership or a dissenter, in favor of
any other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith
with respect to the rights provided by this article.
(3) If the court finds that the services of counsel for any dissenter
were of substantial benefit to other dissenters similarly situated, and that
the fees for those services should not be assessed against the limited
partnership, the court may award to these counsel reasonable fees to be paid
out of the amounts awarded the dissenters who were benefited.
E-4
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article 13 of the Registrant's Certificate of Incorporation provides that
directors of the Registrant shall not be liable to the Registrant or its
stockholders for monetary damages for their conduct as directors to the fullest
extent permitted by the Delaware General Corporation Law ("Delaware Law") as it
existed at the time the Certificate of Incorporation was adopted, and as it may
thereafter be amended. Any amendment to or repeal of Article 13 shall apply only
to acts or omissions of directors occurring after such amendment or repeal.
The Registrant's Bylaws provide that the Registrant shall indemnify and hold
harmless its directors and officers to the fullest extent permitted under
Delaware Law or by any other applicable law against all litigation expenses,
judgments, fines and settlement amounts incurred in connection with their
service or status as directors and officers. Such indemnification also extends
to liabilities arising from actions taken by directors or officers when serving
at the request of the Registrant as a director, officer, employee or agent of
another corporation or of a partnership, joint venture, trust or other
enterprise.
Section 145 of Delaware Law, as currently in effect, sets forth the
indemnification rights of directors and officers of Delaware corporations. Under
such provision, a director or officer of a corporation (i) shall be indemnified
by the corporation for all expenses of litigation or other legal proceedings
when he or she is successful on the merits or otherwise, (ii) may be indemnified
by the corporation for the expenses, judgments, fines and amounts paid in
settlement of such litigation (other than a derivative suit), even if he or she
is not successful on the merits, if he or she acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interests of the corporation (and, in the case of a criminal proceeding, had no
reason to believe his or her conduct was unlawful), and (iii) may be indemnified
by the corporation for the expenses of a derivative suit (a suit by a
stockholder alleging a breach by a director or an officer of a duty owed to the
corporation), even if he or she is not successful on the merits, if he or she
acted in good faith and in a manner he or she reasonably believed to be in or
not opposed to the best interests of the corporation, provided that no such
indemnification may be made in accordance with this clause (iii) if the director
or officer is adjudged liable to the corporation, unless a court determines
that, despite such adjudication but in view of all the circumstances, he or she
is fairly and reasonably entitled to indemnification of such expenses. The
indemnification described in clauses (ii) and (iii) above shall be made only
upon a determination by (A) a majority of a quorum of disinterested directors,
(B) independent legal counsel in a written opinion, or (C) the stockholders,
that indemnification is proper because the applicable standard of conduct has
been met.
The effect of the indemnification provisions contained in the Bylaws is to
require the Registrant to indemnify its directors and officers under
circumstances where such indemnification would otherwise be discretionary and to
extend to the Registrant's directors and officers the benefits of Delaware Law
dealing with director and officer indemnification, as well as any future changes
that might occur under Delaware Law in this area.
The Bylaws state that the indemnification rights granted thereunder are not
exclusive of any other indemnification rights to which the director or officer
may otherwise be entitled. As permitted by Section 145(g) of Delaware Law, the
Bylaws also authorize the Registrant to purchase directors and officers
insurance for the benefit of its directors and officers, irrespective of whether
the Registrant has the power to indemnify such persons under Delaware Law. The
Registrant currently maintains such insurance as allowed by these provisions.
II-1
<PAGE>
ITEM 21. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------------
<C> <S>
2.1 Acquisition Agreement dated July 1, 1996, by and among Shurgard Storage Centers, Inc., IDS/Shurgard
Income Growth Partners L.P., IDS/Shurgard Income Growth Partners L.P. II and IDS/Shurgard Income
Growth Partners L.P. III (incorporated by reference to the Registrant's Schedule 14D-1 filed with
the Commission on July 2, 1996)
5.1 Opinion of Latham & Watkins regarding legality of shares*
8.1 Opinion of Perkins Coie regarding tax matters*
23.1 Consent of Latham & Watkins (contained in Exhibit 5.1)*
23.2 Consent of Perkins Coie (contained in Exhibit 8.1)*
23.3 Consent of Robert A. Stanger & Co., Inc. (Appraisal and Fairness Opinion)
23.4 Consent of Alex. Brown & Sons Incorporated
23.5 Consent of Deloitte & Touche
24.1 Power of Attorney (contained on signature page)
99.1 Form of proxy card for IDS/Shurgard Income Growth Partners L.P.*
99.2 Form of proxy card for IDS/Shurgard Income Growth Partners L.P. II*
99.3 Form of proxy card for IDS/Shurgard Income Growth Partners L.P. III*
</TABLE>
- ------------------------
* To be filed by amendment.
ITEM 22. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
(ii) To reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent
post-effective amendment thereof) that, individually or in the aggregate,
represent a fundamental change in the information set forth in this
Registration Statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or
any material change to such information in this Registration Statement;
PROVIDED, HOWEVER, that subparagraphs (a)(1)(i) and (a)(1)(ii) do not apply
if the information required to be included in a post-effective amendment by
those paragraphs is contained in the periodic reports filed with or
furnished to the Securities and Exchange Commission by the Registrant
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), that are incorporated by reference in
this Registration Statement.
(2) That, for the purpose of determining any under the Securities Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered herein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof; and
II-2
<PAGE>
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered that remain unsold at the termination
of the offering.
(b) The undersigned Registrant hereby further undertakes that, for the
purposes of determining any liability under the Securities Act, each filing of
the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act that is incorporated by reference in this Registration Statement
shall be deemed to be a new registration statement relating to the securities
offered herein, and the offering of such Securities at that time shall be deemed
to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions under Item 20 above, or otherwise, the
Registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Seattle, State of
Washington, on the 10th day of July, 1996.
SHURGARD STORAGE CENTERS, INC.
By /s/ HARRELL L. BECK
-----------------------------------
Harrell L. Beck
SENIOR VICE PRESIDENT, CHIEF
FINANCIAL OFFICER
AND TREASURER
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Kristin H. Stred and Harrell L. Beck, or any one of them, his attorneys-in-fact
and agents, each with full powers of substitution and resubstitution for him in
any and all capacities, to sign any or all amendments or post-effective
amendments to this Registration Statement, and to file the same, with exhibits
thereto and other documents in connection therewith or in connection with the
registration of the Common Stock under the Securities Exchange Act of 1934, as
amended, with the Securities and Exchange Commission, granting unto each of such
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary in connection with such matters and
hereby ratifying and confirming all that each of such attorneys-in-fact and
agents or his or her substitute or substitutes may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ----------------------------------- ------------------------- ----------------
/s/ CHARLES K. BARBO Chairman of the Board,
- ----------------------------------- President and Chief July 10, 1996
Charles K. Barbo Executive Officer
/s/ HARRELL L. BECK Senior Vice President,
- ----------------------------------- Chief Financial Officer, July 10, 1996
Harrell L. Beck Treasurer and Director
/s/ DONALD W. LUSK
- ----------------------------------- Director July 10, 1996
Donald W. Lusk
/s/ WENDELL J. SMITH
- ----------------------------------- Director July 10, 1996
Wendell J. Smith
/s/ HOWARD JOHNSON
- ----------------------------------- Director July 10, 1996
Howard Johnson
/s/ GREENLAW GRUPE
- ----------------------------------- Director July 10, 1996
Greenlaw Grupe
II-4
<PAGE>
EXHIBIT 23.3
- --------------------------------------------------------------------------------
1129 Broad Street
Shrewsbury, NJ 07702-4314
ROBERT A. STANGER & CO., INC.
(908) 389-3600
FAX: (908) 389-1751
FINANCIAL AND MANAGEMENT CONSULTANTS
(908) 544-0779
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CONSENT OF ROBERT A. STANGER & CO., INC.
We hereby consent to (i) the inclusion of our Summary Portfolio Appraisal
Report and opinion letter to IDS/Shurgard Income Growth Partners L.P.,
IDS/Shurgard Income Growth Partners L.P. II and IDS/Shurgard Income Growth
Partners L.P. III as Appendix B and Appendix C to the Proxy Statement/Prospectus
of Shurgard Storage Centers, Inc. ("SSCI") which is part of this Registration
Statement on Form S-4, and (ii) all references made to our firm in such Proxy
Statement/Prospectus. In giving such consent, we do not admit that we come
within the category of persons whose consent is required under, and we do not
admit and we disclaim we are experts for purposes of, the Securities Act of
1933, as amended, and the rules and regulations promulgated thereunder.
Very truly yours,
ROBERT A. STANGER & CO., INC.
July 1, 1996
<PAGE>
EXHIBIT 23.4
[LOGO]
July 9, 1996
We hereby consent to (i) the inclusion of our opinion letter to the Special
Committee of the Board of Directors of Shurgard Storage Centers, Inc. ("SSCI")
as Appendix D to the Proxy Statement/ Prospectus of SSCI, which is part of
SSCI's Registration Statement on Form S-4, and (ii) all references made to our
firm in such Proxy Statement/Prospectus. In giving such consent, we do not admit
that we come within the category of persons whose consent is required under, and
we do not admit and we disclaim we are experts for purposes of, the Securities
Act of 1933, as amended, and the rules and regulations promulgated thereunder.
Very truly yours,
ALEX. BROWN & SONS INCORPORATED
<PAGE>
EXHIBIT 23.5
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Shurgard Storage
Centers, Inc. on Form S-4 of our report dated February 2, 1996, incorporated by
reference in the Annual Report on Form 10-K of Shurgard Storage Centers, Inc.
for the year ended December 31, 1995, and to the use of our reports on the
financial statement of IDS/Shurgard Income Growth Partners L.P., IDS/Shurgard
Income Growth Partners L.P. II and IDS/Shurgard Income Growth Partners L.P. III
for each of the three years in the period ended December 31, 1995 dated March 1,
1996, appearing in the Proxy Statement/Prospectus, which is part of this
Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Proxy Statement/ Prospectus.
DELOITTE & TOUCHE LLP
Seattle, Washington
July 10, 1996
