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Filed Pursuant to Rule 424(b)(5)
File No. 333-21273
PROSPECTUS SUPPLEMENT
- -----------------------------------
(To Prospectus dated February 20, 1997)
2,000,000 SHARES
(SHURGARD LOGO)
SHURGARD STORAGE CENTERS, INC.
8.80% SERIES B CUMULATIVE REDEEMABLE PREFERRED STOCK
(LIQUIDATION PREFERENCE $25.00 PER SHARE)
------------------------
Shurgard Storage Centers, Inc., a Delaware corporation (the "Company"), will
issue the 8.80% Series B Cumulative Redeemable Preferred Stock, $.001 par value
per share (the "Series B Preferred Stock"), offered hereby (the "Offering").
Distributions on shares of the Series B Preferred Stock will be cumulative from
the date of original issue and will be payable quarterly in arrears on or about
the last day of March, June, September and December of each year, commencing on
June 30, 1997, at the rate of 8.80% of the initial liquidation preference per
annum. See "Description of Series B Preferred Stock -- Distributions."
The Series B Preferred Stock is not redeemable prior to June 30, 2002. On
and after June 30, 2002, the Series B Preferred Stock may be redeemed at the
option of the Company, in whole or in part, at a redemption price of $25.00 per
share, plus accumulated and unpaid distributions, if any, thereon. The
redemption price of the Series B Preferred Stock (other than any portion thereof
consisting of accumulated and unpaid distributions) may only be paid from the
sale proceeds of other capital stock of the Company, which may include other
classes or series of preferred shares, and from no other source. The Series B
Preferred Stock has no stated maturity and will not be subject to any sinking
fund or mandatory redemption provisions and will not be convertible into any
other securities of the Company. In order to maintain its qualification as a
real estate investment trust ("REIT") for federal income tax purposes, the
Company's Restated Certificate of Incorporation, as amended, provides that the
Company may prevent the transfer or call for redemption of shares of the Company
(whether Common Stock or Preferred Stock) if more than 50% of the outstanding
shares would be owned, actually or constructively, by five or fewer persons or
if one person would own, actually or constructively, more than 9.8% of the total
outstanding shares (or such higher percentage as may be determined by the
Company's Board of Directors, with limited exceptions). See "Description of
Series B Preferred Stock -- Restrictions on Ownership."
The Company has applied for approval from the New York Stock Exchange (the
"NYSE") to list the Series B Preferred Stock on the NYSE under the symbol
"SHUPrB," subject to official notice of issuance. Trading of the Series B
Preferred Stock on the NYSE is expected to commence within a 30-day period after
the date of initial delivery of the Series B Preferred Stock. While the
Underwriters (as defined below) have advised the Company that they intend to
make a market in the Series B Preferred Stock prior to commencement of trading
on the NYSE, they are under no obligation to do so and there can be no assurance
that a market for the Series B Preferred Stock will exist prior to commencement
of trading. See "Underwriting."
Concurrent with the Offering, the Company is also offering $50,000,000
principal amount of notes due 2004 (the "2004 Notes") and $50,000,000 principal
amount of notes due 2007 (the "2007 Notes") (the "Notes Offering"). The closing
of the Offering is not contingent upon the closing of the Notes Offering and the
closing of the Notes Offering is not contingent upon the closing of the
Offering.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT
RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=================================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(3)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share...................................... $25.00 $.7875 $24.2125
- -----------------------------------------------------------------------------------------------------------------
Total(4)....................................... $50,000,000 $1,575,000 $48,425,000
=================================================================================================================
</TABLE>
(1) Plus accumulated distributions, if any, from the date of original issue.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $300,000.
(4) The Company has granted to the several Underwriters an option for 30 days to
purchase up to an additional 300,000 shares of Series B Preferred Stock
solely to cover over-allotments, if any. If all of such shares are
purchased, the total Price to Public, Underwriting Discount and Proceeds to
Company will be $57,500,000, $1,811,250 and $55,688,750, respectively. See
"Underwriting."
------------------------
The Series B Preferred Stock is offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by the Underwriters,
subject to approval of certain legal matters by counsel for the Underwriters and
to certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of the certificates evidencing the shares of Series B
Preferred Stock will be made in New York, New York on or about April 21, 1997.
------------------------
MERRILL LYNCH & CO. SMITH BARNEY INC.
------------------------
The date of this Prospectus Supplement is April 16, 1997.
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Certain persons participating in the Offering may engage in transactions
that stabilize, maintain or otherwise affect the price of the securities. Such
transactions may include stabilizing, the purchase of securities to cover
syndicate short positions and the imposition of penalty bids. For a description
of these activities, see "Underwriting."
------------------------
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below have been filed by the Company under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), with the
Securities and Exchange Commission (the "Commission") and are incorporated
herein by reference:
a. Annual Report on Form 10-K for the year ended December 31, 1996;
b. Current Reports on Form 8-K dated January 16, 1997, as amended, and
April 16, 1997; and
c. Description of the Series B Preferred Stock contained in the Company's
Registration Statement on Form 8-A, dated April 16, 1997.
All documents filed by the Company pursuant to Sections 13(a), 13(d), 14
and 15(d) of the Exchange Act subsequent to the date of this Prospectus
Supplement and prior to the termination of the Offering shall be deemed to be
incorporated by reference in this Prospectus Supplement and to be a part hereof
from the date of filing such documents.
Any statements contained herein or in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus Supplement to the extent that a statement
contained herein (or in the accompanying Prospectus) or in any other
subsequently filed document that also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus Supplement.
Copies of all documents that are incorporated herein by reference (not
including the exhibits to such documents, unless such exhibits are specifically
incorporated by reference into the information that this Prospectus Supplement
incorporates) will be provided without charge to each person, including any
beneficial owner, to whom this Prospectus Supplement is delivered, upon written
or oral request. Requests should be directed to Investor Relations at the
Company, 1201 Third Avenue, Suite 2200, Seattle, Washington 98101 (telephone
number: (206) 624-8100).
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PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and notes thereto appearing
elsewhere in, or incorporated by reference into, this Prospectus Supplement or
the accompanying Prospectus. Unless the context otherwise requires, as used
herein the terms "Company" and "Shurgard" refer to Shurgard Storage Centers,
Inc. and its subsidiaries on a consolidated basis, and to the Company's
predecessors, including Shurgard Incorporated (the "Management Company"), which
was merged with the Company in March 1995 (the "Management Company Merger").
Unless indicated otherwise, the information contained in this Prospectus
Supplement assumes no exercise of the Underwriters' over-allotment option.
THE COMPANY
Shurgard Storage Centers, Inc. is a fully integrated, self-administered and
self-managed REIT that develops, acquires, owns and manages self storage
centers. The Company is one of the four largest operators of self storage
centers in the United States, and together with its predecessors has been in the
self storage business since 1972. The Company's strategy is to be the national
leader in storage products and services by offering high-quality, conveniently
located and secure self storage and a high level of customer service. This
strategy enables the Company to position itself as a premium-priced storage
provider in its target markets. The Company seeks to own and operate self
storage centers that are located in major metropolitan areas along retail and
high-traffic corridors.
As of December 31, 1996, the Company owned and operated, directly and
through its subsidiaries and joint ventures, 237 properties (including 234 self
storage properties) containing approximately 15.5 million net rentable square
feet, which are located in 19 states. For the year ended December 31, 1996, the
Company's self storage centers had a weighted average annual net rentable square
foot occupancy rate of 87% and a weighted average annual rent per net rentable
square foot of $9.23. The Company also manages, under the "Shurgard" name, 37
self storage centers and one business park containing approximately 1.9 million
net rentable square feet.
The Company employed approximately 700 persons as of December 31, 1996, and
is headquartered in Seattle, Washington, with regional offices in Phoenix,
Arizona; Chicago, Illinois; Atlanta, Georgia; and Bellevue, Washington. The
Company's executive offices are located at 1201 Third Avenue, Suite 2200,
Seattle, Washington 98101, and its telephone number is (206) 624-8100.
THE OFFERING
For a more complete description of the terms of the Series B Preferred
Stock specified in the following summary, see "Description of Series B Preferred
Stock."
Securities Offered......... 2,000,000 shares of Series B Preferred Stock
(2,300,000 shares of Series B Preferred Stock if
the Underwriters' over-allotment option is
exercised in full). The Company is applying for
approval to list the Series B Preferred Stock on
the NYSE, subject to official notice of issuance,
with trading expected to commence, if such
application is approved, within a 30-day period
after the initial delivery of the Series B
Preferred Stock.
Use of Proceeds............ To pay down amounts drawn under the Company's
revolving credit facility and for general corporate
purposes. See "Use of Proceeds."
Ranking.................... With respect to the payment of distributions and
amounts upon liquidation, the Series B Preferred
Stock offered hereby will rank pari passu with any
other preferred shares which are not by their terms
subordinated to the Series B Preferred Stock, and
will rank senior to the Company's Series A Junior
Participating Preferred Stock, par value $.001 per
share (the "Series A Preferred Stock"), the Class A
Common
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Stock, par value $.001 per share (the "Class A
Common Stock"), the Class B Common Stock, par value
$.001 per share (the "Class B Common Stock"), and
any other equity securities of the Company which by
their terms rank junior to the Series B Preferred
Stock.
Distributions.............. Distributions on the Series B Preferred Stock
offered hereby are cumulative from the date of
original issue and will be payable quarterly in
arrears on or about the last day of March, June,
September and December of each year, commencing on
June 30, 1997, at the rate of 8.80% of the
liquidation preference per annum. Distributions on
the Series B Preferred Stock will accumulate
whether or not the Company has earnings, whether or
not there are funds legally available for the
payment of such distributions and whether or not
such distributions are declared.
Liquidation Rights......... The Series B Preferred Stock will have a
liquidation preference of $25.00 per share, plus
accumulated and unpaid distributions, if any,
thereon. See "Description of Series B Preferred
Stock -- Liquidation Rights."
Redemption................. The shares of Series B Preferred Stock are not
redeemable prior to June 30, 2002. On and after
June 30, 2002, the Series B Preferred Stock will be
redeemable for cash at the option of the Company,
in whole or in part, at $25.00 per share, plus
distributions accumulated and unpaid to the
redemption date. The redemption price (other than
the portion thereof consisting of accumulated and
unpaid distributions) is payable solely out of the
sale proceeds of other capital stock of the
Company, which may include other series of
preferred shares, and from no other source. See
"Description of Series B Preferred
Stock -- Redemption."
Voting Rights.............. If distributions on the Series B Preferred Stock
are in arrears for six or more quarterly periods,
whether or not such quarterly periods are
consecutive, holders of Series B Preferred Stock
(voting separately as a class with all other series
of preferred shares upon which like voting rights
have been conferred and are exercisable) will be
entitled to vote for the election of two additional
Directors to serve on the Company's Board of
Directors until all distribution arrearages have
been paid. See "Description of Series B Preferred
Stock -- Voting Rights."
Conversion................. The shares of Series B Preferred Stock are not
convertible into or exchangeable for any other
property or securities of the Company.
Concurrent Offering........ Concurrent with the Offering, the Company is also
offering the 2004 Notes and the 2007 Notes in the
aggregate principal amount of $100,000,000.
------------------------
This Prospectus Supplement and the accompanying Prospectus, including
documents incorporated herein by reference, contain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Exchange Act. Forward-looking
statements are inherently subject to risk and uncertainties, many of which
cannot be predicted with accuracy and some of which might not even be
anticipated. Future events and actual results, financial and otherwise, may
differ materially from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Risk Factors" in the accompanying Prospectus and in
"Management's Discussion and Analysis of Financial Condition and Result of
Operations" included elsewhere in this Prospectus Supplement.
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BUSINESS AND PROPERTIES
HISTORY OF THE COMPANY
The Company is a fully integrated, self-administered and self-managed REIT
that develops, acquires, owns and manages self storage centers. The Company is
one of the four largest operators of self storage centers in the United States,
and through its predecessors has been in the self storage business since 1972.
From 1972 to 1992, Shurgard sponsored 24 separate real estate limited
partnerships, which raised in the aggregate approximately $600 million from over
80,000 investors with the objective of investing in the ownership and operation
of self storage properties. In March 1994, 17 of these partnerships were
consolidated (the "Consolidation") and Shurgard began operations as a REIT.
During the past 25 years, the Company's personnel have gained extensive
expertise in the development and refinement of operational systems and
procedures to enhance the value of self storage investments. Today, Shurgard is
an independent, fully integrated real estate operating company with in-house
expertise covering all aspects of the self storage industry, including real
estate development, acquisition and disposition, project design and consulting,
full-service property management capabilities, marketing, personnel management,
legal, accounting and finance.
The Company is a Delaware corporation incorporated on July 23, 1993. At the
Company's 1997 Annual Meeting of Shareholders to be held on May 13, 1997,
shareholders will vote on a proposal to reincorporate the Company in Washington
primarily to reduce costs. A complete discussion of the impact of this proposal
is included in the Company's Proxy Statement filed with the Commission in
connection with the 1997 Annual Meeting.
RECENT DEVELOPMENTS
Acquisition Activities. On November 14, 1996, the Company completed the
acquisition 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
(collectively, the "IDS Partnerships") through the merger of each of the IDS
Partnerships into the Company pursuant to an Acquisition Agreement among the IDS
Partnerships and the Company dated as of July 1, 1996 (the "Acquisition
Agreement"). Pursuant to the Acquisition Agreement, the Company issued
approximately 2,462,000 shares of its Class A Common Stock in the mergers. Based
on the value of the Class A Common Stock as defined in the Acquisition
Agreement, $25.90 per share, the shares issued in the mergers had a value of
approximately $63.8 million. The Company paid cash in lieu of issuing any
fractional shares of Class A Common Stock. The Company had previously acquired
between 32% and 43% of the limited partnership units of each of the IDS
Partnerships through cash tender offers for an aggregate purchase price of
approximately $40.1 million.
On April 8, 1997, the Company acquired 63.5 of the outstanding limited
partnership units (approximately 19% of the outstanding units) of Self-Service
Storage Partners L.P. (the "Self-Service Partnership") through a cash tender
offer at a price per unit of $55,000. The Self-Service Partnership owns ten self
storage facilities located in Michigan and Washington. These properties are
currently managed by the Company under the "Shurgard" name pursuant to a
management services agreement with the Self-Service Partnership.
Development Activities. During the year ended December 31, 1996, the
Company opened 13 domestic storage centers and, as of December 31, 1996, had ten
domestic storage centers under construction (five developed through joint
venture partnerships and five developed directly). The 13 opened storage centers
are renting up ahead of schedule and their average annualized rent per square
foot is $9.72, which is 5.5% above the "same store" portfolio (as defined in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Internal Growth") for the year ended December 31, 1996.
Financing Activities. Concurrent with the Offering, the Company is also
offering the 2004 Notes and 2007 Notes in the aggregate principal amount of
$100,000,000. The closing of the Offering is not contingent upon the closing of
the Notes Offering and the closing of the Notes Offering is not contingent upon
the closing of the Offering. During the first quarter of 1997, the Company
completed a public offering of 2,179,800 shares
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of Class A Common Stock. Net proceeds to the Company were approximately $59.3
million. The Company used the proceeds to pay down outstanding indebtedness
under its revolving credit facility.
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.
Commitment to Customer Service and Satisfaction
The Company's goal is to achieve a high level of customer satisfaction, and
views the quality of customers' interaction with employees as critical to the
Company's long-term success. Accordingly, the Company utilizes employee training
programs that emphasize a team-oriented approach to customer service. Through
its emphasis on training, personnel development and decentralized
decision-making, the Company believes it attracts well-qualified, highly
motivated employees committed to providing superior levels of customer service.
Convenient and Secure Stores
The Company's stores are located for easy access, offer a range of premium
storage products and services for customer convenience, and emphasize security
and product quality. The Company believes that its strategy of offering
high-quality, convenient stores strengthens the brand image of Shurgard,
attracts customers and enables the Company to maintain premium rents.
Store Location and Hours. The Company's stores are generally located in
major metropolitan areas along retail and high-traffic corridors for easy
customer access, and usually have significant road frontage for high visibility.
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. The Company's 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 truck rentals (through a
third-party rental company), to conveniently and efficiently address customers'
storage needs. In addition, the Company generally offers premium features such
as computer-controlled access and electronic security systems. Some of the
Company's stores offer climate-controlled storage space.
Property Security. A variety of measures are used at the Company's stores
as appropriate to enhance security. Such measures may include, among others,
on-site personnel, electronic devices such as intrusion and fire alarms, access
controls, video and intercom surveillance devices, 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, the Company has
developed and plans to continue to develop a proprietary package of security
controls, including software, video and interactive communication.
Capital Expenditures and Maintenance. The Company budgets for a level of
capital expenditures consistent with its commitment to own and operate
attractive, well-maintained and secure self storage centers. This commitment
contributes to the Company's ability to pursue a premium pricing strategy. In
addition, capital expenditures for signage and color scheme among the Company's
properties strengthen the brand image of Shurgard. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Capital
Expenditures."
Selective Disposition. The Company regularly reviews its portfolio
compared to established internal standards and identifies those few properties
which cannot economically meet these standards. The Company intends to dispose
of these properties over time.
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Marketing and Market Research
The Company employs various means to increase its share of the self storage
market. The Company places prominent advertisements in the yellow pages and
seeks to promote customer awareness of its stores through highly visible store
locations, site signage and architectural features. The Company locates its
stores along retail and high-traffic corridors, usually with significant road
frontage to increase visibility. The Company builds, on newly developed stores,
a distinctive "lighthouse" office to distinguish itself from competitors and to
increase customer awareness of the Shurgard brand.
Primary marketing emphasis is placed on providing managers with telephone
sales skills to elicit customer needs and turn prospects into customers. The
Company also has a national call center to field overflow calls from individual
properties. Employees at the national call center are able to market and rent a
unit at one of the Company's stores nearest to the caller.
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. The Company has also
conducted focus group research and telephone surveys and utilizes customer
comment cards to identify the primary considerations in customers' self storage
choices and satisfaction so that the Company can better attract and service
customers.
The Company is testing a new strategy that makes storage more visible and
more convenient to potential customers. In 1997, the Company added kiosks in
major malls in the Seattle, Washington 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. The Company's computerized
management information system links the Company's corporate office with each
store. The Company has developed and is installing proprietary software that
expedites internal auditing, financial statement and budget preparations, allows
the daily exchange of information with the Company's 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, the Company has purchased a new
network-based accounting package that will aid in the compilation and
dissemination of information from the Company's stores. Management believes that
this new information system will be adequate to support the Company's growth.
Other Activities
The Company also manages, under the Shurgard name, self storage properties
owned by others that meet the Company's quality standards. Management of such
properties enables the Company to spread the cost of overhead over a greater
number of properties. Additionally, it enables the Company to expand its
presence in the markets in which it operates 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, the Company closely monitors the
level of these activities to ensure its continued qualification as a REIT.
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PORTFOLIO MANAGEMENT
The Company seeks 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 the Company's
existing stores.
- Revenue Optimization. The Company seeks to optimize its revenues by
achieving the highest rental rate structure for its stores, consistent with
strong levels of occupancy, through the use of teams of store employees who
are trained and authorized to set rental rates and make rental rate changes
based on their analysis of demand and availability at a particular store.
The Company encourages decentralized decisions by store managers to change
marginal rental rates in order to ensure a fast, flexible response to
changing market dynamics. Store managers evaluate their property's rental
rates on a periodic basis, based on unit demand, unit availability and
competitors' rental rates, and can quickly change marginal rental rates to
ensure that revenue is optimized.
- Cost Containment and Improved Operating Leverage. The Company seeks
to maximize cash flow by carefully containing operating expenses. For
example, the Company aggressively appeals its 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.
- Strategic Build-Outs. The Company seeks to maximize revenue by
building out additional rentable storage space at suitable stores. The
Company receives high incremental returns on investments to build out
additional rental units, either through on-site expansion or acquisition of
property adjacent to existing stores, because resulting revenue increases
are achieved with little increase in fixed operating costs.
DEVELOPMENT AND ACQUISITIONS
The Company develops new, high-quality self storage properties and
selectively acquires additional self storage properties that meet or can be
upgraded to its standards. In general, the Company plans to develop or acquire
new properties primarily in its existing markets and in new markets that create
economies of scale with the Company's current network of stores. The Company
seeks to own at least 15 stores in each of its markets in order to realize
operating and marketing efficiencies and increase brand awareness. The Company
has an integrated real estate and storage operations management team which
combines its experience to manage and grow the Company's portfolio.
The Company favors development or acquisition of self storage properties in
major metropolitan markets, located near retail or high-traffic corridors,
usually with significant road frontage to increase visibility. The Company
relies on its market personnel to target areas in which to develop and acquire
new stores. The Company utilizes its staff of real estate acquisition
specialists in various markets around the nation to develop and acquire new
stores in the markets presenting the best business opportunities. The Company
has developed comprehensive market expansion plans for each of its target
markets, and uses the plans as the basis for selecting new store locations and
acquisition targets. The market expansion plans utilize a demographic analysis
of an area along with an evaluation of competitors' locations, rates and product
quality to determine the optimum number 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, the Company's current business
plan focuses on property development; however, management continually analyzes
market conditions and acquisition opportunities.
Development. The Company believes that several factors favor its
development strategy:
- Development Expertise. The Company has substantial construction
management and architectural experience that was acquired over the past 25
years. Since 1972, the Company has developed more than a third of the
properties it owns and operates. The Company's internal development staff
currently employs 25 development professionals. The in-house development
staff oversees construction and
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architectural design performed by third parties to ensure cost-effective,
quality development of self storage properties.
- Strategic Site Selection to Maximize Revenues. To obtain the best
store locations, the Company targets sites for development in urban areas
and up-scale retail areas that often require rezoning and other complex
development measures. The Company believes that the difficulties of
developing storage properties in such in-fill areas may discourage
competitors from locating nearby and, as a result, enable it to operate in
areas that are underserved, which in turn enables the Company to charge
higher rental rates.
- Increased Competition for Acquisitions. Recently, increased
competition for acquisitions of high-quality properties has decreased the
pool of favorably priced acquisition targets in many of the Company's
markets. In these markets, the Company believes that returns from
development are generally more favorable than those from acquisitions, and
make attractive a strategy of developing new self storage centers in the
markets in which the Company currently operates. The Company may also
pursue opportunities for developments in new markets primarily through
affiliation agreements with established local operators or chain
acquisitions.
- 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-1980s, 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.
- Focus on Quality and Brand Image Development. Development of its
own self storage properties provides the Company with greater control to
ensure excellent construction and consistent building design that is
inviting to customers. The Company believes its focus on quality and
consistency will enable it to further strengthen awareness of the Shurgard
brand, obtain repeat business, maintain premium prices and differentiate
itself from competitors.
The operating results of properties recently developed by the Company
demonstrate the superior returns possible through development. The Company's
development properties that were completed from 1989 to 1994 returned 15% on
original property costs for the year ended December 31, 1996. There can be no
assurance, however, that the Company will achieve such returns on its future
development properties, the results of which 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 the
Company's new developments than was experienced in the periods in which these
properties were renting up, the quality and location of the competing projects
being built, and the possibility that the metropolitan markets in which the
Company is developing may have less favorable supply and demand characteristics.
Acquisitions. The Company also selectively acquires high-quality
properties that provide it with a strategic advantage. Additional acquisitions
allow the Company to spread overhead and certain management, marketing and
advertising costs over a greater number of revenue-producing assets. As a
result, the Company can achieve increasing economies of scale with each new
property acquired. The Company completes a thorough analysis of each property
that it intends to acquire, including, but not limited to, a review of capital
expenditures that will be required for the property to meet the Company's
standards and, at a minimum, a Phase I environmental assessment report.
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. The Company's 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. The Company believes that it is desirable to have
commercial customers because they tend to rent larger units, stay for longer
terms, are more
S-9
<PAGE> 10
reliable payers and are less sensitive to price increases. Accordingly, the
Company has marketing programs that target commercial users. The Company
estimates that commercial users account for approximately 30%-35% of its total
occupancy.
The Company's self storage properties are divided into a number of
self-enclosed rental units that generally range in size from 25 to 360 square
feet. Many properties have uncovered storage outside the buildings for parking
motor vehicles, boats, campers and other similar items suitable for outside
storage. Approximately 36% of the properties owned by the Company include
climate-controlled storage units for which the Company charges 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. The Company offers truck rentals at a
majority of its properties for added convenience to its customers and to
differentiate itself from most of its competitors. In addition to truck rentals,
the Company sells locks, boxes and packing and storage materials at its stores.
The leasing, maintenance and operation of the Company's stores are the
responsibility of store managers. The property's security is provided through a
variety of systems that may include, among others, on site personnel, electronic
devices such as intrusion and fire alarms, access controls, video and intercom
surveillance devices, property fencing and lighting. Although the Company's
stores range considerably in size, most properties consist of one or more
single-story buildings that are located on a site of 1.5 to 5 acres. The
smallest store has approximately 25,000 net rentable square feet, while the
largest store has approximately 300,000 net rentable square feet.
The following table sets forth certain information regarding the domestic
self storage properties owned by the Company for the years ended December 31,
1996, 1995, and 1994.
<TABLE>
<CAPTION>
PERCENTAGE OF WEIGHTED WEIGHTED AVERAGE RENT
1996 NET AVERAGE OCCUPANCY PER SQUARE FOOT
OPERATING ---------------------- ----------------------------
STATE INCOME(1) 1996 1995 1994 1996 1995 1994
- ------------------------------ ------------- ---- ---- ---- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Arizona....................... 4% 78% 84% 91% $ 9.21 $ 9.15 $ 7.50
California.................... 16 88 85 86 10.32 10.04 9.28
Florida....................... 5 85 83 85 8.41 8.12 7.70
Illinois...................... 5 94 95 95 8.60 8.30 7.84
Maryland...................... 4 91 91 91 11.14 10.54 10.32
Michigan...................... 6 91 93 91 8.09 7.38 6.66
New York...................... 5 89 92 87 15.98 15.14 14.63
Oregon........................ 5 84 92 93 8.34 7.77 7.22
Texas......................... 11 79 82 87 8.19 8.13 7.63
Virginia...................... 8 92 90 89 9.35 8.95 9.40
Washington.................... 19 90 89 88 8.41 8.17 7.83
Other......................... 12 85 89 91 9.50 8.76 7.71
--- -- -- -- ------ ------ ------
Weighted Average ............. 100% 87% 88% 89% $ 9.23 $ 8.84 $ 8.25
</TABLE>
- ---------------
(1) Net Operating Income is defined as rental revenue less direct property
operating expenses and real estate taxes. It does not include joint expenses
incurred by the Company such as off-site management personnel.
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
S-10
<PAGE> 11
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.
The following graph shows the cumulative annual percentage increase from
January 1, 1990 through December 31, 1996 of the Company's net operating income
and revenue. The percentage growth shown from year to year in net operating
income and revenue is based on "same store" data for each of the applicable
comparison periods. The following graph also shows inflation for the same
period, based on the Consumer Price Index.
SAME STORE GROWTH
CUMULATIVE ANNUAL PERCENTAGE CHANGE SINCE 1990
<TABLE>
<CAPTION>
MEASUREMENT PERIOD NET OPERATING
(FISCAL YEAR COVERED) INCOME REVENUE INFLATION
<S> <C> <C> <C>
1990 0 0 0
1991 6.7 6.3 3.1
1992 14.8 16.0 6.0
1993 25.0 24.1 8.7
1994 34.4 30.7 11.4
1995 41.2 36.3 13.9
1996 45.1 40.7 17.2
</TABLE>
THE SELF STORAGE INDUSTRY
The self storage industry serves an important function in the commercial
and residential real estate markets. Self storage properties were first
developed in the early 1960s in the southwestern United States in response to
the growing need for low-cost, accessible storage. A number of factors
accelerated the demand for low-cost storage, including, among others, a more
mobile society, with individuals moving to new homes and new cities needing
short-term storage for their belongings, the increasing cost of housing
(resulting in smaller houses), the increased popularity of apartments and
condominiums, more individuals with growing discretionary income (resulting in
the purchase of items such as boats and recreational vehicles that cannot be
stored at residences), the growing number of small businesses and the escalating
cost of other storage alternatives. As the demand for such storage increased,
and the acceptance of self storage became more widespread, self storage
properties were built throughout the United States. Generally, such properties
were constructed along major thoroughfares that provided ready access and public
visibility or in outlying areas where land was inexpensive. In certain areas of
the country, where new construction was impractical because of construction
costs, lack of suitable sites or other restrictions, older structures have been
converted into self storage properties.
The Company believes 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,
such as sales representatives and distributors, who require frequent access, to
business owners requiring seasonal
S-11
<PAGE> 12
storage. The Company believes business use to be 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
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.
S-12
<PAGE> 13
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Series B Preferred
Stock offered hereby (after deducting the underwriting discount and the
estimated offering expenses payable by the Company) will be approximately
$48,125,000 (approximately $55,388,750 if the Underwriters' over-allotment
option is exercised in full). The Company intends to use the net proceeds to pay
down outstanding indebtedness under its revolving credit facility, which had an
outstanding balance at April 4, 1997 of $90.7 million, and for general corporate
purposes. The credit facility is an unsecured two-year revolving line of credit
which bears interest at a spread over LIBOR of 125 basis points. On April 4,
1997, the interest rate on this credit facility was 7.5%. The credit facility is
scheduled to mature on September 9, 1998.
CAPITALIZATION
The following table sets forth the historical capitalization of the Company
as of December 31, 1996, the capitalization as adjusted to reflect the sale by
the Company of Class A Common Stock in the first quarter of 1997 and the use of
the net proceeds therefrom, and pro forma capitalization to give effect to the
issuance and sale of the Series B Preferred Stock offered hereby and the
issuance and sale of the 2004 Notes and the 2007 Notes offered pursuant to the
Notes Offering and the use of the net proceeds therefrom:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
-------------------------------------------
HISTORICAL AS ADJUSTED(1) PRO FORMA
---------- -------------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Long-term debt
Lines of credit....................................... $ 140,997 $ 82,597 $ --
Notes payable(2)...................................... 131,794 131,794 131,794
2004 Notes.................................... -- -- 50,000
2007 Notes.................................... -- -- 50,000
-------- -------- --------
Total long-term debt.......................... 272,791 214,391 231,794
-------- -------- --------
Shareholders' equity
Class A Common Stock, $0.001 par value per share;
120,000,000 shares authorized; 25,663,952 issued
and outstanding historical; 27,843,752 issued and
outstanding as adjusted and pro forma.............. 516,796 576,076 576,076
Class B Common Stock, $0.001 par value per share;
500,000 shares authorized; 154,604 issued and
outstanding; net of loans to shareholders of
$4,002............................................. (1,086) (1,086) (1,086)
Series B Preferred Stock, $0.001 par value per share;
2,300,000 shares authorized; none issued and
outstanding historical and as adjusted; 2,000,000
issued and outstanding pro forma(3)................ -- -- 50,000
Accumulated distributions in excess of earnings....... (17,199) (17,199) (17,199)
-------- -------- --------
Total shareholders' equity.................... 498,511 557,791 607,791
-------- -------- --------
Total capitalization.......................... $ 771,302 $772,182 $ 839,585
======== ======== ========
</TABLE>
- ---------------
(1) As adjusted to reflect the sale by the Company of 2,179,800 shares of Class
A Common Stock in the first quarter of 1997 and the application of the net
proceeds therefrom.
(2) Includes $122.6 million aggregate principal amount of notes rated AA by
Fitch Investors Service.
(3) Assumes no exercise of the Underwriters' over-allotment option.
S-13
<PAGE> 14
SELECTED FINANCIAL INFORMATION
The following table sets forth selected financial information for the
Company for each of the five years in the period ended December 31, 1996. The
following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein and the other financial information included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996, which
is incorporated herein by reference.
<TABLE>
<CAPTION>
COMPANY(1)
------------------------------------ PREDECESSOR(2)
---------------------------------
AT OR FOR YEAR PERIOD FROM AT OR FOR YEAR
ENDED DECEMBER 31, JANUARY 1 ENDED DECEMBER 31,
------------------------------------ TO MARCH 1, -------------------
1996 1995 1994 1994 1993 1992
--------- -------- --------- ----------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue:
Rental...................................... $ 103,784 $ 92,397 $ 66,697 $ 12,348 $ 72,217 $ 66,994
Other real estate investments............... 3,371 1,396 224 20 129 111
Property management......................... 3,244 2,978 -- -- -- --
--------- -------- --------- -------- -------- --------
Total revenues....................... 110,399 96,771 66,921 12,368 72,346 67,105
Expenses:
Operating................................... 30,889 24,851 15,799 2,961 21,574 19,731
Management fees............................. -- 1,320 4,046 733 -- --
Depreciation and amortization............... 21,199 17,410 11,373 2,390 13,923 13,557
Real estate taxes........................... 8,898 7,596 5,840 1,170 7,066 7,067
General, administrative and other........... 4,351 4,859 2,502 1,232 2,390 2,359
--------- -------- --------- -------- -------- --------
Total expenses....................... 65,337 56,036 39,560 8,486 44,953 42,714
--------- -------- --------- -------- -------- --------
Income from operations........................ 45,062 40,735 27,361 3,882 27,393 24,391
Interest and other income or expense, net..... 552 875 745 30,891 (6,821) 11
Interest expense.............................. (12,829) (12,038) (9,105) (487) (2,288) (2,347)
--------- -------- --------- -------- -------- --------
Net income before extraordinary item.......... 32,785 29,572 19,001 34,286 18,284 22,055
Extraordinary item -- loss on retirement of
debt........................................ -- -- (1,180) -- -- --
--------- -------- --------- -------- -------- --------
Net income.................................... $ 32,785 $ 29,572 $ 17,821 $ 34,286 $ 18,284 $ 22,055
========= ======== ========= ======== ======== ========
Net income per common share................... $ 1.39 $ 1.43 $ 1.05
Weighted average number of shares
outstanding................................. 23,552 20,675 16,984
Distributions declared per common share....... $ 1.41(3) $ 2.38(4) $ 1.02(5)
BALANCE SHEET DATA (AT END OF PERIOD):
Storage centers, before accumulated
depreciation................................ $ 758,726 $558,861 $ 462,780 $ -- $469,398 $463,194
Total assets.................................. 804,483 610,394 494,590 391,685 393,982 400,182
Notes payable................................. 131,794 131,395 125,137 -- 21,826 22,795
Total liabilities............................. 302,755 172,610 177,745 391,685 39,820 32,388
Shareholders' equity.......................... 498,511 434,496 316,845 -- 354,162 367,794
OTHER DATA:
Funds from operations(6)...................... $ 53,083 $ 45,788 $ 29,759 $ 5,980 $ 39,657 $ 35,968
Percentage of funds from operations paid out
as distributions............................ 81.7% 80.1% 59.1% 12.8% 80.5% 84.5%
Cash flow provided by (used in):
Operating activities........................ $ 48,065 $ 46,113 $ 29,309 $ 5,116 $ 35,049 $ 34,793
Investing activities........................ (137,835) (86,311) (115,169) 62,962 (5,582) (5,140)
Financing activities........................ 87,326 32,719 99,021 (589) (30,269) (31,041)
Debt service coverage ratio(7)................ 5.21x 4.92x 4.34x
PORTFOLIO DATA (AT END OF PERIOD):
Number of properties:
Owned properties............................ 237 181 157 137 137 137
Managed properties.......................... 37 83 -- -- -- --
--------- -------- --------- -------- -------- --------
Total................................ 274 264 157 137 137 137
========= ======== ========= ======== ======== ========
Net rentable square feet:
Owned properties............................ 15,500 11,900 10,600 9,800 9,800 9,800
Managed properties.......................... 1,900 4,700 -- -- -- --
--------- -------- --------- -------- -------- --------
Total................................ 17,400 16,600 10,600 9,800 9,800 9,800
========= ======== ========= ======== ======== ========
</TABLE>
S-14
<PAGE> 15
- ---------------
(1) Operating data for the Company for the year ended December 31, 1993 are not
included as they are de minimis.
(2) The Predecessor information reflects the combination of the 17 partnerships
included in the Consolidation.
(3) Does not include the distribution of $.47 per share declared in January 1997
based on financial results for the quarter ended December 31, 1996.
(4) Includes the 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.
(5) Does not include the distribution of $.44 per share declared in January 1995
based on financial results for the quarter ended December 31, 1994.
(6) Funds from operations ("FFO"), as promulgated by the National Association of
Real Estate Investment Trusts ("NAREIT") in its March 1995 White Paper on
Funds from Operations, is defined as net income (calculated in accordance
with generally accepted accounting principles ("GAAP")) excluding gains or
losses from debt restructuring and sales of real estate, plus depreciation
of rental 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. The Company believes 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 the Company believes
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 the Company's 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.
FFO for each of the periods presented is calculated as follows:
<TABLE>
<CAPTION>
COMPANY
----------------------------- PREDECESSOR
------------------------------------
FOR YEAR PERIOD FROM FOR YEAR
ENDED DECEMBER 31, JANUARY 1 TO ENDED DECEMBER 31,
----------------------------- MARCH 1, -------------------
1996 1995 1994 1994 1993 1992
------- ------- ------- ------------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net income before extraordinary item.......... $32,785 $29,572 $19,001 $ 34,286 $18,284 $22,055
Depreciation and amortization................. 21,199 17,410 11,373 2,390 13,923 13,557
Depreciation and amortization from
unconsolidated joint revenues and
subsidiaries................................ 219 149 137 16 94 92
Deferred financing costs...................... (1,120) (1,120) (694) (9) (55) (42)
Nonrecurring items............................ -- (223)(a) (58)(b) (30,703)(c) 7,411(d) 306(e)
------- ------- ------- -------- ------- -------
Funds from operations..................... $53,083 $45,788 $29,759 $ 5,980 $39,657 $35,968
======= ======= ======= ======== ======= =======
</TABLE>
- ---------------
(a) Gain on sale of storage centers.
(b) Gain on condemnation.
(c) Litigation, hostile takeover and consolidation expenses of $12,180 less
$48,223 of gains in sale of storage centers plus incentive management
fees of $5,340.
(d) Litigation, hostile takeover and consolidation expenses.
(e) Loss on condemnation.
(7) Debt service coverage ratio is calculated as Consolidated Income Available
for Debt Service divided by the amount which is expended in any 12-month
period for interest on debt of the Company and its subsidiaries.
"Consolidated Income Available for Debt Service" for any period means
Consolidated Net Income (as defined below) plus amounts which have been
deducted in determining Consolidated Net Income during such period for (i)
Consolidated Interest Expense (as defined below), (ii) provision for taxes
of the Company and its subsidiaries based on income, (iii) amortization
(other than amortization of debt discount) and depreciation, (iv) provisions
for losses from sales or joint ventures, (v) increases in deferred taxes and
other noncash charges, (vi) charges resulting from a change in accounting
principles, and (vii) charges for early extinguishment of debt, and less
amounts which have been added in determining Consolidated Net Income during
such period for (a) provisions for gains from sales or joint ventures and
(b) decreases in deferred taxes and other noncash items. "Consolidated Net
Income" for any period means the amount of consolidated net income (or loss)
of the Company and its subsidiaries for such period determined on a
consolidated basis in accordance with GAAP. "Consolidated Interest Expense"
for any period, and without duplication, means all interest (including the
interest component of rentals on capitalized leases, letter of credit fees,
commitment fees and other like financial charges) and all amortization of
debt discount on all debt (including, without limitation, payment-in-kind,
zero coupon and other like securities) but excluding legal fees, title
insurance charges, other out-of-pocket fees and expenses incurred in
connection with the issuance of debt and the amortization of any such debt
issuance costs that are capitalized, all determined in accordance with GAAP.
S-15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company is a fully integrated, self-administered, self-managed REIT
headquartered in Seattle, Washington, specializing in all aspects of the self
storage industry. The Company operates a network of more than 270 storage
centers located throughout the United States and in Europe. Of these properties,
the Company owns, as of December 31, 1996, directly and through its 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.
The Company's mission is to be the national leader in storage products and
services. The Company believes it can obtain this goal by focusing on providing
exceptional customer service and the highest quality products to its customers.
Throughout the past three years, the Company has expanded its portfolio of
real estate properties and real estate based investments through the use of
equity and debt capital. During 1996, the Company acquired 40 properties (four
in which it 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.
INTERNAL GROWTH
In 1996, the Company continued its focus on increasing net operating income
from its existing real estate assets. One of the ways the Company analyzes its
performance is to measure year over year improvements in same store operating
results. The Company defines "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 and this will affect their comparability. The following table
summarizes same store operating performance from 1995 to 1996 and from 1994 to
1995.
SAME STORE RESULTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,(1) YEAR ENDED DECEMBER 31,(2)
---------------------------------- --------------------------------
% PRO FORMA %
1996 1995 CHANGE 1995 1994(3) CHANGE
----------- ----------- ------ ---------- ---------- ------
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE RENT)
<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
======= ======= ======= =======
Average annual rent per sq. ft.(5)...... $ 9.22 $ 8.89 3.7 $ 8.92 $ 8.36 6.7
Average 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
Number of properties (4th qtr).......... 169 169 154 154
</TABLE>
- ---------------
(1) Includes 30% of the operating results of four properties in which the
Company owns a 30% interest (operating results for these properties are not
consolidated in the Company's financial statements), as well as 74% of the
operating results of three properties in which the Company owns a 74%
interest and 90% of the operating results of one property in which the
Company owns a 90% interest (operating results for those properties are
consolidated in the Company's financial statements). Includes only operating
results for the six months ended December 31, 1996 and 1995 for the 15
properties purchased in the first half of 1995.
S-16
<PAGE> 17
(2) Excludes the three storage centers sold in 1995. Includes 30% of the
operating results of four properties in which the Company owns a 30%
interest (operating results for these properties are not consolidated in the
Company's financial statements), as well as 90% of the operating results of
one property in which the Company owns a 90% interest (operating results for
this property are consolidated in the Company's financial statements).
Includes only operating results for the three months ended December 31, 1995
and 1994 for the 20 properties purchased in September 1994.
(3) Represents the actual historical results of the properties as if they had
been acquired by the Company 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 by the Company 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, the Company's same
store net operating income is primarily driven by its 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 the storage operation
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 the
Company's 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, management implemented a new pricing strategy called "revenue
optimization." Historically, the Company has 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 it. As such, the Company did not fully realize the impact of
this strategy until the fourth quarter of 1996. However, now that the training
phase is complete, the Company expects to see benefits from 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, the
Company does not believe it can continue to increase rental rates as
significantly as it had prior to 1996.
Direct operating expenses were higher in 1996 than in 1995 due to a number
of factors. The Company experienced unusually high real estate assessment
increases in 1996, particularly in the Denver market. Additionally, the Company
expanded its yellow page advertising coverage in markets where it intends 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. Management believes 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, the Company has seen development activity pick up in
many of its markets and where this development has occurred close to its
existing stores, the Company does
S-17
<PAGE> 18
not expect to be able to raise rents at the same rate as in the past. Management
believes that some of its markets have begun to reflect the effect of this
development in 1996 and this is expected to 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 footnotes to the previous table:
<TABLE>
<CAPTION>
% CHANGE IN RATE % CHANGE IN NO. OF
% CHANGE IN RENTS PER SQ. FT. SQ. FT. OCCUPIED
----------------------------- ----------------------------- -----------------------------
1995 TO 1996 1994 TO 1995 1995 TO 1996 1994 TO 1995 1995 TO 1996 1994 TO 1995
------------ ------------ ------------ ------------ ------------ ------------
<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 Avg. .... 4.4% 5.5% 3.7% 6.7% 0.7% (1.1)%
</TABLE>
The Company believes its 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 revenues. Over the last three years, market conditions in Detroit, Michigan,
Portland, Oregon and Seattle, Washington contributed to above average revenue
increases. Detroit and Portland, in particular, demonstrate the Company's use of
revenue optimization; although occupancy declined in both markets, revenues rose
well above average due to rate increases. In 1996, Arizona 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 going forward. 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, Texas market declined in 1996 as new competition has forced
rate decreases. Ten additional storage centers have opened within the Company's
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,
management believes that the Company's stores in San Antonio, Texas have
stabilized. The Company's results in Houston, Texas 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, the Company has continued to selectively seek acquisition
opportunities for high quality storage centers that meet its investment
standards. The Company has limited its efforts to pursue only those centers that
enhance the Company's 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 the Company had previously managed for
affiliated owners. The acquisition of previously managed properties means the
properties are in existing Shurgard markets and management is familiar with the
operating issues of that particular store. Additionally, they have been
maintained to the Company's standards and as such do not have significant
deferred maintenance costs. The
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<PAGE> 19
operating results of the Company's acquisitions are presented in the tables
below in order to show the impact of the Company's 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.)
RESULTS OF 1996 ACQUISITIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996(1)
---------------------
(DOLLARS IN
THOUSANDS,
EXCEPT AVERAGE RENT)
<S> <C>
Rental revenue..................................................... $2,787
Property operating expenses(2)..................................... 851
------------
Net operating income............................................... $1,936
============
Average annual rent per sq. ft.(3)................................. $ 8.74
Average sq. ft. occupancy.......................................... 88%
Total net rentable sq. ft.......................................... 2,400,000
No. of properties.................................................. 40
No. 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 by the Company.
(2) Includes all direct property expenses. Does not include any allocation of
joint expenses incurred by the Company 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 the Company owned and operated
each property during the year.
During 1996, the Company purchased 40 storage centers, four in which it
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. The Company 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, Washington metropolitan area, and one located in Atlanta,
Georgia. These three properties cost $6.4 million and added approximately
135,000 net rentable square feet to the Company's portfolio.
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<PAGE> 20
RESULTS OF 1995 ACQUISITIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995(1) % CHANGE
------- ------- --------
(DOLLARS IN THOUSANDS,
EXCEPT AVERAGE RENT)
<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
====== ======
Average annual rent per sq. ft.(3).................... $10.59 $10.25 3.3
Average sq. ft. occupancy............................. 89% 86%
Total net rentable sq. ft............................. 970,000 970,000
No. of properties..................................... 15 15
No. of property-months(4)............................. 180 115
</TABLE>
- ---------------
(1) Includes the operating results of the three properties owned by Shurgard
Institutional Partners in which the Company owns 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 by the Company 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 the Company owned and operated
each property during the year.
In May 1995, the Company 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 the Company is 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 the Company's line of credit. For 1996,
the return on this investment in the limited partnership interest, defined as
historical net operating income for the properties divided by the Company's
historical investment amount, was 12.5%.
In addition to these major acquisitions, in 1995 the Company also acquired
four self storage properties through individual purchases and one storage
property through the Management Company Merger. 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, California (March
1995), Taylor, Michigan (March 1995), Orland Park, Illinois (May 1995),
Puyallup, Washington (May 1995) and Madison Heights, Michigan (June 1995).
Operating results for 1996 for these acquisitions reflect the additional months
of operations. The Company previously managed all but two of these properties.
S-20
<PAGE> 21
RESULTS OF 1994 ACQUISITIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
-------------------------------- --------------------------------
1995 1996 % CHANGE 1995 1994 % CHANGE
------- ------- -------- ------- ------- --------
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE RENT)
<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
====== ====== ====== ======
Average annual rent per sq.
ft.(2)........................ $ 8.53 $ 8.01 6.5 $ 8.01 n/a(3)
Average 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 by the Company 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 the Company owned and operated
each property during the year.
In September 1994, the Company 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
the Company's lines of credit, a $1 million note to the seller and $3 million in
cash. This acquisition gave the Company a significant presence in the Raleigh
market as well as expanding its presence in Washington, D.C., and Richmond and
Virginia Beach, Virginia. For 1996, the annual return on this investment,
defined as historical net operating income for the properties divided by the
historical investment amount, was 12.7%. Since the Company began managing these
properties, both rental rates and revenue for 1996 have increased faster than
the Company's 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
The Company's long-term growth plan focuses on the development of new
storage centers in markets in which it currently operates. This is due to the
increased competition for acquisitions in the storage market and the Company's
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. The Company believes the
likelihood of the success of this strategy is greatly enhanced as a result of
the substantial experience it gained through the development of over one-third
of its properties.
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<PAGE> 22
The Company 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>
ESTIMATED TOTAL NET TOTAL 12/31/96 AVERAGE ESTIMATED
NO. OF TOTAL RENTABLE COST PER AVERAGE RENTAL RATE ANNUAL
PROPERTIES COST SQ. FT. SQ. FT. OCCUPANCY PER SQ. FT. YIELD(1)
---------- ------------- --------- -------- --------- ----------- ---------
<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>
- ---------------
(1) The estimated annual yield is based on the estimated total cost of the
projects assuming the projects are at 85% occupancy at the average
annualized rental rates in effect during 1996.
The nine projects opened in the first three quarters of 1996 are renting up
ahead of plan; the average occupancy of these centers as of December 31, 1996
was 48%. The average rental rate of these stores for 1996 was $9.72 per square
foot. Together, the centers 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 the original budgeted cost. The
1996 developments cost more per square foot because of differences in land
costs. The Company currently expects these centers to take approximately 18
months to reach stabilization (defined as 85% occupancy) compared to the
original projection of 21 months.
The six storage centers opened in 1995 are also renting up ahead of plan;
the average occupancy of these centers 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 projects, 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, the Company's experience suggests
that rent up proceeds faster in earlier months, and tapers off over time.
Accordingly, the Company is estimating stabilization at 18 months.
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 facilities 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, the Company has ten
storage centers currently under construction (five of these are being developed
through the Tennessee and Florida joint ventures described below). As a general
rule, to limit the risks of development, the Company does not purchase land
until the permitting process is complete. Construction usually begins shortly
after the Company obtains title to the land. The following table summarizes
domestic development projects in progress at December 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF ESTIMATED COMPLETED
PROJECTS COST OF PROJECTS
--------- -------------------
<S> <C> <C>
New Domestic Developments:
Construction in progress............................... 10 $36.9 million
Land purchased pending construction.................... 3 $11.2 million
Expansion of Existing Properties:
Opened during 1996..................................... 4 $ 3.7 million
Construction in progress............................... 3 $ 3.3 million
</TABLE>
In the current real estate environment, management believes 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
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<PAGE> 23
development locations are opened. The rent-up deficit for a typical $3 million
project, assuming it takes 18 months to rent-up and it is financed with debt at
8.5%, is estimated to be to $240,000 in the first year of operations. The amount
of rent-up deficit 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 the
Company's operating margins as new property expenses are added but the related
revenue stream does not hit stabilized levels until occupancy reaches 85%. The
Company is 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 Company currently anticipates opening 20 to 30
domestic developments in 1997 including the 13 listed in the table above. The
actual number of projects could be reduced by zoning and permitting delays
outside of the Company's 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 its in-house real estate
development personnel, the Company has begun establishing affiliations with
quality storage operators outside its current markets. The Company believes 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 affiliations create instant
presence in a new market as affiliate owned centers begin using the "Shurgard"
name. In exchange for the use of the Company's name, computer systems and
general operations support services, the affiliate pays the Company 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. The
Company has 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. See "-- Other Real Estate Investments."
EUROPEAN DEVELOPMENT
During 1995 and 1996, the Company invested $5.4 million and $6.9 million,
respectively, in SSC Benelux & Co., SCS ("Benelux SCS"), a Belgian entity. In
March 1997, the Company refinanced its investment, resulting in a return of $9.3
million of its cash contribution and a reduction of its percentage interest in
economic benefits from Benelux SCS from 85.6% to 12.5%. The Company is a general
partner in an entity that borrowed the funds used for the refinancing. The
funding for investments made during 1995 and 1996 was obtained from the
Company's cash flow from operations, proceeds from the 1995 equity offering and
available lines of credit. As a result of its investments in Europe, the Company
faces 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. The Company, along with its European
partner, funded these centers through a combination of outside debt and equity
capital. Benelux SCS debt is non-recourse. Current debt covenants limit the
overall indebtedness of Benelux SCS to 60% of the cost of the 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, the Company 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
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<PAGE> 24
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
The Company's service focus and mission mean that it is continually
exploring new ways to service its customers' storage needs. One of the most
recent ways the Company has broadened its 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
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.
The Company has 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 is expected to provide enough capital to begin
operation in one or two additional markets. This subsidiary is not legally
controlled by the Company, is not a qualified REIT subsidiary and its income is
subject to corporate level tax.
Another way the Company is making storage more convenient for the customer
is through the addition of kiosks in major malls. 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. This idea is being tested in three malls in the Seattle
market.
OTHER REAL ESTATE INVESTMENTS
In addition, the Company has made several investments during the past three
years through participating mortgages, joint ventures and limited partnerships.
In 1996, the Company made a tender offer for the limited partnership units
in the IDS Partnerships. On September 13, 1996, the Company 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, the Company completed the
acquisition by merging with the IDS Partnerships. For the two months the Company
owned the units of the IDS Partnerships in 1996, earnings from this investment
totaled $1.4 million.
In January 1996, the Company also purchased, from an unaffiliated third
party, one limited partnership unit in Shurgard Institutional Fund LP for $1.1
million in cash. The Company also owns an interest in this partnership through
an interest in the general partner. The Company is now entitled to 8.8% of this
partnership's distributions. In December 1995, the Company also purchased, for
$3.8 million in cash, 3.5 limited partnership units of Shurgard Institutional
Fund LP II, an affiliated partnership in which it also owns an interest through
the general partner. The Company is now entitled to 37% of this partnership's
distributions.
The Company has entered into four joint ventures with a storage operator to
develop properties in the Nashville, Tennessee metropolitan area. The Company's
economic interest in these joint ventures range from 50% to 85.5%. The Company
has guaranteed $6.4 million of loans, the Company's pro rata portion of the
joint ventures' debt. Additionally, the Company has guaranteed $9.0 million of
debt in joint ventures to develop four sites in Orlando, Florida under a similar
arrangement. The Company has a 90% economic interest in these Orlando joint
ventures. The financial information of these projects are not consolidated in
the Company's 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
S-24
<PAGE> 25
loss of $139,000 in 1995. Fund 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."
The Company has 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. The Company 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. The Company has 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 Management Company Merger in March 1995, the Company
internalized the management of its own properties as well as acquired certain
management contracts and relationships under which it now provides property
management services to outside parties. Prior to the Management Company Merger,
the Company paid a property management fee equal to 6% of revenues to the
Management Company. The Company now incurs the actual costs of property
management on properties it owns, and receives 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, the Company now participates
directly in the revenue and expenses relating to these properties.
Management 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 of
new storage centers. Additionally, during 1996, the Company 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. The Company's 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 the Company's 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.
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<PAGE> 26
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 seventeen 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. The Company's debt at December 31, 1994
was $141 million higher than the Predecessor's debt at December 31, 1993. This
additional debt is reflected in the Company's 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. The Company 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%). The Company 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
FFO, pursuant to the 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. The Company believes 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 the Company believes 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 the Company's 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 joint
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 Predecessor's properties
had been acquired by the Company on January 1, 1994. Assumes the Company's
fixed rate seven-year debt (8.28%) was outstanding during the entire period.
FFO for 1996 rose $7.3 million over the 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. Management believes 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."
S-26
<PAGE> 27
INVESTING TRANSACTIONS
On March 1, 1994, the Company 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 Company's Class
A Common Stock and Class B Common Stock and $67.1 million in borrowings from a
financial services company. Additionally, in 1994, the Company 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 Class A Common
Stock and an additional 282,572 shares that replaced the Class A Common Stock
previously owned by the Management Company, subject to certain adjustments. The
market value of consideration on the date of the Management Company Merger was
$29.4 million. Pursuant to the Merger Agreement, Management Company shareholders
are also entitled to receive additional shares of Class A Common Stock in the
future based on (i) the extent to which, during the five years following the
Management Company Merger, the Company will realize value on this back end
interest as a result of certain transactions relating to interests in or assets
of six limited partnerships acquired by the Company in the Management Company
Merger or (ii) the value, at the end of five years after the Management Company
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 the Company purchased during 1995. As a result of this purchase, the Board
of Directors could, at their option, choose to liquidate the partnership, and
upon such liquidation the Company would be required to issue additional shares
based on an independent appraisal.
During 1995, the Company acquired a storage center valued at $7.8 million
in the Management Company Merger (which was a non-cash transaction), and
invested $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 its
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, the Company 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, the Company purchased
limited partnership units in the IDS Partnerships totaling $40 million. This
purchase was funded through the Company's line of credit. These units were owned
by the Company until November 14, 1996 when it completed the merger with the IDS
Partnerships. Under the terms of the agreement between the Company and the IDS
Partnerships, the Company 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, the Company 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 its 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, the
Company makes investments in improving its 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 management believes are necessary to maintain the Company's
quality standards and its ability to generate
S-27
<PAGE> 28
premium returns. The following table summarizes the type of recurring
expenditures the Company anticipates 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, the Company invests 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 represents roofs, pavement and sealant.
During 1996, the Company completed an extensive research and evaluation
program through which it selected a new updated logo. In order to maintain the
Company's brand awareness across all Shurgard businesses, the Company intends to
replace 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 the Company's stores. The Company intends to re-sign the remaining
stores in 1998.
FINANCING TRANSACTIONS
On June 9, 1994, the Company refinanced substantially all of its 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. The Company 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, the Company wrote off $1.2 million of unamortized loan fees. The
refinancing provided the Company with stabilized debt service costs and greater
flexibility for future growth. Additionally, in 1994, the Company established
two $50 million lines of credit under which the Company borrowed $42 million in
1994 to fund property acquisitions.
In June and July 1995, the Company issued a total of 4.92 million
additional shares of Class A Common Stock 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 the Company's
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 Management Company Merger. All outstanding balances on the
Company's domestic lines of credit were repaid on June 13, 1995. Subsequent to
the offering, the Company invested the excess proceeds in real estate
developments and borrowed an additional $11 million on its lines of credit.
Additionally, during 1995, the Company borrowed $2.9 million under its European
line of credit to fund development activity in Belgium.
S-28
<PAGE> 29
The Company borrowed $130.1 million during 1996 under its lines of credit,
both domestic and foreign, to finance development and investment activity
described above as well as general corporate purposes. In September 1996, the
Company 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 credit agreement. As of
December 31, 1996, the amount available was $175 million (of which $133.4
million was outstanding) and the spread over LIBOR was 1.625%. On April 4, 1997,
the spread over LIBOR was reduced to 1.25%. This line replaced both of the
Company's $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, the Company also obtained additional
available credit under its European lines of credit bringing the total available
to $12.1 million. Of the total available, the Company has borrowed approximately
$7.6 million (approximately $4.7 million during 1996) to fund development and
operating cash needs.
In January and February, 1997, the Company issued 2.2 million shares of
Class A Common Stock through a public offering. Net proceeds of $59.3 million
were used to pay down its 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 the Company's liquidity and capital resources:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------
1996 1995 1994
--------------- ------------- -------------
<S> <C> <C> <C>
Debt (GAAP) to total assets (GAAP)................... 34% 23% 34%
Total market capitalization(1)....................... $1,033 million $769 million $520 million
Debt (GAAP) to total market capitalization(1)........ 26% 19% 32%
Weighted average 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.
The Company's 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 the Company's revolving credit facility. The Company believes during 1997
that it will fully utilize all available borrowings under its domestic line of
credit and as such anticipates refinancing this credit facility during 1997.
Although the Company limits its use of variable rate debt, at times balances
could be significant enough that fluctuations in interest rates may impact the
Company's earnings. The Company believes that it will be able to minimize the
impact of such rate fluctuations through the use of interest rate caps,
refinancing or other strategies and that the Company will be able to raise
sufficient debt or equity capital to fund its 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
Management Company Merger, the Company accelerated its usual fourth quarter
distribution and declared a special distribution in November 1995. See "-- REIT
Qualification and Distribution Requirements."
REIT QUALIFICATION AND DISTRIBUTION REQUIREMENTS
As a REIT, the Company is not required to pay federal income tax on annual
taxable income that it currently distributes to its shareholders, provided that
the Company distributes an amount equal to at least 95% of its 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. The Company's first distribution in
S-29
<PAGE> 30
1995 was partially applied towards its 1994 distribution requirement. Similarly,
the Company's first distribution in 1997, was partially applied towards its 1996
distribution requirement.
In connection with the Management Company Merger, the accumulated earnings
and profits of the Management Company were carried over to the Company for tax
purposes. In order to maintain its REIT qualification, the Company was required
to distribute to its shareholders in 1995 an amount necessary to eliminate such
accumulated earnings and profits. The Company did so through accelerating its
normal quarterly distribution and a special distribution of $2.3 million. As a
result 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 returns of capital.
As a REIT, the Company must derive at least 95% of its total gross income
from specified classes of income related to real property, dividends, interest
or certain gains from the sale or other disposition of stock or other
securities. The Company's revenues 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
4.0% of gross revenue in 1996 and the Company estimates that it will meet the
95% test in 1997. The Company's 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,
the Company may be required to defer or reduce its income from its third-party
management services to avoid terminating the Company's REIT qualification.
S-30
<PAGE> 31
MANAGEMENT OF THE COMPANY
<TABLE>
<CAPTION>
NAME AGE POSITIONS AND OFFICES WITH THE COMPANY
- ----------------------- --- ------------------------------------------------------------
<S> <C> <C>
Charles K. Barbo....... 55 Chairman of the Board, President and Chief Executive Officer
Harrell L. 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
Greenlaw Grupe, Jr..... 59 Director
Howard J. Johnson...... 58 Director
Donald W. Lusk......... 69 Director
Wendell J. Smith....... 63 Director
</TABLE>
Charles K. Barbo has been involved as a principal in the real estate
investment industry since 1969. Mr. Barbo is one of the co-founders of the
Management Company, which was organized in 1972 to provide property management
services for self storage facilities and other real estate and commercial
ventures. Prior to the Management Company Merger, he served as Chairman of the
Board and President of the Management Company. Upon the closing of the
Management Company Merger, he was named Chairman of the Board, President and
Chief Executive Officer of the Company. Mr. Barbo is a graduate of the
Owner/President Management Program of Harvard Business School, has a Bachelor of
Arts degree in history from the University of Washington, and is a licensed real
estate broker. He is an alumnus of the Young Presidents' Organization. Mr. Barbo
is a director of Matthew G. Norton Co., Northwest Building Corp. and
Asia-Europe-America's Bank, all of which are privately held.
Harrell L. Beck has served as a director of the Company and as its Chief
Financial Officer and Treasurer since July 1993. Prior to the closing of the
Management Company Merger, Mr. Beck also served as the Company's President. He
was named Senior Vice President of the Company upon the closing of the
Management Company Merger. He joined the Management Company in April 1986 as its
Eastern Regional Vice President and, in 1990, became its Chief Financial Officer
and, in 1992, its Treasurer. Prior to joining the Management Company, Mr. Beck
was a manager with Touche Ross & Co., where he was employed for approximately
six years, during which time he provided services primarily to clients in the
real estate and aerospace industries. Mr. Beck has a Bachelor of Arts degree in
Business Administration from Washington State University and is a member of the
American Institute of Certified Public Accountants.
Kristin H. Stred has served as the Company's Secretary and General Counsel
since July 1993. She was named Senior Vice President of the Company upon the
closing of the Management Company Merger. Ms. Stred joined the Management
Company in July 1992 and until the Management Company Merger served as its
Secretary and General Counsel. She was previously an attorney with The Boeing
Company from October 1991 to July 1992 and Assistant General Counsel with King
Broadcasting Company from July 1987 to September 1991. Ms. Stred has a Bachelor
of Arts degree with honors in general studies from Harvard University and a J.D.
from Harvard Law School. She is a member of the Washington State Bar
Association, is a former president of Washington Women Lawyers and is a former
member of the Executive Committee of the Corporate Law Department Section of the
Washington State Bar Association.
David K. Grant has served as the Company's 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 Management Company Merger. He also served as an Executive
Vice President of the Management Company. Mr. Grant was previously a manager
with Touche Ross & Co., where he was employed for approximately 10 years, during
which time he provided financial consulting, accounting and auditing services
primarily to clients in the real estate, construction and engineering
industries. Mr. Grant has a Bachelor of Arts degree in Business Administration
and a Bachelor of Science degree in Accounting, both from Washington State
University.
S-31
<PAGE> 32
Michael Rowe has served as the Company's Executive Vice President and
Director of Storage Operations since July 1993. Effective January 1, 1996, Mr.
Rowe became the Company's Chief Operating Officer. Prior to the Management
Company 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 named Director of Storage Operations of the Management Company. Mr.
Rowe has a Bachelor of Arts degree in Business Administration from Washington
State University.
Greenlaw Grupe, Jr. has served as a director of the Company since May 1996.
In 1979, he founded The Grupe Company, which has developed 50 communities valued
at $2 billion and which actively manages residential and commercial assets in
eight states and is its Chairman and Chief Executive Officer. Mr. Grupe is a
graduate of the University of California at Berkeley. He is a past president of
the Urban Land Institute, the Stockton Chamber of Commerce, and the Golden Gate
and Northern California Chapters of The Young Presidents' Organization, and is a
current member of the Board of Regents of the University of the Pacific and of
the Board of Directors of the California Chamber of Commerce. Mr. Grupe was an
indirect general partner in three partnerships which, in 1994, along with 18
other partnerships, filed a prenegotiated uncontested filing under the U.S.
Bankruptcy Code as part of a refinancing designed to enable a lender to be
admitted to the partnerships while protecting certain tax advantages of the
partnerships. All creditors of the partnerships involved in the refinancing were
paid in full. Mr. Grupe is a director of The Grupe Company and some of its
affiliates, all of which are privately held.
Howard J. Johnson has served as a director of the Company since May 1996.
Since 1965 he has been the Chairman of the Board, President and Chief Executive
Officer of Howard Johnson & Company, an independent consulting and actuarial
firm specializing in employee benefits and compensation. He has also served as
the Chairman of the Board and President of Howard Johnson & Company (UK) Limited
and Howard Johnson & Company (Europe) Limited since 1994. Mr. Johnson attended
the University of Washington. Mr. Johnson is a director of Smith Barney
Fundamental Value Fund, Inc. and Northwestern Trust and Investor Advisory
Company.
Donald W. Lusk has served as a director of the Company since March 1994.
Since October 26, 1995, Mr. Lusk has served as the Lead Outside Director of the
Company. He is the President of Lusk Consulting Group, which is engaged in
general management consulting as well as the formation and delivery of
management development programs in the United States and Canada. From 1974 to
1991, Mr. Lusk was Regional Managing Partner of Management Action Programs in
the Pacific Northwest. Mr. Lusk has a Bachelor of Arts degree from Pomona
College. He currently serves as a director of G.T. Development Corporation and
Savolite Corporation. He has previously served as a director of Robert E. Bayley
Construction Company, Management Action Programs, Inc., The Bekins Company,
California Pacific National Bank, I.C.X. Corporation, Laguna Manufacturing
Company, Ormand Industries and Pacific United Services Corporation, and was
Chairman of the School of Business and Economics Advisory Board of Seattle
Pacific University.
Wendell J. Smith has served as a director of the Company since March 1994.
Mr. Smith is a director of Franchise Finance Corporation of America and PGA Tour
Properties. He has previously served on the Western and National Advisory Boards
for Federal National Mortgage Association and the Advisory Board of the Center
for Real Estate Research at the University of California. He retired in 1991
from the State of California Public Employees Retirement System ("Calpers")
after 27 years. Calpers invested over $8 billion in real estate and mortgages.
In 1991, Mr. Smith established W.J.S. & Associates, which provides advisory and
consulting services for pension funds and pension fund advisors.
S-32
<PAGE> 33
DESCRIPTION OF SERIES B PREFERRED STOCK
The description of the particular terms of the Series B Preferred Stock
offered hereby supplements and, to the extent inconsistent therewith, replaces
the description of the general terms and provisions of the Series B Preferred
Stock set forth in the accompanying Prospectus, to which description reference
is hereby made.
GENERAL
The Board of Directors of the Company (the "Board of Directors") is
authorized to establish one or more classes and series of capital stock,
including series of preferred stock, from time to time, establish the number of
shares in each class or series and fix the preference, conversion and other
rights of such series, including, but not limited to, fixing distribution
rights, distribution rates, voting powers, restrictions, limitations as to
distributions, qualifications and terms and conditions of redemption (including
sinking fund provisions) of such class or series, and the liquidation
preference, without any further vote or action by the shareholders (except in
limited circumstances by holders of Stock A Junior Participating Preferred
Stock), unless such action is required by applicable law or the rules of any
stock exchange or automated quotation system on which the Company's securities
may be listed.
On April 16, 1997, a committee of the Board of Directors adopted the
relevant resolutions with respect to the designation and issuance of the Series
B Preferred Stock. The following summary of the terms and provisions of the
Series B Preferred Stock does not purport to be complete and is qualified in its
entirety by reference to the pertinent sections of the Company's Restated
Certificate of Incorporation, as amended (the "Charter"), and the Certificate of
Designations of Series B Preferred Stock, each of which is available from the
Company.
The registrar, transfer agent and distributions disbursing agent for the
Series B Preferred Stock will be Gemisys Corporation.
Application has been made to list the Series B Preferred Stock on the NYSE,
subject to official notice of issuance. If so approved, trading of the Series B
Preferred Stock on the NYSE is expected to commence within a 30-day period after
the date of initial delivery of the Series B Preferred Stock. See
"Underwriting."
DISTRIBUTIONS
Holders of the Series B Preferred Stock shall be entitled to receive, when
and as authorized by the Board of Directors, out of funds legally available for
the payment of distributions, cumulative cash distributions at the rate of 8.80%
of the liquidation preference per annum. Distributions on the Series B Preferred
Stock offered hereby shall accumulate and be cumulative from the date of
original issue and shall be payable quarterly in arrears on or about the last
day of each March, June, September and December or, if not a business day, the
succeeding business day (each, a "Distribution Payment Date"). The first
distribution on the Series B Preferred Stock offered hereby will be paid on June
30, 1997. Any distributions payable on the Series B Preferred Stock for any
partial period will be computed on the basis of a 360-day year consisting of
twelve 30-day months. Distributions will be payable to holders of record as they
appear in the share records of the Company at the close of business on the
applicable record date, which shall be the first day of the calendar month in
which the applicable Distribution Payment Date falls or such other date
designated by the Board of Directors for the payment of distributions that is
not more than 30 or less than 10 days prior to such Distribution Payment Date
(each, a "Distribution Record Date").
No distributions on the Series B Preferred Stock shall be authorized by the
Board of Directors or be paid or set apart for payment by the Company at such
time as the terms and provisions of any agreement of the Company, including any
agreement relating to its indebtedness, prohibits such authorization, payment or
setting apart for payment or provides that such authorization, payment or
setting apart for payment would constitute a breach thereof or a default
thereunder, or if such authorization, payment or setting apart shall be
restricted or prohibited by law.
Notwithstanding the foregoing, distributions on the Series B Preferred
Stock will accumulate whether or not the Company has earnings, whether or not
there are funds legally available for the payment of such distributions and
whether or not such distributions are authorized. Accumulated but unpaid
distributions on
S-33
<PAGE> 34
the Series B Preferred Stock will not bear interest, and holders of the Series B
Preferred Stock will not be entitled to any distributions in excess of full
cumulative distributions as described above.
Any distribution payment made on the Series B Preferred Stock shall first
be credited against the earliest accumulated but unpaid distribution due with
respect to such shares that remains payable.
If, for any taxable year, the Company elects to designate as "capital gain
dividends" (as defined in Section 857 of the Internal Revenue Code of 1986, as
amended (the "Code")) any portion (the "Capital Gains Amount") of the dividends
(within the meaning of the Code) paid or made available for the year to holders
of all classes of shares (the "Total Dividends"), then the portion of the
Capital Gains Amount that shall be allocable to the holders of Series B
Preferred Stock shall be the Capital Gains Amount multiplied by a fraction, the
numerator of which shall be the total dividends (within the meaning of the Code)
paid or made available to the holders of the Series B Preferred Stock for the
year, and the denominator of which shall be Total Dividends.
LIQUIDATION RIGHTS
In the event of any liquidation, dissolution or winding up of the affairs
of the Company, the holders of the Series B Preferred Stock are entitled to be
paid out of the assets of the Company legally available for distribution to its
stockholders liquidating distributions in cash or property at its fair market
value as determined by the Board of Directors in the amount of a liquidation
preference of $25.00 per share, plus an amount equal to any accumulated and
unpaid distributions to the date of such liquidation, dissolution or winding up,
before any distribution of assets is made to holders of Common Stock or any
other capital shares that rank junior to the Series B Preferred Stock as to
liquidation rights. After payment of the full amount of the liquidating
distributions to which they are entitled, the holders of Series B Preferred
Stock will have no right or claim to any of the remaining assets of the Company.
The consolidation or merger of the Company with or into any other entity or the
sale, lease, transfer or conveyance of all or substantially all of the property
or business of the Company shall not be deemed to constitute a liquidation,
dissolution or winding up of the Company. For further information regarding the
rights of the holders of the Series B Preferred Stock upon the liquidation,
dissolution or winding up of the Company, see "Description of Preferred
Stock -- Liquidation Preference" in the accompanying Prospectus.
REDEMPTION
The shares of Series B Preferred Stock are not redeemable prior to June 30,
2002. On and after June 30, 2002, the Company may, at its option upon not less
than 30 or more than 60 days' written notice, redeem the Series B Preferred
Stock, in whole or in part, at any time or from time to time, at a redemption
price of $25.00 per share, plus all accumulated and unpaid distributions thereon
to the date fixed for redemption (except as provided below), without interest,
to the extent the Company has funds legally available therefor. The redemption
price of the Series B Preferred Stock (other than any portion thereof consisting
of accumulated and unpaid distributions) may be paid solely from the sale
proceeds of other capital stock of the Company and not from any other source.
For purposes of the preceding sentence, "capital stock" means any common stock,
preferred stock, depository shares, interests, participation or other ownership
interests (however designated) and any rights (other than debt securities
convertible into or exchangeable for equity securities) or options to purchase
any of the foregoing. Holders of Series B Preferred Stock to be redeemed shall
surrender such Series B Preferred Stock at the place designated in such notice
and shall be entitled to the redemption price and any accrued and unpaid
distributions payable upon such redemption following such surrender. If notice
of redemption of any Series B Preferred Stock has been given and if the funds
necessary for such redemption have been set aside by the Company in trust for
the benefit of the holders of any Series B Preferred Stock so called for
redemption, then from and after the redemption date distributions will cease to
accrue on such Series B Preferred Stock, such Series B Preferred Stock shall no
longer be deemed outstanding and all rights of the holders of such shares will
terminate, except the right to receive the redemption price. If fewer than all
of the outstanding shares of Series B Preferred Stock are to be redeemed, the
Series B Preferred Stock to be redeemed shall be selected pro rata (as nearly as
may be practicable without creating fractional Series B
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<PAGE> 35
Preferred Stock) or by any other equitable method determined by the Company. See
"Description of Preferred Stock -- Redemption" in the accompanying Prospectus.
Notice of redemption will be given by publication in a newspaper of general
circulation in the City of New York, such publication to be made once a week for
two successive weeks commencing not less than 30 or more than 60 days prior to
the redemption date. A similar notice will be mailed by the Company, postage
prepaid, not less than 30 or more than 60 days prior to the redemption date,
addressed to the respective holders of record of the Series B Preferred Stock to
be redeemed at their respective addresses as they appear on the share transfer
records of the Company. No failure to give such notice or any defect thereto or
in the mailing thereof shall affect the validity of the proceedings for the
redemption of any Series B Preferred Stock, except as to the holder to whom
notice was defective or not given. Each notice shall state (i) the redemption
date, (ii) the redemption price, (iii) the number of shares of Series B
Preferred Stock to be redeemed, (iv) the place or places where the certificates
evidencing the shares of Series B Preferred Stock are to be surrendered for
payment of the redemption price, and (v) that distributions on the shares to be
redeemed will cease to accumulate on such redemption date. If fewer than all the
shares of Series B Preferred Stock held by any holder are to be redeemed, the
notice mailed to such holder shall also specify the number of shares of Series B
Preferred Stock to be redeemed from such holder.
The holders of Series B Preferred Stock at the close of business on a
Distribution Record Date will be entitled to receive the dividend payable with
respect to such Series B Preferred Stock on the corresponding Distribution
Payment Date notwithstanding the redemption thereof between such Distribution
Record Date and the corresponding Distribution Payment Date or the Company's
default in the payment of the distribution due. Except as provided above, the
Company will make no payment or allowance for unpaid distributions, whether or
not in arrears, on Series B Preferred Stock to be redeemed.
The Series B Preferred Stock has no stated maturity and will not be subject
to any sinking fund or mandatory redemption provisions, except as provided under
"-- Restrictions on Ownership" below.
VOTING RIGHTS
The Series B Preferred Stock is not entitled to vote except as expressly
provided herein, by the Charter or by the Certificate of Designations of Series
B Preferred Stock, or as may be required by law or by the rules of the NYSE. In
any matter in which the Series B Preferred Stock is entitled to vote, including
any action by written consent, each share of Series B Preferred Stock shall be
entitled to one vote.
Whenever distributions on any shares of Series B Preferred Stock shall be
in arrears for six or more quarterly periods, the holders of such shares of
Series B Preferred Stock (voting separately as a class with all other series of
preferred stock upon which like voting rights have been conferred and are
exercisable) will be entitled to vote for the election of two additional
directors of the Company at a special meeting called by the holders of record of
at least 10% of any series of Series B Preferred Stock so in arrears (unless
such request is received less than 90 days before the date fixed for the next
annual or special meeting of the shareholders) or at the next annual meeting of
shareholders, and at each subsequent annual meeting until (i) if such series of
Series B Preferred Stock has a cumulative distribution, all distributions
accumulated on such shares of Series B Preferred Stock for the past distribution
periods and the then current distribution period shall have been fully paid or
declared and a sum sufficient for the payment thereof set aside for payment or
(ii) if such series of Series B Preferred Stock does not have a cumulative
distribution, four consecutive quarterly distributions shall have been fully
paid or declared and a sum sufficient for the payment thereof set aside for
payment. In such case, the entire Board of Directors will be increased by two
directors.
CONVERSION
The shares of Series B Preferred Stock are not convertible into or
exchangeable for any other property or securities of the Company.
RESTRICTIONS ON OWNERSHIP
In order to maintain its qualification as a REIT, the Charter imposes
limitations on the number of shares of capital stock, including Series B
Preferred Stock, that may be owned by any single person or affiliated group. For
information regarding such restrictions on ownership of Series B Preferred
Stock, see "Restrictions on Transfer of Capital Stock; Excess Stock" in the
accompanying Prospectus.
S-35
<PAGE> 36
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following general discussion summarizes certain U.S. federal income tax
considerations relating to the acquisition, ownership and disposition of the
Series B Preferred Stock. The tax treatment of a shareholder of Series B
Preferred Stock will vary depending on his, her or its particular situation, and
this discussion does not purport to deal with all aspects of federal income
taxation that may be relevant to particular shareholders in light of their
personal investment or tax circumstances. The following discussion is directed
principally at investors who are United States citizens or residents or domestic
corporations, and does not address in all material respects considerations that
might adversely affect the treatment of investors who are subject to special
treatment under the tax laws (such as insurance companies, cooperatives,
financial institutions, broker-dealers, tax-exempt organizations or foreign
investors). The discussion in this section is based on existing provisions of
the Code, existing and proposed Treasury regulations, existing court decisions
and existing rulings and other administrative interpretations. There can be no
assurance that future Code provisions or other legal authorities will not alter
significantly the tax considerations described below.
This Prospectus Supplement does not address the taxation of the Company or
the impact on the Company of its election to be taxed as a REIT. The discussion
set forth below assumes that the Company qualifies as a REIT under the Code. If
in any taxable year the Company were to fail to qualify as a REIT, the Company
would not be allowed a deduction for distributions to shareholders in computing
taxable income and would be subject to federal income tax on its taxable income
at regular corporate rates. As a result, the funds available for distribution to
the Company's shareholders would be reduced.
ACCORDINGLY, EACH INVESTOR SHOULD REFER TO THE PROSPECTUS FOR A SUMMARY OF
THE FEDERAL INCOME TAX CONSIDERATIONS TO THE COMPANY OF ITS REIT ELECTION. EACH
INVESTOR IS ADVISED TO CONSULT HIS, HER OR ITS OWN TAX ADVISOR REGARDING THE TAX
CONSEQUENCES TO HIM, HER OR IT OF THE ACQUISITION, OWNERSHIP AND SALE OF THE
SERIES B PREFERRED STOCK, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER
TAX CONSEQUENCES OF SUCH ACQUISITION, OWNERSHIP AND SALE AND OF POTENTIAL
CHANGES IN APPLICABLE TAX LAWS.
DIVIDENDS AND OTHER DISTRIBUTIONS
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable domestic shareholders (including shareholders of Series B
Preferred Stock) out of current or accumulated earnings and profits (and not
designated as capital gain dividends) will be taken into account by them as
ordinary income and will not be eligible for the dividends received deduction
for corporations. For purposes of determining whether distributions on the
Series B Preferred Stock are out of current or accumulated earnings and profits,
the earnings and profits of the Company will be allocated first to the Series B
Preferred Stock and then allocated to the Company's common stock.
Distributions that are designated as capital gain dividends will be taxed
as long-term capital gains (to the extent they do not exceed the Company's
actual net capital gain for the taxable year) without regard to the period for
which the shareholder has held his, hers or its Series B Preferred Stock.
However, corporate shareholders may be required to treat up to 20% of certain
capital gain dividends as ordinary income. Distributions in excess of current
and accumulated earnings and profits will not be taxable to a shareholder to the
extent that they do not exceed the adjusted tax basis of the shareholder's
shares, but rather will reduce the adjusted basis of such shares. To the extent
that such distributions exceed the adjusted basis of a shareholder's shares,
they will be included in income as long-term capital gain (or short-term capital
gain if the shares have been held for one year or less) assuming the shares are
a capital asset in the hands of the shareholder. In addition, any dividend
declared by the Company in October, November or December of any year payable to
a shareholder of record on a specified date in any such month shall be treated
as both paid by the Company and received by the shareholder on December 31 of
such year, provided that the dividend is actually paid by the Company during
January of the following calendar year. Shareholders may not include in their
individual income tax returns any net operating losses or capital losses of the
Company.
SALE OR EXCHANGE OF SERIES B PREFERRED STOCK
Upon the sale or exchange of Series B Preferred Stock to or with a person
other than the Company, a shareholder will generally recognize gain or loss
equal to the difference between (i) the amount of cash and the fair market value
of any property received (less any portion thereof attributable to accumulated
and declared but unpaid distributions that the selling shareholder is entitled
to receive, which would have been
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<PAGE> 37
characterized as a dividend to the extent of the Company's current and
accumulated earnings and profits) and (ii) the shareholder's adjusted tax basis
in such shares. Such gain or loss will be a capital gain or loss if the Series B
Preferred Stock has been held as a capital asset, and will be long-term gain or
loss if such shares have been held for more than one year. Any loss upon a sale
or exchange of Series B Preferred Stock by a shareholder who held such Series B
Preferred Stock for six months or less (after applying certain holding period
rules) will generally be treated as a long-term capital loss to the extent such
shareholder previously received capital gain distributions with respect to such
Series B Preferred Stock.
REDEMPTION OF SERIES B PREFERRED STOCK
A redemption of Series B Preferred Stock will be treated as a distribution
taxable as a dividend (to the extent of the Company's current and accumulated
earnings and profits) at ordinary income tax rates unless the redemption
satisfies one of three tests set forth in Section 302(b) of the Code. The
redemption will be treated as a sale or exchange if it (i) is "substantially
disproportionate" with respect to the shareholder, (ii) results in a "complete
termination" of the shareholder's interest in the Company's shares, or (iii) is
"not essentially equivalent to a dividend" with respect to the shareholder, all
within the meaning of Section 302 of the Code. In determining whether any of
these tests have been met, Series B Preferred Stock considered to be owned by a
shareholder by reason of certain constructive ownership rules set for in the
Code, as well as Series B Preferred Stock actually owned by such shareholder,
must generally be taken into account. If a particular holder of Series B
Preferred Stock owns (actually or constructively) no shares of common stock of
the Company, or an insubstantial percentage of the outstanding shares of the
common stock, a redemption of all of the Series B Preferred Stock owned by such
shareholder (actually or constructively) is likely to qualify for sale or
exchange treatment because the redemption would not be "essentially equivalent
to a dividend." However, because the determination as to whether any of the
alternative tests of Section 302(b) of the Code will be satisfied with respect
to any particular holder of Series B Preferred Stock depends upon the facts and
circumstances at the time that the determination must be made, prospective
holders of Series B Preferred Stock are encouraged to consult their own tax
advisors to determine such tax treatment.
If a redemption of Series B Preferred Stock is not treated as a
distribution taxable as a dividend to a particular shareholder, it will be
treated as to that shareholder as a taxable sale or exchange As a result, such
shareholder will recognize gain or loss for Federal income tax purposes in an
amount equal to the difference between (i) the amount of cash and the fair
market value of any property received (less any portion thereof attributable to
accumulated and declared but unpaid dividends attributable to the redeemed
shares, which will be taxable as a dividend to the extent of the Company's
current and accumulated earnings and profits) and (ii) the shareholder's
adjusted basis in the shares of Series B Preferred Stock for tax purposes. Such
gain or loss will be capital gain or loss if the shares of Series B Preferred
Stock have been held as a capital asset and will be long-term gain or loss if
such shares have been held for more than one year.
If a redemption of the Series B Preferred Stock is treated as a
distribution that is taxable as a dividend, the amount of the distribution will
be measured by the amount of cash and the fair market value of any property
received by the shareholders. The shareholder's adjusted tax basis in such
redeemed Series B Preferred Stock will be transferred to the shareholder's
remaining stockholdings in the Company. If, however, the shareholder has no
remaining stockholdings in the Company, such basis could be transferred to a
related person or it may be lost entirely.
Backup Withholding. The Company will report to its domestic shareholders
and the Internal Revenue Service (the "IRS") the amount of dividends paid during
each calendar year, and the amount of tax withheld, if any. Under the backup
withholding rules, a shareholder may be subject to backup withholding at the
rate of 31% with respect to dividends paid and redemptions unless such
shareholder (i) is a corporation or comes within certain other exempt categories
and, when required, demonstrates this fact, or (ii) provides a taxpayer
identification number, certifies that the shareholder is not subject to backup
withholding, and otherwise complies with applicable requirements of the backup
withholding rules. A shareholder that does not provide the Company with his, her
or its correct taxpayer identification number may also be subject to penalties
imposed by the IRS. Any amount paid as backup withholding will be creditable
against the shareholder's income tax liability.
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<PAGE> 38
UNDERWRITING
Subject to the terms and conditions contained in the purchase agreement
(the "Underwriting Agreement"), the Company has agreed to sell to each of the
Underwriters named below, and each of the Underwriters for whom Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Smith Barney Inc. are
acting as Representatives (the "Representatives") has severally agreed to
purchase from the Company, the number of shares of Series B Preferred Stock set
forth opposite their names below. The Underwriting Agreement provides that the
obligations of the Underwriters are subject to certain conditions precedent, and
that the Underwriters will be obligated to purchase all of the Series B
Preferred Stock if any is purchased.
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF SERIES B
UNDERWRITERS PREFERRED STOCK
-----------
---------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................................. 862,500
Smith Barney Inc. ................................................... 862,500
Alex. Brown & Sons Incorporated...................................... 25,000
Dain Bosworth Incorporated........................................... 25,000
Legg Mason Wood Walker, Incorporated................................. 25,000
Morgan Keegan & Company, Inc. ....................................... 25,000
Oppenheimer & Co., Inc. ............................................. 25,000
Piper Jaffray Inc. .................................................. 25,000
Ragen MacKenzie Incorporated......................................... 25,000
Raymond James & Associates, Inc. .................................... 25,000
Stone & Youngberg.................................................... 25,000
Sutro & Co. Incorporated............................................. 25,000
Wheat, First Securities, Inc. ....................................... 25,000
---------
Total................................................... 2,000,000
=========
</TABLE>
The Representatives have advised the Company that they propose initially to
offer the Series B Preferred Stock to the public at the public offering price
set forth on the cover page of this Prospectus Supplement, and to certain
dealers at such price less a concession not in excess of $.50 per share. The
Underwriters may allow, and such dealers may reallow, a discount not in excess
of $.25 per share on sales to certain other dealers. After the initial public
offering, the public offering price, concession and discount may be changed.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus Supplement, to purchase up
to 300,000 additional shares of Series B Preferred Stock at the price to the
public set forth on the cover page of this Prospectus Supplement, less the
underwriting discounts. If the Underwriters exercise this option, each of the
Underwriters will have a firm commitment, subject to certain conditions, to
purchase approximately the same percentage thereof which the number of shares of
Series B Preferred Stock to be purchased by it shown in the foregoing table
bears to the 2,000,000 shares of Series B Preferred Stock offered hereby.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, as amended, or to
contribute to payments the Underwriters may be required to make in respect
thereof.
The Series B Preferred Stock is a new issue of securities with no
established trading market. The Company is applying for approval from the NYSE
to list the Series B Preferred Stock on the NYSE under symbol "SHUPrB," subject
to official notice of issuance. Trading of the Series B Preferred Stock on the
NYSE is expected to commence within a 30-day period after the initial delivery
of the Series B Preferred Stock. The Underwriters have advised the Company that
they intend to make a market in the Series B Preferred Stock prior to the
commencement of trading on the NYSE. The Underwriters will have no
S-38
<PAGE> 39
obligation to make a market in the Series B Preferred Stock, however, and may
cease market making activities if commenced at any time.
Until the distribution of the Series B Preferred Stock is completed, rules
of the Commission may limit the ability of the Underwriters and certain selling
group members to bid for and purchase the Series B Preferred Stock. As an
exemption to these rules, the Representatives are permitted to engage in certain
transactions that stabilize the price of the Series B Preferred Stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Series B Preferred Stock.
If the Underwriters create a short position in the Series B Preferred Stock
in connection with the Offering, i.e., they sell more shares of Series B
Preferred Stock than are set forth on the cover page of this Prospectus, the
Representatives may reduce that short position by purchasing shares of Series B
Preferred Stock in the open market. The Representatives may also elect to reduce
any short position by exercising all or part of the over-allotment option
described below.
The Representatives may also impose a penalty bid on selling group members.
This means that if the Representatives purchase shares of Series B Preferred
Stock in the open market to reduce the Underwriters' short position or to
stabilize the price of the Series B Preferred Stock, they may reclaim the amount
of the selling concession from the selling group members who sold those shares
as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Series B Preferred Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Representatives will engage in such transactions or that
such transactions once commenced, will not be discounted without notice.
Certain of the Underwriters from time to time have provided investment
banking and financial advisory services to the Company. Merrill Lynch, Smith
Barney Inc. and Alex. Brown & Sons Incorporated acted as representatives of
various underwriters in connection with a public offering of the Company's Class
A Common Stock in 1995. Merrill Lynch is also acting as representative of
various underwriters in connection with the Notes Offering. Smith Barney Inc.
acted as the underwriter in connection with a public offering of the Company's
Class A Common Stock in January 1997.
LEGAL MATTERS
The validity of the Series B Preferred Stock to be issued in connection
with the Offering will be passed upon for the Company by Perkins Coie, Seattle,
Washington. Certain legal matters relating to the Offering will be passed upon
for the Underwriters by Latham & Watkins, Costa Mesa, California.
S-39
<PAGE> 40
PROSPECTUS
SHURGARD STORAGE CENTERS, INC.
$300,000,000
DEBT SECURITIES, PREFERRED STOCK AND COMMON STOCK
Shurgard Storage Centers, Inc. (the "Company") may from time to time offer
in one or more series (a) its debt securities (the "Debt Securities"), (b)
shares of its preferred stock, par value $.001 per share (the "Preferred
Stock"), or (c) shares of its Class A Common Stock, par value $.001 per share
(the "Class A Common Stock"), with an aggregate public offering price of up to
$300,000,000 on terms to be determined at the time of offering. The Debt
Securities, the Preferred Stock and the Class A Common Stock (collectively, the
"Securities") may be offered, separately or together, in separate series, in
amounts, at prices and on terms to be set forth in one or more supplements to
this Prospectus (each, a "Prospectus Supplement").
The specific terms of the Securities in respect of which this Prospectus is
being delivered will be set forth in the applicable Prospectus Supplement and
will include, where applicable: (a) in the case of Debt Securities, the specific
title, aggregate principal amount, currency, form (which may be registered or
bearer, or certificated or global), authorized denominations, maturity, rate (or
manner of calculation thereof) and time of payment of interest, terms for
redemption at the Company's option or repayment at the holder's option, terms
for sinking fund payments, terms for conversion into Preferred Stock or Class A
Common Stock, covenants and any initial public offering price; (b) in the case
of Preferred Stock, the specific designation and stated value, any dividend,
liquidation, redemption, conversion, voting and other rights, and any initial
public offering price; and (c) in the case of Class A Common Stock, any initial
public offering price. In addition, such specific terms may include limitations
on actual or constructive ownership and restrictions on transfer of the
Securities, in each case as may be appropriate to preserve the status of the
Company as a real estate investment trust ("REIT") for federal income tax
purposes. See "Restrictions on Transfers of Capital Stock; Excess Stock."
The applicable Prospectus Supplement will also contain information, where
applicable, about certain U.S. federal income tax considerations relating to,
and any listing on a securities exchange of, the Securities covered by such
Prospectus Supplement.
The Securities may be offered directly, through agents designated from time
to time by the Company, or to or through underwriters or dealers. If any agents
or underwriters are involved in the sale of any of the Securities, their names,
and any applicable purchase price, fee, commission or discount arrangement
between or among them, will be set forth, or will be calculable from the
information set forth, in the applicable Prospectus Supplement. See "Plan of
Distribution." No Securities may be sold without delivery of the applicable
Prospectus Supplement describing the method and terms of the offering of such
series of Securities.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 4 FOR CERTAIN FACTORS RELEVANT TO AN
INVESTMENT IN THE COMPANY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION
TO THE CONTRARY IS UNLAWFUL.
------------------------
The date of this Prospectus is February 20, 1997.
<PAGE> 41
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The registration
statement on Form S-3 (of which this Prospectus is a part) (the "Registration
Statement"), the exhibits and schedules forming a part thereof and the reports,
proxy statements and other information filed by the Company with the Commission
in accordance with the Exchange Act can be inspected and copied at the
Commission's Public Reference Section, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the following regional offices of the Commission: Seven World
Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can
be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains a web site (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants such as the
Company which file electronically with the Commission. In addition, the Class A
Common Stock is listed on the New York Stock Exchange (the "NYSE") and such
reports, proxy statements and other information concerning the Company can be
inspected and copied at the offices of the NYSE, 20 Broad Street, New York, New
York 10005.
The Company has filed with the Commission the Registration Statement under
the Securities Act of 1933, as amended (the "Securities Act"), with respect to
the Securities. This Prospectus does not contain all the information set forth
in the Registration Statement, certain portions of which have been omitted as
permitted by the Commission's rules and regulations. Statements contained in
this Prospectus as to the contents of any contract or other document are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference and the
exhibits and schedules thereto. For further information regarding the Company
and the Securities, reference is hereby made to the Registration Statement and
such exhibits and schedules, which may be obtained from the Commission at its
principal office in Washington, D.C. upon payment of the fees prescribed by the
Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below have been filed by the Company under the
Exchange Act with the Commission and are incorporated herein by reference:
a. Annual Report on Form 10-K for the year ended December 31, 1995;
b. Quarterly Reports on Form 10-Q for the quarters ended March 31,
June 30 and September 30, 1996;
c. Current Reports on Form 8-K dated November 14, 1996 and January 16,
1997;
d. Description of the Class A Common Stock contained in the Company's
Registration Statement on Form 8-A, dated April 26, 1995, as
amended; and
e. Description of Preferred Share Purchase Rights contained in the
Company's Registration Statement on Form 8-A, dated April 26, 1995,
as amended.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14
and 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of the offering of the Securities shall be deemed to be
incorporated by reference in this Prospectus and to be part hereof from the date
of filing such documents.
Any statements contained herein or in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
(or in the applicable Prospectus Supplement) or in any other subsequently filed
document that also is or is deemed to be incorporated by reference herein
modifies or supersedes such
2
<PAGE> 42
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
Copies of all documents that are incorporated herein by reference (not
including the exhibits to such documents, unless such exhibits are specifically
incorporated by reference into the information that this Prospectus
incorporates) will be provided without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon written or oral
request. Requests should be directed to Investor Relations at the Company, 1201
Third Avenue, Suite 2200, Seattle, Washington, 98101 (telephone number: (206)
624-8100).
3
<PAGE> 43
RISK FACTORS
An investment in the Company involves various risks. In evaluating an
investment, investors should consider the following factors, in addition to
other matters set forth or incorporated in this Prospectus and any accompanying
Prospectus Supplement.
GENERAL REAL ESTATE INVESTMENT RISKS
General Risks Relating to Real Estate Ownership and Operation of Self
Storage Centers. An investment in the Company is subject to the risks incident
to the ownership of real estate-related assets and the operation of self storage
centers. These risks include the fact that real estate investments are generally
illiquid, which may impact the Company's ability to vary its portfolio in
response to changes in economic and other conditions, as well as the risks
normally associated with changes in market rental rates, the impact of
environmental protection laws, and changes in tax, real estate and zoning laws.
Risks of Real Estate Development and Acquisitions. The Company may invest
new capital or reinvest sale or refinancing proceeds to develop properties or to
acquire existing properties. Real estate development involves risks in addition
to those involved in the ownership and operation of established properties,
including the risks that construction may not be completed on schedule,
resulting in increased construction and other costs, and that properties may not
be leased on profitable terms or in accordance with scheduled lease-up plans. In
addition, to develop properties, the Company must engage appropriate contractors
or subcontractors or both to construct the properties, and problems may arise in
connection with such engagements, thereby increasing the cost of the
construction and resulting in delays in completion. Real estate acquisitions
entail risks that acquired properties may not perform in accordance with
management's expectations, including projected occupancy and rental rates, and
that the Company may have overpaid for acquisitions. Furthermore, the Company
may have underestimated the cost of improvements required to bring an acquired
property up to standards established for the market position intended for that
property. If any of the above were to occur to a material extent, the Company's
ability to meet debt service obligations and to make expected distributions to
stockholders would be adversely affected. The Company's ability to develop and
acquire properties depends on its ability to obtain equity or debt financing.
The issuance of additional capital stock to obtain financing to develop and
acquire properties could result in a dilution of ownership for the existing
stockholders. In addition, if cash flows generated from the investment of the
net proceeds of such offering in properties or otherwise are less than the
distributions payable to such new stockholders, the Company's ability to meet
debt service obligations and to make expected distributions to all stockholders
may be adversely affected. If any property fails to perform as expected or if
any property owned by the Company requires significant unanticipated capital
improvements, cash flow would be adversely affected.
Investments in Other Commercial Real Estate. Although the Company invests
primarily in self storage properties, it may also invest in other commercial
real estate if such investments are specifically approved by the Company's Board
of Directors. The Company has no present plans to make any such investments. The
authority of the Board of Directors to make such investments permits the Company
flexibility in selecting appropriate investments and in adjusting to changes in
the marketplace, without requiring amendments to the Company's Amended Bylaws
(the "Bylaws") or specific stockholder approval. Investments in other forms of
real estate, if they were to occur, will be subject to the risks unique to such
investments and, in particular, the Company must ensure that such investments
are managed by persons having the experience and expertise necessary for the
effective management and operation of those investments. Unfamiliarity with
local laws, procedures and practices, or in the operation of such other
investments, might adversely affect the Company's funds from operations and its
ability to meet debt service obligations and to make expected distributions to
stockholders.
Indirect Investments. The Company has invested and may continue to invest
in real estate by making participating mortgages or acquiring equity interests
in partnerships, joint ventures or other legal entities that in turn have
invested in real estate constituting appropriate investments for the Company.
Under the Bylaws, a number of conditions must be satisfied before the Company is
permitted to make these indirect investments, including, among others, the
requirement that the joint investment not jeopardize the Company's eligibility
to
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<PAGE> 44
be taxed as a REIT or result in the Company's becoming an investment company
under the Investment Company Act of 1940, as amended. These investments expose
the Company to certain risks not present had the Company invested directly in
the real estate, including, among others, the risk that the Company may not have
control over the legal entity that has title to the real estate, the possibility
that the Company may invest in an enterprise that has liabilities that are not
disclosed at the time of the investment and the possibility that the Company's
investments would be illiquid and not readily accepted as collateral by the
Company's lenders. Each of these risks might reduce the Company's cash flow or
impair its ability to borrow funds, which ultimately could adversely affect the
Company's ability to meet debt service obligations and make expected
distributions to stockholders.
Limited Asset Diversification. The Company limits its investments
primarily to self storage and related businesses. The success of an investment
in the Company will depend in large measure on the profitability of such
businesses and real estate investments. The Company is not expected to have
substantial interests in other real estate investments to hedge against the risk
that national trends might adversely affect the profitability of self storage
and related businesses.
Competition. Competition exists in every market in which the Company's
stores are located. The Company competes with, among others, national, regional
and numerous local self storage operators and developers. Such competition has
adversely affected the occupancy levels and the rental revenues of the Company's
self storage properties in specific markets. If competition adversely affects
occupancy levels and rental revenues in a significant number of the Company's
markets, it would adversely affect the Company's cash flow from operations and
its ability to meet debt service obligations and make expected distributions to
stockholders. The Company believes that the primary competition for potential
customers of any of the Company's self storage stores comes from other self
storage properties within a three-to-five-mile radius of that store. The Company
does not seek to be the lowest-price self storage provider. Entry into the self
storage business through acquisition of existing properties is relatively easy
for persons or institutions with the required initial capital. Some of the
Company's competitors may have more resources than the Company. Competition may
be accelerated by any increase in availability of funds for investment in real
estate. Decreases in interest rates tend to increase the availability of funds
and therefore can increase competition. The extent to which the Company is
affected by competition will depend in significant part on local market
conditions.
Possible Liability Relating to Environmental Matters. Under various
federal, state and local laws, ordinances and regulations, an owner or operator
of real property may become liable for the costs of removal or remediation of
certain hazardous substances released on or in its property. Such laws may
impose liability without regard to whether the owner or operator knew of, or
caused, the release of such hazardous substances. The Company obtains such
environmental assessment reports on the properties it owns and the properties it
operates as it deems appropriate. While the reports obtained by the Company have
not revealed any environmental liability or compliance concerns that the Company
believes would have a material adverse effect on its financial condition or
results of operations, no assurance can be given that any environmental
assessments undertaken by the Company have revealed all potential environmental
liabilities. The presence of hazardous substances on a property or the failure
to meet environmental regulatory requirements may materially adversely affect
the owner's ability to use or sell such property or to borrow using such
property as collateral, and may cause the owner or operator of the property to
incur substantial remediation or compliance costs. In addition to claims for
cleanup or compliance costs, the presence of hazardous substances on a property
or the release of hazardous substances from such property could result in the
owner or operator incurring substantial liabilities as a result of a claim by a
private party for personal injury, by an adjacent property owner for property
damage or by a governmental entity for other damages. Such liability may be
imposed under environmental laws or common-law principles. Although the Company
has not received any notice of potential liability for any environmental
remediation or associated damages or environmental compliance costs, and is not
currently aware of any material environmental claims against it, no assurance
can be given that no such claim will be asserted against the Company. In
addition, no assurance can be given that any prior owner or operator of the
properties did not create any material environmental condition not known to the
Company, or that an environmental contamination, noncompliance or other
condition does not otherwise exist as to any one or more of the properties that
could have a material adverse effect on the Company's
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<PAGE> 45
financial condition or results of operations. Furthermore, no assurance can be
given that (i) future laws, ordinances or regulations will not impose any
material environmental liability, (ii) the current environmental conditions of
the Company's owned or managed properties will not be affected by the condition
of properties in the vicinity of such properties (such as the presence of
leaking underground storage tanks) or by the actions of third parties unrelated
to the Company, or (iii) tenants will not violate their leases by introducing
hazardous or toxic substances into the Company's owned or managed properties
that could expose the Company to liability under federal or state environmental
laws. The cost of defending such claims, conducting such environmental
remediation or responding to such changed condition could materially adversely
affect the Company's financial condition and results of operations.
Cost of Compliance With Americans With Disabilities Act and Fire and Safety
Regulations. All of the Company's properties are required to comply with the
Americans With Disabilities Act, and the regulations, rules and orders that may
be issued thereunder (the "ADA"). The ADA has separate compliance requirements
for "public accommodations" and "commercial facilities," but generally requires
that buildings be made accessible to persons with disabilities. Compliance with
ADA requirements might require, among other things, removal of access barriers
and noncompliance could result in the imposition of fines by the U.S.
government, or an award of damages to private litigants. In addition, the
Company is required to operate its properties in compliance with fire and safety
regulations, building codes and other land use regulations, as they may be
adopted by governmental agencies and bodies and become applicable to the
Company's properties. Compliance with such requirements may require the Company
to make substantial capital expenditures, which expenditures would reduce cash
otherwise available for distribution to stockholders.
Property Taxes. Each of the Company's properties is subject to real
property taxes. The real property taxes on these properties and any other
properties that the Company develops or acquires in the future may increase as
property tax rates change and as such properties are assessed or reassessed by
tax authorities.
Potential Underinsured Losses. The Company maintains title insurance on
all of its properties. The Company uses its discretion in determining amounts,
coverage limits and deductibility provisions of title, casualty and other
insurance, based on appraisals and the purchase price paid by the Company for
such property, in each case with a view to obtaining appropriate insurance
coverage on the Company's properties at a reasonable cost and on suitable terms.
This may result in insurance coverage that in the event of a loss would not be
sufficient to pay the full current market value or current replacement cost of
the Company's lost investment. Inflation, changes in building codes and
ordinances, environmental considerations, and other factors also might make it
infeasible to use insurance proceeds to replace a facility after it has been
damaged or destroyed. Under such circumstances, the insurance proceeds received
by the Company might not be adequate to restore its economic position with
respect to such property.
RISKS RELATING TO QUALIFICATION AND OPERATION AS A REIT
Failure to Remain Qualified as a REIT. The Company has elected to be taxed
as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"),
commencing with its taxable year ended December 31, 1994. So long as the Company
meets the requirements under the Code for qualification as a REIT each year, the
Company will be entitled to a deduction when calculating its taxable income for
dividends paid to its stockholders. For the Company to qualify as a REIT,
however, certain detailed technical requirements must be met (including certain
income, asset and stock ownership tests) under Code provisions for which, in
many cases, there are only limited judicial and administration interpretations.
In addition, the determination of various factual matters and circumstances not
entirely within the Company's control may affect its ability to qualify as a
REIT, and no assurance can be given that new legislation, regulations,
administrative interpretations or court decisions will not significantly change
the tax laws with respect to qualification as a REIT or the federal income tax
consequences of such qualification. Although the Company believes that it is
organized so as to qualify as a REIT under the Code, and that it has operated
and will continue to operate in such a manner to so qualify as a REIT, the
highly complex nature of the rules governing REITs, the ongoing importance of
factual determinations and the possibility of future changes in the Company's
circumstances preclude any assurance that the Company will so qualify in any
year. For any taxable year that the Company fails to qualify as a REIT, it would
not be entitled to a deduction for dividends
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<PAGE> 46
paid to its stockholders in calculating its taxable income. Consequently, the
net assets of the Company and distributions to stockholders would be
substantially reduced because of the Company's increased tax liability.
Furthermore, to the extent that distributions had been made in anticipation of
the Company's qualification as a REIT, the Company might be required to borrow
additional funds or to liquidate certain of its investments in order to pay the
applicable tax. Should the Company's qualification as a REIT terminate, the
Company may not be able to elect to be treated as a REIT for the four taxable
years following the year during which the qualification was lost. See "Certain
Federal Income Tax Considerations -- Failure of the Company to Qualify as a
REIT" in this Prospectus.
Effect of Distribution Requirements. To maintain its status as a REIT for
federal income tax purposes, the Company generally is required each year to
distribute to its stockholders at least 95% of its taxable income. In addition,
the Company is subject to a 4% nondeductible excise tax on the amount, if any,
by which certain distributions paid by it with respect to any calendar year are
less than the sum of 85% of its ordinary income for such calendar year, 95% of
its capital gain net income for the calendar year and any amount of such income
that was not distributed in prior years. The Company may be required, under
certain circumstances, to accrue as income for tax purposes interest, rent and
other items treated as earned for tax purposes but not yet received. In
addition, the Company may not be able to deduct currently as expenses for tax
purposes certain items that actually have been paid. It is also possible that
the Company could realize income, such as income from cancellation of
indebtedness, that is not accompanied by cash proceeds. In any such event, the
Company could have taxable income in excess of cash available for distribution.
In such circumstances, the Company could be required to borrow money or
liquidate investments on unfavorable terms in order to meet the distribution
requirement applicable to a REIT. See "Certain Federal Income Tax
Considerations -- Overview of REIT Qualification Rules -- Annual Distribution
Requirements" in this Prospectus.
Changes in Tax Laws Which Could Affect REITs. Income tax treatment of
REITs may be modified, prospectively or retroactively, by legislative, judicial
or administrative action at any time. No assurance can be given that
legislation, new regulations, administrative interpretations or court decisions
will not significantly change the tax laws with respect to the qualification as
a REIT or the federal income tax consequences of such qualification. While any
such legislation may contain transitional rules that would reduce their impact
on the Company, it is impossible to predict whether or in what form such
legislation may be enacted in the future.
OTHER GENERAL RISKS
Effect of Market Interest Rates on Price of Debt Securities, Preferred
Stock and Common Stock. One of the factors that would influence the price of
the Debt Securities, Preferred Stock and Common Stock in public trading markets
is the annual yield from interest payments, Preferred Stock dividends or Common
Stock distributions by the Company on the price paid for the Debt Securities,
Preferred Stock or Common Stock, respectively, as compared to yields on other
financial instruments. Thus, an increase in market interest rates will result in
higher yields on other financial instruments, which could adversely affect the
market price of the Debt Securities, Preferred Stock and Common Stock.
Debt Financing. The Company is subject to risks normally associated with
debt financing, including the risk that the Company's net cash flow from
operations will be insufficient to meet required payments of principal and
interest, the risk that existing indebtedness on the properties will not be able
to be refinanced and the risk that the terms of such refinancing will not be as
favorable as the terms of the existing indebtedness.
International Operations. The Company invests in operations outside the
United States. The Company either faces or may 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. Each of these risks might impact the Company's cash flow or impair
its ability to borrow funds, which ultimately could adversely affect the
Company's ability to meet debt service obligations and make expected
distributions to stockholders.
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<PAGE> 47
THE COMPANY
Shurgard Storage Centers, Inc. is a fully integrated, self-administered and
self-managed REIT that develops, acquires, owns and manages self storage
centers. The Company is one of the three largest operators of self storage
centers in the United States and through its predecessors has been in the self
storage business since 1972. The Company's strategy is to be the national leader
in storage products and services by offering high-quality, conveniently located
and secure self storage and a high level of customer service. This strategy
enables the Company to position itself as a premium-priced storage provider in
its target markets. The Company seeks to own and operate self storage centers
that are located in major metropolitan areas along retail and high-traffic
corridors.
The Company's growth strategies are designed to maximize stockholder value
by increasing funds from operations through (a) internal growth through
increases in revenues and operating efficiencies at its existing stores and (b)
external growth through the development of new self storage properties and the
acquisition of additional self storage properties. The Company believes that the
experience of its management team in operating, developing and acquiring self
storage properties and its access to capital markets strongly contribute to its
ability to execute these strategies. The Company expects to fund future
development and acquisitions through the incurrence of additional indebtedness,
future offerings of equity securities and retained cash flow.
As of September 30, 1996, the Company owned and operated, directly and
through its subsidiaries and joint ventures, 230 self storage properties,
containing approximately 14.7 million net rentable square feet, which are
located in over 22 major metropolitan areas in 19 states and Europe. In
addition, the Company owns two business parks and one commercial building. The
Company also manages, under the "Shurgard" name, 37 self storage centers and one
business park, containing approximately 1.9 million net rentable square feet.
For the nine months ended September 30, 1996, the self storage centers owned by
the Company had a weighted average net rentable square foot occupancy rate of
approximately 87% and a weighted average annual rent per net rentable square
foot of $9.14.
The Company employed approximately 700 persons as of December 31, 1996, and
is headquartered in Seattle, Washington, with regional offices in Phoenix,
Arizona; Chicago, Illinois; Atlanta, Georgia; and Bellevue, Washington. The
Company is a Delaware corporation incorporated on July 23, 1993. The Company
began operations as a REIT through the consolidation on March 1, 1994 of 17
publicly held real estate limited partnerships (the "Consolidation"). The
Company's executive offices are located at 1201 Third Avenue, Suite 2200,
Seattle, Washington 98101, and its telephone number is (206) 624-8100.
USE OF PROCEEDS
Unless otherwise described in the applicable Prospectus Supplement, the
Company intends to use the net proceeds from the sale of the Securities for
general corporate purposes, which will include the development and acquisition
of additional properties and other acquisition transactions, the expansion and
improvement of certain properties in the Company's portfolio, and the repayment
of indebtedness.
RATIOS OF EARNINGS TO FIXED CHARGES
The following table sets forth ratios of earnings to fixed charges for the
periods shown. The ratios shown for the years ended December 31, 1994, 1995 and
1996 are for the Company. Ratios shown for the years ended December 31, 1992 and
1993 are derived from combined historical financial information of the 17
publicly held real estate limited partnerships that were included in the
Consolidation ("Predecessor").
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------------------------------
PREDECESSOR COMPANY
- ----------------- --------------------------
1992 1993 1994 1995 1996
- ------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
10.23x 8.80x 2.95x 3.00x 2.79x
</TABLE>
The ratios of earnings to fixed charges were computed by dividing earnings
by fixed charges. For this purpose, earnings consist of net income before
extraordinary items plus fixed charges. Fixed charges consist of
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<PAGE> 48
interest expense (including interest costs capitalized) and the amortization of
debt issuance costs. To date, the Company has not issued any Preferred Stock;
therefore, the ratios of earnings to combined fixed charges and preferred share
dividends are the same as the ratios presented above.
DESCRIPTION OF DEBT SECURITIES
GENERAL
The Debt Securities will be direct obligations of the Company, which may be
secured or unsecured, and which may be senior or subordinated indebtedness of
the Company. The Debt Securities may be issued under one or more indentures,
each dated as of a date before the issuance of the Debt Securities to which it
relates and in the form that has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part, subject to such amendments or
supplements as may be adopted from time to time. Each such indenture
(collectively, the "Indenture") will be entered into between the Company and a
trustee (the "Trustee"), which may be the same Trustee. The Indenture will be
subject to, and governed by, the Trust Indenture Act of 1939, as amended. The
statements made hereunder relating to the Indenture and the Debt Securities to
be issued thereunder are summaries of the anticipated material provisions
thereof, do not purport to be complete and are subject to, and are qualified in
their entirety by reference to, all provisions of the Indenture and such Debt
Securities. Capitalized terms used but not defined herein shall have the
respective meanings set forth in the Indenture.
TERMS
The particular terms of the Debt Securities offered by a Prospectus
Supplement will be described in such Prospectus Supplement, along with any
applicable modifications of or additions to the general terms of the Debt
Securities as described herein and in the applicable Indenture and any
applicable federal income tax considerations. Accordingly, for a description of
the terms of any series of Debt Securities, reference must be made to both the
Prospectus Supplement relating thereto and the description of the Debt
Securities set forth in this Prospectus.
Except as set forth in any Prospectus Supplement, the Debt Securities may
be issued without limits as to aggregate principal amount, in one or more
series, in each case as established from time to time by the Company's Board of
Directors or as set forth in the applicable Indenture or one or more indentures
supplemental to the Indenture. All Debt Securities of one series need not be
issued at the same time and, unless otherwise provided, a series may be
reopened, without the consent of the holders of the Debt Securities of such
series, for issuances of additional Debt Securities of such series.
Each Indenture will provide that the Company may, but need not, designate
more than one Trustee thereunder, each with respect to one or more series of
Debt Securities. Any Trustee under an Indenture may resign or be removed with
respect to one or more series of Debt Securities, and a successor Trustee may be
appointed to act with respect to such series. If two or more persons are acting
as Trustee with respect to different series of Debt Securities, each such
Trustee shall be a Trustee of a trust under the applicable Indenture separate
and apart from the trust administered by any other Trustee and, except as
otherwise indicated herein, any action described herein to be taken by a Trustee
may be taken by each such Trustee with respect to, and only with respect to, the
one or more series of Debt Securities for which it is Trustee under the
applicable Indenture.
The following summaries set forth certain general terms and provisions of
the Indenture and the Debt Securities. The Prospectus Supplement relating to the
series of Debt Securities being offered will contain further terms of such Debt
Securities, including the following specific terms:
(1) the title of such Debt Securities;
(2) the aggregate principal amount of such Debt Securities and any
limit on such aggregate principal amount;
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<PAGE> 49
(3) the price (expressed as a percentage of the principal amount
thereof) at which such Debt Securities will be issued and, if other than
the principal amount thereof, the portion of the principal amount thereof
payable upon declaration of acceleration of the maturity thereof, or (if
applicable) the portion of the principal amount of such Debt Securities
that is convertible into Class A Common Stock or Preferred Stock or the
method by which any such portion shall be determined;
(4) if convertible, the terms on which such Debt Securities are
convertible, including the initial conversion price or rate and conversion
period and, in connection with the preservation of the Company's status as
a REIT, any applicable limitations on the ownership or transferability of
the Class A Common Stock or the Preferred Stock into which such Debt
Securities are convertible;
(5) the date or dates, or the method for determining such date or
dates, on which the principal of such Debt Securities will be payable;
(6) the rate or rates (which may be fixed or variable), or the method
by which such rate or rates shall be determined, at which such Debt
Securities will bear interest, if any;
(7) the date or dates, or the method for determining such date or
dates, from which any interest will accrue, the dates upon which any such
interest will be payable, the record dates for payment of such interest, or
the method by which any such dates shall be determined, the persons to whom
such interest shall be payable, and the basis upon which interest shall be
calculated if other than that of a 360-day year consisting of twelve 30-day
months;
(8) the place or places where the principal of (and premium, if any)
and interest, if any, on such Debt Securities will be payable, where such
Debt Securities may be surrendered for conversion or registration of
transfer or exchange and where notices or demands to or upon the Company in
respect of such Debt Securities and the Indenture may be served;
(9) the period or periods, if any, within which, the price or prices
at which and the terms and conditions upon which such Debt Securities may
be redeemed, as a whole or in part, at the Company's option, if the Company
is to have such option;
(10) the obligation, if any, of the Company to redeem, repay or
purchase such Debt Securities pursuant to any sinking fund or analogous
provision or at the option of a holder thereof, and the period or periods
within which, the price or prices at which and the terms and conditions
upon which such Debt Securities will be redeemed, repaid or purchased, as a
whole or in part, pursuant to such obligation;
(11) if other than U.S. dollars, the currency or currencies in which
such Debt Securities are denominated and payable, which may be a foreign
currency or units of two or more foreign currencies or a composite currency
or currencies, and the terms and conditions relating thereto;
(12) whether the amount of payments of principal of (and premium, if
any) or interest, if any, on such Debt Securities may be determined with
reference to an index, formula or other method (which index, formula or
method may, but need not, be based on a currency or currencies, currency
unit or units or composite currency or currencies) and the manner in which
such amounts shall be determined;
(13) whether such Debt Securities will be issued in certificated
and/or book-entry form, and, if in book entry form, the identity of the
depositary for such Debt Securities and the terms of the depositary
arrangement;
(14) whether such Debt Securities will be in registered or bearer form
and, if in registered form, the denominations thereof if other than $1,000
and any integral multiple thereof and, if in bearer form, the denominations
thereof and terms and conditions relating thereto;
(15) the applicability, if any, of the defeasance and covenant
defeasance provisions described herein or set forth in the applicable
Indenture, or any modification thereof;
(16) any deletions from, modifications of or additions to the events
of default or covenants of the Company, to the extent different from those
described herein or in the applicable Indenture with respect
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<PAGE> 50
to such Debt Securities, and any change in the right of any Trustee or any
of the holders to declare the principal amount of any such Debt Securities
due and payable;
(17) whether and under what circumstances the Company will pay any
Additional Amounts, as contemplated in the applicable Indenture, on such
Debt Securities in respect of any tax, assessment or governmental charge
and, if so, whether the Company will have the option to redeem such Debt
Securities in lieu of making such payment;
(18) the subordination provisions, if any, relating to such Debt
Securities;
(19) the provisions, if any, relating to any security provided for
such Debt Securities; and
(20) any other terms of such Debt Securities not inconsistent with the
provisions of the applicable Indenture.
If so provided in the applicable Prospectus Supplement, the Debt Securities
may be issued at a discount below their principal amount and provide for less
than the entire principal amount thereof to be payable upon declaration of
acceleration of the maturity thereof ("Original Issue Discount Securities"). In
such cases, any special U.S. federal income tax, accounting and other
considerations applicable to Original Issue Discount Securities will be
described in the applicable Prospectus Supplement.
Except as may be set forth in any Prospectus Supplement, the Indenture will
not contain any provisions that would limit the Company's ability to incur
indebtedness or that would afford holders of Debt Securities protection in the
event of a highly leveraged or similar transaction involving the Company or in
the event of a change of control. Restrictions on ownership and transfers of the
Common Stock (defined below) and Preferred Stock are, however, designed to
preserve the Company's status as a REIT and, therefore, may act to prevent or
hinder a change of control. See "Restrictions on Transfers of Capital Stock;
Excess Stock." In addition, the Company's Restated Bylaws provide that, subject
to certain exceptions, the Company may not incur debt if, after giving effect to
such borrowing, its indebtedness for borrowed funds would exceed 50% of its
total assets (as defined in the Bylaws) or 300% of its adjusted net worth (as
defined in the Bylaws). Reference is made to the applicable Prospectus
Supplement for information with respect to any deletions from, modifications of
or additions to the events of default or covenants of the Company that are
described below, including any addition of a covenant or other provision
providing event risk or similar protection.
DENOMINATIONS, INTEREST, REGISTRATION AND TRANSFER
Unless otherwise described in the applicable Prospectus Supplement, the
Debt Securities of any series will be issuable in denominations of $1,000 and
integral multiples thereof.
Unless otherwise described in the applicable Prospectus Supplement, the
principal of (and applicable premium, if any) and interest on any series of Debt
Securities will be payable at the applicable Trustee's corporate trust office,
the address of which will be set forth in the applicable Prospectus Supplement;
provided, however, that, at the Company's option, payment of interest may be
made by check mailed to the address of the person entitled thereto as it appears
in the applicable register for such Debt Securities or by wire transfer of funds
to such person at an account maintained within the United States.
Any interest not punctually paid or duly provided for on any Interest
Payment Date with respect to a Debt Security ("Defaulted Interest") will
forthwith cease to be payable to the holder of such Debt Security on the
applicable Regular Record Date and may be paid either to the person in whose
name such Debt Security is registered at the close of business on a special
record date to be fixed by the Trustee (the "Special Record Date") for the
payment of such Defaulted Interest, notice whereof shall be given to the holder
of such Debt Security not less than 10 days prior to such Special Record Date,
or may be paid at any time in any other lawful manner, all as will be more
completely described in the Indenture.
Subject to certain limitations imposed on Debt Securities issued in
book-entry form, the Debt Securities of any series will be exchangeable for any
authorized denomination of other Debt Securities of the same series and of a
like aggregate principal amount and tenor upon surrender of such Debt Securities
at the applicable Trustee's corporate trust office or at the office of any
transfer agent designated by the Company for such
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<PAGE> 51
purpose. In addition, subject to certain limitations imposed on Debt Securities
issued in book-entry form, the Debt Securities of any series may be surrendered
for conversion or registration of transfer thereof at the applicable Trustee's
corporate trust office or at the office of any transfer agent designated by the
Company for such purpose. Every Debt Security surrendered for conversion,
registration of transfer or exchange shall be duly endorsed or accompanied by a
written instrument of transfer and the person requesting such transfer must
provide evidence of title and identity satisfactory to the applicable Trustee or
transfer agent. No service charge will be made for any registration of transfer
or exchange of any Debt Securities, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge payable in connection
therewith. If the applicable Prospectus Supplement refers to any transfer agent
(in addition to the applicable Trustee) initially designated by the Company with
respect to any series of Debt Securities, the Company may at any time rescind
the designation of any such transfer agent or approve a change in the location
through which any such transfer agent acts, except that the Company will be
required to maintain a transfer agent in each place of payment for such series.
The Company may at any time designate additional transfer agents with respect to
any series of Debt Securities.
Neither the Company nor any Trustee shall be required to (a) issue,
register the transfer of or exchange Debt Securities of any series during a
period beginning at the opening of business 15 days before the day of mailing
notice of redemption of any Debt Securities of that series that may be selected
for redemption and ending at the close of business on the day of mailing the
relevant notice of redemption; (b) register the transfer of or exchange any Debt
Security, or portion thereof, so selected for redemption, in whole or in part,
except the unredeemed portion of any Debt Security being redeemed in part; or
(c) issue, register the transfer of or exchange any Debt Security that has been
surrendered for repayment at the holder's option, except the portion, if any, of
such Debt Security not to be so repaid.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Indenture will provide that the Company may, with or without the
consent of the holders of any outstanding Debt Securities, consolidate with, or
sell, lease or convey all or substantially all of its assets to, or merge with
or into, any other entity, provided that (a) either the Company shall be the
continuing entity, or the successor entity (if other than the Company) formed by
or resulting from any such consolidation or merger or which shall have received
the transfer of such assets shall expressly assume the Company's obligation to
pay the principal of (and premium, if any) and interest on all the Debt
Securities and the due and punctual performance and observance of all the
covenants and conditions contained in the Indenture; (b) immediately after
giving effect to such transaction and treating any indebtedness that becomes an
obligation of the Company or any subsidiary as a result thereof as having been
incurred by the Company or such subsidiary at the time of such transaction, no
event of default under the Indenture, and no event that, after notice or the
lapse of time, or both, would become such an event of default, shall have
occurred and be continuing; and (c) an officers' certificate and legal opinion
covering such conditions shall be delivered to each Trustee.
CERTAIN COVENANTS
Existence. Except as permitted under "-- Merger, Consolidation or Sale of
Assets," the Indenture will require the Company to do or cause to be done all
things necessary to preserve and keep in full force and effect its corporate
existence, rights (by certificate of incorporation, bylaws and statute) and
franchises; provided, however, that the Company shall not be required to
preserve any right or franchise if its Board of Directors determines that the
preservation thereof is no longer desirable in the conduct of its business and
that the loss thereof is not disadvantageous in any material respect to the
holders of the Debt Securities.
Maintenance of Properties. The Indenture will require the Company to cause
all of its material properties used or useful in the conduct of its business or
the business of any subsidiary to be maintained and kept in good condition,
repair and working order and supplied with all necessary equipment and to cause
to be made all necessary repairs, renewals, replacements, betterments and
improvements thereof, all as in the Company's judgment may be necessary so that
the business carried on or in connection therewith may be properly and
advantageously conducted at all times; provided, however, that the Company and
its subsidiaries
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shall not be prevented from selling or otherwise disposing of their properties
for value in the ordinary course of business.
Insurance. The Indenture will require the Company to, and to cause each of
its subsidiaries to, keep in force upon all of its properties and operations
policies of insurance carried with responsible companies in such amounts and
covering all such risks as shall be commercially reasonable.
Payment of Taxes and Other Claims. The Indenture will require the Company
to pay or discharge or cause to be paid or discharged, before the same shall
become delinquent, (a) all taxes, assessments and governmental charges levied or
imposed on it or any subsidiary or on the income, profits or property of the
Company or any subsidiary and (b) all lawful claims for labor, materials and
supplies that, if unpaid, might by law become a lien upon the property of the
Company or any subsidiary; provided, however, that the Company shall not be
required to pay or discharge or cause to be paid or discharged any such tax,
assessment, charge or claim the amount, applicability or validity of which is
being contested in good faith by appropriate proceedings.
Provision of Financial Information. Whether or not the Company is subject
to Section 13 or 15(d) of the Exchange Act, the Indenture will require the
Company, within 15 days after each of the respective dates by which the Company
would have been required to file annual reports, quarterly reports and other
documents with the Commission if the Company were so subject, to (a) transmit by
mail to all holders of Debt Securities, as their names and addresses appear in
the applicable register for such Debt Securities, without cost to such holders,
copies of the annual reports, quarterly reports and other documents that the
Company would have been required to file with the Commission pursuant to Section
13 or 15(d) of the Exchange Act if the Company were subject to such Sections,
(b) file with the Trustee copies of the annual reports, quarterly reports and
other documents that the Company would have been required to file with the
Commission pursuant to Section 13 or 15(d) of the Exchange Act if the Company
were subject to such Sections, and (c) supply, promptly upon written request and
payment of the reasonable cost of duplication and delivery, copies of such
documents to any prospective holder of Debt Securities.
Additional Covenants. Any additional covenants of the Company with respect
to any of the series of Debt Securities will be set forth in the Prospectus
Supplement relating thereto.
EVENTS OF DEFAULT, NOTICE AND WAIVER
Unless otherwise provided in the applicable Indenture, each Indenture will
provide that the following events are "events of default" with respect to any
series of Debt Securities issued thereunder: (a) default for 30 days in the
payment of any installment of interest on any Debt Security of such series; (b)
default in the payment of the principal of (or premium, if any, on) any Debt
Security of such series at its maturity; (c) default in making any sinking fund
payment as required for any Debt Security of such series; (d) default in the
performance of any other covenant of the Company contained in the Indenture
(other than a covenant added to the Indenture solely for the benefit of a series
of Debt Securities issued thereunder other than such series) that is continued
for 60 days after written notice as provided in the applicable Indenture; (e) a
default under any bond, debenture, note or other evidence of indebtedness for
money borrowed by the Company or any of its subsidiaries (including obligations
under leases required to be capitalized on the balance sheet of the lessee under
generally accepted accounting principles) in an aggregate principal amount in
excess of $10,000,000 or under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
indebtedness for money borrowed by the Company or any of its subsidiaries
(including such leases) in an aggregate principal amount in excess of
$10,000,000, whether such indebtedness now exists or shall hereafter be created,
which default shall have resulted in such indebtedness becoming or being
declared due and payable prior to the date on which it would otherwise have
become due and payable or such obligations being accelerated, without such
acceleration having been rescinded or annulled; (f) certain events of
bankruptcy, insolvency or reorganization, or court appointment of a receiver,
liquidator or trustee of the Company or any Significant Subsidiary of the
Company; and (g) any other event of default provided with respect to a
particular series of Debt Securities. The term "Significant Subsidiary" has the
meaning ascribed to such term in Regulation S-X promulgated under the Securities
Act.
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If an event of default under any Indenture with respect to Debt Securities
of any series at the time outstanding occurs and is continuing, then in every
such case the applicable Trustee or the holders of not less than 25% in
principal amount of the outstanding Debt Securities of that series may declare
the principal amount (or, if the Debt Securities of that series are Original
Issue Discount Securities or indexed securities, such portion of the principal
amount as may be specified in the terms thereof) of all the Debt Securities of
that series to be due and payable immediately by written notice thereof to the
Company (and to the applicable Trustee if given by the holders). However, at any
time after such a declaration of acceleration with respect to Debt Securities of
such series (or of all Debt Securities then outstanding under the Indenture, as
the case may be) has been made, but before a judgment or decree for payment of
the money due has been obtained by the applicable Trustee, the holders of not
less than a majority of the principal amount of the outstanding Debt Securities
of such series (or of all Debt Securities then outstanding under the Indenture,
as the case may be) may rescind and annul such declaration and its consequences
if (a) the Company shall have deposited with the applicable Trustee all required
payments of the principal of (and premium, if any) and interest on the Debt
Securities of such series (or of all Debt Securities then outstanding under the
Indenture, as the case may be), plus certain fees, expenses, disbursements and
advances of the applicable Trustee and (b) all events of default, other than the
nonpayment of accelerated principal (or specified portion thereof), with respect
to Debt Securities of such series (or of all Debt Securities then outstanding
under the Indenture, as the case may be) have been cured or waived as provided
in the Indenture. The Indenture will also provide that the holders of not less
than a majority in principal amount of the outstanding Debt Securities of any
series (or of all Debt Securities then outstanding under the Indenture, as the
case may be) may waive any past default with respect to such series and its
consequences, except a default (y) in the payment of the principal of (or
premium, if any) or interest on any Debt Security of such series or (z) in
respect of a covenant or provision contained in the Indenture that cannot be
modified or amended without the consent of the holder of each outstanding Debt
Security affected thereby.
The Indenture will require each Trustee to give notice to the holders of
Debt Securities within 90 days of a default under the Indenture unless such
default shall have been cured or waived; provided, however, that such Trustee
may withhold notice to the holders of any series of Debt Securities of any
default with respect to such series (except a default in the payment of the
principal of (or premium, if any) or interest on any Debt Security of such
series or in the payment of any sinking fund installment in respect of any Debt
Security of such series) if specified responsible officers of the Trustee
consider such withholding to be in such holders' interest.
The Indenture will provide that no holders of Debt Securities of any series
may institute any proceedings, judicial or otherwise, with respect to the
Indenture or for any remedy thereunder, except in the case of failure of the
Trustee, for 60 days, to act after it has received a written request to
institute proceedings in respect of an event of default from the holders of not
less than 25% in principal amount of the outstanding Debt Securities of such
series, as well as an offer of indemnity reasonably satisfactory to it. This
provision will not prevent, however, any holder of Debt Securities from
instituting suit for the enforcement of payment of the principal of (and
premium, if any) and interest on such Debt Securities at the respective due
dates thereof.
The Indenture will provide that, subject to provisions in such Indenture
relating to its duties in case of default, the Trustee is under no obligation to
exercise any of its rights or powers under the Indenture at the request or
direction of any holders of any series of Debt Securities then outstanding under
the Indenture, unless such holders shall have offered to the Trustee reasonable
security or indemnity. The holders of not less than a majority in principal
amount of the outstanding Debt Securities of any series (or of all Debt
Securities then outstanding under the Indenture, as the case may be) shall have
the right to direct the time, method and place of conducting any proceeding for
any remedy available to the Trustee, or of exercising any trust or power
conferred upon the Trustee. The Trustee may, however, refuse to follow any
direction that is in conflict with any law or the Indenture that may involve the
Trustee in personal liability or that may be unduly prejudicial to the holders
of Debt Securities of such series not joining therein.
Within 120 days after the close of each fiscal year, the Company will be
required to deliver to the Trustee a certificate, signed by one of several
specified officers, stating whether or not such officer has knowledge of any
default under the Indenture and, if so, specifying each such default and the
nature and status thereof.
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MODIFICATION OF THE INDENTURE
Modifications and amendments of any Indenture will be permitted only with
the consent of the holders of not less than a majority in principal amount of
all outstanding Debt Securities issued under such Indenture affected by such
modification or amendment; provided, however, that no such modification or
amendment may, without the consent of the holder of each Debt Security affected
thereby, (a) change the stated maturity of the principal of, or any installment
of interest (or premium, if any) on, any such Debt Security; (b) reduce the
principal amount of, or the rate or amount of interest on, or any premium
payable on redemption of, any such Debt Security, or reduce the amount of
principal of an Original Issue Discount Security that would be due and payable
upon declaration of acceleration of the maturity thereof or would be provable in
bankruptcy, or adversely affect any right of repayment of the holder of any such
Debt Security; (c) change the place of payment, or the coin or currency, for
payment of principal of (and premium, if any) or interest on any such Debt
Security; (d) impair the right to institute suit for the enforcement of any
payment on or with respect to any such Debt Security; (e) reduce the
above-stated percentage of outstanding Debt Securities of any series necessary
to modify or amend the Indenture, to waive compliance with certain provisions
thereof or certain defaults and consequences thereunder or to reduce the quorum
or voting requirements set forth in the Indenture; or (f) modify any of the
foregoing provisions or any of the provisions relating to the waiver of certain
past defaults or certain covenants, except to increase the required percentage
to effect such action or to provide that certain other provisions may not be
modified or waived without the consent of the holder of such Debt Security.
The holders of a majority in aggregate principal amount of outstanding Debt
Securities of each series may, on behalf of all holders of Debt Securities of
that series, waive, insofar as that series is concerned, compliance by the
Company with certain restrictive covenants in the applicable Indenture.
Modifications and amendments of the Indenture will be permitted to be made
by the Company and the Trustee without the consent of any holder of Debt
Securities for any of the following purposes: (a) to evidence the succession of
another person to the Company as obligor under the Indenture; (b) to add to the
covenants of the Company for the benefit of the holders of all or any series of
Debt Securities or to surrender any right or power conferred upon the Company in
the Indenture; (c) to add events of default for the benefit of the holders of
all or any series of Debt Securities; (d) to add or change any provisions of the
Indenture to facilitate the issuance of, or to liberalize certain terms of, Debt
Securities in bearer form, or to permit or facilitate the issuance of Debt
Securities in uncertificated form, provided that such action shall not adversely
affect the interests of the holders of the Debt Securities of any series in any
material respect; (e) to change or eliminate any provisions of the Indenture,
provided that any such change or elimination shall become effective only when
there are no Debt Securities outstanding of any series created prior thereto
that are entitled to the benefit of such provision; (f) to secure the Debt
Securities; (g) to establish the form or terms of Debt Securities of any series,
including the provisions and procedures, if applicable, for the conversion of
such Debt Securities into Class A Common Stock or Preferred Stock; (h) to
provide for the acceptance of appointment by a successor Trustee or facilitate
the administration of the trusts under the Indenture by more than one Trustee;
(i) to cure any ambiguity, defect or inconsistency in the Indenture, provided
that such action shall not adversely affect the interests of holders of Debt
Securities of any series in any material respect; or (j) to supplement any of
the provisions of the Indenture to the extent necessary to permit or facilitate
defeasance and discharge of any series of such Debt Securities, provided that
such action shall not adversely affect the interests of the holders of the Debt
Securities of any series in any material respect.
The Indenture will provide that in determining whether the holders of the
requisite principal amount of outstanding Debt Securities of a series have given
any request, demand, authorization, direction, notice, consent or waiver
thereunder or whether a quorum is present at a meeting of holders of Debt
Securities, (a) the principal amount of an Original Issue Discount Security that
shall be deemed to be outstanding shall be the amount of the principal thereof
that would be due and payable as of the date of such determination upon
declaration of acceleration of the maturity thereof, (b) the principal amount of
any Debt Security denominated in a foreign currency that shall be deemed
outstanding shall be the U.S. dollar equivalent, determined on the issue date
for such Debt Security, of the principal amount (or, in the case of an Original
Issue Discount Security, the U.S. dollar equivalent on the issue date of such
Debt Security of the amount
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determined as provided in (a) above), (c) the principal amount of an indexed
security that shall be deemed outstanding shall be the principal face amount of
such indexed security at original issuance, unless otherwise provided with
respect to such indexed security in the applicable Indenture, and (d) Debt
Securities owned by the Company or any other obligor upon the Debt Securities or
any affiliate of the Company or of such other obligor shall be disregarded.
The Indenture will contain provisions for convening meetings of the holders
of Debt Securities of a series. A meeting may be permitted to be called at any
time by the Trustee and, upon request, by the Company or the holders of at least
10% in principal amount of the outstanding Debt Securities of such series, in
any such case upon notice given as provided in the Indenture. Except for any
consent that must be given by the holder of each Debt Security affected by
certain modifications and amendments of the Indenture, any resolution presented
at a meeting or adjourned meeting duly reconvened at which a quorum is present
may be adopted by the affirmative vote of the holders of a majority in principal
amount of the outstanding Debt Securities of that series; provided, however,
that, except as referred to above, any resolution with respect to any request,
demand, authorization, direction, notice, consent, waiver or other action that
may be made, given or taken by the holders of a specified percentage that is
less than a majority in principal amount of the outstanding Debt Securities of a
series may be adopted at a meeting or adjourned meeting duly reconvened at which
a quorum is present by the affirmative vote of the holders of such specified
percentage in principal amount of the outstanding Debt Securities of that
series. Any resolution passed or decision taken at any meeting of holders of
Debt Securities of any series duly held in accordance with the Indenture will be
binding on all holders of Debt Securities of that series. Persons holding or
representing a majority in principal amount of the outstanding Debt Securities
of a series will constitute a quorum at any meeting called to adopt a
resolution, and at any reconvened meeting; provided, however, that if any action
is to be taken at such meeting with respect to a consent or waiver that may be
given by the holders of not less than a specified percentage in principal amount
of the outstanding Debt Securities of a series, the persons holding or
representing such specified percentage in principal amount of the outstanding
Debt Securities of such series will constitute a quorum.
Notwithstanding the foregoing provisions, the Indenture will provide that
if any action is to be taken at a meeting of holders of Debt Securities of any
series with respect to any request, demand, authorization, direction, notice,
consent, waiver or other action that the Indenture expressly provides may be
made, given or taken by the holders of a specified percentage in principal
amount of all outstanding Debt Securities affected thereby, or of the holders of
such series and one or more additional series, (a) there shall be no minimum
quorum requirement for such meeting and (b) the principal amount of the
outstanding Debt Securities of such series that vote in favor of such request,
demand, authorization, direction, notice, consent, waiver or other action shall
be taken into account in determining whether such request, demand,
authorization, direction, notice, consent, waiver or other action has been made,
given or taken under the Indenture.
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
Unless otherwise indicated in the applicable Prospectus Supplement, the
Company will be permitted, at its option, to discharge certain obligations to
holders of any series of Debt Securities that have not already been delivered to
the applicable Trustee for cancellation and that either have become due and
payable or will become due and payable within one year (or scheduled for
redemption within one year) by irrevocably depositing with the applicable
Trustee, in trust, funds in such currency or currencies, currency unit or units
or composite currency or currencies in which such Debt Securities are payable in
an amount sufficient to pay the entire indebtedness on such Debt Securities in
respect of principal (and premium, if any) and interest to the date of such
deposit (if such Debt Securities have become due and payable) or to the stated
maturity or redemption date, as the case may be.
The Indenture will provide that, unless otherwise indicated in the
applicable Prospectus Supplement, the Company may elect either to (a) defease
and be discharged from any and all obligations with respect to any series of
Debt Securities (except for the obligation to pay additional amounts, if any,
upon the occurrence of certain events of tax, assessment or governmental charge
with respect to payments on such Debt Securities and the obligations to register
the transfer or exchange of such Debt Securities, to replace temporary or
mutilated, destroyed, lost or stolen Debt Securities, to maintain an office or
agency in respect of such Debt
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Securities and to hold money for payment in trust) ("defeasance") or (b) be
released from its obligations with respect to such Debt Securities under the
applicable Indenture (being the restrictions described under "-- Certain
Covenants") or, if provided in the applicable Prospectus Supplement, its
obligations with respect to any other covenant, and any omission to comply with
such obligations shall not constitute a default or an event of default with
respect to such Debt Securities ("covenant defeasance"), in either case upon the
irrevocable deposit by the Company with the applicable Trustee, in trust, of an
amount, in such currency or currencies, currency unit or units or composite
currency or currencies in which such Debt Securities are payable at stated
maturity, or Government Obligations (defined below), or both, applicable to such
Debt Securities that through the scheduled payment of principal and interest in
accordance with their terms will provide money in an amount sufficient to pay
the principal of (and premium, if any) and interest on such Debt Securities, and
any mandatory sinking fund or analogous payments thereon, on the scheduled due
dates therefor.
Such a trust may only be established if, among other things, the Company
has delivered to the applicable Trustee an opinion of counsel (as specified in
the applicable Indenture) to the effect that the holders of such Debt Securities
will not recognize income, gain or loss for U.S. federal income tax purposes as
a result of such defeasance or covenant defeasance and will be subject to U.S.
federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such defeasance or covenant defeasance had not
occurred, and such opinion of counsel, in the case of defeasance, must refer to
and be based on a ruling of the Internal Revenue Service (the "IRS") or a change
in applicable U.S. federal income tax law occurring after the date of the
Indenture. In the event of such defeasance, the holders of such Debt Securities
would thereafter be able to look only to such trust fund for payment of
principal (and premium, if any) and interest.
"Government Obligations" means securities that are (a) direct obligations
of the United States of America or the government which issued the foreign
currency in which the Debt Securities of a particular series are payable, for
the payment of which its full faith and credit is pledged, or (b) obligations of
a person controlled or supervised by and acting as an agency or instrumentality
of the United States of America or such government which issued the foreign
currency in which the Debt Securities of such series are payable, the payment of
which is unconditionally guaranteed as a full faith and credit obligation by the
United States of America or such other government, which, in either case, are
not callable or redeemable at the option of the issuer thereof, and shall also
include a depository receipt issued by a bank or trust company as custodian with
respect to any such Government Obligation or a specific payment of interest on
or principal of any such Government Obligation held by such custodian for the
account of the holder of a depository receipt; provided, however, that (except
as required by law) such custodian is not authorized to make any deduction from
the amount payable to the holder of such depository receipt from any amount
received by the custodian in respect of the Government Obligation or the
specific payment of interest on or principal of the Government Obligation
evidenced by such depository receipt.
Unless otherwise provided in the applicable Prospectus Supplement, if after
the Company has deposited funds and/or Government Obligations to effect
defeasance or covenant defeasance with respect to Debt Securities of any series,
(a) the holder of a Debt Security of such series is entitled to, and does, elect
pursuant to the applicable Indenture or the terms of such Debt Security to
receive payment in a currency, currency unit or composite currency other than
that in which such deposit has been made in respect of such Debt Security or (b)
a Conversion Event (defined below) occurs in respect of the currency, currency
unit or composite currency in which such deposit has been made, the indebtedness
represented by such Debt Security will be deemed to have been, and will be,
fully discharged and satisfied through the payment of the principal of (and
premium, if any) and interest on such Debt Security as they become due out of
the proceeds yielded by converting the amount so deposited in respect of such
Debt Security into the currency, currency unit or composite currency in which
such Debt Security becomes payable as a result of such election or such
cessation of usage based on the applicable market exchange rate. "Conversion
Event" means the cessation of use of (i) a currency, currency unit or composite
currency both by the government of the country which issued such currency and
for the settlement of transactions by a central bank or other public institution
of or within the international banking community, (ii) the European Currency
Unit ("ECU") both within the European
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Monetary System and for the settlement of transactions by public institutions of
or within the European Communities, or (iii) any currency unit or composite
currency other than the ECU for the purposes for which it was established.
Unless otherwise provided in the applicable Prospectus Supplement, all payments
of principal of (and premium, if any) and interest on any Debt Security that is
payable in a foreign currency that ceases to be used by its government of
issuance shall be made in U.S. dollars.
In the event the Company effects covenant defeasance with respect to any
Debt Securities and such Debt Securities are declared due and payable because of
the occurrence of any event of default other than the event of default described
in clause (d) under "-- Events of Default, Notice and Waiver" with respect to
the specified sections of the applicable Indenture (which sections would no
longer be applicable to such Debt Securities) or clause (g) thereunder with
respect to any other covenant as to which there has been covenant defeasance,
the amount in such currency, currency unit or composite currency in which such
Debt Securities are payable, and Government Obligations on deposit with the
applicable Trustee, will be sufficient to pay amounts due on such Debt
Securities at the time of their stated maturity, but may not be sufficient to
pay amounts due on such Debt Securities at the time of the acceleration
resulting from such event of default. The Company would, however, remain liable
to make payment of such amounts due at the time of acceleration.
The applicable Prospectus Supplement may further describe the provisions,
if any, permitting such defeasance or covenant defeasance, including any
modifications to the provisions described above, with respect to the Debt
Securities of or within a particular series.
CONVERSION RIGHTS
The terms and conditions, if any, upon which the Debt Securities are
convertible into Class A Common Stock or Preferred Stock will be set forth in
the applicable Prospectus Supplement relating thereto. Such terms will include
whether such Debt Securities are convertible into Class A Common Stock or
Preferred Stock, the conversion price (or manner of calculation thereof), the
conversion period, provisions as to whether conversion will be at the option of
the holders or the Company, the events requiring an adjustment of the conversion
price and provisions affecting conversion in the event of the redemption of such
Debt Securities and any restrictions on conversion, including restrictions
directed at maintaining the Company's REIT status.
PAYMENT
Unless otherwise specified in the applicable Prospectus Supplement, the
principal of (and applicable premium, if any) and interest on any series of Debt
Securities will be payable at the Trustee's corporate trust office, the address
of which will be stated in the applicable Prospectus Supplement; provided,
however, that, at the Company's option, payment of interest may be made by check
mailed to the address of the person entitled thereto as it appears in the
applicable register for such Debt Securities or by wire transfer of funds to
such person at an account maintained within the United States.
All amounts paid by the Company to a paying agent or a Trustee for the
payment of the principal of or any premium or interest on any Debt Security that
remain unclaimed at the end of two years after such principal, premium or
interest has become due and payable will be repaid to the Company, and the
holder of such Debt Security thereafter may look only to the Company for payment
thereof.
GLOBAL SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more global securities (the "Global Securities") that will be
deposited with, or on behalf of, a depositary identified in the applicable
Prospectus Supplement relating to such series. Global Securities may be issued
in either registered or bearer form and in either temporary or permanent form.
The specific terms of the depositary arrangement with respect to a series of
Debt Securities will be described in the applicable Prospectus Supplement
relating to such series.
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DESCRIPTION OF COMMON STOCK
The Company has authority to issue 120,000,000 shares of Class A Common
Stock, par value $.001 per share, and 500,000 shares of Class B Common Stock,
par value $.001 per share (collectively, the "Common Stock"). At January 31,
1997, the Company had outstanding 27,609,548 shares of Class A Common Stock and
154,604 shares of Class B Common Stock.
GENERAL
The following description of the Class A Common Stock sets forth certain
general terms and provisions of the Class A Common Stock to which any Prospectus
Supplement may relate, including a Prospectus Supplement providing that Class A
Common Stock will be issuable upon conversion of Debt Securities or Preferred
Stock. The statements below describing the Class A Common Stock are in all
respects subject to and qualified in their entirety by reference to the
applicable provisions of the Company's Amended and Restated Certificate of
Incorporation (the "Certificate of Incorporation") and Bylaws.
TERMS
Subject to the preferential rights of any other shares or series of stock,
holders of Class A Common Stock will be entitled to receive dividends when, as
and if declared by the Company's Board of Directors out of funds legally
available therefor. Payment and declaration of dividends on the Class A Common
Stock and purchases of shares thereof by the Company will be subject to certain
restrictions if the Company fails to pay dividends on the Preferred Stock. See
"Description of Preferred Stock." Upon any liquidation, dissolution or winding
up of the Company, holders of Class A Common Stock (together with holders of
Class B Common Stock) will be entitled to share equally and ratably in any
assets available for distribution to them, after payment or provision for
payment of the debts and other liabilities of the Company and the preferential
amounts owing with respect to any outstanding Preferred Stock. The Class A
Common Stock will possess ordinary voting rights for the election of directors
and, in respect of other corporate matters, each share will entitle the holder
thereof to one vote. Holders of Class A Common Stock will not have cumulative
voting rights in the election of directors, which means that holders of more
than 50% of all the shares of the Common Stock voting for the election of
directors can elect all the directors if they choose to do so and the holders of
the remaining shares cannot elect any directors. Holders of shares of Class A
Common Stock will not have preemptive rights, which means they have no right to
acquire any additional shares of Class A Common Stock that may be issued by the
Company at a subsequent date. All shares of Class A Common Stock now outstanding
are, and additional shares of Class A Common Stock offered will be when issued,
fully paid and nonassessable, and no shares of Class A Common Stock are or will
be subject to preemptive or similar rights.
The Class B Common Stock has rights substantially similar to those of the
Class A Common Stock. Each holder of Class B Common Stock was entitled to a loan
from the Company in an amount necessary to satisfy the holder's general partner
capital obligation to certain partnerships that were acquired by the Company in
the Consolidation. Each loan is secured by a pledge of the Class B Common Stock
held by the borrowing stockholder. Upon repayment of a portion of the loan, that
portion of the Class B Common Stock equal to the percentage of the loan
principal repaid is released from the pledge and is convertible, on a share-
for-share basis, into shares of Class A Common Stock. Class B Common Stock is
not publicly traded but is transferable upon its release from the pledge.
RESTRICTIONS ON OWNERSHIP
For the Company to qualify as a REIT under the Code, not more than 50% in
value of its outstanding capital stock may be owned, actually or constructively,
by five or fewer individuals (defined in the Code to include certain entities)
during the last half of a taxable year. To assist the Company in meeting this
requirement, the Company may take certain actions to limit the beneficial
ownership, actually or constructively, by a single person or entity of the
Company's outstanding equity securities. See "Restrictions on Transfers of
Capital Stock; Excess Stock."
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TRANSFER AGENT
The registrar and transfer agent for the Common Stock is Gemisys
Corporation.
STOCKHOLDER RIGHTS PLAN
Pursuant to the Rights Agreement dated as of March 17, 1994, between the
Company and Gemisys Corporation, as Rights Agent (the "Rights Agreement"),
holders of shares of Common Stock have certain rights to purchase shares of the
Company's Series A Junior Participating Preferred Stock (the "Junior Preferred
Shares") exercisable only in certain circumstances (the "Rights"). The Rights,
which are represented by certificates for the Common Stock, trade together with
the Common Stock until a Distribution Date (defined below). Each Right, when it
becomes exercisable as described below, will entitle the registered holder to
purchase one one-hundredth of a Junior Preferred Share at $65 per one
onehundredth of a Junior Preferred Share (subject to adjustment, the "Purchase
Price").
Until the earlier to occur of (a) 10 days following a public announcement
that a person or group of affiliated or associated persons (an "Acquiring
Person") has acquired beneficial ownership of 10% or more of the outstanding
Common Stock and (b) 10 business days (or such later date as may be determined
by action of the Company's Board of Directors prior to such time as any person
or group of affiliated persons becomes an Acquiring Person) following the
commencement of, or announcement of an intention to make, a tender offer or
exchange offer, the consummation of which would result in the beneficial
ownership by a person or group of 10% or more of such outstanding Common Stock
(the earlier of such dates, the "Distribution Date"), the Rights will be
evidenced, with respect to any of the Common Stock certificates outstanding as
of March 25, 1994 (the "Rights Record Date"), by such Common Stock certificate,
with a copy of a Summary of Rights to Purchase Preferred Shares (the "Summary of
Rights") attached thereto.
The Rights Agreement provides that, until the Distribution Date (or earlier
redemption or expiration of the Rights), the Rights will be transferred with and
only with the Common Stock. Until the Distribution Date (or earlier redemption
or expiration of the Rights), new Common Stock certificates issued after the
Rights Record Date upon transfer or new issuance of Common Stock will contain a
notation incorporating the Rights Agreement by reference. Until the Distribution
Date (or earlier redemption or expiration of the Rights), the surrender for
transfer of any certificates for Common Stock outstanding as of the Rights
Record Date, even without such notation or a copy of the Summary of Rights being
attached thereto, will also constitute the transfer of the Rights associated
with the Common Stock represented by such certificate. As soon as practicable
following the Distribution Date, separate certificates evidencing the Rights
("Right Certificates") will be mailed to holders of record of the Common Stock
as of the close of business on the Distribution Date, and such separate Right
Certificates alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date. The Rights will
expire on March 17, 2004, unless such date is extended or unless the Rights are
earlier redeemed or exchanged by the Company, in each case as described below.
The Purchase Price payable and the number of Junior Preferred Shares or
other securities or property issuable upon exercise of the Rights are subject to
adjustment from time to time to prevent dilution (a) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the Junior
Preferred Shares, (b) upon the grant to holders of the Junior Preferred Shares
of certain rights or warrants to subscribe for or purchase Junior Preferred
Shares at a price, or securities convertible into Junior Preferred Shares with a
conversion price, less than the then-current market price of the Junior
Preferred Shares, or (c) upon the distribution to holders of the Junior
Preferred Shares of evidences of indebtedness or assets (excluding regular
periodic cash dividends paid out of earnings or retained earnings or dividends
payable in Junior Preferred Shares) or of subscription rights or warrants (other
than those referred to above).
The number of outstanding Rights and the number of one one-hundredths of a
Junior Preferred Share issuable upon exercise of each Right is also subject to
adjustment in the event of a stock split of the Common Stock or a dividend on
the Common Stock payable in Common Stock or subdivisions, consolidations or
combinations of the Common Stock occurring, in any such case, prior to the
Distribution Date.
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Junior Preferred Shares purchasable upon exercise of the Rights will not be
redeemable. Each holder of Junior Preferred Shares will be entitled to a minimum
preferential quarterly dividend payment of the greater of $1 per share and a per
share dividend of 100 times the aggregate dividends declared per share of Common
Stock. In the event of liquidation, the holders of Junior Preferred Shares will
be entitled to a minimum preferential liquidation payment of $100 per share or,
if greater, to an aggregate per share payment of 100 times the aggregate payment
made per share of Common Stock. Each Junior Preferred Share will have 100 votes,
voting together with the Common Stock. Finally, in the event of any merger,
consolidation or other transaction in which shares of Common Stock are
exchanged, each Junior Preferred Share will be entitled to receive 100 times the
amount received per share of Common Stock. These rights are protected by
customary antidilution provisions.
Because of the nature of the Junior Preferred Shares' dividend, liquidation
and voting rights, the value of the one one-hundredth of a Junior Preferred
Share purchasable upon exercise of each Right should approximate the value of
one share of Common Stock.
If any person or group of affiliated or associated persons becomes an
Acquiring Person, proper provision will be made so that each holder of a Right,
other than Rights beneficially owned by the Acquiring Person (which will
thereafter be void), will thereafter have the right to receive upon exercise
that number of shares of Common Stock having a market value, as of the date of
exercise, of two times the exercise price of the Right. If the Company is
acquired in a merger or other business combination transaction, or 50% or more
of its consolidated assets or earning power are sold, proper provision will be
made so that each holder of a Right will thereafter have the right to receive,
upon the exercise thereof at the then-current exercise price of the Right, that
number of shares of common stock of the acquiring company that at the time of
such transaction will have a market value of two times the exercise price of the
Right.
At any time after any person or group becomes an Acquiring Person and prior
to the acquisition by such person or group of 50% or more of the outstanding
Common Stock, the Company's Board of Directors may exchange the Rights (other
than Rights owned by such person or group that have become void), in whole or in
part, at an exchange ratio of one share of Common Stock, or one one-hundredth of
a Junior Preferred Share (or of a share of a class or series of the Preferred
Stock having equivalent rights, preferences and privileges), per Right (subject
to adjustment).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional Junior Preferred Shares will be issued (other
than fractions that are integral multiples of one one-hundredth of a Junior
Preferred Share, which may, at the Company's election, be evidenced by
depositary receipts) and, in lieu thereof, an adjustment in cash will be made
based on the market price of the Junior Preferred Shares on the last trading day
prior to the date of exercise.
At any time prior to any person or group becoming an Acquiring Person, the
Company's Board of Directors may redeem the Rights in whole, but not in part, at
the price of $.0001 per Right, with adjustments for stock splits, stock
dividends or other similar transactions (the "Redemption Price"). The redemption
of the Rights may be made effective at such time, on such basis and with such
conditions as the Company's Board of Directors in its sole discretion may
establish. Immediately upon any redemption of the Rights, the right to exercise
the Rights will terminate and the only right of the holders of Rights will be to
receive the Redemption Price.
The terms of the Rights may be amended by the Company's Board of Directors
without the consent of the holders of the Rights, including an amendment to
lower certain 10% thresholds described above to not less than the greater of (a)
the sum of .001% and the largest percentage of the outstanding Common Stock then
known to the Company to be beneficially owned by any person or group of
affiliated persons and (b) 9.8%, except that, from and after such time as any
person or group of affiliated or associated persons becomes an Acquiring Person,
no such amendment may adversely affect the interests of the holders of the
Rights.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive dividends.
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The Rights have certain antitakeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
without conditioning the offer on substantially all the Rights being acquired.
The Rights will not interfere with any merger or other business combination
approved by the Company's Board of Directors since the Company's Board of
Directors may, at its option, at any time prior to any person or group becoming
an Acquiring Person, redeem all, but not less than all, the then-outstanding
Rights at the Redemption Price.
DESCRIPTION OF PREFERRED STOCK
The Company is authorized to issue 40,000,000 shares of Preferred Stock,
par value $.001 per share, of which no shares were outstanding as of January 31,
1997. The Company has designated 2,800,000 shares of the Preferred Stock as the
Junior Preferred Shares issuable in connection with the Rights Agreement
described under "Description of Common Stock -- Stockholder Rights Plan."
GENERAL
The following description of the Preferred Stock sets forth certain general
terms and provisions of the Preferred Stock to which any Prospectus Supplement
may relate. The statements below describing the Preferred Stock are in all
respects subject to and qualified in their entirety by reference to the
applicable provisions of the Certificate of Incorporation (including the
applicable Certificate of Designations) and Bylaws.
Shares of Preferred Stock may be issued from time to time in one or more
series as authorized by the Company's Board of Directors. Subject to limitations
prescribed by the Delaware General Corporation Law and the Certificate of
Incorporation, the Company's Board of Directors is authorized to fix the number
of shares constituting each series of Preferred Stock and the designations and
powers, preferences and relative, participating, optional or other special
rights and qualifications, limitations or restrictions thereof, including such
provisions as may be desired concerning voting, redemption, dividends,
dissolution or the distribution of assets, conversion or exchange, and such
other subjects or matters as may be fixed by resolution by the Board of
Directors or a duly authorized committee thereof. The Preferred Stock will, when
issued, be fully paid and nonassessable and will have no preemptive rights.
Reference is made to the Prospectus Supplement relating to the Preferred
Stock offered thereby for specific terms, including:
(1) the title and stated value of such Preferred Stock;
(2) the number of shares of such Preferred Stock offered, the
liquidation preference per share and the offering price of such Preferred
Stock;
(3) the dividend rate(s), period(s) and/or payment date(s) or
method(s) of calculation thereof applicable to such Preferred Stock;
(4) whether such Preferred Stock is cumulative or not and, if
cumulative, the date from which dividends on such Preferred Stock shall
accumulate;
(5) the procedures for any auction and remarketing, if any, for such
Preferred Stock;
(6) the provision for a sinking fund, if any, for such Preferred
Stock;
(7) any voting rights of such Preferred Stock;
(8) the provision for redemption, if applicable, of such Preferred
Stock;
(9) any listing of such Preferred Stock on any securities exchange;
(10) the terms and conditions, if applicable, upon which such
Preferred Stock will be convertible into Common Stock, including the
conversion price (or manner of calculation thereof);
(11) a discussion of federal income tax considerations applicable to
such Preferred Stock;
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(12) any limitations on actual, beneficial or constructive ownership
and restrictions on transfer, in each case as may be appropriate to
preserve the Company's REIT status;
(13) the relative ranking and preferences of such Preferred Stock as
to dividend rights and rights upon liquidation, dissolution or winding up
of the affairs of the Company;
(14) any limitations on issuance of any series of Preferred Stock
ranking senior to or on a parity with such series of Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up of
the Company's affairs; and
(15) any other specific terms, preferences, rights, limitations or
restrictions of such Preferred Stock.
RANK
Unless otherwise specified in the applicable Prospectus Supplement, the
Preferred Stock will, with respect to dividend rights and rights upon
liquidation, dissolution or winding up of the Company's affairs, rank (a) senior
to all classes or series of Common Stock and Excess Stock of the Company, to the
Junior Preferred Shares and to all equity securities ranking junior to such
Preferred Stock with respect to dividend rights or rights upon liquidation,
dissolution or winding up of the Company; (b) on a parity with all equity
securities issued by the Company, the terms of which specifically provide that
such equity securities rank on a parity with the Preferred Stock with respect to
dividend rights or rights upon liquidation, dissolution or winding up of the
affairs of the Company; and (c) junior to all equity securities issued by the
Company, the terms of which specifically provide that such equity securities
rank senior to the Preferred Stock with respect to dividend rights or rights
upon liquidation, dissolution or winding up of the affairs of the Company. As
used in the Certificate of Incorporation, for these purposes the term "equity
securities" does not include convertible debt securities.
DIVIDENDS
Holders of shares of Preferred Stock of each series shall be entitled to
receive, when, as and if declared by the Company's Board of Directors, out of
the Company's assets legally available for payment, cash dividends at such rates
and on such dates as will be set forth in the applicable Prospectus Supplement.
Each such dividend shall be payable to holders of record as they appear on the
Company's stock transfer books on such record dates as shall be fixed by the
Company's Board of Directors.
Dividends on any series of Preferred Stock may be cumulative or
noncumulative, as provided in the applicable Prospectus Supplement. Dividends,
if cumulative, will be cumulative from and after the date set forth in the
applicable Prospectus Supplement. If the Company's Board of Directors fails to
declare a dividend payable on a dividend payment date on any series of Preferred
Stock for which dividends are noncumulative, then the holders of such series of
Preferred Stock will have no right to receive a dividend in respect of the
dividend period ending on such dividend payment date, and the Company will have
no obligation to pay the dividend accrued for such period, whether or not
dividends on such series are declared payable on any future dividend payment
date.
If any shares of Preferred Stock of any series are outstanding, no full
dividends shall be declared or paid or set apart for payment on the Preferred
Stock of any other series ranking, as to dividends, on a parity with or junior
to the Preferred Stock of such series for any period unless (a) if such series
of Preferred Stock has a cumulative dividend, full cumulative dividends have
been or contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof is set apart for such payment on the Preferred Stock of
such series for all past dividend periods and the then current dividend period
or (b) if such series of Preferred Stock does not have a cumulative dividend,
full dividends for the then current dividend period have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof is set apart for such payment on the Preferred Stock of such
series. When dividends are not paid in full (or a sum sufficient for such full
payment is not so set apart) upon the shares of Preferred Stock of any series
and the shares of any other series of Preferred Stock ranking on a parity as to
dividends with the Preferred Stock of such series, all dividends declared on
shares of Preferred Stock of such series and any other series of Preferred
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Stock ranking on a parity as to dividends of such Preferred Stock shall be
declared pro rata so that the amount of dividends declared per share on the
Preferred Stock of such series and such other series of Preferred Stock shall in
all cases bear to each other the same ratio that accrued dividends per share on
the shares of Preferred Stock of such series (which shall not include any
accumulation in respect of unpaid dividends for prior dividend periods if such
Preferred Stock does not have a cumulative dividend) and such other series of
Preferred Stock bear to each other. No interest, or sum of money in lieu of
interest, shall be payable in respect of any dividend payment or payments on
Preferred Stock of such series that may be in arrears.
Except as provided in the immediately preceding paragraph, unless (a) if
such series of Preferred Stock has a cumulative dividend, full cumulative
dividends on the Preferred Stock of such series have been or contemporaneously
are declared and paid or declared and a sum sufficient for the payment thereof
is set apart for payment for all past dividend periods and the then current
dividend period and (b) if such series of Preferred Stock does not have a
cumulative dividend, full dividends on the Preferred Stock of such series have
been or contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof is set apart for payment for the then current dividend
period, no dividends (other than in Common Stock or other capital stock of the
Company ranking junior to the Preferred Stock of such series as to dividends and
upon liquidation) shall be declared or paid or set aside for payment nor shall
any other distribution be declared or made on the Common Stock or any other
capital stock of the Company ranking junior to or on a parity with the Preferred
Stock of such series as to dividends or upon liquidation, nor shall any Common
Stock or any other capital stock of the Company ranking junior to or on a parity
with the Preferred Stock of such series as to dividends or upon liquidation be
redeemed, purchased or otherwise acquired for any consideration (or any amounts
be paid to or made available for a sinking fund for the redemption of any shares
of any such stock) by the Company (except by conversion into or exchange for
other capital stock of the Company ranking junior to the Preferred Stock of such
series as to dividends and upon liquidation).
Any dividend payment made on shares of a series of Preferred Stock shall
first be credited against the earliest accrued but unpaid dividend due with
respect to shares of such series that remains payable.
REDEMPTION
If so provided in the applicable Prospectus Supplement, the shares of
Preferred Stock will be subject to mandatory redemption or redemption at the
Company's option, as a whole or in part, in each case on the terms, at the times
and at the redemption prices set forth in such Prospectus Supplement.
The Prospectus Supplement relating to a series of Preferred Stock that is
subject to mandatory redemption will specify the number of shares of such
Preferred Stock that shall be redeemed by the Company in each year commencing
after a date to be specified, at a redemption price per share to be specified,
together with an amount equal to all accumulated and unpaid dividends thereon
(which shall not, if such Preferred Stock does not have a cumulative dividend,
include any accumulation in respect of unpaid dividends for prior dividend
periods) to the date of redemption. The redemption price may be payable in cash
or other property, as specified in the applicable Prospectus Supplement. If the
redemption price for Preferred Stock of any series is payable only from the net
proceeds of the issuance of capital stock of the Company, the terms of such
Preferred Stock may provide that, if no such capital stock shall have been
issued or to the extent the net proceeds from any issuance are insufficient to
pay in full the aggregate redemption price then due, such Preferred Stock shall
automatically and mandatorily be converted into shares of the applicable capital
stock of the Company pursuant to conversion provisions specified in the
applicable Prospectus Supplement.
Notwithstanding the foregoing, unless (a) if such series of Preferred Stock
has a cumulative dividend, full cumulative dividends on all outstanding shares
of Preferred Stock of such series have been or contemporaneously are declared
and paid or declared and a sum sufficient for the payment thereof is set apart
for payment for all past dividend periods and the then current dividend period
and (b) if such series of Preferred Stock does not have a cumulative dividend,
full dividends on the Preferred Stock of such series have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof is set apart for payment for the then current dividend period,
no shares of such series of Preferred Stock shall be redeemed unless all
outstanding shares of Preferred Stock of such series are simultaneously
redeemed;
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provided, however, that the foregoing shall not prevent the purchase or
acquisition of shares of Preferred Stock of such series to preserve the
Company's REIT status or pursuant to a purchase or exchange offer made on the
same terms to holders of all outstanding shares of Preferred Stock of such
series. In addition, unless (i) if such series of Preferred Stock has a
cumulative dividend, full cumulative dividends on all outstanding shares of such
series of Preferred Stock have been or contemporaneously are declared and paid
or declared and a sum sufficient for the payment thereof is set apart for
payment for all past dividend periods and the then current dividend period and
(ii) if such series of Preferred Stock does not have a cumulative dividend, full
dividends on the Preferred Stock of such series have been or contemporaneously
are declared and paid or declared and a sum sufficient for the payment thereof
is set apart for payment for the then current dividend period, the Company shall
not purchase or otherwise acquire directly or indirectly any shares of Preferred
Stock of such series (except by conversion into or exchange for capital stock of
the Company ranking junior to the Preferred Stock of such series as to dividends
and upon liquidation); provided, however, that the foregoing shall not prevent
the purchase or acquisition of shares of Preferred Stock of such series to
preserve the Company's REIT status or pursuant to a purchase or exchange offer
made on the same terms to holders of all outstanding shares of Preferred Stock
of such series.
If fewer than all the outstanding shares of Preferred Stock of any series
are to be redeemed, the number of shares to be redeemed will be determined by
the Company and such shares may be redeemed pro rata from the holders of record
of such shares in proportion to the number of such shares held by such holders
(with adjustments to avoid redemption of fractional shares) or any other
equitable method determined by the Company that will not result in the issuance
of any Excess Stock.
Notice of redemption will be mailed at least 30, but not more than 60, days
before the redemption date to each holder of record of a share of Preferred
Stock of any series to be redeemed at the address shown on the Company's stock
transfer books. Each notice shall state (a) the redemption date; (b) the number
of shares and series of the Preferred Stock to be redeemed; (c) the redemption
price; (d) the place or places where certificates for such Preferred Stock are
to be surrendered for payment of the redemption price; (e) that dividends on the
shares to be redeemed will cease to accumulate on such redemption date; and (f)
the date on which the holder's conversion rights, if any, as to such shares
shall terminate. If fewer than all the shares of Preferred Stock of any series
are to be redeemed, the notice mailed to each such holder thereof shall also
specify the number of shares of Preferred Stock to be redeemed from each such
holder and, upon redemption, a new certificate shall be issued representing the
unredeemed shares without cost to the holder thereof. If notice of redemption of
any shares of Preferred Stock has been given and if the funds necessary for such
redemption have been set aside by the Company in trust for the benefit of the
holders of any shares of Preferred Stock so called for redemption, then from and
after the redemption date dividends will cease to accrue on such shares of
Preferred Stock, such shares of Preferred Stock shall no longer be deemed
outstanding and all rights of the holders of such shares will terminate, except
the right to receive the redemption price. In order to facilitate the redemption
of shares of Preferred Stock of any series, the Board of Directors may fix a
record date for the determination of shares of such series of Preferred Stock to
be redeemed.
Subject to applicable law and the limitation on purchases when dividends on
a series of Preferred Stock are in arrears, the Company may, at any time and
from time to time, purchase any shares of such series of Preferred Stock in the
open market, by tender or by private agreement.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Company, then, before any distribution or payment shall be
made to the holders of the Common Stock or any other class or series of capital
stock of the Company ranking junior to any series of the Preferred Stock in the
distribution of assets upon any liquidation, dissolution or winding up of the
affairs of the Company, the holders of such series of Preferred Stock shall be
entitled to receive out of assets of the Company legally available for
distribution to stockholders liquidating distributions in the amount of the
liquidation preference per share (set forth in the applicable Prospectus
Supplement), plus an amount equal to all dividends accrued and unpaid thereon
(which shall not include any accumulation in respect of unpaid dividends for
prior dividend periods if
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such Preferred Stock does not have a cumulative dividend). After payment of the
full amount of the liquidating distributions to which they are entitled, the
holders of Preferred Stock will have no right or claim to any of the remaining
assets of the Company. If, upon any such voluntary or involuntary liquidation,
dissolution or winding up, the legally available assets of the Company are
insufficient to pay the amount of the liquidating distributions on all
outstanding shares of any series of Preferred Stock and the corresponding
amounts payable on all shares of other classes or series of capital stock of the
Company ranking on a parity with such series of Preferred Stock in the
distribution of assets upon liquidation, dissolution or winding up, then the
holders of such series of Preferred Stock and all other such classes or series
of capital stock shall share ratably in any such distribution of assets in
proportion to the full liquidating distributions to which they would otherwise
be respectively entitled.
If liquidating distributions shall have been made in full to all holders of
any series of Preferred Stock, the remaining assets of the Company shall be
distributed among the holders of any other classes or series of capital stock
ranking junior to such series of Preferred Stock upon liquidation, dissolution
or winding up, according to their respective rights and preferences and in each
case according to their respective number of shares. For such purposes, the
consolidation or merger of the Company with or into any other entity, or the
sale, lease, transfer or conveyance of all or substantially all of the Company's
property or business, shall not be deemed to constitute a liquidation,
dissolution or winding up of the affairs of the Company.
VOTING RIGHTS
Holders of Preferred Stock will not have any voting rights, except as set
forth below or as otherwise from time to time required by law or as indicated in
the applicable Prospectus Supplement.
Unless provided otherwise for any series of Preferred Stock, so long as any
shares of Preferred Stock of a series remain outstanding, the Company shall not,
without the affirmative vote or consent of the holders of at least a majority of
the shares of such series of Preferred Stock outstanding at the time, given in
person or by proxy, either in writing or at a meeting (such series voting
separately as a class), (a) authorize or create, or increase the authorized or
issued amount of, any class or series of capital stock ranking prior to such
series of Preferred Stock with respect to payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up or reclassify
any authorized capital stock of the Company into any such shares, or create,
authorize or issue any obligation or security convertible into or evidencing the
right to purchase any such shares or (b) amend, alter or repeal the provisions
of the Certificate of Incorporation or the Certificate of Designations for such
series of Preferred Stock, whether by merger, consolidation or otherwise, so as
to materially and adversely affect any right, preference, privilege or voting
power of such series of Preferred Stock or the holders thereof; provided,
however, that any increase in the amount of the authorized Preferred Stock or
the creation or issuance of any other series of Preferred Stock, or any increase
in the amount of authorized shares of such series or any other series of
Preferred Stock, in each case ranking on a parity with or junior to the
Preferred Stock of such series with respect to payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up, shall not be
deemed to materially and adversely affect such rights, preferences, privileges
or voting powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of such series of Preferred Stock shall have
been redeemed or called for redemption upon proper notice and sufficient funds
shall have been deposited in trust to effect such redemption.
Under Delaware law, notwithstanding anything to the contrary set forth
above, holders of each series of Preferred Stock will be entitled to vote as a
class upon a proposed amendment to the Certificate of Incorporation, whether or
not entitled to vote thereon by the Certificate of Incorporation, if the
amendment would increase or decrease the aggregate number of authorized shares
of such series, increase or decrease the par value of the shares of such series,
or alter or change the powers, preferences or special rights of the shares of
such series so as to affect them adversely.
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CONVERSION RIGHTS
The terms and conditions, if any, upon which shares of any series of
Preferred Stock are convertible into Class A Common Stock will be set forth in
the applicable Prospectus Supplement relating thereto. Such terms will include
the number of shares of Class A Common Stock into which the Preferred Stock is
convertible, the conversion price (or manner of calculation thereof), the
conversion period, provisions as to whether conversion will be at the option of
the holders of the Preferred Stock or the Company, the events requiring an
adjustment of the conversion price and provisions affecting conversion in the
event of the redemption of such Preferred Stock.
RESTRICTIONS ON OWNERSHIP
For the Company to qualify as a REIT under the Code, not more than 50% in
value of its outstanding capital stock may be owned, actually or constructively,
by five or fewer individuals (defined in the Code to include certain entities)
during the last half of a taxable year. To assist it in meeting this
requirement, the Company may take certain actions to limit the beneficial
ownership, actually or constructively, by a single person or entity of the
Company's outstanding equity securities. See "Restrictions on Transfers of
Capital Stock; Excess Stock."
TRANSFER AGENT
The transfer agent and registrar for any series of Preferred Stock will be
set forth in the applicable Prospectus Supplement.
RESTRICTIONS ON TRANSFERS OF CAPITAL STOCK; EXCESS STOCK
For the Company to qualify as a REIT under the Code, among other things,
not more than 50% in value of its outstanding capital stock may be owned,
actually or constructively, by five or fewer individuals (defined in the Code to
include certain entities) during the last half of a taxable year, and such
capital stock must be beneficially owned by 100 or more persons during at least
355 days of a taxable year of 12 months or during a proportionate part of a
shorter taxable year. To ensure that the Company remains qualified as a REIT,
the Certificate of Incorporation, subject to certain exceptions, provides that
the Company may prevent the transfer or call for redemption of shares of the
Company (whether Common Stock or Preferred Stock) if more than 50% of the
outstanding shares would be owned, actually or constructively, by five or fewer
persons (defined to include individuals, corporations, partnerships, joint
ventures and similar entities) or if one person would own, actually or
constructively, more than 9.8% of the total outstanding shares (or such higher
percentage as may be determined by the Company's Board of Directors (the
"Ownership Limit")). In addition, the Company may prevent such transfers or call
for redemption of such shares if the Company's Board of Directors determines in
good faith that the shares have or may become concentrated to an extent that may
prevent the Company from qualifying as a REIT. See "Certain Federal Income Tax
Considerations -- Overview of REIT Qualification Rules -- Share Ownership." Any
class or series of Preferred Stock may be subject to these restrictions if so
stated in the resolutions providing for the issuance of such Preferred Stock.
Any corporate investor wishing to acquire or own more than 9.8% of the total
outstanding shares may petition the Company's Board of Directors in writing for
approval. The Company's Board will grant such request unless it determines in
good faith that the acquisition or ownership of such shares would jeopardize the
Company's qualification as a REIT under existing federal tax laws and
regulations. Any corporate investor intending to acquire shares in excess of the
Ownership Limit must give written notice to the Company of the proposed
acquisition no later than the date on which the transaction occurs and must
furnish such opinions of counsel, affidavits, undertakings, agreements and
information as may be required by the Company's Board of Directors to evaluate
or to protect against any adverse effect of the transfer. Notwithstanding the
foregoing, the Company's Board of Directors is not required to grant a request
to adjust the Ownership Limit if the Company's Board of Directors believes,
based on advice of legal counsel, that the granting of such request would cause
the Company's Board of Directors to breach its fiduciary duties to the
stockholders of the Company.
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If, despite the restrictions noted above, any person acquires shares of
Common Stock in excess of the Ownership Limit (applying certain constructive
ownership provisions), the shares most recently acquired by such person in
excess of the Ownership Limit will be automatically exchanged for an equal
number of shares of Excess Stock. The Company is authorized to issue 160,000,000
shares of Excess Stock, par value $.001 per share. Pursuant to the Company's
Certificate of Incorporation, shares of Excess Stock have the following
characteristics: (a) owners of Excess Stock are not entitled to exercise voting
rights with respect to the Excess Stock; (b) Excess Stock shall not be deemed
outstanding for purposes of determining a quorum at any annual or special
meeting of stockholders; and (c) Excess Stock will not be entitled to any
dividends or other distributions. Any person who becomes an owner of Excess
Stock is obligated to immediately give the Company written notice of such fact
and certain information required by the Certificate of Incorporation. Excess
Stock is also deemed to have been offered for sale to the Company or its
designee for a period of 120 days from the later of (i) the date of the transfer
that created the Excess Stock if the Company has actual notice that such
transfer created the Excess Stock and (ii) the date on which the Company's Board
of Directors determines in good faith that the transfer creating the Excess
Stock has occurred. The Company has the right during such time period to accept
the deemed offer or, in the Board of Directors' discretion, the Company may
acquire and sell, or cause the owner to sell, the Excess Stock. The price for
the Excess Stock will be the lesser of (y) the closing price of the shares
exchanged into Excess Stock on the national stock exchange on which the shares
are listed as of the date the Company or its designee acquires the Excess Stock
or, if no such price is available, as determined in good faith by the Company's
Board of Directors and (z) the price per share paid by the owner of the shares
that were exchanged into Excess Stock or, if no purchase price was paid, the
fair market value of such shares on the date of acquisition as determined in
good faith by the Company's Board of Directors. Upon such transfer or sale, the
Excess Stock will automatically convert to Class A Common Stock with all voting
and dividend rights effective as of the date of such conversion; provided,
however, that the owner will not be entitled to receive dividends payable with
respect to Class A Common Stock for the period during which the shares were
Excess Stock.
All certificates of Class A Common Stock and Class B Common Stock, any
other series of Common Stock, and any class or series of Preferred Stock will
bear a legend referring to the restrictions described above. All persons who own
a specified percentage (or more) of the outstanding capital stock of the Company
must file an affidavit with the Company containing information regarding their
ownership of stock as set forth in the Treasury Regulations. Under current
Treasury Regulations, the percentage is set between .5% and 5%, depending on the
number of record holders of capital stock. In addition, each stockholder shall
upon demand be required to disclose to the Company in writing such information
with respect to the direct, indirect and constructive ownership of shares of
capital stock of the Company as the Company's Board of Directors deems necessary
to comply with the provisions of the Code applicable to a REIT, to comply with
the requirements of any taxing authority or governmental agency or to determine
any such compliance.
This ownership limitation may have the effect of precluding acquisition of
control of the Company by a third party unless the Board of Directors determines
that maintenance of REIT status is no longer in the best interests of the
Company.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following summary of certain federal income tax considerations to the
Company and to holders of Common Stock is based on current law, is for general
information only, and is not tax advice. The tax treatment of a holder of any of
the Common Stock will vary depending on the terms of the specific Common Stock
acquired by such holder, as well as his or her particular situation. Investors
acquiring Debt Securities or Preferred Stock should refer to their respective
Prospectus Supplement for federal income tax considerations associated with such
investment. This discussion does not purport to deal with all aspects of federal
income taxation that may be relevant to particular stockholders in light of
their personal investment or tax circumstances, or to certain types of holders
(including insurance companies, financial institutions or broker-dealers,
tax-exempt organizations, foreign corporations and person who are not citizens
or residents of the United States, except to the extent discussed under
"-- Taxation of Tax-Exempt Stockholders" and
"-- Federal Income Taxation of Foreign Stockholders"), subject to special
treatment under federal income tax laws.
EACH INVESTOR IS ADVISED TO CONSULT HIS OR HER OWN TAX ADVISOR, REGARDING
THE TAX CONSEQUENCES TO HIM OR HER OF THE ACQUISITION, OWNERSHIP AND SALE OF THE
OFFERED SECURITIES, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX
CONSEQUENCES OF SUCH ACQUISITION, OWNERSHIP AND SALE AND OF POTENTIAL CHANGES IN
APPLICABLE LAWS.
QUALIFICATION OF THE COMPANY AS A REIT; OPINION OF COUNSEL
The Company has elected to be taxed as a REIT under Sections 856 through
860 of the Code, commencing with its fiscal year ended December 31, 1994. The
election to be taxed as a REIT will continue until it is revoked or otherwise
terminated. The most important consequence to the Company of being treated as a
REIT for federal income tax purposes is that it will not be subject to federal
corporate income taxes on net income that is currently distributed to its
stockholders. This treatment substantially eliminates the "double taxation" (at
the corporate and stockholder levels) that typically results when a corporation
earns income and distributes that income to stockholders in the form of a
dividend. Accordingly, if the Company at any time fails to qualify as a REIT,
the Company will be taxed on its distributed income, thereby reducing the amount
of cash available for distribution to its stockholders.
In the opinion of Perkins Coie, counsel to the Company, commencing with the
taxable year ended December 31, 1994, the Company has been organized in
conformity with the requirements for qualification as a REIT and its prior and
future proposed method of operation has enabled it and will continue to enable
it to meet the requirements for qualification and taxation as a REIT under the
Code. This opinion is based on various assumptions and is conditioned upon the
representations of the Company as to factual matters. Moreover, continued
qualification and taxation as a REIT will depend on the Company's ability to
satisfy on a continuing basis certain distribution levels, diversity of stock
ownership and various qualification tests imposed by the Code as summarized
below. While the Company intends to operate so that it will continue to qualify
as a REIT, given the highly complex nature of the rules governing REITs, the
ongoing importance of factual determinations, and the possibility of future
changes in the circumstances of the Company, no assurance can be given by
counsel or the Company that the Company will so qualify for any particular year.
Perkins Coie will not review compliance with these tests on a continuing basis,
and has not undertaken to update its opinion subsequent to the date hereof.
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TAXATION OF THE COMPANY AS A REIT
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal income tax on net income that is currently distributed to its
stockholders. The Company may, however, be subject to certain federal taxes
based on the amount of its distributions or its inability to meet certain REIT
qualification requirements. These taxes are the following:
Tax on Undistributed Income. First, if the Company does not distribute all
of its net taxable income, including any net capital gain, it would be taxed at
regular corporate rates on the undistributed income or gains.
Tax on Prohibited Transactions. Second, if the Company has net income from
certain prohibited transactions, including sales or dispositions of property
held primarily for sale to customers in the ordinary course of business, such
net income would be subject to a 100% confiscatory tax.
Tax on Failure to Meet Gross Income Requirements. Third, if the Company
should fail to meet either the 75% or 95% gross income test as described below
but still qualify for REIT status because, among other requirements, it was able
to show that such failure was due to reasonable cause, it will be subject to a
100% tax on an amount equal to (a) the gross income attributable to the greater
of the amount, if any, by which it failed either the 75% or the 95% gross income
test, multiplied by (b) a fraction intended to reflect its profitability.
Tax on Failure to Meet Distribution Requirements. Fourth, if the Company
should fail to distribute during each calendar year at least the sum of (a) 85%
of its REIT ordinary income for such year, (b) 95% of its REIT capital gain net
income for such year, and (c) any undistributed taxable income from prior
periods, the Company would be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed.
Tax on Built-in Gain. Fifth, if during the 10-year period (the
"Recognition Period") beginning on the date that Shurgard Incorporated merged
with and into the Company, the Company recognizes gain on the disposition of any
asset acquired by the Company from Shurgard Incorporated, then to the extent of
the excess of (a) the fair market value of such asset as of the beginning of
such Recognition Period over (b) the Company's adjusted basis in such asset as
of the beginning of such Recognition Period, such gain will be subject to tax at
the highest regular corporate rate pursuant to IRS regulations that have not yet
been promulgated.
Alternative Minimum Tax. Sixth, the Company may be subject to alternative
minimum tax on certain items of tax preference.
Tax on Foreclosure Property. Seventh, if the Company has (a) net income
from the sale or other disposition of foreclosure property that is held
primarily for sale to customers in the ordinary course of business or (b) other
nonqualifying income from foreclosure property, it will be subject to tax at the
highest corporate rate on such income.
OVERVIEW OF REIT QUALIFICATION RULES
The following summarizes the basic requirements for REIT status:
(a) The Company must be a corporation, trust or association that is
managed by one or more trustees or directors.
(b) The Company's stock or beneficial interests must be transferable
and held by more than 100 stockholders, and no more than 50% of the value
of the Company's stock may be held, actually or constructively, by five or
fewer individuals.
(c) Generally, 75% (by value) of the Company's investments must be in
real estate, mortgages secured by real estate, cash or government
securities (the "Qualified Assets") and not more than 25% (by value) of the
Company's total assets be represented by securities (other than those
securities included in Qualified Assets) limited in respect of any one
issuer to an amount not greater than 5% of the
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value of the Company's total assets and to not more than 10% of the
outstanding voting securities of the issuer.
(d) The Company must meet three gross income tests:
(i) First, at least 75% of the gross income must be derived from
specific real estate sources;
(ii) Second, at least 95% of the gross income must be from the real
estate sources includable in the 75% test, or from dividends, interest
or gains from the sale or disposition (other than sales or dispositions
as a dealer) of stock and securities; and
(iii) Third, less than 30% of the gross income may be derived from
the sale of real estate assets held for less than four years, from the
sale of certain "dealer" properties or from the sale of stock or
securities having a short-term holding period.
(e) The Company must distribute to its stockholders in each taxable
year an amount at least equal to 95% of the Company's "REIT taxable income"
(which is generally equivalent to taxable ordinary income and is defined
below).
The discussion set forth below explains these REIT qualification
requirements in greater detail. It also addresses how these highly technical
rules may be expected to impact the Company in its operations, noting areas of
uncertainty that perhaps could lead to adverse consequences to the Company and
its stockholders.
Share Ownership. The Company's shares of stock are fully transferable,
with the exception of certain shares that are subject to contractual transfer
restrictions. Furthermore, the Company has more than 100 stockholders and its
Certificate of Incorporation provides, to decrease the possibility that the
Company will ever be closely held, that no individual, corporation or
partnership is permitted to actually or constructively acquire more than 9.8% of
the number of outstanding shares of Class A Common Stock. The Ownership Limit
may be adjusted, however, by the Company's Board of Directors in certain
circumstances. Shares acquired in excess of the Ownership Limit may be redeemed
by the Company. In addition, the Certificate of Incorporation provides that
shares acquired in excess of the Ownership Limit will automatically convert into
nondividend-paying and nonvoting shares of Excess Stock. Contractual or
securities law restrictions on transferability should be disregarded for
purposes of determining the transferability of REIT shares. The ownership and
transfer restrictions pertaining generally to a particular issue of Preferred
Stock will be described in the Prospectus Supplement relating to such issue.
Nature of Assets. On the last day of each calendar quarter, at least 75%
of the value of the Company's total assets must consist of (a) real estate
assets (including interests in real property and mortgages on loans secured by
real property), (b) cash and cash items (including receivables), and (c)
government securities (collectively, the "real estate assets"). In addition, no
more than 25% of the value of the Company's assets may consist of securities
(other than government securities). Finally, except for certain "qualified REIT
subsidiaries," as described below, the securities of any issuer, other than
securities that are Qualified Assets, may not represent more than 5% of the
value of the Company's total assets or 10% of the outstanding voting securities
of any one issuer. The Company has recently invested in Shurgard's Storage To
Go, a taxable REIT subsidiary engaged in the containerized storage business (the
"Taxable Subsidiary"). The Taxable Subsidiary is a fully taxed C corporation not
qualifying as a REIT or qualified REIT subsidiary. The Company owns nonvoting
stock of the Taxable Subsidiary representing less than 75% of the total value of
all of the Taxable Subsidiary's outstanding securities. Although no appraisal
has been obtained by the Company to determine the value of the Company's
stockholdings in the Taxable Subsidiary, the Company has represented that such
value is significantly less than 5% of the total value of all Company assets.
While, as noted above, a REIT cannot own more than 10% of the outstanding
voting securities of any single issuer, an exception to this rule permits REITs
to own "qualified REIT subsidiaries." A "qualified REIT subsidiary" is any
corporation in which 100% of its stock is owned by the REIT at all times during
which the corporation was in existence. The Company currently has five wholly
owned corporate subsidiaries that were formed and owned at all times during
their existence by the Company. These corporations should be
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treated as "qualified REIT subsidiaries" and should not adversely affect the
Company's qualification as a REIT.
The Company owns interests in partnerships that directly or indirectly own
and operate self storage centers. The Company, for purposes of satisfying its
REIT asset and income tests, will be treated as if it owns a proportionate share
of each of the assets of these partnerships attributable to such interests. For
these purposes, the Company's interest in each of the partnerships will be
determined in accordance with its capital interest in such partnership. The
character of the various assets in the hands of the partnership and the items of
gross income of the partnership will remain the same in the Company's hands for
these purposes. Accordingly, to the extent the partnership receives qualified
real estate rentals and holds real property, a proportionate share of such
qualified income and assets, based on the Company's capital interest in the
partnerships, will be treated as qualified rental income and real estate assets
of the Company for purposes of determining its REIT characterization. It is
expected that substantially all the properties of the partnerships will
constitute real estate assets and generate qualified rental income for these
REIT qualification purposes.
The Company has acquired interests in certain partnerships that entitle the
Company to share in a percentage of profits in excess of its percentage of total
capital contributed to the partnerships. Regulatory authority does not
specifically address this situation and, based on existing authority, the
treatment of these profit interests when applying these gross income and asset
rules is uncertain. For example, based on the existing rules, if the amount of
net income allocated to a REIT based on a profit interest in a partnership is in
excess of its capital interest in the partnership's underlying gross income, the
amount of such excess should be entirely disregarded for these REIT
qualification purposes. Furthermore, these rules do not specifically address the
manner in which a REIT is to determine its capital interest. There is no
reference to the capital account or special allocation rules of Section 704(b)
of the Code and the Treasury Regulations promulgated thereunder and these rules
do not address acquisitions of partnership interests for valuable consideration.
Based on the fact that the Company acquired these interests for valuable
consideration and at a time when the partnership assets may have some
appreciated capital value, the Company may be treated as having a capital
percentage in the partnerships at the time the interests were acquired. In the
event the IRS determines that the percentage of capital contributed is the
proper indicator of a capital interest, however, a portion of the income
recognized by the Company and the real estate treated as owned by the Company
attributable to its interest in these partnerships may be disregarded when
applying these gross income and asset requirements.
This treatment for partnerships is conditioned on the treatment of these
entities as partnerships for federal income tax purposes (as opposed to
associations taxable as corporations). Effective January 1, 1997, the IRS issued
final Treasury Regulations regarding the classification of entities under
Section 7701 of the Code. Pursuant to these Regulations, domestic and foreign
entities having associates and an objective to carry on business for profit,
other than those treated by definition as corporations, may generally choose to
be taxed as either partnerships or associations taxed as corporations. Prior to
the effective date of these Regulations, entities must have had a reasonable
basis for supporting their characterization under prior regulations. These prior
regulations were based on the historical differences under local law between
partnerships and corporations. Accordingly, entities were previously
characterized based on whether the entity had or lacked a preponderance of
corporate attributes (i.e., limited liability, centralized management, free
transferability of interests and continuity of life). If the partnerships were
taxed as corporations and the Company's ownership in any of the partnerships
exceeded 10% of the partnership's voting interests or the value of such
interests exceeded 5% of the value of the Company's assets, the Company would
cease to qualify as a REIT. Furthermore, in such a situation, distributions from
any of the partnerships to the Company would be treated as dividends, which are
not taken into account in satisfying the 75% gross income test described below
and which could therefore make it more difficult for the Company to qualify as a
REIT for the taxable year in which such distribution was received. In addition,
in such a situation, the interest in any of the partnerships held by the Company
would not qualify as "real estate assets," which could make it more difficult
for the Company to meet the 75% asset test described above. Finally, in such a
situation, the Company would not be able to deduct its share of any losses
generated by the partnerships in computing its taxable income. The Company
believes that each of the partnerships will be taxed prior to 1997 as
partnerships (and not as
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associations taxable as a corporations) and that for 1997 and all future years
it will not elect or cause any of the partnerships to be taxed other than as a
partnership.
Income Tests. To maintain its qualification as a REIT, the Company must
meet three gross income requirements that must be satisfied annually. First, at
least 75% of the REIT's gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived directly or indirectly from
investments relating to real property or mortgages on real property (including
"rents from real property" and, in certain circumstances, interest) or from
certain types of temporary investments. Second, at least 95% of the REIT's gross
income (excluding gross income from prohibited transactions) for each taxable
year must be derived from such real property investments, and from dividends,
interest and gain from the sale or disposition of stock or securities, or from
any combination of the foregoing. Third, short-term gain from the sale or other
disposition of stock or securities, gain from prohibited transactions and gain
from the sale or other disposition of real property held for less than four
years (apart from involuntary conversions and sales of foreclosure property)
must represent less than 30% of the REIT's gross income (including gross income
from prohibited transactions) for each taxable year.
Rents received by the Company on the lease of self storage centers will
qualify as "rents from real property" in satisfying the gross income
requirements for a REIT described above only if several conditions are met.
First, the amount of rent must not be based in whole or in part on the income or
profits of any person. However, an amount received or accrued generally will not
be excluded from the term "rents from real property" solely by reason of being
based on a fixed percentage or percentages of receipts of sales. Second, the
Code provides that rents received from a tenant will not qualify as "rents from
real property" in satisfying the gross income test if the Company, or an owner
of 10% or more of the Company, actually or constructively owns 10% or more of
such tenant (a "Related-Party Tenant"). Third, if rent attributable to personal
property leased in connection with the lease of real property is greater than
15% of the total rent received under the lease, then the portion of rent
attributable to such personal property will not qualify as "rents from real
property." The Company does not anticipate charging rent for any portion of any
property that is based in whole or in part on the income or profits of any
person and does not anticipate receiving rents in excess of a de minimis amount
from Related-Party Tenants. Furthermore, the Company does not lease personal
property in connection with its rental of self storage centers.
Finally, for rents to qualify as "rents from real property," the Company
must not operate or manage the property or furnish or render services to tenants
unless the Company furnishes or renders such services through an independent
contractor from whom the Company derives no revenue. The Company need not
utilize an independent contractor to the extent that services provided by the
Company are usually and customarily rendered in connection with the rental of
space for occupancy only and are not otherwise considered "rendered to the
occupant." The Company has obtained a private letter ruling from the IRS ruling
that the management services provided by the Company for its own properties will
not cause the rents received by the Company to be treated as other than "rents
from real property." The ruling is based on a description of those management
services to be performed by the Company in connection with its own properties,
including maintenance, repair, lease administration and accounting and security.
The ruling also considers certain ancillary services to be directly
performed by the Company such as truck rentals and inventory sales. The ruling
provides that such services do not otherwise adversely affect the
characterization of the rental income received by the Company. Nonetheless,
income from truck rentals and certain other ancillary services does not qualify
under these gross income tests ("Nonqualifying Income"). In addition, the fees,
consideration and certain reimbursements that the Company receives for
performing management and administrative services with respect to properties
that are not owned entirely by the Company will also be treated as Nonqualifying
Income.
If the Company fails to satisfy one or both of the 75% and 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. These relief
provisions generally will be available if the Company's failure to meet such
test was due to reasonable cause and not willful neglect and the Company
attaches a schedule of its income sources to its tax
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return that does not fraudulently or intentionally exclude any income sources.
As discussed above, even if these relief provisions apply, a tax would be
imposed with respect to such excess income.
Annual Distribution Requirements. Each year, the Company must have a
deduction for dividends paid (determined under Section 561 of the Code) to its
stockholders in an amount equal to (a) 95% of the sum of (i) its "REIT taxable
income" as defined below, (ii) any net income from foreclosure property less the
tax on such income, minus (b) any "excess noncash income," as defined below.
"REIT taxable income" is the taxable income of a REIT computed without a
deduction for dividends paid and excluding any net capital gain. REIT taxable
income is further adjusted by certain items, including, without limitation, an
exclusion for net income from foreclosure property, a deduction for the tax on
the greater of the amount by which the REIT fails the 75% or the 95% income
test, and an exclusion for an amount equal to any net income derived from
prohibited transactions. "Excess noncash income" means the excess of certain
amounts that the REIT is required to recognize as income in advance of receiving
cash, such as original issue discount on purchase money debt, over 5% of the
REIT taxable income before deduction for dividends paid and excluding any net
capital gain. Such distributions must be made in the taxable year to which they
relate, or in the following taxable year if declared before the REIT timely
files its tax return for such year and is paid on or before the first regular
dividend payment after such declaration.
It is possible that the Company, from time to time, may not have sufficient
cash or other liquid assets to meet the 95% distribution requirement due to
timing differences between (a) the actual receipt of income and the actual
payment of deductible expenses and (b) the inclusion of such income and
deduction of such expenses in arriving at taxable income of the Company.
Furthermore, substantial principal payments on Company indebtedness, which has
the effect of lowering the amount of distributable cash without an offsetting
deduction to Company taxable income, may adversely affect the Company's ability
to meet this distribution requirement. In the event that such timing differences
or reduction to distributable cash occurs, in order to meet the 95% distribution
requirement, the Company may find it necessary to arrange for short-term, or
possible long-term, borrowings or to pay dividends in the form of taxable stock
dividends.
Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirement for a year by paying "deficiency dividends"
to stockholders in a later year that may be included in the Company's deduction
for dividends paid for the earlier year. Thus, the Company may be able to avoid
being taxed on amounts distributed as deficiency dividends; however, the Company
will be required to pay to the IRS interest based on the amount of any deduction
taken for deficiency dividends.
Furthermore, if the Company should fail to distribute during each calendar
year at least the sum of (i) 85% of its REIT ordinary income for such year, (ii)
95% of its REIT capital gain income for such year, and (iii) any undistributed
taxable income from prior periods, the Company would be subject to a 4% excise
tax on the excess of such required distribution over the amounts actually
distributed.
FAILURE OF THE COMPANY TO QUALIFY AS A REIT
If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Company would be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates, thereby reducing the amount of cash available for
distribution to its stockholders. Distributions to stockholders in any year in
which the Company fails to qualify would not be deductible by the Company nor
would they be required to be made. In such an event, to the extent of current
and accumulated earnings and profits, all distributions to stockholders would be
taxable as ordinary income and, subject to certain limitations in the Code,
corporate distributees may be eligible for the dividends-received deduction.
Unless entitled to relief under specific statutory relief provisions, the
Company would also be disqualified from taxation as a REIT for the four taxable
years following the year during which such qualification was lost. It is not
possible to state whether in all circumstances the Company would be entitled to
such statutory relief.
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TAXATION OF HOLDERS OF DEBT SECURITIES
Holders of Debt Securities should consult the Prospectus Supplement with
respect to such Securities for a discussion of U.S. federal income tax
consequences associated with the ownership of Debt Securities.
TAXATION OF HOLDERS OF PREFERRED STOCK
Holders of Preferred Stock should consult the Prospectus Supplement with
respect to such Securities for a discussion of U.S. federal income tax
consequences associated with the ownership of Preferred Stock.
TAXATION OF TAXABLE U.S. STOCKHOLDERS GENERALLY
As used herein, the term "U.S. Stockholder" means a holder of shares of
Common Stock who (for U.S. federal income tax purposes) is (a) a citizen or
resident of the United States, (b) a corporation, partnership or other entity
created or organized in or under the laws of the United States or of any
political subdivision thereof, or (c) an estate or trust the income of which is
subject to U.S. federal income taxation regardless of its source.
As long as the Company qualifies as a REIT, distributions made by the
Company out of its current or accumulated earnings and profits (and not
designated as capital gain dividends) will constitute dividends taxable to its
taxable U.S. Stockholders as ordinary income. Such distributions will not be
eligible for the dividends-received deduction in the case of U.S. Stockholders
that are corporations. Distributions made by the Company that are properly
designated by the Company as capital gain dividends will be taxable to a U.S.
Stockholder as long-term capital gains (to the extent that they do not exceed
the Company's actual net capital gain for the taxable year) without regard to
the period for which the U.S. Stockholder has held his or her shares of stock.
U.S. Stockholders that are corporations may, however, be required to treat up to
20% of certain capital gain dividends as ordinary income.
To the extent that the Company makes distributions (not designated as
capital gain dividends) in excess of its current and accumulated earnings and
profits, such distributions will be treated first as a tax-free return of
capital to each U.S. Stockholder, reducing the adjusted basis that such U.S.
Stockholder has in his or her shares of stock for tax purposes by the amount of
such distribution (but not below zero), with distributions in excess of a U.S.
Stockholder's adjusted basis in his or her shares taxable as capital gains
(provided that the shares have been held as a capital asset). Dividends declared
by the Company in October, November or December of any year and payable to a
stockholder of record on a specified date in any such month shall be treated as
both paid by the Company and received by the stockholder on December 31 of such
year, provided that the dividend is actually paid by the Company on or before
January 31 of the following calendar year. Stockholders may not include in their
own income tax returns any net operating losses or capital losses of the
Company.
Distributions made by the Company and gain arising from the sale or
exchange by a U.S. Stockholder of shares of Common Stock will not be treated as
passive activity income, and, as a result, U.S. Stockholders generally will not
be able to apply any "passive losses" against such income or gain. Distributions
made by the Company (to the extent they do not constitute a return of capital)
generally will be treated as investment income for purposes of computing the
investment interest limitation. Gain arising from the sale or other disposition
of Common Stock, however, will not be treated as investment income unless the
U.S. Stockholder so elects, in which case such capital gains will be taxed at
ordinary income rates. The Company will notify stockholders after the close of
the Company's fiscal year as to the portions of the distributions attributable
to that year that constitute ordinary income, return of capital and capital
gain.
Upon any sale or other disposition of shares of Common Stock, a U.S.
Stockholder will recognize gain or loss for federal income tax purposes in an
amount equal to the difference between (a) the amount of cash and the fair
market value of any property received on such sale or other disposition and (b)
the holder's adjusted basis in the shares for tax purposes. Such gain or loss
will be capital gain or loss if the shares have been held by the U.S.
Stockholder as a capital asset, and will be long-term gain or loss if the shares
have been held for more than one year. In general, any loss recognized by a U.S.
Stockholder on the sale or other disposition of shares of the Company that have
been held for six months or less (after applying certain holding period rules)
will be
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treated as a long-term capital loss to the extent of distributions received by
such U.S. Stockholder from the Company that were required to be treated as
long-term capital gains.
BACKUP WITHHOLDING
The Company will report to its U.S. Stockholders and the IRS the amount of
dividends paid during each calendar year, and the amount of tax withheld, if
any. Under the backup withholding rules, a stockholder may be subject to backup
withholding at the rate of 31% with respect to dividends paid unless such holder
(a) is a corporation or comes within certain other exempt categories and, when
required, demonstrates this fact or (b) provides a taxpayer identification
number, certifies as to no loss of exemption from backup withholding, and
otherwise complies with applicable requirements of the backup withholding rules.
A U.S. Stockholder that does not provide the Company with his or her correct
taxpayer identification number may also be subject to penalties imposed by the
IRS. Any amount paid as backup withholding will be creditable against the U.S.
stockholder's income tax liability. In addition, the Company may be required to
withhold a portion of capital gain distributions to any stockholders who fail to
certify their nonforeign status to the Company. See "-- Federal Income Taxation
of Foreign Stockholders."
TAXATION OF TAX-EXEMPT STOCKHOLDERS
Generally, a tax-exempt investor that is exempt from tax on its investment
income, such as an individual retirement account or a 401(k) plan, that holds
Common Stock as an investment will not be subject to tax on dividends paid by
the Company. However, if such tax-exempt investor is treated as having purchased
the Common Stock with borrowed funds, some or all of its dividends may be
subject to tax as "Unrelated Business Taxable Income" ("UBTI"). Also, for
tax-exempt stockholders that are social clubs, voluntary employee benefit
associations, supplemental unemployment benefit trusts and qualified group legal
services plans exempt from federal income taxation under Sections 501(c)(7),
(c)(9), (c)(17) and (c)(20), respectively, of the Code, income from an
investment in the Company will constitute UBTI unless the organization is able
to properly deduct amounts set aside or placed in reserve for certain purposes
so as to offset the income generated by its investment in the Company. Such
prospective investors should consult their own tax advisors concerning those
"set aside" and reserve requirements. In addition, under Section 856(h) of the
Code, if certain requirements are met, a pension trust that owns more than 10%
(by value) of the Company's outstanding stock, including preferred stock, could
be treated as recognizing UBTI on a portion of its dividends even if its stock
is held for investment and is not treated as acquired with borrowed funds. The
ownership limit provisions on Company stock, however, should prevent this result
in most cases.
FEDERAL INCOME TAXATION OF FOREIGN STOCKHOLDERS
Overview. The rules governing U.S. income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships and foreign trusts and
estates (collectively, "Non-U.S. Stockholders") are complex and the following
discussion is intended only as a summary of these rules. Prospective Non-U.S.
Stockholders should consult with their own tax advisors to determine the impact
of federal, state and local income tax laws on an investment in the Company,
including any reporting requirements.
In general, a Non-U.S. Stockholder will be subject to the same U.S. federal
income tax rules and rates that apply to a U.S. Stockholder if its investment in
the Company is "effectively connected" with the Non-U.S. Stockholder's conduct
of a trade or business in the United States. A corporate Non-U.S. Stockholder
that receives income that is (or is treated as) effectively connected with a
U.S. trade or business also may be subject to the branch profits tax at a 30%
rate (or such lower rate as may be specified by an nonapplicable income tax
treaty) under Section 884 of the Code, which tax is payable in addition to
regular U.S. federal corporate income tax. The following discussion will apply
to a Non-U.S. Stockholder whose investment in the Company is not so effectively
connected.
A distribution by the Company that is neither attributable to gain from the
sale or exchange by the Company of "United States Real Property Interests"
("USRPIs") nor designated by the Company as a capital gain dividend will be
treated as an ordinary income dividend to the extent that it is made out of
current or accumulated earnings and profits of the Company. Generally, an
ordinary income dividend made to a Non-
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<PAGE> 76
U.S. Stockholder will be subject to a U.S. federal withholding tax equal to 30%
of the gross amount of the dividend. This tax may be reduced by an applicable
tax treaty between the United States and the country in which the Non-U.S.
Stockholder resides. A distribution in excess of the Company's earnings and
profits will be treated first as a nontaxable return of capital that will reduce
a Non-U.S. Stockholder's basis in its stock. Any excess is then treated as a
gain from the disposition of the Company's shares, the tax treatment of which is
described below.
Distributions by the Company that are attributable to gain from the sale or
exchange by the Company of USRPIs will be taxed to the Non-U.S. Stockholder in
the United States under the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). FIRPTA generally applies to gains realized by foreign persons upon
the sale or exchange of USRPIs, which includes real property situated in the
United States and stock of any U.S. company that has a significant proportion of
U.S. real property comprising its total business assets (e.g., 50% or more).
Under FIRPTA, distributions by a REIT that are attributable to gains on sales of
USRPIs are taxed to a Non-U.S. Stockholder as if the distributions were gains
effectively connected with a U.S. trade or business even if the Non-U.S.
Stockholder is not in fact engaged in a U.S. trade or business. Accordingly, if
the Company distributes capital gains to which FIRPTA applies, a Non-U.S.
Stockholder will be taxed at the same capital gain rates that apply to U.S.
Stockholders (subject to any applicable alternative minimum tax and special
alternative minimum tax in the case of a nonresident alien individual).
Distributions subject to FIRPTA also may be subject to a 30% branch profits tax
when made to a foreign corporate stockholder (except as otherwise provided by an
applicable income tax treaty).
The Company generally will be required to withhold from distributions to
Non-U.S. Stockholders and remit to the IRS (a) 35% of capital gain dividends
(or, if greater, 35% of the amount of any distributions that could be designated
as capital gain dividends) and (b) 30% (or lower treaty rate) of ordinary
dividends paid out of earnings and profits. If the Company designates prior
distributions as capital gain dividends, it need not make payment of the 35%
withholding requirement; however, subsequent distributions, up to the amount of
such prior distributions, will be treated as capital gain dividends for
withholding purposes. A distribution in excess of the Company's earnings and
profits may be subject to a 30% withholding tax on ordinary dividends if at the
time of the distribution it cannot be determined whether the distribution will
be in an amount in excess of the Company's current or accumulated earnings and
profits. Because it generally cannot be determined at the time a distribution is
made whether or not such distribution will be in excess of current and
accumulated earnings and profits, the entire amount of any distribution normally
will be subject to withholding at the same rate as a dividend. To the extent the
Company does not so withhold, it is required to withhold 10% from any
distribution to a Non-U.S. Stockholder whose shares are classified as a USRPI to
the extent such distribution is in excess of current and accumulated earnings
and profits. If the amount of tax withheld by the Company with respect to a
distribution to a Non-U.S. Stockholder exceeds the Non-U.S. Stockholder's U.S.
federal tax liability with respect to such distribution, the Non-U.S.
Stockholder may file for a refund of such excess from the IRS.
A sale of Company stock by a Non-U.S. Stockholder generally will not be
subject to U.S. federal income taxation unless the stock sold constitutes a
USRPI. Similarly, ordinary income dividends in excess of earnings and profits
and basis will not be subject to U.S. federal taxation if the stock with respect
to which the dividend is paid does not constitute a USRPI. The Common Stock will
not constitute a USRPI if (a) the Company is a "domestically controlled REIT" or
(b) the stock is "regularly traded" on an established securities market (such as
Nasdaq or the NYSE) and the stockholder owns (actually and constructively under
certain constructive ownership rules) less than 5% of the stock during an
applicable "look back" period. A domestically controlled REIT is a REIT in which
at all times during a specified testing period less than 50% in value of its
shares is held directly or indirectly by Non-U.S. Stockholders. While the
Company believes that it is a domestically controlled REIT, such status depends
on the ownership of the Company's freely transferable stock and, therefore, no
assurance can be given that the Company is or will continue to be a domestically
controlled REIT.
If, notwithstanding the above, gain on a sale of the Company's stock is
taxable under FIRPTA, a Non-U.S. Stockholder would generally be subject to the
same tax treatment discussed above with respect to capital gain dividends, with
the exception that the requirement that the Company withhold 35% of the capital
gain
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dividends will not apply. Instead, the purchaser of stock would be required to
withhold 10% of the gross proceeds and remit this amount to the IRS.
Backup Withholding Tax and Information Reporting. Backup withholding tax
(which generally is a withholding tax imposed at the rate of 31% on certain
payments to persons that fail to furnish certain information under the U.S.
information reporting requirements) and information reporting will generally not
apply to distributions paid to Non-U.S. Stockholders outside the United States
that are treated as (a) dividends subject to the 30% (or lower treaty rate)
withholding tax discussed above, (b) capital gains dividends, or (c)
distributions attributable to gain from the sale or exchange by the Company of
USRPIs. Generally, backup withholding and information reporting will not apply
to a payment of stock sale proceeds by or through a foreign office of a foreign
broker. Information reporting (but not backup withholding) will apply, however,
to a payment of stock sale proceeds by a foreign office of a broker that (i) is
a U.S. person, (ii) derives 50% or more of its gross income for certain periods
from the conduct of a trade or business in the United States, or (iii) is a
"controlled foreign corporation" (generally, a foreign corporation controlled by
U.S. Stockholders) for U.S. tax purposes, unless the broker has documentary
evidence that the holder is a Non-U.S. Stockholder and certain other conditions
are met, or the stockholder otherwise establishes an exemption. Payment to or
through a U.S. office of a broker of the stock sale proceeds is subject to both
backup withholding and information reporting unless the stockholder certifies
under penalties of perjury that the stockholder is a Non-U.S. Stockholder, or
otherwise establishes an exemption. A Non-U.S. Stockholder may obtain a refund
of any amounts withheld under the backup withholding rules by filing the
appropriate claim for refund with the IRS.
The backup withholding and information reporting rules are under review by
the United States Treasury and their application to the Securities could be
changed prospectively by future Treasury regulations.
STATE AND LOCAL TAXES
Holders of Common Stock may be subject to various state or local taxes in
other jurisdictions in which stockholders reside or own property or other
interests. Such tax treatment of the stockholders in states having taxing
jurisdiction over them may differ from the federal income tax treatment
described in this summary. Consequently, each stockholder should consult his or
her tax advisor as to the tax consequences of the Common Stock under the
respective state laws applicable to him or her.
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PLAN OF DISTRIBUTION
The Company may sell the Securities to one or more underwriters for public
offering and sale by them or may sell the Securities to investors directly or
through agents. Any such underwriter or agent involved in the offer and sale of
the Securities will be named in the applicable Prospectus Supplement.
Underwriters may offer and sell the Securities at a fixed price or prices,
which may be changed, at prices relating to the prevailing market prices at the
time of sale or at negotiated prices. The Company also may, from time to time,
authorize underwriters acting as the Company's agents to offer and sell the
Securities upon the terms and conditions as are set forth in the applicable
Prospectus Supplement. In connection with the sale of Securities, underwriters
may be deemed to have received compensation from the Company in the form of
underwriting discounts or commissions and may also receive commissions from
purchasers of Securities for whom they may act as agent. Underwriters may sell
Securities to or through dealers, and such dealers may receive compensation in
the form of discounts, concessions or commissions from the underwriters and/or
commissions from the purchasers for whom they may act as agent. Any underwriting
compensation paid by the Company to underwriters or agents in connection with
the offering of Securities, and any discounts, concessions or commissions
allowed by underwriters to participating dealers, will be set forth in the
applicable Prospectus Supplement. Underwriters, dealers and agents participating
in the distribution of the Securities may be deemed to be underwriters, and any
discounts and commissions received by them and any profit realized by them on
resale of the Securities may be deemed to be underwriting discounts and
commissions, under the Securities Act. Any such underwriter or agent will be
identified, and such compensation received from the Company will be described,
in the applicable Prospectus Supplement.
Underwriters, dealers and agents may be entitled, under agreements entered
into with the Company, to indemnification against and contribution toward
certain civil liabilities, including liabilities under the Securities Act.
Certain of the underwriters, dealers and agents and their affiliates may be
customers of, engage in transactions with and perform services for the Company
and its subsidiaries in the ordinary course of business.
If so indicated in the applicable Prospectus Supplement, the Company will
authorize underwriters or other persons acting as the Company's agents to
solicit offers by certain institutions to purchase Securities from the Company
at the public offering price set forth in such Prospectus Supplement pursuant to
Delayed Delivery Contracts ("Contracts") providing for payment and delivery on
the date or dates stated in such Prospectus Supplement. Each Contract will be
for an amount not less than, and the aggregate principal amount of Securities
sold pursuant to Contracts will be not less nor more than, the respective
amounts stated in the applicable Prospectus Supplement. Institutions with whom
Contracts, when authorized, may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational and
charitable institutions, and other institutions, but will in all cases be
subject to the Company's approval. Contracts will not be subject to any
conditions except (a) the purchase by an institution of the Securities covered
by its Contracts shall not at the time of delivery be prohibited under the laws
of any jurisdiction in the United States to which such institution is subject
and (b) if the Securities are being sold to underwriters, the Company shall have
sold to such underwriters the total principal amount of the Securities less the
principal amount thereof covered by Contracts. The underwriters and other agents
will not have any responsibility in respect of the validity or performance of
such Contracts.
Unless otherwise specified in the related Prospectus Supplement, each
series of Securities will be a new issue with no established trading market,
other than the Class A Common Stock. The Class A Common Stock is currently
listed on the NYSE. Unless otherwise specified in the related Prospectus
Supplement, any shares of Class A Common Stock sold pursuant to a Prospectus
Supplement will be listed on the NYSE subject to official notice of issuance.
The Company may elect to list any series of Debt Securities or Preferred Stock
on an exchange, but is not obligated to do so. It is possible that one or more
underwriters may make a market in a series of Securities, but will not be
obligated to do so and may discontinue any market making at any time without
notice. Therefore, no assurance can be given as to the liquidity of, or the
trading market for, the Securities.
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In order to comply with the securities laws of certain states, if
applicable, the Securities offered hereby will be sold in such jurisdictions
only through registered or licensed brokers or dealers. In addition, in certain
states the Securities may not be sold unless they have been registered or
qualified for sale in the applicable state or an exemption from the registration
or qualification requirement is available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the Securities offered hereby may not
simultaneously engage in market-making activities with respect to the Securities
for a period of two business days prior to the commencement of such
distribution.
EXPERTS
The consolidated financial statements incorporated in this Prospectus by
reference from the Company's Annual Report on Form 10-K have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report, which is
incorporated herein by reference, and have been so incorporated in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.
LEGAL MATTERS
The validity of the Securities will be passed upon for the Company by
Perkins Coie, Seattle, Washington.
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======================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITERS. NEITHER THIS PROSPECTUS SUPPLEMENT NOR THE ACCOMPANYING
PROSPECTUS CONSTITUTES AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY,
TO ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT NOR THE
ACCOMPANYING PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Incorporation of Certain Documents by
Reference............................ S-2
Prospectus Supplement Summary.......... S-3
Business and Properties................ S-5
Use of Proceeds........................ S-13
Capitalization......................... S-13
Selected Financial Information......... S-14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... S-16
Management of the Company.............. S-31
Description of Series B Preferred
Stock................................ S-33
Certain Federal Income Tax
Considerations....................... S-36
Underwriting........................... S-38
Legal Matters.......................... S-39
PROSPECTUS
Available Information.................. 2
Incorporation of Certain Documents by
Reference............................ 2
Risk Factors........................... 4
The Company............................ 8
Use of Proceeds........................ 8
Ratios of Earnings to Fixed Charges.... 8
Description of Debt Securities......... 9
Description of Common Stock............ 19
Description of Preferred Stock......... 22
Restrictions on Transfers of Capital
Stock; Excess Stock.................. 27
Certain Federal Income Tax
Considerations....................... 29
Plan of Distribution................... 39
Experts................................ 40
Legal Matters.......................... 40
</TABLE>
======================================================
======================================================
2,000,000 SHARES
(SHURGARD LOGO)
SHURGARD STORAGE
CENTERS, INC.
8.80% SERIES B CUMULATIVE REDEEMABLE PREFERRED STOCK
(LIQUIDATION PREFERENCE
$25.00 PER SHARE)
------------------------
PROSPECTUS SUPPLEMENT
------------------------
MERRILL LYNCH & CO.
SMITH BARNEY INC.
APRIL 16, 1997
======================================================
