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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission file number 0-23466
SHURGARD STORAGE CENTERS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 91-1603837
(State of organization) (IRS Employer
Identification No.)
1201 Third Avenue, Suite 2200, Seattle, Washington 98101
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (206) 624-8100
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Class A Common Stock, par value $.001 per share New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. X
---
Aggregate market value of voting stock held by nonaffiliates of the
registrant as of March 3, 1997: $760,215,623
Class A Common Stock outstanding as of March 3, 1997: 27,695,748 shares
Class B Common Stock outstanding as of March 3, 1997: 154,604 shares
Documents incorporated by reference: Part III is incorporated by reference
from the Proxy Statement to be filed in connection with our Annual
Shareholders Meeting to be held May 13, 1997.
There are 58 pages.
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PART I
ITEM 1 - BUSINESS
OVERVIEW
Shurgard Storage Centers, Inc. (the Company) is a fully integrated,
self-administered and self-managed real estate investment trust (REIT) that
develops, acquires, owns and manages self storage centers. These self storage
centers offer easily accessible storage space for personal and business uses. We
are one of the four largest operators of self storage centers in the United
States. We own and operate, as of December 31, 1996, directly and through joint
ventures, 237 properties (including 234 self storage properties), containing
approximately 15.5 million net rentable square feet, which are located in 19
states. As a result of the merger (the Merger) with Shurgard Incorporated (the
Management Company) described below, we also manage 37 self storage centers and
one business park containing approximately 1.9 million net rentable square feet.
For the year ended December 31, 1996, our self storage centers had a weighted
average annual net rentable square foot occupancy rate of 87% and a weighted
average rent per net rentable square foot of $9.23.
The Company was incorporated in Delaware on July 23, 1993 and began
operations through the consolidation on March 1, 1994 of 17 publicly held real
estate limited partnerships (the Consolidation) that were sponsored by the
Management Company. On March 24, 1995, the Management Company merged with and
into the Company and became self-administered and self managed. Through the
Merger, we internalized the expertise and experience of the Management Company's
personnel that cover all aspects of the self storage industry and significantly
reduced conflicts of interest between the Company and the Management Company.
On November 14, 1996, we completed the purchase 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 (the IDS Partnerships), affiliated
partnerships whose properties were previously managed by the Company. These
acquisitions added 37 properties totaling 2.3 million net rentable square feet
to our portfolio.
At our 1997 Annual Meeting, shareholders will vote on a proposal to
reincorporate the Company in Washington for purposes of cost reductions. A
complete discussion of the impact of this proposal can be found in our Proxy
Statement to be filed with the SEC, in connection with the annual shareholder's
meeting.
BUSINESS STRATEGY
The Company implements its strategy of being a national leader in storage
products and services by (i) emphasizing customer service and satisfaction, (ii)
maintaining a portfolio of convenient and secure stores, (iii) optimizing
revenues through efficient rent pricing and collection policies, (iv) pursuing
on-going market research and Company marketing programs, and (v) integrating its
property management systems and procedures. Shurgard believes the key to the
success of its business strategy is the quality of its employees' interaction
with customers. Accordingly, employee training programs that emphasize a
team-oriented approach to customer service are utilized.
Commitment to Customer Service and Satisfaction
Our goal is to achieve a high level of customer satisfaction, and view the
quality of customers' interaction with employees as critical to our long-term
success. Through our emphasis on training, personnel development and
decentralized decision-making, we believe we attract well-qualified, highly
motivated employees committed to providing superior levels of customer service.
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Convenient and Secure Stores
Our stores are located for easy access, offer a range of premium storage
products and services for customer convenience, and emphasize security and
product quality. We believe that our strategy of offering high-quality,
convenient stores strengthens the brand image of Shurgard, attracts customers
and enables the Company to maintain premium rents.
Store Location and Hours. Our stores are generally located in major
metropolitan areas along retail and high-traffic corridors for easy customer
access, and usually have significant road frontage for high visibility. Although
hours vary from store to store, customers can generally access their individual
units between 6 a.m. and 9 p.m.
One-Stop Convenience. Our stores offer a range of storage products and
ancillary services, generally including sales of supplies such as packing
material, locks and boxes, as well as property insurance referrals, moving
company referrals, and other services such as Ryder truck rentals (through a
third-party rental company), to conveniently and efficiently address customers'
storage needs. In addition, we generally offer premium features such as
computer-controlled access and electronic security systems. In addition, a
number of our stores offer climate-controlled storage space.
Property Security. A variety of measures are used at our stores as
appropriate to enhance security. Such measures may include, among others, on
site personnel, electronic devices such as intrusion and fire alarms, access
controls, video and intercom surveillance devices, individual unit alarms,
perimeter beams, fencing and lighting. Customers are assigned a designated
personal identification number for use in connection with a computerized gate
access system. Each access is computer-logged. In addition, we have developed
and plan to continue to develop a proprietary package of security controls,
including software, video and interactive communication.
Capital Expenditures and Maintenance. We budget for a level of capital
expenditures consistent with our commitment to maintaining attractive,
well-maintained and secure self storage centers. This commitment contributes to
our ability to pursue a premium pricing strategy. In addition, capital
expenditures for signage and color scheme among our properties strengthens the
brand image of Shurgard. (See Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Capital Expenditures)
Selective Disposition. We regularly review our portfolio compared to
established internal standards and identify those few properties which can not
economically meet these standards. We intend to dispose of these properties over
time.
Marketing and Market Research
We employ various means to increase our share of the self storage market.
We place prominent advertisements in the yellow pages and seek to promote
customer awareness of our stores through highly visible store locations, site
signage and architectural features. We locate our stores along retail and
high-traffic corridors, usually with significant road frontage to increase
visibility. We build, on newly developed stores, a distinctive "lighthouse"
office to distinguish ourself from competitors and to increase customer
awareness of the Shurgard brand.
Primary marketing emphasis is placed on providing managers with telephone
sales skills to elicit customer needs and turn prospects into customers. We also
have a national call center to field overflow calls from individual properties.
Employees at the national call center are able to market and rent a unit at one
of our stores nearest to the caller.
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The Company has sophisticated market research skills, and maintains an
extensive market research database on its primary markets that permits it to
closely track occupancy levels, rental rates and other operational data
regarding self storage properties within these markets. We have also conducted
focus group research, telephone surveys, and utilize customer comment cards to
identify the primary considerations in customers' self storage choices and
satisfaction so that we can better attract and service customers.
We are testing a new strategy that makes storage more visible and more
convenient to potential customers. In 1997, we added kiosks in major malls in
the Seattle metropolitan area. These kiosks (a sales counter located in the
center of malls) are staffed with trained sales representatives who are
available to answer questions about both self storage and containerized storage.
They have computer links to area storage centers through which they can give
rate and availability information and lease units or containers to customers on
the spot.
Property Management Systems/Management Information Systems
The Company has integrated property management systems and procedures for
marketing, advertising, leasing, operations, maintenance and security of
properties and the management of on site personnel. Our computerized management
information system links our corporate office with each store. We have developed
and are installing proprietary software that expedites internal auditing,
financial statement and budget preparations, allows the daily exchange of
information with our corporate office, and manages detailed information with
respect to the tenant mix, demographics, occupancy levels, rental rates, revenue
optimization, payroll and other information relating to each store. Installation
of this software is expected to be completed during 1997. Additionally, we have
purchased a new network-based accounting package that will aid in the
compilation and dissemination of information from our stores. Management
believes that this new information system will be adequate to support our owned
properties and significant growth.
Other Activities
The Company also manages, under the Shurgard name, self storage properties
owned by others that meet our quality standards. Management of such properties
enables us to spread the cost of overhead over a greater number of properties.
Additionally, it enables us to expand our presence in the markets in which we
operate, to offer customers a broader geographic selection of self storage
properties to suit their needs and to establish relationships with property
owners that may lead to future acquisitions. Management fees earned by the
Company are not qualifying income for REIT qualification purposes. Accordingly,
we closely monitor the level of these activities to ensure our continued
qualification as a REIT.
GROWTH STRATEGIES
Our growth strategies are designed to maximize shareholder value by
increasing funds from operations through (i) increases in revenues and operating
efficiencies at existing stores and (ii) the development of new self storage
properties and the acquisition of additional self storage properties. We have an
integrated real estate and storage operations management team which combines its
experience to implement our growth plan. We believe that the experience of our
management team in operating, developing and acquiring self storage properties
and our access to capital markets strongly contribute to our ability to execute
these strategies.
Internal Growth Strategy
Our internal growth strategy is to increase same store cash flow by
achieving the highest rental rate structure consistent with strong occupancy
rates, containing costs and improving operating leverage, and undertaking
expansion of our existing stores.
o Revenue Optimization. We seek to optimize our revenues by
achieving the highest rental rate structure for our stores, consistent
with strong levels of occupancy, through the use of teams of
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store employees who are trained and authorized to set rental rates and
make rental rate changes based on their analysis of demand and
availability at a particular store. We encourage decentralized
decisions by store managers to change marginal rental rates in order to
ensure a fast, flexible response to changing market dynamics. Store
managers evaluate their property's rental rates on a periodic basis,
based on unit demand, unit availability and competitors' rental rates,
and can quickly change marginal rental rates to ensure that revenues
are optimized.
o Cost Containment and Improved Operating Leverage. We seek to
maximize cash flow by carefully containing operating expenses. For
example, we aggressively appeal our real estate tax assessments. In
addition, as the Company increases the number of properties in its
targeted markets, it achieves larger economies of scale and lessens the
impact of corporate overhead expense. The Company believes that its
management and operational procedures, which can be implemented over a
large number of properties, enable it to add new properties with little
additional overhead expense.
o Strategic Build-Outs. We seek to maximize revenues by
building out additional rentable storage space at suitable stores. We
receive high incremental returns on investments to build out additional
rental units, either through on site expansion or acquisition of
property adjacent to existing stores, because resulting revenue
increases are achieved with little increase in fixed operating costs.
External Growth Strategy
Our external growth strategy is to develop new, high-quality self storage
properties and to selectively acquire additional self storage properties that
meet or can be upgraded to our standards. In general, we plan to develop or
acquire new properties primarily in our existing markets and in new markets that
create economies of scale with our current network of stores. We seek to own at
least 15 stores in each of our markets in order to realize operating and
marketing efficiencies and increase brand awareness. We believe that the
experience of our management team in developing and acquiring self storage
properties strengthens our ability to pursue our external growth strategy.
We favor development or acquisition of self storage properties in major
metropolitan markets, located near retail or high-traffic corridors, usually
with significant road frontage to increase visibility. We rely on our market
personnel to target areas in which to develop and acquire new stores. We utilize
our staff of real estate professionals in various markets around the nation to
develop and acquire new stores in the markets presenting the best business
opportunities. We have developed comprehensive market expansion plans for each
of our target markets, and use these plans as the basis for selecting new store
locations and acquisition targets. The market expansion plans utilize a
demographic analysis of an area along with an evaluation of competitors'
locations, rates and product quality to determine the optimum number and
location of new stores. Management believes that, under current market
conditions, development will provide generally superior long-term returns when
compared to acquisitions of similar size, quality and location. Based on this
belief, our current growth plan focuses heavily on property development;
however, management continually analyzes market conditions and acquisition
opportunities.
Development. We believe that several factors favor our development
strategy:
o Development Expertise. We have substantial construction
management and architectural experience that was acquired over the past
23 years through the Management Company's development of more than a
third of the properties we currently own or manage. Since 1972, the
Company (or its predecessors) have maintained an internal development
staff, which currently employs 25 development professionals. The
in-house development staff oversees construction and architectural
design performed by third parties to ensure cost-effective, quality
development of self storage properties.
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o Strategic Site Selection to Maximize Revenues. To obtain the
best store locations, we target sites for development in urban areas
and up-scale retail areas that often require rezoning and other complex
development measures. We believe that the difficulties of developing
storage properties in such in-fill areas may discourage competitors
from locating nearby and, as a result, enable us to operate in areas
that are underserved. This in turn enables us to charge higher rental
rates.
o Increased Competition for Acquisitions. Recently, increased
competition for acquisitions of high-quality properties has decreased
the pool of favorably priced acquisition targets in many of our
markets. In these markets, we believe that returns from development are
generally more favorable than those from acquisitions, and make
attractive a strategy of developing new self storage centers in the
markets in which we currently operate. The Company may also pursue
opportunities for developments in new markets primarily through
affiliation agreements with established local operators or chain
acquisitions.
o Positive Supply and Demand Characteristics. Funding for the
construction of new self storage properties (especially from
traditional sources such as savings and loan associations) continues to
be below levels seen in the mid-80's, while demand for storage space
has continued to increase. The Company intends to capitalize on its
access to capital to pursue development of new storage properties under
current conditions.
o Focus on Quality and Brand Image Development. Development of
its own self storage properties provides the Company with greater
control to ensure excellent construction and consistent building design
that is inviting to customers. We believe our focus on quality and
consistency will enable us to further strengthen awareness of the
Shurgard brand, obtain repeat business, maintain premium prices and
differentiate ourself from our competitors.
The historical results of recent development partnerships sponsored by the
Management Company demonstrate the superior returns possible through
development; the development properties completed from 1989 to 1994 are
currently returning 15% on original property costs. There can be no assurance,
however, that we will achieve such returns on our development properties. Future
development may differ materially from results of past development properties.
Factors that may lead to different results include, but are not limited to, the
possibility of more competition to our new developments than was experienced in
the periods in which these partnerships were renting up their developments, the
quality and location of the competing projects being built, and the possibility
that the metropolitan markets in which we are developing may have less favorable
supply and demand characteristics.
Acquisitions. We also selectively acquire high-quality properties that
provide a strategic advantage to the Company. Additional acquisitions allow us
to spread overhead and certain management, marketing and advertising costs over
a greater number of revenue-producing assets. As a result, we can achieve
increasing economies of scale with each new property acquired. We complete a
thorough analysis of each property that we intend to acquire, including, but not
limited to, a review of capital expenditures that will be required for the
property to meet our standards and, at a minimum, a Phase I environmental
assessment report.
Shurgard's Storage To Go, Inc.. Our customer service focus means that we
are continually exploring new ways to service our customers' storage needs. One
of the most recent ways we have broadened our ability to meet customer needs is
by bringing storage directly to the customer through containerized storage.
Weatherized 8'x5'x8' storage containers are delivered to customers for packing.
The containers are then picked up and delivered to a warehouse where they are
stored. The customer may access their storage container in a showroom at the
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warehouse or have it redelivered to their home. In addition to the monthly
rental charge, service fees may be charged for pickup and delivery. This
business venture is currently being tested in the Seattle market.
We have committed to invest $2.85 million in this start up venture,
Shurgard's Storage To Go, Inc., with certain officers and key employees who have
committed $150,000 and an unaffiliated third party who has committed $1 million.
The current $4 million commitment will provide enough capital to begin operation
in one or two additional markets. This subsidiary is not legally controlled by
the Company (we own no voting stock), is not a qualified REIT subsidiary and its
income is subject to corporate level tax.
CAPITAL STRATEGY
We expect to fund future developments and acquisitions through the
incurrence of additional indebtedness, future offerings of equity securities and
retained cash flow. In the long-term, we anticipate reducing our payout ratio in
order to retain cash flow for growth.
To fund development and acquisitions, we have up to $175 million available
pursuant to our revolving credit facility. The actual amount available under
this revolving credit facility varies based on the terms of the agreement. At
December 31, 1996, based on those terms, the Company could borrow the entire
$175 million. On July 1, 1997, the maximum amount available under this credit
facility decreases to $100 million.
We anticipate that cash flow from operating activities will continue to
provide adequate capital for debt service payments until maturity, as well as
for distribution payments in accordance with REIT requirements. We anticipate
refinancing outstanding debt upon maturity through long-term debt or equity or
some combination thereof.
Under our By-Laws, subject to certain exceptions, we may not incur debt
if, after giving effect to such borrowing, our Indebtedness for borrowed funds
would exceed 50% of our Total Assets or 300% of our Adjusted Net Worth (as such
terms are defined in the By-laws). As of December 31, 1996, our Indebtedness was
approximately 32% of our Total Assets and approximately 50% of our Adjusted Net
Worth.
THE SELF STORAGE INDUSTRY
The self storage industry serves an important function in the commercial
and residential real estate markets. Self storage properties were first
developed in the early 1960's in the southwestern United States in response to
the growing need for low-cost, accessible storage. A number of factors
accelerated the demand for low-cost storage, including, among others, a more
mobile society, with individuals moving to new homes and new cities needing
short-term storage for their belongings, the increasing cost of housing
(resulting in smaller houses), the increased popularity of apartments and
condominiums, more individuals with growing discretionary income (resulting in
the purchase of items such as boats and recreational vehicles that cannot be
stored at residences), the growing number of small businesses and the escalating
cost of other storage alternatives. As the demand for such storage increased,
and the acceptance of self storage became more widespread, self storage
properties were built throughout the United States. Generally, such properties
were constructed along major thoroughfares that provided ready access and public
visibility or in outlying areas where land was inexpensive. In certain areas of
the country, where new construction was impractical because of construction
costs, lack of suitable sites or other restrictions, older structures have been
converted into self storage properties.
We believe, based on our experience, that the self storage industry is
characterized by fragmented ownership, high gross margins, low levels of price
sensitivity and increasing customer demand. Typical customers of a self storage
property include individuals, ranging from homeowners to college students, and
commercial users,
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such as sales representatives and distributors, who require frequent access, to
business owners requiring seasonal storage. We believe business use is a growing
segment of demand in the industry. A single customer rarely occupies more than
1% or 2% of the net rentable area in any particular store.
Capital expenditures are generally less for self storage properties as
compared to other types of commercial real estate due to the properties'
structural simplicity and durable materials and the lack of tenant improvement
demands. Primary capital expenditures include periodic expenditures for
replacing roofs and pavement, as well as improvements such as expansions and
unit reconfigurations. Expense items include repairing asphalt, doors, fences
and masonry walls, maintaining landscaping, and repairing damage caused by
customer vehicles. Minimal maintenance is required within a storage unit between
customers.
COMPETITION
Competition exists in every market in which our stores are located and as
a result we compete with, among others, national, regional and numerous local
self storage operators and developers. The primary factors on which competition
is based are location, rental rates, security, suitability of the property's
design to prospective tenants' needs and the manner in which the property is
operated and marketed. We believe that the primary competition for potential
customers of any of our self storage centers comes from other self storage
properties within a five-mile radius of that store. We have positioned our
stores within their respective markets as a high-quality operator that
emphasizes customer service and security. We do not seek to be the lowest-price
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 our 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 the growth of competition. Due
to recent increases in plans for development of self storage properties, we
anticipate that increased available storage space will continue to reduce
occupancy levels per storage property in certain markets in 1997 and 1998 and
further intensify competition among storage providers for available tenants in
those markets. The extent to which we are affected by competition will depend in
significant part on local market conditions.
REGULATION
Environmental Regulations
The Company is subject to federal, state and local environmental
regulations that apply to the ownership, management and development of real
property, including regulations affecting both construction activities and the
operation of self storage properties.
In developing properties and constructing improvements, we utilize
environmental consultants and/or governmental data to determine whether there
are any floodplains, wetlands or environmentally sensitive areas that are part
of the property to be developed. If any such areas are identified, development
and construction are planned in conformance with federal, state, and local
environmental and land-use requirements.
Under various federal, state and local laws, ordinances and regulations,
an owner or operator of real property may become liable for the costs of removal
or remediation of certain hazardous substances released on or in its property.
Such laws may impose liability without regard to whether the owner or operator
knew of, or was responsible for, the release of such hazardous substances. The
presence of hazardous substances on a property may adversely affect the owner's
ability to sell the property or to borrow using the property as collateral, and
may cause the owner or manager of the property to incur substantial remediation
costs. In addition to claims for cleanup costs, the presence of hazardous
substances on a property could result in the owner or manager incurring
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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.
We have not been notified by any governmental authority of any current,
material environmental noncompliance, claim or liability in connection with any
of the properties it owns or manages. We have not been notified of a current
claim for personal injury or property damage by a private party in connection
with any of the properties in connection with environmental conditions. We have
received a Phase I environmental assessment report prepared by an independent
environmental consultant for each of the properties we own.
We are not aware of any environmental condition with respect to the
properties we own or manage that could have a material adverse effect on our
financial condition or results of operations. There can be no assurance,
however, that any environmental assessments undertaken with respect to the
properties have revealed all potential environmental liabilities, that any prior
owner or operator of the properties did not create any material environmental
condition not known to us, 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 our financial condition or results of operation. In addition, there
can be no assurance that (i) future laws, ordinances or regulations will not
impose any material environmental liability, (ii) the current environmental
condition of our 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 us, or
(iii) tenants will not violate their leases by introducing hazardous or toxic
substances into our owned or managed properties that could expose us to
liability under federal or state environmental laws.
Americans With Disabilities Act; Fire and Safety Regulations
Under the ADA, all public accommodations are required to meet certain
federal requirements relating to physical access and use by disabled persons.
Compliance might require, among other things, removal of access barriers. A
determination that we are not in compliance with the ADA could result in the
imposition of fines, injunctive relief, damages or attorneys' fees. If we were
required to make modifications to comply with the ADA, our ability to make
expected distributions to our shareholders could be adversely affected; however,
management believes that such effect would not be material. In addition, we are
required to operate our 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 our
properties. Compliance with such requirements may require substantial capital
expenditures, which would reduce money otherwise available for distribution to
shareholders.
INSURANCE
We believe that our self storage properties are covered by adequate fire,
flood, wind, earthquake and property insurance, as well as business interruption
insurance, provided by reputable companies and with commercially reasonable
deductibles and limits. We purchase title insurance on all of our properties at
the time of acquisition. We use our discretion in determining amounts, coverage
limits and deductibility provisions of title, casualty and other insurance,
based on the purchase price paid for such property, in each case with a view to
obtaining appropriate insurance coverage on our properties at a reasonable cost
and on suitable terms.
EMPLOYEES
As of December 31, 1996, the Company employed approximately 700 persons.
None of our employees are covered by a collective bargaining agreement. We
believe that our relations with our employees are good.
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ITEM 2 - PROPERTIES
The Company owns, as of December 31, 1996, directly and through its
subsidiaries and joint ventures, 237 properties (including 234 self storage
properties) located in 19 states. Our self storage properties are designed to
offer accessible storage space for personal and business use. 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. We believe that it is desirable to have commercial customers because
they tend to rent larger units, stay for longer terms, are more reliable payers
and are less sensitive to price increases. Accordingly, we have marketing
programs that target commercial users. We estimate that commercial users account
for approximately 30%-35% of our total occupancy.
Our 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.
Additionally, a number of our properties include climate-controlled storage
units for which we charge rents at substantial premiums.
Customers of self storage properties are generally responsible for
delivering and retrieving their goods. Many leased spaces can be accessed
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. We offer truck rentals at a majority
of our properties for added convenience to our customers and to differentiate
ourself from most of our competitors. In addition to truck rentals, we sell
locks, boxes and packing and storage materials at our stores.
The leasing, maintenance and operation of our stores are the
responsibility of store managers. The property's security is provided through a
variety of systems that may include, among others, on site personnel, electronic
devices such as intrusion and fire alarms, access controls, video and intercom
surveillance devices, property fencing and lighting.
Although our stores range considerably in size, most properties consist of
one or more single-story buildings that are located on a site of 1.5 to 5 acres.
The smallest store has approximately 25,000 net rentable square feet, while the
largest store has approximately 300,000 net rentable square feet. The properties
generally are constructed with concrete block or tilt-up concrete panels, with
steel columns or precast concrete columns that rest on concrete footings and
slabs, and have built-up tar roofs or pitched truss roofs with shingles or
standing seam metal roofs. The interior walls are generally constructed with
metal studs and partitions or other construction materials that are secure but
readily movable. The parking areas and driveways are generally asphalt or
cement. All stores have fencing, floodlights, and electronic gates.
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.
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The following table provides information regarding the year developed or
acquired (by the Company or by one of the predecessor partnerships., 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 us as of December 31,
1996. We own additional properties which are under development, but not
reflected in this table.
<TABLE>
<CAPTION>
APPROXIMATE
PROPERTY OWNED YEAR NET RENTABLE
PROPERTY NAME PROPERTY LOCATION STATE SINCE BUILT SQUARE FEET ACREAGE
- ------------------------ ------------------- -------- ------- ------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Chandler Chandler AZ 1986 1986 69,000 4.0
Dobson Ranch Mesa AZ 1996 1978 55,000 4.2
Gilbert Gilbert AZ 1996 1985 66,000 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
Aliso Viejo Aliso Viejo CA 1996 1996 70,000 3.5
Castro Valley Castro Valley CA 1996 1975 72,000 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/Union City(2) Hayward CA 1985 1985 90,000 5.7
Huntington Beach Huntington Beach CA 1988 1986 91,000 3.3
Kearney-Balboa San Diego CA 1986 1984 94,000 2.3
La Habra La Habra CA 1986 1979/91 97,000 7.1
Martinez (3) Martinez CA 1995 1987 56,000 3.0
Mountain View Mountain View CA 1987 1986 29,000 0.7
Newark Newark CA 1996 1991 61,000 3.1
Ontario Ontario CA 1996 1984 57,000 2.1
Orange Orange CA 1996 1985 90,000 2.8
Palo Alto Palo Alto CA 1986 1987 49,000 1.4
Pinole (3) Pinole CA 1995 1988 38,000 2.5
S. San Francisco San Francisco CA 1987 1985 57,000 2.1
Sacramento Sacramento CA 1996 1991 53,000 2.6
San Leandro San Leandro CA 1996 1991 59,000 2.7
San Lorenzo San Lorenzo CA 1996 1990 54,000 1.9
Santa Ana Santa Ana CA 1986 1975/86 168,000 8.1
Solana Beach (4) Solana Beach CA 1987 1984 95,000 4.5
Sunnyvale Sunnyvale CA 1986 1974/75 122,000 6.5
Tracy Tracy CA 1996 1986 70,000 3.0
Walnut Walnut CA 1996 1986 96,000 3.6
Westwood Santa Monica CA 1986 1988 38,000 0.3
Lakewood Golden CO 1986 1985 67,000 2.7
</TABLE>
-11-
<PAGE> 12
<TABLE>
<CAPTION>
APPROXIMATE
PROPERTY OWNED YEAR NET RENTABLE
PROPERTY NAME PROPERTY LOCATION STATE SINCE BUILT SQUARE FEET ACREAGE
- ------------------------ ------------------- -------- ------- ------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
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
Davie (5) Davie FL 1996 1990 76,000 5.5
Delray Beach Delray Beach FL 1996 1986 77,000 4.5
Margate Margate FL 1996 1984 75,000 4.0
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
Clairemont Atlanta GA 1996 1990 42,000 1.1
Decatur Atlanta GA 1995 1992 63,000 2.5
Forest Park Forest Park GA 1996 1980 65,000 7.9
Gwinnett Lawrenceville GA 1996 1996 54,000 4.4
Morgan Falls Dunwoody GA 1996 1990 76,000 3.7
Norcross Norcross GA 1996 1984 62,000 9.3
Perimeter Atlanta GA 1996 1996 61,000 3.3
Roswell Roswell GA 1986 1986 57,000 3.8
Stone Mountain Stone Mountain GA 1996 1985 61,000 10.1
Tucker Tucker GA 1996 1987 60,000 4.6
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
Carmel Carmel IN 1996 1996 61,000 4.3
College Park Indianapolis IN 1986 1984 70,000 6.0
Georgetown Indianapolis IN 1996 1996 83,000 4.2
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
</TABLE>
-12-
<PAGE> 13
<TABLE>
<CAPTION>
APPROXIMATE
PROPERTY OWNED YEAR NET RENTABLE
PROPERTY NAME PROPERTY LOCATION STATE SINCE BUILT SQUARE FEET ACREAGE
- ------------------------ ------------------- -------- ------- ------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Suitland Suitland MD 1987 1985 44,000 2.7
Ann Arbor Ann Arbor MI 1988 1977 62,000 3.9
Canton Canton MI 1988 1986 58,000 3.3
Fraser 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 LIvonia MI 1988 1985 67,000 4.8
Madison Heights Detroit MI 1995 1977 66,000 4.1
Plymouth Canton Township MI 1985 1979 75,000 5.3
Rochester Utica MI 1996 1989 57,000 4.8
Southfield Southfield MI 1983 1976 77,000 4.3
Sterling Heights Sterling Heights MI 1996 1986 105,000 8.9
Taylor Taylor MI 1995 1980 66,000 4.2
Troy East Troy MI 1981 1975/77 79,000 4.8
Troy West Troy MI 1983 1979 88,000 5.2
Walled Lake Walled Lake MI 1985/89 1984 68,000 4.3
Warren 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
Gold Brooklyn NY 1986 1940 108,000 0.4
Northern Long Island City NY 1987 1940 78,000 1.9
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
16th & Sandy (3) Portland OR 1995 26,000 0.5
Allen Blvd. Beaverton OR 1996 1973 42,000 2.6
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
Division (5) Portland OR 1996 1992 47,000 2.0
Gresham Portland OR 1996 1996 64,000 4.4
Hillsboro Portland OR 1996 1996 65,000 8.9
King City Tigard OR 1987 1986 84,000 4.9
Liberty Road Salem OR 1995 1993 54,000 4.4
Milwaukie (5) Milwaukie OR 1996 1990 62,000 3.3
Oregon City Portland OR 1995 1992 57,000 3.2
Portland Portland OR 1988 1988 49,000 2.1
</TABLE>
-13-
<PAGE> 14
<TABLE>
<CAPTION>
APPROXIMATE
PROPERTY OWNED YEAR NET RENTABLE
PROPERTY NAME PROPERTY LOCATION STATE SINCE BUILT SQUARE FEET ACREAGE
- ------------------------ ------------------- -------- ------- ------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Salem Salem OR 1983 1979/81 67,000 3.8
Airport Philadelphia PA 1986 1985 101,000 6.7
Edgemont Philadelphia PA 1995 1992 64,000 5.5
West Chester (4) West Chester PA 1986 1980 87,000 7.0
Franklin (6) Nashville TN 1995 1995 55,000 3.3
Hermitage (7) Nashville TN 1995 1995 68,000 19.0
Rivergate(6) Nashville TN 1996 1996 83,000 4.7
Medical Center (8) 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 Road Irving TX 1989 1985/86 89,000 6.3
Blanco Road San Antonio TX 1988 1989/91 66,000 3.6
East Lamar Arlington TX 1996 1996 58,000 3.0
Euless Blvd. Hurst TX 1987 1974 68,000 4.7
Federal Houston TX 1988 1988 55,000 3.4
Fredicksburg San Antonio TX 1987 1978/82 82,000 4.5
Greenbriar Houston TX 1989 1988 60,000 1.8
Highway 6 Houston TX 1995 1995 57,000 4.1
Hill Country Village San Antonio TX 1985 1982 79,000 4.0
Hillcroft (4) Houston TX 1991 1988 59,000 3.4
Imperial Valley Houston TX 1988 1987 54,000 3.1
Irving/MacArthur Blvd.(2) Irving TX 1985 1975/84 141,000 11.4
Kingwood Kingwood TX 1988 1988 54,000 3.3
McArthur Crossing Irving TX 1996 1996 66,000 4.1
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 Dallas TX 1995 1995 46,000 3.5
River Oaks (5) Houston TX 1996 1989 67,000 2.4
San Antonio NE San Antonio TX 1985 1982 74,000 3.6
South Cooper Arlington TX 1996 1996 61,000 3.7
Sugarland Sugarland TX 1988 1987 55,000 3.0
T.C. Jester Houston TX 1996 1990 64,000 2.8
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
Windcrest San Antonio TX 1996 1975 86,000 6.3
Woodforest Houston TX 1996 1996 65,000 6.2
Woodlands Houston TX 1988 1988 64,000 3.8
Bayside Virginia Beach VA 1988 1984 28,000 1.7
Burke Fairfax VA 1996 1984 32,000 1.7
Cedar Road Chesapeake VA 1994 1989 36,000 2.1
Charlottesville Charlottesville VA 1994 1984 32,000 2.1
Chesapeake Chesapeake VA 1996 1986 58,000 5.2
</TABLE>
-14-
<PAGE> 15
<TABLE>
<CAPTION>
APPROXIMATE
PROPERTY OWNED YEAR NET RENTABLE
PROPERTY NAME PROPERTY LOCATION STATE SINCE BUILT SQUARE FEET ACREAGE
- ------------------------ ------------------- -------- ------- ------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
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
Jeff 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
Leesburg Leesburg VA 1996 1986 28,000 1.6
Manassas East & West(2) Manassas VA 1988 1984 70,000 3.5
Midlothian Turnpike Richmond VA 1996 1984 44,000 2.9
Newport News North Newport News VA 1996 1986 59,000 3.8
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
S. Military Highway Virginia Beach VA 1996 1984 48,000 2.7
Temple Avenue Petersburg VA 1994 1989 34,000 4.0
Virginia Beach Virginia Beach VA 1989 1985 36,000 2.3
Auburn Auburn WA 1996 1996 62,000 7.3
Aurora North Seattle WA 1986 1978 58,000 1.6
Bellefield Bellevue WA 1996 1978 67,000 2.9
Bellevue East & West (2) Bellevue WA 1984 1975 165,000 10.8
Bellingham Bellingham WA 1981 1981 73,000 5.7
Burien Seattle WA 1985 1974 92,000 5.3
Canyon Park (9) Bothell WA 1996 1990 58,000 4.4
Capitol Hill (10) Seattle WA 1987 1988 76,000 0.7
Downtown Seattle (11) Seattle WA 1986 1912 28,000 0.3
E. Bremerton Bremerton WA 1996 1985 66,000 3.1
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
Factoria Square Bellevue WA 1996 1989 70,000 1.9
Federal Way Federal Way WA 1984 1975 134,000 5.7
Fife (12) Tacoma WA 1984 1977 64,000 3.9
Hazel Dell (5) Vancouver WA 1996 1989 56,000 3.4
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
Kennydale Renton WA 1996 1991 67,000 2.8
Lake City (1) Seattle WA 1995 1987 51,000 1.1
North Spokane Spokane WA 1984 1976 76,000 4.1
Puyallup Puyallup WA 1996 1986 28,000 1.7
</TABLE>
-15-
<PAGE> 16
<TABLE>
<CAPTION>
APPROXIMATE
PROPERTY OWNED YEAR NET RENTABLE
PROPERTY NAME PROPERTY LOCATION STATE SINCE BUILT SQUARE FEET ACREAGE
- ------------------------ ------------------- -------- ------- ------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
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 Center Renton WA 1985 1979 67,000 4.1
South Hill` Seattle WA 1995 1980 44,000 2.8
South Tacoma Tacoma WA 1987 1975 46,000 3.1
Sprague (5) Tacoma WA 1996 1950/89 51,000 2.8
Tacoma Interstate (12) 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 (13) Greater Brussels Belgium 1995 1995 49,000 0.4
Molenbeek (13) Greater Brussels Belgium 1995 1995 34,000 0.5
Waterloo (13) Greater Brussels Belgium 1995 1995 86,000 3.5
Zaventem(13) Greater Brussels Belgium 1996 1996 35,000 3.0
------------ --------
Total 15,436,000 899.7
============ ========
</TABLE>
- ---------------
(1) We own a 74.1% interest in this property. (Does not include general
partner interest)
(2) These properties are now operated as one property.
(3) We own a 36.1% interest in this property. (Does not include general
partner interest)
(4) We do not have fee title, but have a long-term lease, with respect to the
land on which property is located.
(5) We own a 3.8% interest in this property. (Does not include general partner
interest)
(6) We own a 85.5% interest in this property.
(7) We own a 50% interest in this property.
(8) We own a 67% interest in this property.
(9) We own a 3.2% interest in this property. (Does not include general
partner interest)
(10) We own a 90% interest in this property.
(11) Property is a commercial building.
(12) Property is a business park.
(13) We own a 85.6% interest in this property.
-16-
<PAGE> 17
The following table sets forth information by state regarding weighted
average occupancy and weighted average rent per square foot for the domestic
self storage properties owned by the Company for the years ended December 31,
1996, 1995 and, 1994.
<TABLE>
<CAPTION>
AVERAGE OCCUPANCY AVERAGE RENT PER SQUARE FOOT
------------------------- ------------------------------
STATE 1996 1995 1994 1996 1995 1994
- ----------- ------- ------- ------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Arizona 78% 84% 91% $ 9.21 $ 9.15 $ 7.50
California 88 85 86 10.32 10.04 9.28
Colorado 82 88 91 8.08 7.52 7.01
Florida 85 83 85 8.41 8.12 7.70
Illinois 94 95 95 8.60 8.30 7.84
Michigan 91 93 91 8.09 7.38 6.66
New York 89 92 87 15.98 15.14 14.63
Oregon 84 92 93 8.34 7.77 7.22
Texas 79 82 87 8.19 8.13 7.63
Virginia 92 90 89 9.35 8.95 9.40
Washington 90 89 88 8.41 8.17 7.83
Other 87 89 92 10.11 9.48 8.53
------- ------- ------- --------- --------- --------
Weighted Average 87% 88% 89% $ 9.23 $ 8.84 $ 8.25
</TABLE>
The following table sets forth information for all domestic properties
owned by the Company (and its predecessors) regarding weighted average occupancy
and weighted average rent per square foot for the years ended December 31, 1996
through December 31, 1992.
<TABLE>
<CAPTION>
1996 1995 1994 1993(2) 1992(1)
---- ---- ---- ------- -------
<S> <C> <C> <C> <C> <C>
Weighted average occupancy 87% 88% 89% 87% 86%
Weighted average rent per
square foot $ 9.23 $ 8.84 $ 8.25 $ 7.84 $ 7.68
</TABLE>
- ------------------
(1) Calculated as the simple average of the information for the 17
partnerships included in the Consolidation.
(2) Calculated as the weighted average of the original 137 properties owned by
the Company.
Leasing of Properties. Rental units are usually rented on a month-to-month
basis. The average rental period for a tenant is approximately 1.5 years. This
average is comprised of the rental periods of business tenants, who tend to
lease space for longer periods (approximately 2-3 years), and those of
residential customers, who tend to lease space for shorter periods
(approximately six months to a year). Rental income from leased space
constitutes the primary revenue from such properties, but additional revenues
are 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, the property location, the quality of the
property and the location of competition within five miles.
Other Properties. The Company owns two business parks, both of which are
located near Tacoma, Washington. The business parks were built in 1977 and 1979
and contain an aggregate of approximately 191,000 net rentable square feet. We
also manage one additional business park for an unaffiliated owner. In addition,
we own a property in downtown Seattle, Washington that is leased to a records
storage company affiliated with our management, on terms approved by our
disinterested directors.
-17-
<PAGE> 18
ITEM 3 - LEGAL PROCEEDINGS
On July 16,1996, Irving and Roberta B. Schuman, unitholders of
IDS/Shurgard Income Growth Partners L.P. II, filed a purported class and
derivative action complaint on behalf of the IDS Partnerships in the Superior
Court of the State of Washington in and for the County of King naming the
Company, Charles K. Barbo, each of the General Partners of the IDS partnerships,
and others as defendants.
In the complaint, the plaintiffs asserted claims for breach of fiduciary
duty, aiding and abetting a breach of fiduciary duty, breach of contract and
fraud against each of the defendants for their actions taken in connection with
the tender offers for units in the IDS partnerships and the mergers of the
Company with the IDS partnerships. The plaintiffs requested monetary damages and
equitable relief. The Plaintiffs' motion for preliminary injunction was denied
on October 3, 1996.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the fourth
quarter of 1996.
-18-
<PAGE> 19
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
On May 5, 1995, the Company began trading on the NYSE under the symbol
"SHU." Before May 5, 1995, the Common Stock was quoted on the Nasdaq National
Market under the symbol "SHUR." As of March 3, 1997, there were 27,505 holders
of record of our Common Stock and the reported NYSE closing price per share of
Common Stock was $28.38.
The table below sets forth for the fiscal periods indicated the high and
low closing prices per share of Common Stock as reported in published financial
sources, and distributions declared.
<TABLE>
<CAPTION>
PRICE PER SHARE OF
COMMON STOCK
---------------------- DISTRIBUTIONS
HIGH LOW DECLARED(1)
-------- --------- -----------------
<S> <C> <C> <C>
1995
First Quarter................. $23.75 $19.50 $.46
Second Quarter(2)............. 24.25 22.63 .46
Third Quarter................. 26.00 22.25 .46
Fourth Quarter................ 27.38 24.75 .56(3)
1996
First Quarter................. 27.50 25.88 .47
Second Quarter................ 26.13 24.13 .47
Third Quarter................. 26.00 23.63 .47
Fourth Quarter................ 29.63 25.13 .47
</TABLE>
- -------------
(1) Distributions declared by the Board of Directors based on financial
results for the quarter specified.
(2) The high and low closing prices of the Common Stock were $23.50 and $23.00
per share, respectively, during the period from April 1, 1995 through May
4, 1995, when the Common Stock was quoted on the Nasdaq National Market.
The high and low closing prices of the Common Stock were $24.50 and $22.63
per share, 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.
(3) Includes a special distribution of $.10 declared in November 1995.
Holders of shares of Company Common Stock are entitled to receive
distributions when, as and if declared by our Board of Directors out of any
assets legally available for payment. We are required to distribute annually to
our shareholders at least 95% of our "REIT taxable income," which, as defined by
the relevant tax statutes and regulations, is generally equivalent to net
taxable ordinary income.
-19-
<PAGE> 20
ITEM 6 - SELECTED FINANCIAL DATA
The following selected consolidated financial data of the Company should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the other financial information
included elsewhere in this Form 10-K.
(in thousands, except per share data)
<TABLE>
<CAPTION>
COMPANY PREDECESSOR(1)
--------------------------------------------- ---------------------------------------
AT OR FOR YEAR AT OR FOR YEAR
ENDED DEC. 31, JAN 1 TO ENDED DEC. 31,
--------------------------------------------- MAR 1, -------------------------
1996 1995 1994(2) 1994 1993 1992
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Total revenues $ 110,399 $ 96,771 $ 66,921 $ 12,368 $ 72,346 $ 67,105
Net income 32,785 29,572 17,821 34,286 18,284 22,055
Net income per
common share(3) 1.39 1.43 1.05 63.97 34.11 41.15
Distributions
declared per
common share(3) 1.41(6) 2.38(5) 1.02(4) 732.05 59.57 56.71
BALANCE SHEET DATA:
Total assets 804,483 610,394 494,590 391,685 393,982 400,182
Total borrowings 272,791 142,840 167,137 -- 26,016 24,365
</TABLE>
- -----------
(1) The Predecessor information reflects the combination of the 17
partnerships included in the Consolidation.
(2) Operating data for the year ended December 31, 1993 are not included as
they are de minimis.
(3) Predecessor "per share" information is net income and distributions per
limited partner unit. Distributions for the period from January 1, 1994 to
March 1, 1994 include the liquidating distribution made in connection with
the Consolidation.
(4) Does not include the distribution of $.44 per share declared in January
1995 based on financial results for the quarter ended December 31, 1994.
(5) Includes distribution of $.44 per share declared in January 1995 based on
financial results for the quarter ended December 31, 1994 as well as the
special distribution of $.10 declared in November 1995.
(6) Does not include the distribution of $.47 per share declared in January
1997 based on financial results for the quarter ended December 31, 1996.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is a fully integrated, self-administered, self-managed REIT
headquartered in Seattle, Washington, specializing in all aspects of the self
storage industry. We operate a network of more than 270 storage centers located
throughout the United States and in Europe. Of these properties, we own, as of
December 31, 1996, directly and through our wholly owned subsidiaries and joint
ventures, 237 operating properties (including 234 self storage properties),
containing approximately 15.5 million net rentable square feet, located in 19
states. Self storage properties offer low-cost, easily accessible storage space
for personal and business uses. Our investment objective is to maximize
shareholder value by increasing funds from operations through internal growth
and through the acquisition and development of additional self storage
properties. We believe that our access to both the debt and equity markets, the
experience of our management team in acquiring, developing, and operating self
storage properties, our geographic diversification and our emphasis on quality
will enhance our ability to achieve this objective.
-20-
<PAGE> 21
Our mission is to be the national leader in storage products and services.
We believe we can obtain this goal by focusing on providing exceptional customer
service and the highest quality products to our customers.
We believe that in order to supply the best customer service in the
industry, we must have employees who are both responsive to customer needs and
innovative in their approach to servicing those needs. Accordingly, we promote
employee empowerment and training programs, as well as personnel policies that
attract quality people. We also promote entrepreneurship among our employees by
encouraging the exchange of ideas on providing new ways to meet customers'
ever-changing needs. One service that is currently being tested as a result of
this company culture involves bringing storage to the customer through a
containerized storage business. Another is designed to make the process of
renting storage more convenient by placing kiosks in local malls at which a
customer may rent a storage unit.
As part of our focus on obtaining the highest quality products for our
customers, we look for those storage centers that are located in well populated
retail areas. When entering a market, we seek dominant locations within specific
three to five mile trade areas. "Dominant locations" refers to highly visible
and accessible locations in retail corridors. This kind of visibility creates
customer awareness. Through multiple locations of this kind within a
metropolitan area, we establish brand recognition as well as economies of scale
in operations of our stores. We seek to own at least 15 stores in each of our
markets in order to realize these efficiencies. To further enhance brand
recognition, we strive to achieve a uniform look to our properties. This is
accomplished through the use of signage, color schemes, quality of the building
and our trademark "lighthouse" office design in new developments.
Throughout the past three years, we have expanded our portfolio of real
estate properties and real estate based investments through the use of equity
and debt capital. During 1996, we acquired 40 (four in which we previously owned
a 30% interest) and developed 14 new centers directly or through joint ventures.
The following discussion of operations provides additional comparative financial
information and discussion of each of the areas of growth, including internal or
same store growth, direct acquisitions, domestic development, European
development, property management operations and other forms of real estate
investments. A discussion of capital expenditures, financing transactions and
liquidity is also included.
When used in this discussion and elsewhere in this Annual Report on Form
10-K, the words "believes," "anticipates," "projects" and similar expressions
are intended to identify forward-looking statements regarding financial
performance. Such statements are subject to risks that could cause actual
results to differ materially including the risk that competition from new self
storage facilities or other storage alternatives may cause rent to decline and
may cause occupancy rates to drop. We are also at risk for increases in expenses
of labor, taxes, marketing and construction. Other factors which could affect
our financial results are described below and in Item 1 (Business) of this
Annual Report on Form 10-K. Forward-looking statements are based on estimates as
of the date hereof. The Company disclaims any obligation to publicly release the
results of any revisions to these forward-looking statements reflecting new
estimates, events or circumstances after the date hereof.
INTERNAL GROWTH
In 1996, we continued our focus on increasing net operating income from
our existing real estate assets. One of the ways we analyze our performance is
to measure year over year improvements in same store operating results. We
define "same stores" each quarter as those stabilized storage centers which were
owned for the entire quarter of both comparison years. Thus, storage centers
acquired in May of 1995 are included only in the third and fourth quarter same
store comparison of 1995 versus 1996. Developed storage centers are included in
same stores in the first full quarter following two years of operations. Annual
same store data is the combination of same store data for each quarter. Other
storage companies may define same stores differently, which will affect their
comparability. The following table summarizes same store operating performance
from 1996 to 1994.
-21-
<PAGE> 22
SAME STORE RESULTS
(dollars in thousands except average rent)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,(1) YEAR ENDED DECEMBER 31,(2)
----------------------------------- -------------------------------------
% PRO FORMA %
1996 1995 CHANGE 1995 1994(3) CHANGE
----------- ----------- ------ ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Rental revenue $ 92,334 $ 88,434 4.4% $ 81,113 $ 76,777 5.6%
Property operating expenses(4) 28,031 26,545 5.6% 24,553 23,822 3.1%
----------- ----------- ----------- -----------
Net operating income $ 64,303 $ 61,889 3.9% $ 56,560 $ 52,955 6.8%
=========== =========== =========== ===========
Avg. annual rent per sq.ft.(5) $ 9.22 $ 8.89 3.7% $ 8.92 $ 8.36 6.7%
Avg. sq.ft. occupancy 89% 88% 88% 89%
Total net rentable sq.ft. (4th qtr) 10,900,000 10,900,000 9,900,000 9,900,000
No. of properties (4th qtr) 169 169 154 154
</TABLE>
- --------------
(1) Includes 30% of the operating results of four properties in which we own a
30% interest (operating results for these properties are not consolidated
in our financial statements), as well as 74% of the operating results of
three properties in which we own a 74% interest and 90% of the operating
results of one property in which we own a 90% interest (operating results
for those properties are consolidated in our financial statements).
Includes only operating results for the six months ended December 31, 1995
and 1996 for the 15 properties purchased in the first half of 1995.
(2) Excludes the three storage centers sold in 1995. Includes 30% of the
operating results of four properties in which we own a 30% interest
(operating results for these properties are not consolidated in our
financial statements), as well as 90% of the operating results of one
property in which we own a 90% interest (operating results for this
property are consolidated in our financial statements). Includes only
operating results for the three months ended December 31, 1994 and 1995
for the 20 properties purchased in September 1994.
(3) Represents the actual historical results of the properties as if they had
been acquired on January 1, 1994.
(4) Includes all direct property expenses. Does not include property
management fees previously charged by the Management Company nor does it
include any allocation of joint expenses incurred such as off-site
management personnel.
(5) Average annual rent per square foot is calculated by dividing actual rent
collected by the average number of square feet occupied during the period.
As demonstrated by the operating information above, our same store net
operating income is primarily driven by our ability to increase revenues while
limiting expense increases. Various programs are utilized to bring in and keep
storage customers in order to maximize property revenue. Providing the best
customer service requires exceptional employees and on-going quality training.
Personnel are trained in all aspects of storage operations from operating the
computer system and renting a unit to analyzing demand and pricing strategies.
They are also trained and authorized to make substantially all pricing and
customer service decisions on-site, with reference to our values and mission
statement. These training and personnel programs are continually evaluated and
improved upon. Another revenue enhancing program undertaken in 1994 was the
establishment of the national call center which fields overflow calls from all
the individual properties, providing personal service when on-site employees are
not available. Employees at the national call center are able to market and sell
a rental at the store nearest to the caller.
In 1996, we implemented a new pricing strategy called "revenue
optimization." Historically, we have maintained a general policy on annual rent
increases implemented toward the beginning of the year. The revenue optimization
program focuses on establishing product pricing in relationship to demand and
closing ratios (the percentage of prospects who subsequently rent a unit) in
order to maximize revenues. The implementation of this new program took longer
than expected and there were some additional training costs associated with
implementing
-22-
<PAGE> 23
it. As such, we did not fully realize the impact of this strategy until the
fourth quarter of 1996. However, now that the training phase is complete, we
expect to see the benefits of this program in 1997.
Net operating income has risen over the last three years due to increases
in revenue, which are a function of changes in rental rates and occupancy. While
storage has a seasonal trend, spring and summer being peak occupancy periods,
the cycle is annual and the revenue trend from 1994 to 1996 reflects general
market changes. Revenue gains from 1994 to 1995 resulted entirely from rental
rate increases, while gains from 1995 to 1996 resulted primarily from rate
increases with slight occupancy improvements. As a result of competition, we do
not believe we can continue to increase rental rates as significantly as we had
prior to 1996.
Direct operating expenses were higher in 1996 than in 1995 due to a number
of factors. We experienced unusually high real estate assessment increases in
1996, particularly in the Denver market. Additionally, we expanded our yellow
page advertising coverage in markets where we intend to grow, but until the new
developments open in those areas costs are allocated to the existing stores in
that market. Training of field personnel for the revenue optimization program
discussed above also impacted 1996 expenses. Despite these increases, direct
operating expenses as a percentage of revenue remained constant.
Industry occupancy rates rose between 1990 to about 1995 as demand
continued to rise during a period of scarce capital and thus little storage
development. We believe the month-to-month nature of storage rentals is such
that in order to maintain available product for incoming customers, occupancy
percentages in the high 80s to low 90s is considered "full." Beyond that level,
average market rates will begin to rise. Beginning in 1995 and to a greater
degree in 1996, we have seen development activity pick up in many of our markets
and where this development has occurred close to our existing stores, we do not
expect to be able to raise rents at the same rate as in the past. We believe
that some of our markets have begun to reflect the effect of this development in
1996 and this will continue to be a factor in operating results for 1997 and
1998.
The following table is a geographical summary of the changes in weighted
average rents, rates and occupancies for the same store storage centers as
defined in the footnotes to the previous table:
<TABLE>
<CAPTION>
% CHANGE IN RATE % CHANGE IN NO. OF
% CHANGE IN RENTS PER SQ. FT. SQ. FT. OCCUPIED
------------------------ ------------------------ ------------------------
'95 TO '96 '94 TO '95 '95 TO '96 '94 TO '95 '95 TO '96 '94 TO '95
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Arizona (4.3%) 10.8% 1.0% 21.7% (5.2)% (9.0)%
California 7.0 4.5 3.5 6.8 3.4 (2.2)
Florida 4.7 2.9 2.8 5.6 1.9 (2.6)
Illinois 6.2 4.9 4.3 5.3 1.8 (0.4)
Maryland 7.0 2.9 5.6 5.6 1.4 (2.6)
Michigan 7.6 10.7 9.5 9.3 (1.8) 1.2
New York 2.2 9.2 5.7 3.4 (3.3) 5.7
Oregon 8.3 7.8 8.9 7.1 (0.6) (0.7)
Texas (3.9) 2.6 (3.0) 7.5 (0.9) (4.6)
Virginia 6.9 5.2 4.2 4.0 2.6 1.2
Washington 7.8 5.4 4.8 3.0 2.9 2.3
Other 2.0 5.4 2.8 7.1 (0.8) (1.6)
----- ----- ----- ----- -------- ------
Weighted Average 4.4% 5.5% 3.7% 6.7% 0.7% (1.1)%
</TABLE>
We believe our diversified portfolio minimizes the impact of individual
market fluctuations that result from economic or competitive changes within
these markets. In general, rental rate increases have driven the increase in
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<PAGE> 24
revenues. Over the last three years, market conditions in Detroit, MI, Portland,
OR and Seattle, WA contributed to above average revenue increases. Detroit and
Portland, in particular, demonstrate our use of revenue optimization; although
occupancy declined in both markets, revenues rose well above average due to rate
increases. In 1996, Arizona has experienced new competition in certain trade
areas and a leveling off of demand. Demand had been high in this market due to
the long waiting periods for housing; as these waits have shortened, so has the
average length of storage in this market. Additionally, the conversion of units
to climate controlled space at one store created a drop in occupancy. During the
construction phase of this project it was necessary to vacate these units, but
they are expected to command higher rent. The conversion of these units was
expected to be completed in late spring but due to unexpected delays was not
finished until late August. The San Antonio, TX market declined in 1996 as new
competition has forced rate decreases. Ten additional storage centers have
opened within our trade areas in the last year and five new projects are
currently under construction. Although performance continues to be below that of
a year ago, we believe our stores in this market have stabilized. Our results in
Houston, TX were impacted by a fire in 1995; revenue replacement insurance
coverage has expired and new market competition has slowed the rent up of the
reconstructed space.
ACQUISITIONS
Although availability of capital and competition has in many cases driven
acquisition prices up, we have continued to selectively seek acquisition
opportunities for high quality storage centers that meet our investment
standards. We have limited our efforts to pursue only those centers that enhance
our existing network of stores (i.e. establish greater market presence or expand
an established market to create greater economies of scale) and thus can be
efficiently managed and operated. In many cases, this has resulted in the
purchase of properties we had previously managed for affiliated owners. The
acquisition of previously managed properties means the properties are in
existing Shurgard markets and we are familiar with the operating issues of that
particular store. Additionally, they have been maintained to our standards and
as such do not have significant deferred maintenance costs. The operating
results of our acquisitions are presented in the tables below in order to show
the impact of our operating strategies since the acquisition date. Based on the
definition of same stores, the results of these properties for certain periods
have been included in the same store results previously discussed. (See notes
(1) and (2) to the Same Store Results table.)
<TABLE>
<CAPTION>
RESULTS OF 1996 ACQUISITIONS
(dollars in thousands except average rent) YEAR ENDED
DEC. 31, 1996 (1)
-----------------
<S> <C>
Rental revenue $ 2,787
Property operating expenses(2) 851
----------
Net operating income $ 1,936
==========
Avg. annual rent per sq.ft.(3) $ 8.74
Avg. sq.ft. occupancy 88%
Total net rentable sq.ft. 2,400,000
Number of properties 40
Number of property-months(4) 69
</TABLE>
- ----------------
(1) Includes 70% of the operating results of the four storage centers
purchased in November 1996 as a 30% interest was previously owned.
(2) Includes all direct property expenses. Does not include any allocation of
joint expenses incurred such as off-site management personnel.
(3) Average annual rent per square foot is calculated by dividing actual rents
collected by the average number of square feet occupied during the period.
(4) Represents the sum of the number of months we operated each property
during the year.
-24-
<PAGE> 25
During 1996, we purchased 40 storage centers, four in which we previously
owned a 30% interest. Thirty-seven of these properties, totaling 2.3 million net
rentable square feet, were purchased on November 14, 1996, through the
acquisition of the IDS Partnerships. We paid approximately $122 million for the
33 storage centers and the remaining 70% interest in the four centers mentioned
above. The purchase, which included $1.6 million in net liabilities and
approximately $3 million in transaction costs, was funded through cash ($59
million) and the issuance of stock ($64 million). The 1996 pro forma yield on
these properties was 10% (calculated as actual 1996 net operating income divided
by cost). Pro forma results are not necessarily indicative of future results.
Additional acquisitions included two Properties located in the greater Seattle,
WA metropolitan area, and one located in Atlanta, GA. These three properties
cost $6.4 million and added approximately 135,000 net rentable square feet to
our portfolio.
RESULTS OF 1995 ACQUISITIONS
(dollars in thousands except average rent)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995(1) % CHANGE
--------- --------- ----------
<S> <C> <C> <C>
Rental revenue $ 9,229 $ 5,492 68.0%
Property operating expenses(2) 2,455 1,592 54.2%
--------- ---------
Net operating income $ 6,774 $ 3,900 73.7%
========= =========
Avg. annual rent per sq.ft.(3) $ 10.59 $ 10.25 3.3%
Avg. sq.ft. occupancy 89% 86%
Total net rentable sq.ft. 970,000 970,000
Number of properties 15 15
Number of property-months(4) 180 115
</TABLE>
- ----------
(1) Includes the operating results of the three properties owned by Shurgard
Institutional Partners in which we own a 59.5% interest.
(2) Includes all direct property expenses. Does not include property
management fees previously charged by the Management Company nor does it
include any allocation of joint expenses incurred such as off-site
management personnel.
(3) Average annual rent per square foot is calculated by dividing actual rents
collected by the average number of square feet occupied during the period.
(4) Represents the sum of the number of months we operated each property
during the year.
In May 1995, we purchased the limited partner interest in Shurgard
Evergreen Limited Partnership (the Evergreen Partnership), an entity formed in
May 1990 to develop and own self storage centers, of which we are the general
partner. The limited partner interest was owned by a wholly owned subsidiary of
the State Investment Board of the State of Washington. The Evergreen Partnership
developed and owns seven self storage centers directly and, through a joint
venture, owns an interest in an additional three centers. The ten centers have
an aggregate of 630,000 net rentable square feet. The purchase price for the
limited partner interest in the Evergreen Partnership was $35.5 million which
was financed through our line of credit. For 1996, the return on this investment
in limited partnership interest, defined as net operating income divided by our
historical investment amount, was 12.5%.
In addition to these major acquisitions, in 1995 we also acquired four
self storage properties through individual purchases and one storage property
through the Merger with the Management Company. These five storage centers,
having a total of approximately 340,000 net rentable square feet of storage
space, are located and were acquired as follows: Daly City, CA (March 1995),
Taylor, MI (March 1995), Orland Park, IL (May 1995), Puyallup, WA (May 1995) and
Madison Heights, MI (June 1995). 1996 operating results for these acquisitions
reflect the additional months of operations. We previously managed all but two
of these properties.
-25-
<PAGE> 26
RESULTS OF 1994 ACQUISITIONS
(dollars in thousands except average rent)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
-------------------------------------- -------------------------------------
1996 1995 % CHANGE 1995 1994 % CHANGE
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Rental revenue $ 6,366 $ 5,939 7.2% $ 5,939 $ 1,920 209%
Property operating expenses (1) 2,059 1,957 5.2% 1,957 554 253%
---------- ---------- ---------- ----------
Net operating income $ 4,307 $ 3,982 8.2% $ 3,982 $ 1,366 192%
========== ========== ========== ==========
Avg. annual rent per sq.ft. (2) $ 8.53 $ 8.01 6.5% $ 8.01 n/a (3)
Avg. sq.ft. occupancy 92% 91% 91% 91%
Total net rentable sq.ft 730,000 730,000 730,000 730,000
No. of properties 20 20 20 20
No. of property-months (4) 240 240 240 80
</TABLE>
- ----------------
(1) Includes all direct property expenses. Does not include property
management fees previously charged by the Management Company nor does it
include any allocation of joint expenses incurred such as off-site
management personnel.
(2) Average annual rent per square foot is calculated by dividing actual rents
collected by the average number of square feet occupied during the period.
(3) Information is not available for this period. Under the prior owner, the
average rate per square foot for these properties was $7.34.
(4) Represents the sum of the number of months we operated each property
during the year.
In September 1994, we purchased 20 storage centers from an unaffiliated
storage operator based in Raleigh, North Carolina for an aggregate purchase
price of $34 million. These centers were financed with $30 million from our
lines of credit, a $1 million note to the seller and $3 million in cash. This
acquisition gave us a significant presence in the Raleigh market as well as
expanding our presence in Washington DC, Richmond and Virginia Beach, VA. For
1996, annual return on this investment, defined as net operating income divided
by the historical investment amount, was 12.7%. Since we began managing these
properties, both rates and revenue for 1996 have increased faster than our total
same store average discussed under Internal Growth. Expenses also rose more than
the same store average due to an 18% increase in repair and maintenance expense
in 1996.
DOMESTIC DEVELOPMENT
Our long-term growth plan focuses on the development of new storage
centers in markets in which we currently operate. This is due to the increased
competition for acquisitions in the storage market and our focus on maintaining
high quality standards and consistent building design to develop brand
awareness. Implementation of this development strategy is expected to continue
through 1997. Each development project progresses through a series of review
processes from initial review, through due diligence, final review and finally
to the land purchase and construction. We believe the success of this strategy
has been greatly enhanced as a result of the substantial experience we gained
through the development of over one-third of our properties.
-26-
<PAGE> 27
We opened 13 domestic storage centers in 1996 and six in 1995. Four of the
projects opened in 1996 opened at the end of the fourth quarter and as a result
did not have significant operations during the year. Accordingly, these four
properties have been excluded from the following table:
<TABLE>
<CAPTION>
NUMBER ESTIMATED TOTAL NET TOTAL 12/31/96 AVERAGE ESTIMATED
OF TOTAL RENTABLE COST PER AVERAGE PER SQ. FT. ANNUAL
PROPERTIES COST SQ. FT. SQ. FT. OCCUPANCY RENTAL RATE YIELD
---------- ---- ------- ------- --------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Opened through
September 1996 9 $32.9 million 607,000 $54 48% $9.72 12%
Opened in 1995 6 $18.3 million 379,000 $48 68% $10.25 14%
</TABLE>
The nine storage centers opened in the first three quarters of 1996 are
renting up ahead of plan; the average occupancy of these stores as of December
31, 1996 was 48%. The average rental rate of these stores for 1996 was $9.72 per
square foot. Together, these stores provided $337,000 in net operating income
for 1996. For these nine projects, total development costs, including land,
averaged $54 per net rentable square foot, which is 104% of our original
budgeted cost. The 1996 developments cost more per square foot because of
differences in land costs. We currently expect these stores to take
approximately 18 months to reach maturity (defined as 85% occupancy) compared to
the original projections of 21 months. The average annual yield on estimated
total cost of these nine projects is projected at 12%, assuming the projects are
at 85% occupancy at current rates.
The six storage centers opened in 1995 are also renting up ahead of plan;
the average occupancy of these stores as of December 31, 1996 was 68%. The
average rental rate of these stores for 1996 was $10.25 per square foot. Each of
these projects provided positive net operating income and together provided net
operating income of $1,006,000 for 1996. For these six stores, total
development costs, including land, averaged $48 per net rentable square foot,
which is 101% of the original budgeted cost. The storage centers opened in 1995
are renting up faster than expected; however, our experience suggests that rent
up proceeds faster in earlier months, and tapers off over time. Accordingly, we
are estimating stabilization at 18 months. The average annual yield on the
estimated total cost of these six projects is projected at 14%, assuming the
projects are at 85% occupancy at current rates.
There is of course no assurance that these projections regarding 1995 and
1996 development projects will come to fruition as numerous factors affect the
actual yields and rent up periods. These factors include the possible inability
to reach and maintain assumed occupancy levels and rates due to development of
competing self storage properties and increased competition from self storage
and other storage alternatives, and possible increases in expenses such as
property taxes, labor, and marketing, among others.
In addition to the above completed developments, we have ten storage
centers currently under construction (five of these are being developed through
the Tennessee and Florida joint ventures). As a general rule, to limit the risks
of development, we do not purchase land until the permitting process is
complete. Construction usually begins shortly after we obtain title to the land.
The following table summarizes domestic development projects in progress at
December 31, 1996:
<TABLE>
<CAPTION>
ESTIMATED
NUMBER OF COMPLETED COST
PROJECTS OF PROJECTS
-------------- -----------------
<S> <C> <C>
New Domestic Developments:
Construction in progress 10 $36.9 million
Land purchased pending 3 $11.2 million
construction
Expansion of Existing Properties:
Opened during 1996 4 $3.7 million
Construction in progress 3 $3.3 million
</TABLE>
-27-
<PAGE> 28
In the current real estate environment, we believe that a long-term
strategy of growth through development will result in superior returns over the
long-term. A development strategy, however, creates a short-term dilution of
earnings during the rent-up phase of a project. Although certain costs,
including real estate taxes and interest, are capitalized during the
construction period, net operating income does not generally exceed interest
expense on development projects for at least the first year of operations. This
rent-up deficit for developments was $3,741,000 (net operating income of
$610,000 less interest on invested capital of $4,351,000) in 1996 compared to
only $1,459,000 in 1995 and the effect will increase in 1997 as more development
locations are opened. The rent-up deficit for a typical $3 million project,
assuming it takes 18 months to rent-up and is financed with debt at 8.5%, is
estimated to be $240,000 in the first year of operations. The amount of rent-up
deficit and the timing of positive cash flow cannot be predicted with certainty
as it is based on a number of factors including length of rent-up, ability to
collect stated rental rates on leased units, actual operating expenses incurred,
and the time of year a property opens. Another result of this rent-up period is
a decrease in our operating margins as new property expenses are added but the
related revenue stream does not hit stabilized levels until occupancy reaches
85%. We currently anticipate opening 20 to 30 domestic developments in 1997
including the 13 listed in the table above. We are currently considering various
alternatives which, if implemented, could minimize this rent-up deficit and
allow the volume of development projects to increase. Some of these alternatives
include, but are not limited to, phased development, joint venture development
programs, and increasing the rate at which stores rent-up. The actual number of
projects could be reduced by zoning and permitting delays outside of our
control, increased competition for sites, delays during construction caused by,
among other things, weather, unforeseen site conditions, labor shortages,
personnel turnover, scheduling problems with contractors, subcontractors or
suppliers, or resource constraints.
In addition to utilizing the experience of our in-house real estate
development personnel, we have begun establishing relationships with quality
storage operators outside our current markets. We believe that the most
efficient way to operate storage centers is to saturate a market thereby
creating brand awareness and allowing certain economies of scale in operation
processes and advertisement. These relationships create instant presence in a
new market as affiliate owned centers begin using the "Shurgard" name. In
exchange for the use of our name, computer systems and general operations
support services, the affiliate pays us an affiliation fee of 2% of revenues.
Additionally, these affiliation agreements provide the framework for the joint
development of additional storage centers, allowing us to take advantage of the
local operator's market knowledge. We have signed two such affiliation
agreements, which include (1) a Tennessee developer that opened three jointly
developed centers in 1995, one in 1996, and has one additional property under
development and (2) a Florida developer that began its first joint developments
in 1996 and has four properties under construction. (For further discussion see
OTHER REAL ESTATE INVESTMENTS.)
EUROPEAN DEVELOPMENT
During 1995 and 1996, we invested $5.4 million and $6.9 million,
respectively, in SSC Benelux & Co., SCS (Benelux SCS), a Belgian entity. Through
our entitlement to a majority of the seats on the Benelux SCS Board, we
currently have authority to direct the business affairs of Benelux SCS. Our
percentage interest in economic benefits from this partnership is 85.6%. The
funding for investments made during 1995 and 1996 was obtained from our cash
flow from operations, proceeds from the equity offering and available lines of
credit. As a result of our investments in Europe, we face certain risks inherent
in international business operations, including currency risks, unexpected
changes in regulatory requirements, longer accounts receivable payment cycles,
difficulties in staffing and managing international operations, potentially
adverse tax burdens, obstacles to the repatriation of earnings and cash, and the
burdens of complying with different permitting standards and a wide variety of
foreign laws.
The self storage industry is not yet well established in much of Europe
and Benelux SCS is in the process of developing the market in the Benelux
region. During 1995 and 1996, Benelux SCS opened four developed storage centers
in Belgium totaling 237,000 square feet. We, along with our European partner,
funded these
-28-
<PAGE> 29
centers through a combination of outside debt and equity capital. Benelux SCS
debt is nonrecourse. Current debt covenants limits the overall indebtedness of
Benelux SCS to 60% of the cost of storage centers. Benelux SCS has two
additional stores under construction. Because of the newness of storage to this
market, the rent-up period for these storage centers is expected to be
substantially longer than that of domestic development projects. Management
estimates that the European sites may take two and a half to three years to
reach a stabilized occupancy of approximately 85% and the three stores opened in
1995 are tracking in that range. Occupancy of the four open centers at December
31, 1996 was 36%.
During 1996, we launched a marketing campaign to increase product
awareness in Brussels. This campaign resulted in a significant increase in the
number of customer inquiries. Benelux SCS is now concentrating on strategies to
increase the capture rate on those inquiries and to overcome pricing objections
for those customers utilizing the product for the first time. Another planned
area of concentration for 1997 will be the training of on-site personnel
focusing primarily on improving telephone sales techniques.
NEW PRODUCTS AND SERVICES
Our service focus and mission mean that we are continually exploring new
ways to service our customers' storage needs. One of the most recent ways we
have broadened our ability to meet customer needs is by bringing storage
directly to the customer through containerized storage. Weatherized 8'x5'x8'
storage containers are delivered to customers for packing. The containers are
then picked up and delivered to a warehouse where they are stored. Customers
may access their storage container in a showroom at the warehouse or have it
redelivered to their home. In addition to the monthly rental charge, service
fees may be charged for pickup and delivery. This business venture is currently
being tested in the Seattle, WA market.
We have committed to invest $2.85 million in this startup venture,
Shurgard's Storage To Go, Inc., with certain officers and key employees who have
committed $150,000 and an unaffiliated third party who has committed $1 million.
The current $4 million commitment is expected to provide enough capital to begin
operation in one or two additional markets. This subsidiary is not legally
controlled by us, is not a qualified REIT subsidiary and its income is subject
to corporate level tax.
Another way we are making storage more convenient for the customer is through
the addition of kiosks in major malls. These kiosks (sales counters located in
the center of malls) are staffed with trained sales representatives who are
available to answer questions about both self storage and containerized storage.
They have computer links to area storage centers through which they can give
rate and availability information and lease units or containers to customers on
the spot. This idea is being tested in three malls in the Seattle market.
OTHER REAL ESTATE INVESTMENTS
In addition, we have made several investments during the past three years
through participating mortgages, joint ventures and limited partnerships.
In 1996, we made a tender offer for the limited partnership units in the
IDS Partnerships. On September 13, 1996, we purchased approximately 42%, 32% and
42% of the outstanding limited partnership units 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, respectively, for a total of $40 million. On
November 14, 1996, we completed the acquisition by merging with the IDS
Partnerships. For the two months we owned the units of the IDS Partnerships in
1996, earnings from this investment totaled $1.4 million.
-29-
<PAGE> 30
In January 1996, we purchased from an unaffiliated third party, for $1.1
million in cash, one limited partnership unit in Shurgard Institutional Fund LP,
an affiliated partnership. We are now entitled to 8.8% of this partnership's
distributions. In December 1995, we also purchased from an unaffiliated third
party, for $3.8 million in cash, 3.5 limited partnership units of Shurgard
Institutional Fund LP II, an affiliated partnership. We are now entitled to 37%
of this partnership's distributions.
We have entered into four joint ventures with a storage operator to
develop in the Nashville, Tennessee metropolitan area. Our economic interest in
these joint ventures range from 50% to 85.5%. We have guaranteed $6.4 million of
loans, our pro rata portion of the joint ventures' debt. Additionally, we have
guaranteed $9.0 million of debt in joint ventures to develop 4 sites in Orlando,
Florida under a similar arrangement. We have a 90% economic interest in these
Orlando joint ventures. The financial information of these projects is not
consolidated in our financial statements because the affiliation agreement
allows the local operator to control the daily operations of the property and
all significant investment decisions require the approval of both parties
regardless of ownership percentage. Earnings from these joint ventures totaled
$82,000 for 1996 compared to a loss of $139,000 in 1995. Funds from operations,
as defined below, for these joint ventures totaled $234,000 in 1996 compared to
a negative $43,000 in 1995. (See DOMESTIC DEVELOPMENT.)
We have paid approximately $11.8 million for investment in two 10-year
participating mortgage loans, which are nonrecourse to the borrower and are
secured by real estate, including four storage centers and office/warehouse
space. We will receive interest at 8% per annum plus 50% of both operating cash
flow and distributions from the gain on sale of real property, as defined. We
have options to purchase the properties at established prices, generally
exercisable in 1999 and extending until maturity of the loans.
PROPERTY MANAGEMENT OPERATIONS
In connection with the Merger with the Management Company in March 1995,
we internalized the management of our own properties as well as acquired certain
management contracts and relationships under which we now provide property
management services to outside parties. Prior to the Merger, we paid a property
management fee equal to 6% of revenues to the Management Company. We now incur
the actual costs of property management on properties we own, and receive
property management fees from affiliated partnerships and outside parties.
The acquisition of the IDS Partnerships in November 1996 eliminated third
party management fee revenue and a corresponding amount of expenses for those 37
stores. Although property management revenue in 1997 will be significantly
reduced as a result of the IDS transaction, there will be no impact as the
corresponding expense will also be eliminated from the 37 stores' operating
expenses in 1997. As a result of this acquisition, we now participate directly
in the revenue and expenses relating to these stores.
We will continue to pursue growth opportunities in property management to
maximize brand awareness, realize economies of scale in management and as a
means of establishing relationships with owners of quality projects that may
provide future acquisition opportunities. However, property management revenue
will be limited to 5% or less of total revenue due to limitations imposed by the
REIT qualification requirements (see REIT QUALIFICATION AND DISTRIBUTION
REQUIREMENTS).
OTHER INCOME AND EXPENSES
Interest expense increased $3.7 million due to a rise in the average
outstanding balance on the lines of credit from 1994 to 1996. This rise
represents borrowings to purchase partnership units and to fund development
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<PAGE> 31
of new storage centers. Additionally, during 1996, we capitalized $2.8 million
in interest related to the construction of storage centers while only $1.1
million in interest was capitalized in 1995. No interest was capitalized in
1994.
Net income per share decreased from 1995 to 1996 primarily due to the
development projects opened during the last year. Our planned development will
continue to impact net income and net income per share. The issuance of 4.9
million shares in late June and early July 1995 also impacted the per share
data. Proceeds from this stock issuance were used to repay short term loans and
although interest expense declined, outstanding shares increased.
PRE-CONSOLIDATION INCOME AND EXPENSES
The Predecessor operating results presented in the consolidated financial
statements are not comparable in all material respects with financial statements
of the Company. The most significant differences relate to (1) lower
depreciation resulting from our lower original cost of storage centers and (2)
higher debt and related interest expense as a result of certain limited partners
electing to take a cash payment in lieu of the Company's common stock in the
Consolidation. The following discussion summarizes differences for the periods
presented which do not directly relate to property operations.
General and administrative expenses from January 1, 1994 to the
Consolidation Date for the Predecessor included certain expenses related to the
liquidation of the partnerships including audit, tax and legal fees. State taxes
for the Predecessor were also high for the two months of 1994 due to the tax
resulting from the sale of assets.
The Predecessor financial statements for the period from January 1, 1994 to
the Consolidation Date include various nonrecurring items related to the
Consolidation of the 17 partnerships which comprise the Predecessor; these
include the gain on the sale of net assets resulting from the Consolidation and
related incentive management fees, legal expenses, hostile takeover defense and
transaction costs. Our debt at December 31, 1994 was $141 million higher than
the Predecessor's debt at December 31, 1993. This additional debt is reflected
in our interest expense and earnings for the year ended December 31, 1994.
Certain of the limited partners of the partnerships included in the
Consolidation elected to take cash rather than stock in the Company. We borrowed
the $67 million required for these cash payments as well as approximately $20
million to pay liabilities related to the Consolidation which were assumed from
the Predecessor and approximately $10 million to cover loan closing costs and
establish cash reserves. Interest on the $97 million for the year ended December
31, 1994 was $6.7 million. Additionally, as a result of the Consolidation, the
majority of the debt held by the partnerships, including short-term debt at
relatively low interest rates, was refinanced at a slightly higher rate (8.28%).
We also borrowed $30 million in connection with the acquisition of the 20
storage centers on September 1, 1994 and $12 million in connection with an
investment in participating mortgages on December 14, 1994; interest on this $42
million was $806,000 for 1994.
FUNDS FROM OPERATIONS
Funds from operations (FFO), pursuant to the National Association of
Real Estate Investment Trusts' (NAREIT) March, 1995, White Paper on Funds from
Operations, is defined as net income (calculated in accordance with GAAP)
excluding gains or losses from debt restructuring and sales of real estate, plus
depreciation of real estate and amortization of intangible assets exclusive of
deferred financing costs. Contributions to FFO from unconsolidated entities in
which the reporting entity holds an active interest are to be reflected in FFO
on the same basis. We believe FFO is meaningful disclosure as a supplement to
net income because net income implicitly assumes that the value of assets
diminish predictably over time while we believe that real estate values have
historically risen or fallen with market conditions. FFO is not a substitute for
net cash provided by operating activities or net income computed in accordance
with GAAP, nor should it be considered an alternative indication of
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<PAGE> 32
our operating performance or liquidity. In addition, FFO is not comparable to
"funds from operations" reported by other REITs that do not define funds from
operations in accordance with the NAREIT definition. The following table sets
forth the calculation of FFO in accordance with the NAREIT definition (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
PRO FORMA
1996 1995 1994(1)
-------- -------- --------
<S> <C> <C> <C>
Net income before extraordinary item $32,785 $29,572 $21,917
Depreciation/amortization 21,199 17,410 13,519
Depreciation/amortization from
unconsolidated joints ventures
and subsidiaries 219 149 113
Non-recurring revenue/expenses (223) (58)
Deferred financing costs (1,120) (1,120) (820)
-------- -------- --------
FFO as currently defined $53,083 $45,788 $34,671
======== ======== ========
</TABLE>
- ----------
(1) Represents the actual historical results as if the Predecessors' properties
had been acquired on January 1, 1994. Assumes our fixed rate
seven-year debt (8.28%) was outstanding during the entire period.
FFO for 1996 rose $7.3 million over 1995 FFO, which had grown $11.1
million from pro forma 1994. As previously discussed, this growth rate reflects
the improved performance of the original portfolio of properties as well as the
addition of properties acquired during the two years. We believe future growth
rates will slow until development levels off, as the rent-up period on
development projects partially offsets operating results from current properties
and acquisitions. (See DOMESTIC DEVELOPMENT.)
INVESTING TRANSACTIONS
On March 1, 1994, we acquired the assets, subject to existing liabilities,
of the Predecessor for an aggregate cost of $387.4 million. The Consolidation
was funded by the issuance of 16,983,728 shares of the Company's Class A and
Class B Common Stock and $67.1 million in borrowings from a financial services
company. Additionally, in 1994, we purchased a chain of 20 storage centers in
the mid-Atlantic region for $34 million. Investments in other real estate assets
during 1994 consisted primarily of the two participating mortgages and two of
the Tennessee joint ventures discussed earlier.
On March 24, 1995, in order to create a fully integrated company and more
closely align the interests of management with the shareholders, the Company
merged with the Management Company. Pursuant to the Agreement and Plan of
Merger, the outstanding shares of the Management Company common stock were
converted into an aggregate of 1,289,734 newly issued shares of the Company's
Class A common stock (Class A Stock) and an additional 282,572 shares that
replaced the Class A Stock previously owned by the Management Company, subject
to certain adjustments. The market value of consideration on the date of the
Merger was $29.4 million. Pursuant to the Merger Agreement, Management Company
shareholders are also entitled to receive additional shares of Class A Stock in
the future based on (i) the extent to which, during the five years following the
Merger, we realize value on this back end interest as a result of certain
transactions relating to interests in or assets of the six limited partnerships
acquired by us in the Merger or (ii) the value, at the end of five years after
the Merger, or in the event of a change of control of the Company, of any
remaining interests in such partnerships as determined by independent appraisal.
Only three of the original six partnerships still exist. One of the three
partnerships is the Evergreen Partnership, the limited partnership interest of
which we purchased during 1995. As a result of this purchase, the Board of
Directors could, at its option, choose to liquidate the partnership, and upon
such liquidation we would be required to issue additional shares based on an
independent appraisal.
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<PAGE> 33
During 1995, we acquired a storage center valued at $7.8 million in the
Merger (which was a non-cash transaction), $9.4 million in acquisitions of four
operating storage centers, $30.1 million in domestic development and expansion
projects, $10.6 million in European development projects, and $3.9 million in
capital improvements to our existing portfolio. The $6.5 million increase in
other real estate investments reflects primarily the $3.8 million invested in
the limited partnership units and the $2.6 million invested in the Tennessee
joint ventures. As described above, we also invested $36 million in cash in the
purchase of the Evergreen partnership interest. Proceeds from the sale of real
estate contributed $3.3 million in cash.
On September 13, 1996, pursuant to a tender offer, we purchased limited
partnership units in the IDS Partnerships totaling $40 million. This purchase
was funded through our line of credit. We owned these units until November 14,
1996 when we completed the merger with the IDS Partnerships. Under the terms of
the agreement between the Company and the Partnerships, we issued 2,462,414
shares of Class A common stock based on the partners interest in the IDS
Partnerships' net asset value of $106.6 million ($121.8 million in storage
centers less net liabilities of $15.2 million either assumed or paid off at
closing) as defined in the agreement. Total cash paid for this acquisition was
$58.6 million.
Additionally, during 1996, we invested $6.4 million in the acquisition of
three storage centers, $47.9 million in domestic development and expansion
projects, $9.3 million in European development projects, and $3.7 million in
capital improvements to our existing portfolio. The $11.1 million increase in
other real estate investments reflects primarily the $2.1 million invested in
the limited partnership units, the $5.8 million invested in the Florida joint
ventures and the $3.2 million invested in the Tennessee joint ventures.
CAPITAL EXPENDITURES
In addition to continued investments in acquisitions and developments, we
make investments in improving our current portfolio of real estate. Investments
in existing storage properties include primarily expansions, conversions (i.e.,
size of units or climate control) and certain recurring improvements that we
believe are necessary to maintain our quality standards and our ability to
generate premium returns. The following table summarizes the type of recurring
expenditures we anticipate and the average cost per square foot per year:
<TABLE>
<CAPTION>
ANNUAL COST
PER SQ. FT.
----------------
<S> <C>
Roofs $ 0.07
Pavement 0.05
Sealant 0.03
Other 0.02-0.03
----------------
Total $ 0.17-0.18
----------------
</TABLE>
The above amounts assume expenditures are made evenly over the life of the
project, this however does not occur in reality. In certain years expenditures
will be significantly higher than $0.18 per square foot, but this in turn would
mean other years will be significantly lower. In addition to these types of
expenditures, we invest in other improvements such as security upgrades. Of the
$3.7 million in capital improvements expended during 1996, $2.1 million was for
roof, pavement and sealant, while $2.2 million out of a total of $3.9 million
was spent for these items during 1995. Specifically identified capital
improvements expected for 1997 total $4.6 to $5.3 million, of which $1.7 to
$2.4 million represent roofs, pavement and sealant.
During 1996, we completed an extensive research and evaluation program
through which we selected a new updated logo. In order to maintain our brand
awareness across all Shurgard businesses, we intend to replace
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<PAGE> 34
current signs, awnings, etc. to incorporate this new logo over the next two
years. Included in the 1997 estimates is $1 million to re-sign approximately
half of our stores. We intend to re-sign the remaining stores in 1998.
FINANCING TRANSACTIONS
On June 9, 1994, we refinanced substantially all of our existing debt
through a debt purchase transaction with Nomura Asset Capital Corp., a
subsidiary of Nomura Securities International, Inc. The $122.6 million of
indebtedness, secured by certain real estate, has a seven year term, a fixed
rate equal to 8.28% and requires monthly payments of interest only until
maturity. We paid $1.8 million in fees for this seven-year loan. The following
table summarizes the uses of proceeds from this loan (in thousands):
<TABLE>
<S> <C>
Repayment of consolidation debt $ 104,600
Repayment of other debt 14,156
Loan fees and closing costs 2,371
Net proceeds 1,453
-----------
Loan proceeds $ 122,580
===========
</TABLE>
Repayment of other debt represents retirement of notes assumed from the
Predecessor in connection with the Consolidation. In connection with the
refinance, we wrote off $1.2 million of unamortized loan fees. The refinancing
provided us with stabilized debt service costs and greater flexibility for
future growth. Additionally, in 1994, we established two $50 million lines of
credit under which we borrowed $42 million in 1994 to fund property
acquisitions.
In June and July 1995, we issued a total of 4.92 million additional Class
A common shares through a public offering. These shares were issued at $23.00
per share, providing net proceeds after offering costs of $106 million. Net
proceeds were used to repay lines of credit and the remaining funds have been
used to fund storage center acquisitions, development, and general corporate
purposes.
Prior to the stock offering, $96 million was outstanding on our domestic
lines of credit. This amount had been borrowed to meet interim acquisition and
development requirements and repay the $4.3 million line of credit assumed in
the Merger. All outstanding balances on our domestic lines of credit were repaid
on June 13, 1995. Subsequent to the offering, we invested the excess proceeds in
real estate developments and borrowed an additional $11 million on our lines.
Additionally, during 1995, we borrowed $2.9 million under our European line of
credit to fund development activity in Belgium.
We borrowed $130.1 million during 1996 under our lines of credit, both
domestic and foreign, to finance development and investment activity described
above as well as general corporate purposes. In September 1996, we negotiated a
two year, unsecured line of credit to borrow up to $175 million at a spread over
LIBOR. The actual amount available under this line of credit and the spread vary
based on the terms of the agreement. The current amount available is $175
million (of which $133.4 million was outstanding at December 31, 1996) and the
current spread over LIBOR is 1.625%. Upon receiving an investment grade rating,
the spread over LIBOR will become 137.5 basis points or lower, depending on the
level of the investment grade rating. This line replaced both of our $50 million
domestic lines of credit. The available amount under this line of credit is
capped at $175 million until July 1, 1997, at which time it decreases to $100
million. During 1996, we also obtained additional available credit under our
European lines bringing the total available to $12.1 million. Of the total
available, we have borrowed approximately $7.6 million (approximately $4.7
million during 1996) to fund development and operating cash needs.
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<PAGE> 35
In January and February, 1997, we issued 2.2 million Class A common shares
through a public offering. Net proceeds of $59.3 million were used to pay down
our domestic line of credit.
SHORT-TERM AND LONG-TERM LIQUIDITY
Cash balances remained stable from December 31, 1995 to December 31, 1996
as capital expenditures were funded primarily through the financing and equity
transactions described above. The following table summarizes certain information
regarding our liquidity and capital resources:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------
1996 1995 1994
---------------- ---------------- ---------------
<S> <C> <C> <C>
Debt to total assets 34% 23% 34%
Total market capitalization(1) $1,033 million $769 million $520 million
Debt to total market cap(1) 26% 19% 32%
Weighted avg. interest rate 7.68% 8.18% 8.16%
Available lines of credit $46.1 million $92 million $58 million
</TABLE>
- ----------------
(1) Total market capitalization is based on the closing market price of the
Class A common stock multiplied by the total number of outstanding shares
of common stock, plus total debt.
Our total debt at December 31, 1996 was $273 million, of which $132
million is fixed rate debt. A portion of the stock offering proceeds received in
1997 were used to repay $58.4 million of outstanding borrowings under our
domestic line of credit. We believe during 1997 that we will fully utilize all
available borrowings under our domestic line of credit and as such anticipate
refinancing this credit facility during 1997. Although we limit our use of
variable rate debt, at times balances could be significant enough that
fluctuations in interest rates may impact our earnings. We believe that we will
be able to minimize the impact of such rate fluctuations through the use of
interest rate caps, refinancing or other strategies and that we will be able to
raise sufficient debt or equity capital to fund our growth plan in 1997, make
required principal payments and make distribution payments in accordance with
REIT requirements. Cash provided by operating activities for the years ended
December 31, 1996, 1995 and 1994 was $50 million, $46 million, and $29 million,
respectively.
In order to distribute accumulated earnings and profits related to the
Merger with the Management Company, we accelerated our usual fourth quarter
distribution and declared a special distribution in November 1995. (See REIT
QUALIFICATIONS AND DISTRIBUTION REQUIREMENTS)
REIT QUALIFICATION AND DISTRIBUTION REQUIREMENTS
As a REIT, we are not required to pay federal income tax on annual taxable
income that we currently distribute to our shareholders, provided that we
distribute an amount equal to at least 95% of our taxable income. Such
distributions must be made in the taxable year to which they relate or in the
following taxable year if declared before the REIT timely files its tax return
for such years and is paid on or before the first regular distribution payment
date after such declaration. Our first distribution in 1995 was partially
applied toward our 1994 distribution requirement. Similarly, our first
distribution in 1997, was partially applied toward our 1996 distribution
requirement.
In connection with the Merger, the accumulated earnings and profits of the
Management Company were carried over to the Company for tax purposes. In order
to maintain our REIT qualification, we were required to distribute to our
shareholders in 1995 an amount necessary to eliminate such accumulated earnings
and profits. We did so through accelerating our normal quarterly distribution
and a special distribution of $2.3 million. As a result
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<PAGE> 36
of these additional distributions, approximately 14% of the 1995 distributions
were return of capital for federal income tax purposes. None of the 1994 or 1996
distributions were return of capital.
As a REIT, we must derive at least 95% of our total gross income from
specified classes of income related to real property, distributions, interest or
certain gains from the sale or other disposition of stock or other securities.
Our revenue from truck rentals, sales of locks and boxes and management services
performed for owners of other properties do not qualify under this 95% gross
income test. Such nonqualifying income was approximately 4% of gross revenue in
1996 and we estimate that we will meet the 95% test in 1997. Our acquisition of
additional properties and development of new properties will tend to reduce the
percentage of nonqualifying income, while additional management contracts and
the sales of properties from the existing portfolio will tend to increase the
percentage of nonqualifying income. There can be no assurance, however, that
acquisitions and development activities will occur on such a scale or within
such time periods that nonqualifying income will meet the 95% test for future
years. Accordingly, we may be required to defer or reduce our income from our
third-party management services to avoid terminating our REIT qualification.
-36-
<PAGE> 37
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
-------- ---------
<S> <C> <C>
ASSETS:
Storage Centers:
Land $142,127 $ 105,224
Buildings and equipment, net 538,180 404,329
Construction in progress 32,531 20,942
-------- ---------
Total storage centers 712,838 530,495
Other real estate investments 29,436 21,407
Cash and cash equivalents 3,239 5,683
Restricted cash and investments 6,814 5,551
Other assets 52,156 47,258
-------- ---------
Total assets $804,483 $ 610,394
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable and other liabilities $ 29,964 $ 19,101
Distributions payable 10,669
Lines of credit 140,997 10,905
Notes payable 131,794 131,935
-------- ---------
Total liabilities 302,755 172,610
Minority interest in other real estate 3,217 3,288
investments
Commitments (Notes C and D)
Shareholders' equity:
Class A common stock, $0.001 par value;
120,000,000 authorized; 25,663,952 and
23,039,317 shares issued and outstanding 516,796 452,852
Class B common stock, $0.001 par value;
500,000 shares authorized, 154,604
issued and outstanding; net of loans to (1,086) (1,086)
shareholders of $4,002
Accumulated distributions in excess of (17,199) (17,270)
earnings -------- ---------
Total shareholders' equity 498,511 434,496
-------- ---------
Total liabilities and
shareholders' equity $804,483 $ 610,394
======== =========
</TABLE>
See notes to consolidated financial statements
-37-
<PAGE> 38
CONSOLIDATED STATEMENTS OF NET INCOME
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
------------------------------------------------ ---------------
YEAR YEAR YEAR PERIOD FROM
ENDED ENDED ENDED JAN. 1, 1994
(in thousands, except per share data) DEC. 31, 1996 DEC. 31, 1995 DEC. 31, 1994 TO MAR. 1, 1994
------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
REVENUE:
Rental $ 103,784 $ 92,397 $ 66,697 $ 12,348
Other real estate investments 3,371 1,396 224 20
Property management 3,244 2,978
------------ ------------ ------------ ------------
Total revenue 110,399 96,771 66,921 12,368
EXPENSES:
Operating 30,889 24,851 15,799 2,961
Management fees 1,320 4,046 733
Depreciation and amortization 21,199 17,410 11,373 2,390
Real estates taxes 8,898 7,596 5,840 1,170
General, administrative and other 4,351 4,859 2,502 1,232
------------ ------------ ------------ ------------
Total expenses 65,337 56,036 39,560 8,486
------------ ------------ ------------ ------------
Income from Operations 45,062 40,735 27,361 3,882
OTHER INCOME (EXPENSE):
Interest and other income 552 875 745 188
Interest expense (12,829) (12,038) (9,105) (487)
Incentive management fees (5,340)
Gain on sale of net assets 48,223
Litigation, hostile takeover defense and
consolidation expenses (12,180)
------------ ------------ ------------ ------------
Other income (expense), net (12,277) (11,163) (8,360) 30,404
------------ ------------ ------------ ------------
Income before extraordinary item 32,785 29,572 19,001 34,286
Extraordinary item-loss on retirement of debt (1,180)
------------ ------------ ------------
Net Income $ 32,785 $ 29,572 $ 17,821 $ 34,286
============ ============ ============ ============
Net Income per Common and Common Equivalent Share:
Income before extraordinary item $ 1.39 $ 1.43 $ 1.12
Extraordinary item-loss on retirement of debt (0.07)
------------ ------------ ------------
Net Income $ 1.39 $ 1.43 $ 1.05
============ ============ ============
Distributions per Common and Common Equivalent Share $ 1.41 $ 2.38 $ 1.02
============ ============ ============
Net Income per Unit of Limited Partnership Interests $ 63.97
------------
Distributions per Unit of Limited Partnership
Interests $ 732.05
============
</TABLE>
See notes to consolidated financial statements
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<PAGE> 39
CONSOLIDATED STATEMENTS OF PARTNERS' AND
SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREDECESSOR
LIMITED GENERAL
(in thousands) PARTNERS PARTNERS TOTAL
-------- ------- --------
<S> <C> <C> <C>
Balance, December 31, 1993 $354,787 $ (625) $354,162
Distributions (388,432) (4,018) (392,450)
Contributions 4,002 4,002
Earnings 33,645 641 34,286
-------- ------- --------
Balance, March 1, 1994 $ --- $ --- $ ---
======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
CLASS A CLASS B ACCUMULATED
COMPANY COMMON STOCK COMMON STOCK LOANS TO NET INCOME
------------------------- ------------------------- CLASS B LESS
(in thousands) SHARES AMOUNT SHARES AMOUNT SHAREHOLDERS DISTRIBUTIONS TOTAL
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, Dec. 31, 1993 $ -- $ -- $ -- $ -- $ --
Issuance of common stock 16,829 317,434 155 2,916 (4,002) 316,348
Net Income 17,821 17,821
Distributions (17,324) (17,324)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, Dec. 31, 1994 16,829 317,434 155 2,916 (4,002) 497 316,845
Issuance of common stock 6,210 135,418 135,418
Net Income 29,572 29,572
Distributions (47,339) (47,339)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, Dec. 31 1995 23,039 452,852 155 2,916 (4,002) (17,270) 434,496
Issuance of common stock 2,625 63,944 63,944
Net Income 32,785 32,785
Distributions (32,714) (32,714)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, Dec. 31, 1996 25,664 $ 516,796 155 $ 2,916 $ (4,002) $ (17,199) $ 498,511
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements
-39-
<PAGE> 40
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
------------------------------------------------ ----------------
YEAR YEAR YEAR PERIOD FROM
ENDED ENDED ENDED JAN. 1, 1994
DEC. 31, DEC. 31, DEC. 31, TO MAR. 1,
(in thousands) 1996 1995 1994 1994
---------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 32,785 $ 29,572 $ 17,821 $ 34,286
Adjustments to reconcile earnings to net
cash by operating activities:
Depreciation and amortization 21,199 17,485 11,392 2,390
Gain on sale of net assets (48,223)
Other (223)
Loss on retirement of debt 1,180
Earnings in excess of distributions from
joint ventures (149) (20)
Minority interest in earnings from
investments in joint ventures 52 251
Changes in operating accounts:
Restricted cash (1,263) (2,785) (2,766)
Other assets (6,776) 518 (1,196) 2,675
Accounts payable and other liabilities 2,068 1,295 3,027 (2,391)
Accrued consolidation expense 16,399
---------- -------- ----------- ---------
Net cash provided by operating activities 48,065 46,113 29,309 5,116
---------- -------- ----------- ---------
INVESTING ACTIVITIES:
Proceeds from sale of real estate and
equipment 6,398 64,120
Purchase of other real estate investments (11,105) (6,670) (12,534)
Purchase of non-competition agreements (1,055)
Distributions in excess of earnings from
joint ventures 275 452
Purchase of amortizable assets (416)
Purchase of property management company (885)
Investment in limited partnerships (58,644) (35,671)
Construction, acquisition and improvements
to storage centers (67,306) (49,519) (102,635) (1,158)
---------- -------- ----------- ----------
Net cash (used in) provided by investing
activities $ (137,835) $(86,311) $ (115,169) $ 62,962
---------- -------- ----------- ---------
</TABLE>
See notes to consolidated financial statements
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<PAGE> 41
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
-------------------------------------------- -------------
YEAR YEAR YEAR PERIOD FROM
ENDED ENDED ENDED JAN. 1, 1994
DEC. 31, DEC. 31, DEC. 31, TO MAR. 1,
(in thousands) 1996 1995 1994 1994
---------- ------------ ----------- ------------
FINANCING ACTIVITIES:
<S> <C> <C> <C> <C>
Proceeds from stock offering, net $ $ 106,012 $ $
Proceeds from exercise of stock options 167
Contributions by minority partners 733 778
Distributions paid (43,383) (36,670) (17,324) (764)
Net proceeds from (payments on) lines of credit 130,092 (35,432) 42,000 680
Proceeds from notes payable 315 227,180 350
Payment of financing costs (1,088) (8,718)
Payment of assumed consolidation liabilities (14,946)
Principal payments on notes payable (456) (552) (129,171) (855)
Distributions to minority partners (142) (329)
---------- ------------ ----------- ------------
Net cash provided by (used in) financing
activities 87,326 32,719 99,021 (589)
(Decrease) increase in cash and cash equivalents (2,444) (7,479) 13,161 67,489
Cash and cash equivalents at beginning of period 5,683 13,162 1 9,057
---------- ------------ ----------- ------------
Cash and cash equivalents at end of period $ 3,239 $ 5,683 $ 13,162 $ 76,546
========== ============ =========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 15,276 $ 13,372 $ 8,829 $ 428
Cash paid during the period for taxes $ 594 $ 197 $ 263 $ --
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING INFORMATION:
Liabilities incurred in connection with the
construction of storage centers $ 9,008 $ 4,457 $ -- $ --
</TABLE>
See notes to consolidated financial statements
-41-
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION
Shurgard Storage Centers, Inc. (SSCI) was organized under the laws of the
State of Delaware on July 23, 1993, to serve as a vehicle for investments in,
and ownership of, a professionally managed, nationally diverse real estate
portfolio consisting primarily of self-service storage properties which provide
month-to-month leases for business and personal use. We intend to qualify as a
real estate investment trust (REIT) as defined in Section 856 of the Internal
Revenue Code.
On March 1, 1994 (Consolidation Date), we completed the acquisition of 17
publicly-held limited partnerships (the Predecessor, Note M) administered by
Shurgard Incorporated (the Management Company) as a means for assembling an
initial portfolio of real estate investments (Note E). On March 24, 1995, we
became self-advised and self-administered after acquiring the Management Company
through a merger (the Management Company Merger, Note E).
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation: The consolidated financial statements include the
accounts of SSCI and its subsidiaries. All intercompany balances and
transactions have been eliminated upon consolidation. Prior to the Consolidation
Date, SSCI was inactive.
The accompanying combined financial statements for the period from January
1, 1994 to March 1, 1994 represent the Predecessor's combined results of
operations and cash flows through the Consolidation Date. The Predecessor
financial statements are not comparable in all material respects with our
financial statements. The most significant differences relate to (1) lower
depreciation expense due to our lower original cost of storage centers and (2)
higher debt and related interest expense as a result of certain limited
partners electing to take a cash payment in lieu of our common stock at the
Consolidation Date. Certain amounts in the Predecessor financial statements have
been reclassified to conform to our current year presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires us to make estimates and assumptions
that affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Effective January 1, 1996, we adopted Statement of Financial Accounting
Standards No. 121, "Accounting for Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed of". Adoption of this standard had no impact
on our financial statements.
Storage centers: Storage centers are recorded at cost. Depreciation on
buildings and equipment is recorded on a straight-line basis over their
estimated useful lives which range from three to 33 years.
Other real estate investments: We consolidate the accounts of those joint
ventures in which we have effective control as evidenced by, among other
factors, a majority interest in the investment and
-42-
<PAGE> 43
the ability to cause a sale of investment assets. A minority interest in
earnings or loss from such investments is included in other income. All other
investments in joint ventures are accounted for on the equity method and are
included in other real estate investments. Investments accounted for on the
equity method include four joint ventures owning a total of seven storage
centers as well as investments in certain limited partnerships. Participation
mortgages, which are accounted for as loans, are also included in other real
estate investments.
Cash equivalents: Cash equivalents consist of money market instruments and
securities with original maturities of 90 days or less.
Restricted cash and investments: Restricted cash and investments consist
of certain cash deposits and securities held in trust in connection with certain
notes payable. Restricted cash deposits represent expense reserves required by
lenders. Restricted securities (Note H), per the loan agreement, must be held to
maturity and thus are carried at amortized cost. The premium is amortized over
the estimated remaining life of the security using the constant yield method.
Other assets: Other assets include financing costs, non-competition
agreements, and goodwill, which are presented net of accumulated amortization of
$7,373,000 and $3,765,000 as of December 31, 1996 and 1995, respectively.
Financing costs are amortized on the effective interest method over the life of
the related debt and the related expense is included in amortization.
Non-competition agreements and goodwill are amortized over their estimated
useful lives which range from three to 30 years.
Federal income taxes: To qualify as a REIT, we must distribute annually at
least 95% of our taxable income and meet certain other requirements.
Additionally, as a REIT, we will not be subject to federal income taxes to the
extent of distributions. We were not required to pay any federal income tax in
1994 or 1995 and we intend to make elections regarding distributions such that
we will not pay federal taxes for 1996. As a result, no provision for federal
income taxes has been made in our financial statements.
The financial statements of the Predecessor do not reflect a provision for
federal income taxes because such taxes were the responsibility of the
individual partners.
Foreign exchange: The consolidated financial statements are prepared in
United States dollars. Assets and liabilities of the foreign subsidiary are
denominated in foreign currencies and are translated to United States dollars at
the exchange rates in effect on the balance sheet date. Revenue, costs and
expenses for this subsidiary are translated using an average rate.
Revenue recognition: Revenue is recognized when earned under accrual
accounting principles.
Gain on sale of net assets: Gain on sale of net assets is calculated as
the excess of the purchase price paid over the book value of the net assets of
the Predecessor on the Consolidation Date.
Net income and distributions per common and common equivalent share: Net
income and distributions per share is calculated based on the weighted average
shares outstanding during the periods presented (23,552,315, 20,675,356 and
16,983,887 shares for the years ended December 31, 1996, 1995 and 1994,
respectively).
-43-
<PAGE> 44
Net income and distributions per unit of limited partnership interest: Net
income and distributions per unit of limited partnership interest of the
Predecessor is based on total earnings allocated to the limited partners divided
by the total number of $1,000 limited partnership units outstanding during the
year (530,607 units for the period ended March 1, 1994).
Valuation of long-lived assets: Using our best estimates based on
reasonable and supportable assumptions and projections, we review storage
centers and other long-lived assets for impairment whenever events or changes in
circumstances have indicated that the carrying amount of our assets might not be
recoverable. At December 31, 1996, no assets had been written down.
Financial instruments: The carrying values reflected in the balance sheet
at December 31, 1996, reasonably approximate the fair value of cash and cash
equivalents, other assets, accounts payable and other liabilities. We estimate
that the fair value of loans to shareholders is $2.7 million. Based on the
borrowing rates currently available to us for bank loans with similar terms and
average maturities, the fair value of fixed rate long-term debt is estimated to
be $130.6 million.
NOTE C - STORAGE CENTERS
<TABLE>
<CAPTION>
(in thousands) December 31, December 31,
1996 1995
------------ -----------
<S> <C> <C>
Land $ 142,127 $ 105,224
Buildings 572,218 424,760
Equipment 11,751 7,935
------------ -----------
726,096 537,919
Less accumulated depreciation (45,888) (28,366)
------------ -----------
680,208 509,553
Construction in progress, including
related land of $8,116 and $8,353 at
December 31, 1996 and 1995, respectively 32,630 20,942
------------ -----------
$ 712,838 $ 530,495
============ ===========
</TABLE>
We have entered into 24 construction contracts for developments or
improvements to current storage centers. Outstanding commitments under these
contracts total $13.3 million. In 1996 and 1995, we capitalized approximately
$2.8 million and $1.1 million in interest related to the development of storage
centers.
NOTE D - OTHER REAL ESTATE INVESTMENTS
<TABLE>
<CAPTION>
(in thousands) December 31, December 31,
1996 1995
----------- -----------
<S> <C> <C>
Investments in participating mortgages $ 11,903 $ 11,587
Investments in joint ventures 12,804 6,056
Investments in limited partnerships 4,729 3,764
---------- ----------
$ 29,436 $ 21,407
========== ==========
</TABLE>
We have paid approximately $11.8 million for investment in two
participating mortgage loans maturing in December 2004, which are nonrecourse to
the borrower and are secured by real estate, including four storage centers and
office/warehouse space. We will receive interest at 8% per annum
-44-
<PAGE> 45
plus 50% of both operating cash flow and distributions from the gain on sale of
real property, as defined. We have options to purchase the properties at
established prices, generally exercisable in 1999 and extending until maturity
of the loans.
We have entered into four joint ventures with a storage operator and
developer to develop five properties in the Nashville, Tennessee metropolitan
area. Our economic interest in these ventures range from 50% to 85.5%. We have
guaranteed $6.4 million of loans, our pro rata portion of the joint ventures'
debt. Additionally, we have guaranteed $9.0 million of debt in joint ventures to
develop four sites in Orlando, Florida under a similar arrangement. We have a
90% economic interest in these Orlando joint ventures. The financial information
of these projects are not consolidated in our financial statements because the
affiliation agreement allows the local operator to control the daily operations
of the property and all significant investment decisions require the approval of
both parties regardless of ownership percentage.
During 1995, we purchased from an unaffiliated third party, for $3.8
million in cash, 3.5 limited partnership units in Shurgard Institutional Fund LP
II, an affiliated partnership. We are now entitled to 37% of distributions. In
January 1996, we also purchased from an unaffiliated third party, for $1.1
million in cash, one limited partnership unit in Shurgard Institutional Fund LP,
an affiliated partnership. We are now entitled to 8.8% of this partnership's
distributions.
During 1996, we committed to invest $2.85 million in Shurgard's Storage to
Go, Inc., a containerized storage business. We will own only nonvoting stock in
this start-up venture which is not a qualified REIT Subsidiary and is subject to
corporate level tax.
NOTE E - ACQUISITIONS
On September 13, 1996, pursuant to a tender offer, we purchased
approximately 42%, 32% and 42% of the outstanding limited partnership units of
three affiliated public partnerships (the IDS Partnerships) for a total of $40
million, funded through our line of credit. On November 14, 1996, we completed
the acquisition of the IDS Partnerships for 2,462,414 shares of Class A common
stock. A summary of the assets and liabilities acquired in this transaction are
as follows (in thousands):
<TABLE>
<S> <C>
Storage centers $121,780
Debt repaid by SSCI at closing (13,639)
Other assets 644
Total liabilities (2,207)
--------
$106,578
=========
</TABLE>
On March 24, 1995, we merged with the Management Company in order to
become self-administered and self-advised. On that date, we issued 1,266,704 new
shares of Class A common stock to the shareholders of the Management Company. In
addition, 282,572 shares previously owned by the Management Company were
reissued to Management Company shareholders. On August 28, 1995, pursuant to the
Management Company Merger Agreement, an additional 23,030 shares were issued as
a result of adjustments identified in the audit of the Management Company's
final statement of assets, liabilities and stockholder's equity. On November 14,
1996, pursuant to the Management Company Merger Agreement, an additional 49,573
shares were issued as consideration for certain
-45-
<PAGE> 46
partnership interests held by the Management Company which were not valued at
the time of the Merger; additional shares may be issued over the next three
years as consideration for similar interests in other partnerships. A summary of
the assets and liabilities acquired in this purchase transaction are as follows
(in thousands):
<TABLE>
<S> <C>
Storage centers $ 7,964
Cash 780
Other assets 35,133
Line of credit (4,337)
Notes payable (7,275)
Other liabilities (2,856)
--------
$ 29,409
========
</TABLE>
On September 1, 1994, we purchased twenty storage centers for $34 million
from an unaffiliated seller. These centers, located in Maryland, Virginia and
North Carolina, were financed through a $30 million draw on our credit facility,
a $1 million note to the seller paid in 1995 and 1996 and approximately $3
million from cash reserves.
On March 1, 1994, we acquired the assets, subject to existing liabilities,
of the Predecessor for a cost of $387 million (the Consolidation). A summary of
the assets and liabilities assumed in this purchase transaction are as follows
(in thousands):
<TABLE>
<S> <C>
Real estate $417,218
Interest in joint ventures 7,074
Cash, receivables and other assets 10,642
Notes payable (26,192)
Other liabilities (21,326)
--------
$387,416
========
</TABLE>
The Consolidation was funded by the issuance of 16,983,728 shares of
common stock and $67,068,631 in proceeds from a note payable to a financial
services company. Assets assumed included approximately $2,947,000 in cash and
cash equivalents. Real estate assets acquired in the Consolidation consist of
134 self-service storage centers and two business parks located in seventeen
states, as well as interests in two joint ventures owning an additional five
storage centers. In 1994, the purchase price was increased $1,200,000 for
additional costs.
The following unaudited pro forma statements of income represent our
results of operations for the years ended December 31, 1996 and 1995, as if the
IDS Partnerships, all properties we owned at December 31, 1995, the Management
Company Merger, the acquisition of the Evergreen Partnership, and the 1995 stock
offering (Note I) had been consummated on January 1, 1995. The pro forma results
do not necessarily indicate the actual results that would have been obtained,
nor are they necessarily indicative of the future operations of the combined
companies (in thousands).
-46-
<PAGE> 47
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DEC. 31, 1996 DEC. 31, 1995
------------- -------------
<S> <C> <C>
Revenue and other income $ 127,905 $ 117,731
Operations expenses (50,163) (46,622)
Depreciation and amortization (24,662) (21,522)
Interest expense (17,107) (14,448)
------------- -------------
Net income $ 35,973 $ 35,139
============= =============
Net income per share $ 1.40 $ 1.37
============= =============
</TABLE>
NOTE F - EUROPEAN OPERATIONS
We have invested $5.4 million and $6.9 million in SSC Benelux, our Belgian
subsidiary, for the years ended December 31, 1995 and 1996, respectively. Our
investment represents an 85.6% interest.
Ground leases related to two European storage centers are included in land
at the discounted value of required cash payments ($1.9 million) and the
corresponding liabilities have been recorded in other liabilities. The lease
terms are 27 and 99 years with bargain purchase options at 27 and 16 years,
respectively. These leases require annual payments of approximately $170,000 in
each of the next five years.
NOTE G - LINES OF CREDIT
We have an unsecured line of credit to borrow up to $175 million at a
spread over LIBOR, maturing September 1999. The amount available and the spread
vary based on the terms of the agreement; as of December 31, 1996, the current
available amount is $175 million, of which approximately $133.4 million is
outstanding. At December 31, 1996 the interest rate was 7.3%. On April 1, 1997
the maximum amount available under this line of credit decreases to $100
million. Subsequent to year end, we repaid $58.4 million with a portion of the
proceeds from the issuance of Class A common stock.
We have two European credit facilities, totaling 10 million ECU
(approximately $12.1 million at December 31, 1996), maturing January 2000, under
which we have borrowed approximately $7.6 million. These credit facilities
accrue interest at 100 basis points above the Belgium Interbank Offer Rate. We
purchased an agreement under which the effective rate on borrowings would not be
above 6% or below 4.45%. At December 31, 1996 the interest rate was 4.45%.
-47-
<PAGE> 48
NOTE H - NOTES PAYABLE
<TABLE>
<CAPTION>
(in thousands) December 31, December 31,
1996 1995
----------- -----------
<S> <C> <C>
Note payable to financial services company $ 122,580 $ 122,580
Mortgage notes payable 9,089 8,733
Other notes payable 125 622
----------- -----------
$ 131,794 $ 131,935
=========== ===========
</TABLE>
On June 9, 1994, we refinanced substantially all of our existing debt
through a debt purchase transaction with a financial services company. The
$122.58 million loan provides us with funds for seven years at a fixed rate
equal to 8.28%, requires monthly payments of interest only until maturity and is
secured by 86 properties with a book value of $226 million. The refinancing
resulted in a loss on early retirement of $1.18 million. As required by the loan
agreement, we have deposited cash in restricted accounts to fund certain
expenses including real estate taxes and insurance. During 1995, we sold two
properties securing this note and, as part of the defeasance, were required to
place US treasury notes costing $3.1 million into a trust account. These
treasury notes mature in June 2001 and carry an effective interest rate of 5.1%.
The mortgage notes are secured by a deed of trust on two storage centers.
The first is due in monthly installments of $13,441, including principal and
interest at 10.25%, and matures April 2001. The second is a participating
mortgage for $7.3 million requiring fixed monthly payments of interest only at
8% plus quarterly payments of 90% of cash flow, as defined. This mortgage also
requires payment of 90% of the storage center's appreciation upon maturity,
December 2003. Other notes payable consists of local improvement district
warrants and a note taken in connection with a real estate acquisition. The
approximate maturities of principal over the next five fiscal years are
approximately $20,000 in each year from 1997 through 2000 and $124 million in
2001.
NOTE I - SHAREHOLDERS' EQUITY
In addition to the rights, privileges and powers of Class A common stock,
Class B common stockholders received loans from SSCI to fund certain obligations
to the Predecessor. The loans are due between 2000 and 2003 and are secured by
the Class B common stock. Class B common stock is convertible to Class A common
stock at a one-to-one ratio as the loans are repaid.
SSCI has authorized 40,000,000 shares of preferred stock, of which
2,800,000 shares have been designated as Series A Junior Participating Preferred
Stock, and none are issued and outstanding at December 31, 1996. The Board of
Directors is authorized to determine the rights, preferences and privileges of
the preferred stock including the number of shares constituting any such series,
and the designation thereof.
In June and July 1995, we issued a total of 4.92 million additional Class
A common shares through a public offering. These shares were issued at $23.00
per share, providing net proceeds after offering costs of $106 million. Net
proceeds were used to repay lines of credit and the remaining funds have been
used to fund storage center acquisitions, development, and general corporate
purposes.
In January and February 1997, we issued 2.2 million Class A common shares
through a public offering. Net proceeds of $59.3 million were used to pay down
our domestic line of credit.
-48-
<PAGE> 49
NOTE J - STOCK COMPENSATION PLANS
We have established two employee stock plans for the purpose of attracting
and retaining our directors, executive officers and other employees:
1) The 1993 Stock Option Plan (the 1993 Plan) provides for the
granting of options for up to 3% of our outstanding shares of Class A
common stock at the end of each year, limited in the aggregate to 5,000,000
shares. In general, the options vest ratably over five years and must be
exercised within ten years from date of grant. The exercise price for
qualified incentive options under the 1993 Plan must be at least equal to
fair market value at date of grant and at least 85% of fair market value at
date of grant for non qualified options. The 1993 Plan expires in 2003.
2) The 1995 Long-Term Incentive Compensation Plan (the 1995 Plan)
which provides for the granting of options for up to 2% of the adjusted
average shares of our Class A common stock outstanding during the preceding
calendar year, as well as stock appreciation rights, stock awards
(including restricted stock), performance awards, other stock-based awards
and distribution equivalent rights. The 1995 Plan requires mandatory
acceleration in the event of certain mergers and consolidations or a sale
of substantially all the assets or a liquidation of SSCI, except where such
awards are assumed or replaced in the transaction. The 1995 Plan permits
the plan administrator to authorize loans, loan guarantees or installment
payments to assist award recipients in acquiring shares pursuant to awards
and contains certain limitations imposed by recent tax legislation. The
1995 Plan allows for grants to consultants and agents, as well as our
officers and key employees.
In 1993, we also established the Stock Option Plan for Nonemployee
Directors (the Directors Plan) for the purpose of attracting and retaining the
services of experienced and knowledgeable outside directors. This plan was
amended during 1995 and provided current outside directors with 6,000 shares
each in 1995 and 3,000 shares each annually thereafter. Such options vest upon
continued service until our next annual meeting. The total shares reserved under
the Directors Plan, as amended, is 200,000. The exercise price for options
granted under the Directors Plan is equal to fair market value at date of grant.
As of December 31, 1996, 54,400 of these options were outstanding.
In 1996, we established an Employee Stock Purchase Plan under which
employees can elect to purchase Company stock through regular periodic payroll
deductions without paying broker commissions. This plan provides for potential
price discounts of up to 15%; however, no discount is currently being offered to
employees.
-49-
<PAGE> 50
The weighted average remaining contractual life of options outstanding at
December 31, 1996 was 8.7 years and option prices ranged from $18.90 to $27.00
per share. The following table summarizes the outstanding and exercisable
options under all of our plans:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NO. OF SHARES EXERCISE PRICE
------------- --------------
<S> <C> <C>
Outstanding, January 1, 1994 0
Granted 9,200 $ 19.44
-------------
Outstanding, December 31, 1994 9,200 19.44
Granted 196,500 23.34
Forfeited (13,200) 23.00
Exercised (300) 23.00
--------------
Outstanding, December 31, 1995 192,200 22.15
Granted 80,597 26.26
Forfeited (14,206) 24.99
Exercised (7,500) 22.00
--------------
Outstanding, December 31, 1996 251,091 23.32
=============
Exercisable, December 31, 1994 0
=============
Exercisable, December 31, 1995 15,100 23.10
=============
Exercisable, December 31, 1996 51,000 22.45
=============
</TABLE>
Additionally, during 1996, we granted performance awards for an additional
12,994 shares which are contingent on meeting certain performance objectives
over the next three years.
We have adopted the disclosure only provisions of the Statement of
Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation." No compensation cost has been recognized for the stock option
plans. Had compensation cost for our two stock options granted been determined
based on the fair value at the grant date for awards in 1996 consistent with the
provision of SFAS No. 123, our net income and net income per share would have
been reduced to the pro forma amounts indicated below (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Net income - as reported $32,785 $29,572
Net income - pro forma 32,212 29,269
Net income per share - as reported 1.39 1.43
Net income per share - pro forma 1.37 1.42
</TABLE>
The fair value of options granted under our stock option plans during 1996
and 1995, was estimated on the date of grant using the binomial option-pricing
model with the following weighted average assumptions used: dividend yield of
3.60% and 8.22%, expected volatility of 21.61% and 26.87%, risk free interest
rate of 5.99% and 7.33%, and expected life of 10 and 7 years.
In January 1997, we granted 254,045 options which vest ratably over three
years at fair market value or $28.25 per share.
-50-
<PAGE> 51
NOTE K - SHAREHOLDER RIGHTS PLAN
In March 1994, we adopted a Shareholder Rights Plan and declared a
distribution of one Right for each outstanding share of common stock. Under
certain conditions, each Right may be exercised to purchase one one-hundredth of
a share of Series A Junior Participating Preferred Stock at purchase price of
$65, subject to adjustment. The Rights will be exercisable only if a person or
group has acquired 10% or more of the outstanding shares of common stock, or
following the commencement of a tender or exchange offer for 10% or more of such
outstanding shares of common stock. If a person or group acquires more than 10%
of the then outstanding shares of common stock, each Right will entitle its
holder to receive, upon exercise, common stock (or, in certain circumstances,
cash, property or other securities of SSCI) having a value equal to two times
the exercise price of the Right. In addition, if SSCI is acquired in a merger or
other business combination transaction, each Right will entitle its holder to
purchase that number of the acquiring company's common shares having a market
value of twice the Right's exercise price. We will be entitled to redeem the
Rights at $.0001 per Right at any time prior to the earlier of the expiration of
the Rights in March 2004 or the time that a person has acquired a 10% position.
The Rights do not have voting or distribution rights, and until they become
exercisable, have no dilutive effect on our earnings.
NOTE L - ADVISORY AND MANAGEMENT AGREEMENTS
Prior to the Management Company Merger, the Management Company advised the
Company with respect to its investments, managed its day-to-day operations, and
provided property management services. The agreements provided for an annual
advisory fee, incentive advisory fees, reimbursement for certain costs and
expenses, and property management fees. The property management fee is equal to
approximately 6% of property revenues. These agreements were eliminated through
the Management Company Merger with the Management Company on March 24, 1995.
Property management fees for the years ended December 31, 1994 and 1995 were
$3,987,000 (representing ten months of operations) and $1,261,000 (representing
three months of operations), respectively. In addition, we paid $59,000 each
year during 1994 and 1995 under an advisory agreement.
In connection with the management of storage centers, the Predecessor paid
to the Management Company a property management fee of 6% of rental revenues.
Incentive management fees were paid by two of the partnerships included in the
Predecessor. These incentive fees were based on the amount of distributions to
partners at 8% and 25% depending on the cumulative amount of distributions to
limited partners. We pay no comparable fee.
-51-
<PAGE> 52
NOTE M - PREDECESSOR
The combined financial statements of the Predecessor include the accounts
of the partnerships listed below for the period from January 1 to March 1, 1994.
Shurgard Mini-Storage Limited Partnership I
Shurgard Income Properties II
Shurgard Income Properties III, a Real Estate Limited Partnership Shurgard
Income Properties IV, a Real Estate Limited Partnership Shurgard Income
Properties Five, a Real Estate Limited Partnership Shurgard Income
Properties Six, a Real Estate Limited Partnership Shurgard Income
Properties Seven, a Real Estate Limited Partnership Shurgard Income
Properties Eight, a Real Estate Limited Partnership Shurgard Income
Properties Nine, a Real Estate Limited Partnership Shurgard Income
Properties Ten, a Real Estate Limited Partnership Shurgard Income
Properties Eleven, a Real Estate Limited Partnership Shurgard Income
Properties Twelve, a Real Estate Limited Partnership Shurgard Income
Properties - Fund 14 Limited Partnership Shurgard Growth Capital - Fund 15
Limited Partnership Shurgard Income Properties - Fund 16 Limited
Partnership Shurgard Growth Capital - Fund 17 Limited Partnership Shurgard
Income Properties - Fund 18 Limited Partnership
NOTE N - SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
(in thousands, except per share data) 1995 1995 1995 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 21,368 $ 24,107 $ 26,088 $ 25,208
Income from operations 8,551 10,329 11,483 10,372
Net income 5,354 6,638 9,221 8,359
Net income per common
and common equivalent share 0.31 0.35 0.40 0.35
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
(in thousands, except per share data) 1996 1996 1996 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 24,819 $ 26,323 $ 28,051 $ 31,207
Income from operations 9,645 10,472 12,096 12,850
Net income 7,313 7,801 9,029 8,643
Net income per common
and common equivalent share 0.32 0.34 0.39 0.36
</TABLE>
-52-
<PAGE> 53
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
Shurgard Storage Centers, Inc.
Seattle, Washington
We have audited the accompanying consolidated balance sheets of Shurgard
Storage Centers, Inc., and subsidiaries (the "Company") as of December 31, 1996
and 1995, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1996. We have also audited the combined statements of income, cash flows and
partners' equity (deficit) of the 17 limited partnerships (the "Predecessor")
described in Note A, for the period from January 1, 1994 to March 1, 1994. These
financial statements are the responsibility of the Company's and Predecessor'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 accounting
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, the consolidated financial statements of the Company and
the combined financial statements of the Predecessor present fairly, in all
material respects, the financial position of the Company as of December 31, 1996
and 1995, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996 the results of the
Predecessor's operations and its cash flows for the period from January 1, 1994
to March 1, 1994 in conformity with generally accepted accounting principles.
/s/Deloitte & Touche LLP
Deloitte & Touche LLP
Seattle, Washington
February 28, 1997
-53-
<PAGE> 54
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors of the Company and Section 16 reporting is
set forth in our proxy statement for the annual meeting of shareholders to be
held May 13, 1997, and is incorporated herein by reference.
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
POSITIONS AND OFFICES
NAME AGE WITH THE COMPANY
- --------------- --- ------------------------------------------------------
<S> <C> <C>
Charles K. Barbo 55 Chairman of the Board, President and Chief Executive
Officer
Harrell Beck 40 Director, Senior Vice President, Chief Financial
Officer and Treasurer
Kristin H. Stred 38 Senior Vice President, Secretary and General Counsel
David K. Grant 43 Executive Vice President
Michael Rowe 40 Executive Vice President, Chief Operating Officer
</TABLE>
- ---------------
For Mr. Barbo's and Mr. Beck's biographies, see our proxy statement for
the annual meeting of shareholders to be held on May 13, 1997.
Kristin H. Stred has served as our Secretary and General Counsel since
July 1993. She was named Senior Vice President of the Company upon the closing
of the Merger. Ms. Stred joined the Management Company in July 1992 and until
the Merger served as Secretary and General Counsel. She was previously an
attorney with The Boeing Company from October 1991 to July 1992 and Assistant
General Counsel with King Broadcasting Company from July 1987 to September 1991.
Ms. Stred has a Bachelor of Arts degree with honors in general studies from
Harvard University and a J.D. from Harvard Law School. She is a member of the
Washington State Bar Association, is a former president of Washington Women
Lawyers and a former member of the Executive Committee of the Corporate Law
Department Section of the Washington State Bar Association.
David K. Grant has served as our Executive Vice President and Director of
Real Estate Investment since July 1993. In February 1996, Mr. Grant was
transferred to Brussels, Belgium. He became Managing Director Benelux SCS
effective January 1, 1996. Mr. Grant joined the Management Company in November
1985 as Director of Real Estate Investment and continued to serve in that
capacity until the Merger. He also served as an Executive Vice President of the
Management Company. Mr. Grant was previously a manager with Touche Ross & Co.,
where he was employed for approximately 10 years providing financial consulting,
accounting and auditing services primarily to clients in the real estate,
construction and engineering industries. Mr. Grant has a Bachelor of Arts degree
in Business Administration and a Bachelor of Science degree in Accounting, both
from Washington State University.
Michael Rowe has served as our Executive Vice President and Director of
Storage Operations since July 1993. Effective January 1, 1996, Mr. Rowe became
our Chief Operating Officer. Prior to the Merger, he served as Executive Vice
President and Director of Storage Operations of the Management Company. Prior to
his employment with the Management Company, he was employed with Touche Ross &
Co., where he participated in independent audits of major real estate
syndication, development and management companies in the Pacific Northwest. He
became Controller of the Management Company in 1982 and Vice President and
Treasurer in 1983. In 1987, Mr. Rowe was
-54-
<PAGE> 55
named Director of Storage Operations of the Management Company. Mr. Rowe has a
Bachelor of Arts degree in Business Administration from Washington State
University.
ITEM 11 - EXECUTIVE COMPENSATION
Information regarding executive compensation is set forth in our proxy
statement for the annual meeting of shareholders to be held May 13, 1997, and is
incorporated herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is set forth in our proxy statement for the annual meeting of
shareholders to be held May 13, 1997, and is incorporated herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
set forth in our proxy statement for the annual meeting of shareholders to be
held May 13, 1997, and is incorporated herein by reference.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Consolidated Balance Sheet at December 31, 1996 and 1995. 37
For the years ended December 31, 1996, 1995 and 1994 (Company), and the
period from January 1, 1994 to March 1, 1994 (Predecessor):
Consolidated Statements of Net Income 38
Consolidated Statements of Partners' and Shareholders' Equity 39
Consolidated Statements of Cash Flows 40-41
Notes to Consolidated Financial Statements 42-52
Independent Auditors' Report 53
</TABLE>
-55-
<PAGE> 56
2. Financial Statement Schedules
All schedules have been omitted because either they are not
applicable or the required information is shown in the financial
statements.
3. Exhibits
3.1 Amended and Restated Certificate of Incorporation of the
Registrant (1)
3.2 Restated By-Laws of the Registrant (7)
4.1 Rights Agreement between the Registrant and Gemisys
Corporation dated as of March 17, 1994 (2)
10.1 Amended and Restated Loan Agreement between Nomura Asset
Capital Corp., as Lender, and SSC Property Holdings, Inc., as
Borrower, dated as of June 8, 1994(4)
10.2 Amended and Restated Collection Account and Servicing
Agreement among SSC Property Holdings, Inc., Pacific Mutual
Life Insurance Company, LaSalle National Bank and Nomura Asset
Capital Corp. dated as of June 8, 1994(4)
10.3 Amended and Restated Loan Agreement among Shurgard Storage
Centers, Inc., Seattle-First National Bank, KeyBank of
Washington, U.S. Bank of Washington and LaSalle National Bank
dated September 9, 1996(6)
10.4 Agreement and Plan of Merger dated as of December 19, 1994(4)
*10.6 Amended and Restated 1993 Stock Option Plan(3)
*10.7 Amended and Restated Stock Incentive Plan for Nonemployee
Directors
*10.8 1995 Long-Term Incentive Compensation Plan (5)
*10.9 Form of Business Combination Agreement, together with schedule
of actual agreements
10.10 Second Amendment to Amended and Restated Loan Agreement dated
as of March 12, 1997
11.1 Statement Re: computation of Net Income Per Share
12.1 Statement Re: computation of Earnings to Fixed Changes
21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule
-56-
<PAGE> 57
-----------------
(1) Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form S-4, Amendment No. 8
(Post-Effective Amendment No. 4), filed with the Securities and
Exchange Commission on February 2, 1994.
(2) Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form 8-A filed with the Securities and
Exchange Commission on March 17, 1994.
(3) Incorporated by reference to exhibit no. 10.7 filed with the
Registrant's Annual Report on Form 10-K filed with the Securities
and Exchange Commission on March 31, 1995.
(4) Incorporated by reference to exhibit filed with the
Registrant's Registration Statement on Form S-4, Amendment
No. 2, filed with the Securities and Exchange Commission on
February 8, 1995.
(5) Incorporated by reference to appendix B filed as part of the
Registrant's definitive Proxy Statement dated June 8, 1995.
(6) Incorporated by reference to exhibit 99.40 filed with the
Registrant's Schedule 13E-3/A Amendment No. 11 filed with the
Securities and Exchange Commission on October 12, 1996.
(7) Incorporated by reference to exhibit no. 3.2 filed with the
Registrant's Annual report on Form 10-K filed with the
Securities and Exchange Commission on March 20, 1996.
* Management contract or compensatory plan or arrangement
(b) Reports on Form 8-K
The following Form 8-K was filed by the Company during the quarter ended
December 31, 1996:
November 14, 1996 (filed November 14, 1996) Completion of Acquisition
-57-
<PAGE> 58
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this Annual
Report on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Seattle, State of Washington, on the 12th day of
March, 1997.
SHURGARD STORAGE CENTERS, INC.
By:
------------------------------------
Harrell Beck
Senior Vice President
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Annual Report on Form 10-K has been signed by the following
persons in the capacities indicated below on the 19th day of March, 1996.
<TABLE>
<CAPTION>
Signature Title
- ----------------------------------- ----------------------------------------
<S> <C>
- ----------------------------------- Chairman of the Board, President and
Charles K. Barbo Chief Executive Officer (Principal
Executive Officer)
- ----------------------------------- Senior Vice President, Treasurer,
Harrell L. Beck Chief Financial Officer and
Director (Principal Financial and
Accounting Officer)
Greenlaw Grupe
- ----------------------------------- Director
Howard Johnson
- ----------------------------------- Director
Donald W. Lusk
- ----------------------------------- Director
W. J. Smith
- ----------------------------------- Director
</TABLE>
-58-
<PAGE> 59
Exhibit Index
3.1 Amended and Restated Certificate of Incorporation of the
Registrant (1)
3.2 Restated By-Laws of the Registrant (7)
4.1 Rights Agreement between the Registrant and Gemisys
Corporation dated as of March 17, 1994 (2)
10.1 Amended and Restated Loan Agreement between Nomura Asset
Capital Corp., as Lender, and SSC Property Holdings, Inc., as
Borrower, dated as of June 8, 1994(4)
10.2 Amended and Restated Collection Account and Servicing
Agreement among SSC Property Holdings, Inc., Pacific Mutual
Life Insurance Company, LaSalle National Bank and Nomura Asset
Capital Corp. dated as of June 8, 1994(4)
10.3 Amended and Restated Loan Agreement among Shurgard Storage
Centers, Inc., Seattle-First National Bank, KeyBank of
Washington, U.S. Bank of Washington and LaSalle National Bank
dated September 9, 1996(6)
10.4 Agreement and Plan of Merger dated as of December 19, 1994(4)
*10.6 Amended and Restated 1993 Stock Option Plan(3)
*10.7 Amended and Restated Stock Incentive Plan for Nonemployee
Directors
*10.8 1995 Long-Term Incentive Compensation Plan (5)
*10.9 Form of Business Combination Agreement, together with schedule
of actual agreements
10.10 Second Amendment to Amended and Restated Loan Agreement dated
as of March 12, 1997
11.1 Statement Re: computation of Net Income Per Share
12.1 Statement Re: computation of Earnings to Fixed Changes
21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule
<PAGE> 60
-----------------
(1) Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form S-4, Amendment No. 8
(Post-Effective Amendment No. 4), filed with the Securities and
Exchange Commission on February 2, 1994.
(2) Incorporated by reference to exhibit filed with the Registrant's
Registration Statement on Form 8-A filed with the Securities and
Exchange Commission on March 17, 1994.
(3) Incorporated by reference to exhibit no. 10.7 filed with the
Registrant's Annual Report on Form 10-K filed with the Securities
and Exchange Commission on March 31, 1995.
(4) Incorporated by reference to exhibit filed with the
Registrant's Registration Statement on Form S-4, Amendment
No. 2, filed with the Securities and Exchange Commission on
February 8, 1995.
(5) Incorporated by reference to appendix B filed as part of the
Registrant's definitive Proxy Statement dated June 8, 1995.
(6) Incorporated by reference to exhibit 99.40 filed with the
Registrant's Schedule 13E-3/A Amendment No. 11 filed with the
Securities and Exchange Commission on October 12, 1996.
(7) Incorporated by reference to exhibit no. 3.2 filed with the
Registrant's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 20, 1996.
* Management contract or compensatory plan or arrangement
<PAGE> 1
EXHIBIT 10.9
SENIOR MANAGEMENT EMPLOYMENT AGREEMENT
SENIOR MANAGEMENT EMPLOYMENT AGREEMENT, dated the 14th day of June, 1996,
between SHURGARD STORAGE CENTERS, INC., a Delaware corporation (the "Company"),
and [name1] ("Executive").
RECITALS
A. Executive is currently employed by the Company or one of its
Subsidiaries.
B. The Board of Directors of the Company (the "Board") has determined
that it is appropriate to reinforce the continued attention and dedication of
certain members of the Company's management, including Executive, to their
assigned duties without distraction in potentially disturbing circumstances
arising from the possibility of a Business Combination of the Company, as
defined in Schedule A attached hereto.
AGREEMENTS
NOW, THEREFORE, in consideration of the covenants and agreements
hereinafter set forth, the Company and Executive agree as follows:
1. DEFINITIONS
Terms capitalized in this Agreement which are not otherwise defined
shall have the meanings assigned to such terms in Schedule A attached hereto.
2. EMPLOYMENT FOLLOWING A BUSINESS COMBINATION.
Once a Business Combination has occurred, no termination of Executive's
employment with the Company, other than on account of death, shall be effective
unless the party causing such termination of employment provides the other party
30 days' prior written notice of such termination, which shall indicate those
specific provisions in this Agreement relied upon and which sets forth in
reasonable detail the facts and circumstances claimed to provide a basis for the
termination of Executive's employment constituting a Termination, if any, under
the provision so indicated.
<PAGE> 2
3. BENEFITS UPON BUSINESS COMBINATION
Executive shall be entitled to the following payments and benefits
following a Business Combination, whether or not a Termination occurs:
(a) SALARY AND BENEFITS. Executive shall (i) receive an annual base
salary no less than the Executive's annual base salary in effect immediately
prior to the date that the Business Combination occurs, including any salary
which has been earned but deferred, and an annual bonus equal to at least the
average of the two annual bonuses paid to Executive in the two years prior to
the Business Combination, and (ii) be entitled to participate in all employee
expense reimbursement, incentive, savings and retirement plans, practices,
policies and programs (including any Company plan qualified under Section 401(a)
of the Code) available to other peer executives of the Company and its
Subsidiaries, but in no event shall the benefits provided to Executive under
this item (ii) be less favorable, in the aggregate, than the most favorable of
those plans, practices, policies or programs in effect immediately prior to the
date that the Business Combination occurs.
(b) WELFARE BENEFITS. The Company shall at the Company's expense
(except for the amount, if any, of any required employee contribution which
would have been necessary for Executive to contribute as an active employee
under the plan or program as in effect on the date of the Business Combination)
continue to cover Executive (and his or her dependents) under, or provide
Executive (and his or her dependents) with insurance coverage no less favorable
than, the Company's life, disability, health, dental and any other employee
welfare benefit plans or programs, as in effect on the date of the Business
Combination (such benefits, the "Welfare Benefits").
(c) DEATH OF EXECUTIVE. In the event of Executive's death prior to
Termination, but while employed by the Company or any Subsidiary, as the case
may be, his or her spouse, if any, or otherwise the personal representative of
his or her estate shall be entitled to receive (i) Executive's salary at the
rate then in effect through the date of death, as provided under the Company's
pay policy, and (ii) any Accrued Benefits for the periods of service prior to
the date of death.
(d) DISABILITY OF EXECUTIVE. In the event of Executive's Disability
prior to Termination, but while employed by the Company or any Subsidiary, as
the case may be, Executive shall be entitled to receive (i) his or her salary at
the rate then in effect through the date of the determination of Disability, as
provided under the Company's pay policy, (ii) any Accrued Benefits for the
periods of service prior to the date of the determination of Disability, (iii)
payments under the Company's short and
<PAGE> 3
long term disability plans following the determination of Disability, and (iv)
Welfare Benefits for a period of one year following the determination of
Disability.
(e) CAUSE; UPON EXPIRATION OF THIS AGREEMENT; OTHER THAN FOR GOOD
REASON. If Executive's employment shall be terminated by the Company for Cause
or upon expiration of this Agreement or by Executive other than for Good Reason,
Executive shall be entitled to receive only (i) his or her salary at the rate
then in effect through the date of such termination, as provided under the
Company's pay policy, and (ii) any Accrued Benefits for the periods of service
prior to the date of such termination.
(f) WITHHOLDING. All payments under this Section 4 are subject to
applicable federal and state payroll withholding or other applicable taxes.
4. PAYMENTS AND BENEFITS UPON TERMINATION
Executive shall be entitled to the following payments and benefits
following Termination:
(a) TERMINATION PAYMENT. Subject to Section 4(b)(i), in recognition
of past services to the Company by Executive, the Company shall make a lump sum
payment in cash to Executive as severance pay within ten (10) business days
following the date of Termination equal to two and one-half (2-1/2) times the
sum of: (i) Executive's annual base salary in effect immediately prior to the
date that either a Business Combination shall occur or such date of Termination,
whichever salary is higher; plus (ii) Executive's target bonus for the current
fiscal year as determined by the Compensation Committee; provided, however, that
if Termination occurs prior to the determination of such target bonus for a
fiscal year, such bonus shall be the target bonus for the prior fiscal year.
(b) TERMINATION BENEFITS; CERTAIN ADDITIONAL PAYMENTS BY THE
COMPANY.
(i) Notwithstanding anything to the contrary in this
Agreement, if Executive's Termination Benefits would otherwise exceed an amount
equal to three times the Base Amount plus $100,000 (the "Benefits Cap"), then
the Company shall reduce the termination payment described in paragraph (a) or
the Gross-Up Payment, or both, so that the Executive's Termination Benefits do
not exceed the Benefits Cap. If the Executive's Termination Benefits would still
exceed the Benefits Cap even after elimination of such termination payment and
the Gross-Up Payment, then no termination payment or Gross-Up Payment shall be
paid to the
<PAGE> 4
Executive and no further reduction in payments or benefits shall occur.
"Termination Benefits" shall mean the payments or benefits provided under
Section 4(a) either alone or together with all other payments and benefits that
Executive receives or is then entitled to receive (pursuant to this Agreement or
otherwise) from the Company or any Subsidiary and that would be considered in
determining whether or not Executive had received a Parachute Payment.
(ii) Subject only to subparagraph (i) above, if all or any
portion of Termination Benefits would constitute a Parachute Payment and be
subject to Excise Tax, then the payments to Executive under Section 4(a) shall
be increased (such increase, a "Gross-Up Payment"), but only to the extent
necessary to ensure that, after payment by the Executive of all taxes (including
any interest or penalties imposed with respect to such taxes), including,
without limitation, any income taxes and Excise Tax imposed upon the Gross-Up
Payment, the Executive retains an amount of the Gross-Up Payment equal to the
Excise Tax imposed upon the Termination Benefits. The foregoing calculations
shall be made by the Company and Executive. If no agreement on the calculations
is reached within ten (10) business days after the date of Termination, then the
accounting firm which regularly audits the financial statements of the Company
(the "Auditors") shall review the calculations, and report their determination
of the amount due to both Executive and the Company within thirty (30) days of
the Termination. The determination of such firm shall be conclusive and binding
on all parties and the expense for such accountants shall be paid by the
Company. Pending such determination, the Company shall continue to make all
other required payments to Executive at the time and in the manner provided
herein.
(iii) As a result of the uncertainty in the application of
Section 280G and Section 4999 of the Code, it is possible that the Company will
make a Payment (including a Gross-Up Payment) under this Agreement that should
not have been made (an "Overpayment") or that the Company will fail to make a
payment (including a Gross-Up Payment) under this Agreement that should have
been made (an "Underpayment"). If the Company and Executive, or, if no agreement
is reached by the Company and Executive, the Auditors, determine that
Overpayment has been made, such Overpayment shall be treated for all purposes as
a loan to the Executive which he shall repay to the Company, together with
interest at the applicable federal rate provided for in section 7872(f)(2)(A) of
the Code. If the Company and Executive, or, if no agreement is reached by the
Company and Executive, the Auditors, determine that an Underpayment has
occurred, such Underpayment shall promptly be paid by the Company to Executive,
together with interest at the applicable federal rate provided for in section
7872(f)(2)(A) of the Code. The
<PAGE> 5
Company and Executive agree to give each other prompt written notice of any
information or taxing authority inquiry that could reasonably result in the
determination that an Overpayment or Underpayment has been made.
(c) ACCRUED BENEFITS. Within ten (10) business days following the
date of Termination, the Company shall make a lump sum payment in cash to
Executive in the amount of any Accrued Benefits for the periods of service prior
to the date of Termination.
(d) WELFARE BENEFITS. The Company shall, at its sole option and
expense (except for the amount, if any, of any required employee contribution
that would have been necessary for Executive to contribute as an active employee
under the plan or program as in effect on the date of Termination) either (i)
continue to cover Executive (and his or her dependents) under, or provide
Executive (and his or her dependents) with Welfare Benefits (as in effect on the
date of the Business Combination or, at the option of Executive, on the date of
Termination) for a period of two and one-half (2-1/2) years following the date
of Termination, or (ii) pay Executive a lump sum cash payment within ten (10)
business days following the date of Termination equal to the then-present value
of the cost to the Company of such Welfare Benefits; provided, however, that if
Executive is provided by another employer during such two and one-half-year
period with benefits substantially comparable to the Welfare Benefits, the
benefits provided by the Company shall, unless a lump sum payment has been made
by the Company (in which case Executive shall not, for any reason, be required
to return any part of such payment), be reduced by the benefits provided by such
other employer, but only to the extent of, and with respect to, the Welfare
Benefits otherwise payable by the Company to Executive.
(e) DEATH OF EXECUTIVE. In the event of Executive's death subsequent
to Termination and prior to receiving all benefits and payments provided for by
this Section 4, such benefits and payments shall be paid to his or her spouse,
if any, or otherwise to the personal representative of his or her estate, unless
Executive has otherwise directed the Company in writing prior to his or her
death.
(f) EXCLUSIVE SOURCE OF SEVERANCE PAY. Benefits provided hereunder
shall replace the amount of any severance payments to which Executive would
otherwise be entitled under any severance plan or policy generally available to
employees of the Company.
(g) NONSEGREGATION. No assets of the Company need be segregated or
earmarked to represent the liability for benefits payable hereunder. The rights
of
<PAGE> 6
any person to receive benefits hereunder shall be only those of a general
unsecured creditor.
(h) WITHHOLDING. All payments under this Section 4 are subject to
applicable federal and state payroll withholding or other applicable taxes.
5. NONCOMPETITION
(a) NONCOMPETITION. In the event that this Agreement is terminated
by the Company or by Executive for any reason, and provided that any payments
due Executive upon such termination are paid when due, then for a period of one
year after such termination, Executive shall not, within any standard
metropolitan statistical area in which the Company has ten or more self storage
facilities, engage in any activities (including, without limitation, activities
for any subsequent employer of Executive) directly competitive with the
self-storage business of the Company.
(b) COMPANY REMEDY. In the event of any breach by Executive of the
obligations set forth in Section 5(a), the Company shall be entitled to recover
an amount equal to the total of all amounts paid to Executive pursuant to
Sections 4(a) and 4(b) of this Agreement in addition to any other remedies
available to the Company at law or in equity.
6. ARBITRATION
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration in Seattle, Washington, in
accordance with the Rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any jurisdiction.
7. CONFLICT IN BENEFITS
This Agreement is not intended to and shall not adversely affect, limit or
terminate any other agreement or arrangement between Executive and the Company
presently in effect or hereafter entered into, including any employee benefit
plan under which Executive is entitled to benefits.
8. TERM, TERMINATION AND AMENDMENT
(a) The initial term of this Agreement shall be from the date hereof until
the anniversary date of this Agreement. On each such annual anniversary date,
this Agreement shall automatically be renewed for a period of one year, unless
60 days prior to such anniversary date the Company shall give notice to
Executive that the
<PAGE> 7
Agreement is terminated or amended, provided that no Business Combination has
occurred prior to such anniversary. Notwithstanding such termination, the
Company shall remain liable for any rights or payments arising prior to such
termination to which Executive is entitled under this Agreement. During each
such one year term, this Agreement may not be amended or terminated except by
written agreement between Executive and the Company.
(b) In the event of a Business Combination, unless earlier terminated as
provided herein, this Agreement shall continue in effect until for a period of
30 months from the date of the Business Combination at which time this Agreement
shall expire. For a 30 month period following a Business Combination, (i) this
Agreement may not be terminated, and (ii) no amendment or other action of the
Board which adversely affects the rights of Executive hereunder is valid and
enforceable without the prior written consent of Executive. After the 30 month
period from the date of the Business Combination, the Board may terminate or
amend this Agreement without the prior written consent of Executive.
9. MISCELLANEOUS
(a) AMENDMENT. This Agreement may not be amended except by written
agreement between Executive and the Company.
(b) NO MITIGATION. All payments and benefits to which Executive is
entitled under this Agreement shall be made and provided without offset,
deduction or mitigation on account of income Executive could or may receive from
other employment or otherwise, except as provided in Section 4(d) and Section
5(b) hereof.
(c) EMPLOYMENT NOT GUARANTEED. Nothing contained in this Agreement,
and no decision as to the eligibility for benefits or the determination of the
amount of any benefits hereunder, shall give Executive any right to be retained
in the employ of the Company or rehired, and the right and power of the Company
to dismiss or discharge any employee for any reason is specifically reserved.
Except as expressly provided herein, no employee or any person claiming under or
through him or her shall have any right or interest herein, or in any benefit
hereunder.
(d) LEGAL EXPENSES. In connection with any litigation, arbitration
or similar proceeding, whether or not instituted by the Company or Executive,
with respect to the interpretation or enforcement of any provision of this
Agreement, the prevailing party shall be entitled to recover from the other
party all costs and expenses, including reasonable attorneys' fees and
disbursements, in connection with such litigation, arbitration or similar
proceeding. The Company shall pay
<PAGE> 8
prejudgment interest on any money judgment obtained by Executive as a result of
such proceedings, calculated at the published commercial interest rate of
Seattle-First National Bank for its best customers, as in effect from time to
time from the date that payment should have been made to Executive under this
Agreement.
(e) NOTICES. Any notices required under the terms of this Agreement
shall be effective when mailed, postage prepaid, by certified mail and addressed
to, in the case of the Company:
Shurgard Storage Centers, Inc.
1201 Third Avenue, Suite 2200
Seattle, WA 98101
Attention: Chief Executive Officer
and to, in the case of Executive
[name1]
------------------------------
[add1]
------------------------------
[add2]
------------------------------
Either party may designate a different address by giving written notice of
change of address in the manner provided above.
(f) WAIVER; CURE. No waiver or modification in whole or in part of
this Agreement, or any term or condition hereof, shall be effective against any
party unless in writing and duly signed by the party sought to be bound. Any
waiver of any breach of any provision hereof or any right or power by any party
on one occasion shall not be construed as a waiver of, or a bar to, the exercise
of such right or power on any other occasion or as a waiver of any subsequent
breach. Other than a breach of the provisions of Section 5, any breach of this
Agreement may be cured by the breaching party within ten days of the date that
such breaching party shall have received written notice of such breach from the
party asserting such breach.
(g) BINDING EFFECT; SUCCESSORS. Subject to the provisions hereof,
nothing in this Agreement shall prevent the consolidation of the Company with,
or its merger into, any other corporation, or the sale by the Company of all or
substantially all of its properties and assets, or the assignment of this
Agreement by the Company in connection with any of the foregoing actions. This
Agreement shall be binding upon, inure to the benefit of and be enforceable by
the Company and Executive and their respective heirs, legal representatives,
successors and assigns. If the Company shall be merged into or consolidated with
another entity, the provisions of this Agreement
<PAGE> 9
shall be binding upon and inure to the benefit of the entity surviving such
merger or resulting from such consolidation. The Company shall require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business or assets of the Company,
including the successor to all or substantially all of the business or assets of
any Subsidiary, division or profit center of the Company, to expressly assume
and agree to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform it if no such succession had taken
place. The provisions of this Section 9(g) shall continue to apply to each
subsequent employer of Executive hereunder in the event of any subsequent
merger, consolidation or transfer of assets of such subsequent employer.
(h) SEPARABILITY. Any provision of this Agreement which is held to
be unenforceable or invalid in any respect in any jurisdiction shall be
ineffective in such jurisdiction to the extent that it is unenforceable or
invalid without affecting the remaining provisions hereof, which shall continue
in full force and effect. The enforceability or invalidity of a provision of
this Agreement in one jurisdiction shall not invalidate or render unenforceable
such provision in any other jurisdiction.
(i) CONTROLLING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the state of Washington applicable to
contracts made and to be performed therein.
IN WITNESS WHEREOF, the Company and Executive have executed this Agreement
as of the day and year first above written.
SHURGARD STORAGE CENTERS, INC.
By:
------------------------------
Title:
--------------------------
EXECUTIVE:
[name2]
<PAGE> 10
Schedule A
CERTAIN DEFINITIONS
As used in this Agreement, and unless the context requires a different
meaning, the following terms have the meanings indicated:
"Accrued Benefits" means the aggregate of any compensation previously
deferred by Executive (together with any accrued interest or earnings thereon),
any accrued vacation pay and, if the date of Termination occurs after the end of
a Fiscal Year for which a bonus is payable to Executive, such bonus, in each
case to the extent previously earned and not paid.
"Base Amount" shall mean the "base amount" of Executive as defined in
Section 280G of the Code.
"Benefits Cap" shall have the meaning set forth in Section 4(b).
"Business Combination" means, and shall be deemed to occur upon the
happening of, any one of the following:
(a) The occupying of a majority of the seats (other than vacant seats) on
the Board by individuals who were neither nominated or appointed by a majority
of the Incumbent Directors;
(b) The acquisition, directly or indirectly, by any Person of beneficial
ownership of 15% or more of the combined voting power of the then outstanding
voting securities of the Company entitled to vote generally in the election of
directors, which acquisition is not approved in advance by a majority of the
Incumbent Directors;
(c) The first purchase of the Company's Common Stock pursuant to a tender
or exchange offer (other than a tender or exchange offer made by the Company);
(d) The approval by the stockholders of the Company of a reorganization,
merger or consolidation or sale of substantially all of the assets of the
Company (an "Acquisition Transaction") unless, following such Acquisition
Transaction, all or substantially all of the individuals and entities who were
the beneficial owners of the outstanding voting securities of the Company
immediately prior to such Acquisition Transaction beneficially own, directly or
indirectly, more than 50% of the then outstanding voting securities of the
corporation resulting from such Acquisition Transaction (including, without
limitation, a corporation which as a result of such
<PAGE> 11
transaction owns the Company or all or substantially all of the Company's assets
either directly or through one or more subsidiaries) in substantially the same
proportions as their ownership, immediately prior to such Acquisition
Transaction of the outstanding voting securities of the Company; or
(e) Approval by the stockholders of the Company of a liquidation or
dissolution of the Company.
(f) For purposes of this definition, (i) the terms "beneficial owner" and
"beneficial ownership" shall have the meanings set forth in Rules 13d-3 and
13d-5 of the General Rules and Regulations promulgated under the Exchange Act,
and the term "voting securities" shall mean the voting securities of a
corporation entitled to vote generally in the election of directors.
"Cause" means (a) willful misconduct on the part of Executive that has a
materially adverse effect on the Company and its Subsidiaries, taken as a whole,
(b) Executive's engaging in conduct which could reasonably result in his or her
conviction of a felony or a crime against the Company or involving substance
abuse, fraud or moral turpitude, or which would materially compromise the
Company's reputation, as determined in good faith by a written resolution duly
adopted by the affirmative vote of not less than two-thirds of all of the
directors who are not employees or officers of the Company, or (c) unreasonable
refusal by Executive to perform the duties and responsibilities of his or her
position in any material respect. No action, or failure to act, shall be
considered "willful" if it is done by Executive in good faith and with
reasonable belief that his or her action or omission was in the best interests
of the Company.
"Code" means the Internal Revenue Code of 1986, as amended.
"Disability" means that (a) a person has been incapacitated by bodily
injury or physical or mental disease so as to be prevented thereby from
performance of his or her duties with the Company for 120 days in any 12-month
period, and (b) such person is disabled for purposes of any and all of the plans
or programs of the Company or any Subsidiary that employs Executive under which
benefits, compensation or awards are contingent upon a finding of disability.
The determination with respect to whether Executive is suffering from such a
Disability will be determined by a mutually acceptable physician or, if there is
no physician mutually acceptable to the Company and Executive, by a physician
selected by the then Dean of the University of Washington Medical School.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
<PAGE> 12
"Excise Tax" means the excise tax, including any interest or penalties
thereon, imposed on Executive by Section 4999 of the Code.
"Fiscal Year" means the 12-month period ending on December 31 in each year
(or such other fiscal year period established by the Board).
"Good Reason" means, without Executive's express written consent:
(a) (i) the assignment to Executive of duties, or limitation of
Executive's responsibilities, inconsistent with Executive's title,
position, duties, responsibilities and status with the Company
Executive as such duties and responsibilities existed immediately
prior to the date of the Business Combination, or (ii) removal of
Executive from, or failure to re-elect Executive to, Executive's
positions with the Company or any Subsidiary that employs Executive
immediately prior to the Business Combination, except in connection
with the involuntary termination of Executive's employment by the
Company for Cause or as a result of Executive's death or Disability;
(b) failure by the Company to pay, or reduction by the Company of,
Executive's annual base salary, as reflected in the Company's
payroll records for Executive's last pay period immediately prior to
the Business Combination;
(c) failure by the Company to pay, or reduction by the Company of,
Executive's bonus;
(d) the relocation of the principal place of Executive's employment to a
location that is more than 25 miles further from Executive's
principal residence than such principal place of employment
immediately prior to the Business Combination; or
(e) the breach of any material provision of this Agreement by the
Company, including, without limitation, failure by the Company to
bind any successor to the Company to the terms and provisions of
this Agreement in accordance with Section 10(g).
"Gross-Up Payment" shall have the meaning set forth in Section 4(b).
"Incumbent Director" means a member of the Board who has been either (a)
nominated by a majority of the directors of the Company then in office or (b)
appointed by directors so nominated, but excluding, for this purpose, any such
<PAGE> 13
individual whose initial assumption of office occurs as a result of either an
actual or threatened election contest (as such terms are used in Rule 14a-11 of
Regulation 14A promulgated under the Exchange Act) or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than the
Board.
"Parachute Payment" means any payment deemed to constitute a "parachute
payment" as defined in Section 280G of the Code.
"Person" means any individual, entity or group (as such term is used in
Section 13(d)(3) or 14(d)(2) of the Exchange Act).
"Subsidiary" means an Person controlled by the Company directly, or
indirectly through one or more intermediaries.
"Termination" means, following the occurrence of any Business Combination
by the Company, (a) the involuntary termination of the employment of Executive
for any reason other than death, Disability or for Cause or (b) the termination
of employment by Executive for Good Reason.
"Termination Benefits" shall have the meaning set forth in
Section 4(b)(i).
"Welfare Benefits" shall have the meaning set forth in Section 3(b).
<PAGE> 14
<TABLE>
<CAPTION>
NAME1 ADD1 ADD2 NAME2
<S> <C> <C> <C>
Charles K. Barbo 508 McGilvra Blvd. E. Seattle, WA 98112 Charles
Michael Rowe 5330 90th Avenue SE Mercer Island, WA 98040 Michael Rowe
Harrell L. Beck 5357 SW Admiral Way Seattle, WA 98116 Harrell
Kristin H. Stred 7540 24th Avenue NE Seattle, WA 98115 Kristin
Mark Hall 6018 E. Mercer Way Mercer Island, WA 98040 Mark Hall
Gerald Cleary 1500 Chevron Way Dunwoody, GA 30350 Gerald Cleary
Donald Favreau 2503 East Garnet Mesa, AZ 85204 Donald Favreau
</TABLE>
<PAGE> 1
EXHIBIT 10.10
SECOND AMENDMENT TO
AMENDED AND RESTATED LOAN AGREEMENT
THIS SECOND AMENDMENT TO AMENDED AND RESTATED LOAN AGREEMENT
("Amendment") is made as of March 12, 1997 by and among BANK OF AMERICA NT&SA,
a successor by merger to Seattle-First National Bank, doing business as
SEAFIRST BANK ("Seafirst Bank"), a national banking association; KEY BANK OF
WASHINGTON, a Washington corporation; U.S. BANK OF WASHINGTON, N.A., a national
banking association and successor to West One Bank, Washington; and LASALLE
NATIONAL BANK, a national banking association (each individually a "Lender" and
collectively the "Lenders"); SEAFIRST BANK as agent for Lenders (the "Agent");
and SHURGARD STORAGE CENTERS, INC., a Delaware corporation ("Borrower").
RECITALS
A. Lenders, Agent and Borrower are parties to that certain
Amended and Restated Loan Agreement dated as of September 9, 1996 (the
"Original Loan Agreement").
B. Lenders, Agent and Borrower entered into a First Amendment to
Loan Agreement dated as of November 14, 1996 (the "First Amendment"). The
Original Loan Agreement, as amended by the First Amendment, is referred to
herein as the "Loan Agreement."
C. Borrower has requested, and Lenders and Agent have agreed, to
amend the Loan Agreement upon certain terms and conditions contained in this
Amendment.
NOW, THEREFORE, Lenders, Agent and Borrower agree as follows:
AMENDMENT
1. Capitalized Terms. Capitalized terms not otherwise defined in
this Amendment shall have the meanings set forth in the Loan Agreement.
2. Changes in Corporate Structure. Subject to Section 2.d.
below, Lenders consent to the following changes in the corporate structure of
Borrower and its affiliates, which consent shall satisfy the written consent
requirement contained in Section 8.1 of the Loan Agreement:
a. Borrower Incorporation in Washington. Within six
months of this Amendment, a new corporation will be formed under
<PAGE> 2
the laws of the State of Washington with the name "Shurgard Washington Corp."
("New Shurgard"). Borrower may merge into New Shurgard, with New Shurgard
being the surviving entity ("Merger"). At the time of the Merger, New Shurgard
shall become the Borrower under the Loan Agreement. Following the Merger, the
name of New Shurgard will be changed to "Shurgard Storage Centers, Inc."
b. Merger of SSC Acquisitions, Inc. into Borrower.
Within five months of this Amendment, SSC Acquisitions, Inc. shall merge into
Borrower.
c. Dissolution of SSC North Carolina, Inc. On or before
the date of this Amendment, SSC North Carolina, Inc. shall dissolve.
d. Condition Precedent. As a condition precedent to the
Lenders' consent to Section 2.a, and pursuant to Section 7.2 of the Loan
Agreement, Borrower shall provide Agent with a legal opinion in form and
substance satsifactory, and from legal counsel acceptable, to Agent to the
effect that the reincorporation of Borrower described in Section 2.a, above,
shall have no adverse legal effect on any of Agent's or Lender's rights or
remedies under any of the Loan Documents, together with such other evidence
that Agent may reasonably require relating to the effect of any such
reincorporation.
3. Amendments to Loan Agreement.
a. Section 6.1. If the Merger occurs, the first
sentence of Section 6.1 shall read:
Borrower is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Washington and is
qualified to do business in each and every state where it owns any of
the Applicable Properties.
b. Definitions.
(1) The definition of "Commitment" found in
Section 1.1 of the Loan Agreement shall be amended to read as follows:
"Commitment" means until June 30, 1997, One Hundred
Seventy-five Million Dollars ($175,000,000) and, after June 30, 1997,
One Hundred Million Dollars ($100,000,000).
(2) The definition of "Immaterial Subsidiaries"
<PAGE> 3
found in Section 1.1 of the Loan Agreement shall be amended to read as follows:
"Immaterial Subsidiaries" means Shurgard Storage To
Go, Inc., a Delaware corporation; and any other wholly owned
Subsidiaries of Borrower, other than the Guarantors, the Potential
Guarantors and the Excluded Subsidiaries.
(3) The definition of "Potential Guarantors"
found in Section 1.1 of the Loan Agreement shall be amended to read as follows:
"Potential Guarantors" means SSC Property Holdings,
Inc., a Delaware corporation, and any other Subsidiaries designated by
Borrower as Potential Guarantors. Any Subsidiary that has been so
designated shall remain a "Potential Guarantor" until such time as it
becomes a Guarantor.
c. Schedule 5. Schedule 5 referenced in Section 6.11 of
the Agreement is replaced with Schedule 5, attached hereto.
4. Counterpart; Effectiveness of Amendment. This Amendment may
be executed in any number of counterparts and by different parties in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same agreement.
This Amendment shall become effective immediately upon the execution and
delivery hereof by Borrower, Agent and each Lender.
5. Representations and Warranties. Borrower hereby repeats the
representations and warranties set forth in Article 6 of the Loan Agreement on
and as of the date hereof.
6. Loan Agreement Remains in Effect. Except as expressly amended
by this Amendment, the Loan Agreement shall remain in full force and effect.
7. Choice of Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of Washington without regard
to principles of conflicts of laws.
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY. TO EXTEND
CREDIT. OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE
NOT ENFORCEABLE UNDER WASHINGTON LAW.
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their respective officers or agents thereunto duly authorized as
of the date first above written.
BORROWER:
SHURGARD STORAGE CENTERS, INC.
By /s/ HARRELL BECK
-------------------------------------
Its Chief Financial Officer
----------------------------------
Address: 1201 Third Avenue
Suite 2200
Seattle, WA 98101
Attn: Kristin Stred
Telephone: (206) 624-8100
Telefax: (206) 624-1645
LENDERS:
Pro Rata Share of
Total Commitment
From Closing until SEAFIRST BANK
June 30, 1997:
$72,500,000 41.42857%
By /s/ Robert Peters
------------------------------------
After June 30, 1997:
$30,300,000 30.3% Its Vice President
-----------------------------------
Address: Columbia Seafirst Center
Floor 11
701 Fifth Avenue
Seattle, WA 98104
Attn: Robert Peters
Metropolitan Commercial
Banking Division
Telephone: (206) 358-3133
Telefax: (206) 585-1794
<PAGE> 5
From Closing until KEY BANK OF WASHINGTON
June 30, 1997:
$35,000,000 20%
By /s/ Kathleen Johanson
-------------------------------------
After June 30, 1997: Its Vice President
$24,900,000 24.9% ----------------------------------
Address: 700 Fifth Avenue
Seattle, WA 98111
Attn: Kathleen Johanson
Telephone: (206) 684-6308
Telefax: (206) 684-6035
From Closing until U.S. BANK OF WASHINGTON, N.A.
June 30, 1997:
$35,000,000 20% BY /s/ Matthew Rudolf
-------------------------------------
After June 30, 1997: Its Vice President
$24,900,000 24.9% ------------------------------------
Address: 1420 Fifth Avenue,
Floor 11, WWH733
Seattle, WA 98101
Attn: Matt Rudolf
Telephone: (206) 344-4276
Telefax: (206) 344-2332
From Closing until LASALLE NATIONAL BANK
June 30, 1997:
$32,500,000 18.571428%
After June 30, 1997: By /s/ Brian Greenblatt
$19,900,000 19.9% -------------------------------------
Its First Vice President
-------------------------------------
Address: 135 South LaSalle Street
Chicago, Illinois 60603
Attn: Brian Greenblatt
Telephone: (312) 904-6346
Telefax: (312) 904-6469
<PAGE> 6
AGENT:
SEAFIRST BANK
By /s/ Dora Brown
--------------------------------------
Its Vice President
--------------------------------------
Address: Seafirst Bank
701 Fifth Ave., Floor 16
Seattle, WA 98124
Attn: Seafirst Agency Services
Telephone: (206) 358-0101
Telefax: (206) 358-0971
<PAGE> 7
SCHEDULE 5
GUARANTORS, POTENTIAL GUARANTORS AND IMMATERIAL SUBSIDIARIES
<TABLE>
<CAPTION>
STATE OF AUTHORIZED # OF SHARES SHARES ISSUED
NAME INCORPORATION
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHURGARD EVERGREEN LIMITED DE
PARTNERSHIP
- ----------------------------------------------------------------------------------------------------------
SSC PROPERTY HOLDINGS, INC. DE Class A Common - 3,000 Shurgard Storage
Centers, Inc. -
1,000
- ----------------------------------------------------------------------------------------------------------
SSC BENELUX, INC. DE Class A Common - 3,000 Shurgard Storage
Centers, Inc. - 1,000
EVERGREEN, INC. DE 3,000 1,000 - Shurgard
Storage Centers,
Inc.
- ----------------------------------------------------------------------------------------------------------
SHURGARD'S STORAGE TO GO, INC. DE Common - 1,000
Preferred - 1,000
</TABLE>
<PAGE> 1
SHURGARD STORAGE CENTERS, INC.
EXHIBIT (11.1) - STATEMENT RE: COMPUTATION OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
PRIMARY NET INCOME PER COMMON AND ----------------------------------------------
COMMON EQUIVALENT SHARE: 1996 1995 1994
------------ ------------- -------------
<S> <C> <C> <C>
Net income $ 32,785,000 $ 29,572,000 $ 17,821,000
------------ ------------- -------------
Weighted average common and common equivalent
shares outstanding:
Weighted average common shares outstanding 23,517,337 20,661,218 16,983,887
Net effect of dilutive stock options-based on
treasury stock method using average market
price (1) 34,978 14,138
------------ ------------- -------------
Primary common and common equivalent shares 23,552,315 20,675,356 16,983,887
============ ============= =============
Primary net income per common and common
equivalent share $ 1.39 $ 1.43 $ 1.05
============ ============= =============
</TABLE>
(1) No adjustment has been made in 1994 as the option price exceeded the
market price of our stock for substantially all of the fourth quarter of
1994.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
FULLY-DILUTED NET INCOME PER COMMON ------------------------------------------------
AND COMMON EQUIVALENT SHARE: 1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Net income $ 32,785,000 $ 29,572,000 $ 17,821,000
------------- ------------- -------------
Weighted average common and common equivalent
shares outstanding:
Weighted average common shares outstanding 23,517,337 20,661,218 16,983,887
Net effect of dilutive stock options-based on
treasury stock method using average market
price(1) 53,476 34,516
------------- ------------- -------------
Fully diluted common and common equivalent
shares 23,570,813 20,695,734 16,983,887
============= ============= =============
Fully diluted net income per common and common
equivalent share $ 1.39 $ 1.43 $ 1.05
============= ============= =============
</TABLE>
(1) No adjustment has been made in 1994 as the option price exceeded the market
price of our stock for substantially all of the fourth quarter of 1994.
<PAGE> 1
SHURGARD STORAGE CENTERS, INC.
EXHIBIT (12.1) - STATEMENT RE: COMPUTATION OF EARNINGS TO FIXED CHARGES
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
---------------------------------------------- -------------------------------
YEAR ENDED DECEMBER 31, DECEMBER 31,
---------------------------------------------- -------------------------------
1996 1995 1994 1993 1992
--------------- -------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Net income before extraordinary item
32,785 29,572 19,001 18,284 22,055
Fixed charges:
Interest 12,829 12,038 9,105 2,288 2,347
Amortization of loan costs 1,120 1,120 629 55 42
-------- -------- -------- -------- --------
13,949 13,158 9,734 2,343 2,389
Net income before extraordinary item
and fixed charges 46,734 42,730 28,735 20,627 24,444
Divided by fixed charges(1) 16,734 14,265 9,734 2,343 2,389
-------- -------- -------- -------- --------
Ratio of earnings to fixed charges 2.79 3.00 2.95 8.80 10.23
</TABLE>
(1) Fixed charges includes capitalized interest that was not deducted when
arriving at net income.
<PAGE> 1
SHURGARD STORAGE CENTERS, INC.
EXHIBIT (21.1) - SUBSIDIARIES OF THE REGISTRANT
(i) SSC Property Holdings, Inc.;
(ii) SSC Acquisitions, Inc.;
(iii) SSC Benelux, Inc.; and
(iv) SSC Evergreen, Inc.
<PAGE> 1
SHURGARD STORAGE CENTERS, INC.
EXHIBIT (23.1) - INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
Nos. 33-76248 and 33-61611 of Shurgard Storage Centers, Inc. on form S-8 of our
report dated February 28, 1997, appearing in this Annual Report on Form 10-K of
Shurgard Storage Centers, Inc. for the year ended December 31, 1996.
/s/Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Seattle, Washington
March 13, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,239
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 758,726
<DEPRECIATION> (45,888)
<TOTAL-ASSETS> 804,483
<CURRENT-LIABILITIES> 0
<BONDS> 131,794
0
0
<COMMON> 515,710
<OTHER-SE> (17,199)
<TOTAL-LIABILITY-AND-EQUITY> 804,483
<SALES> 0
<TOTAL-REVENUES> 110,399
<CGS> 0
<TOTAL-COSTS> 60,986
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,829
<INCOME-PRETAX> 32,785
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,785
<EPS-PRIMARY> 1.39
<EPS-DILUTED> 1.39
</TABLE>
