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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 [Fee Required]
For the fiscal year ended December 31, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required]
For the transition period from to
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Commission File Number 0-8667
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PUBLIC STORAGE PROPERTIES, LTD.
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(Exact name of registrant as specified in its charter)
California 95-3196921
- -------------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
701 Western Avenue
Glendale, California 91201
- -------------------------------------- ------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 244-8080
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
-------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
form 10-K. [ X ]
DOCUMENTS INCORPORATED BY REFERENCE
NONE
PART I
ITEM 1. BUSINESS.
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General
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Public Storage Properties, Ltd. (the "Partnership") is a publicly held
limited partnership formed under the California Uniform Limited Partnership Act
in November 1976. The Partnership raised $10,000,000 in gross proceeds by
selling 20,000 units of limited partnership interest ("Units") in an interstate
offering, which commenced in October, 1977 and was completed in January, 1978.
The Partnership was formed to engage in the business of developing and operating
storage space for personal and business use ("mini-warehouses").
In 1995, there were a series of mergers among Public Storage
Management, Inc. (which was the Partnership's mini-warehouse operator), Public
Storage, Inc. (which was one of the Partnership's general partners) ("old PSI")
and their affiliates (collectively, "PSMI"), culminating in the November 16,
1995 merger (the "PSMI Merger") of PSMI into Storage Equities, Inc., a real
estate investment trust ("REIT") organized as a California corporation. In the
PSMI Merger, Storage Equities, Inc. was renamed Public Storage, Inc. ("PSI") and
PSI acquired substantially all of PSMI's United States real estate operations
and became a co-general partner of the Partnership and the operator of the
Partnership's mini-warehouse properties.
The Partnership's general partners are PSI and B. Wayne Hughes
("Hughes") (collectively referred to as the "General Partners"). Hughes has been
a general partner of the Partnership since its inception. Hughes is chairman of
the board and chief executive officer of PSI, and Hughes and members of his
family (the "Hughes Family") is the major shareholder of PSI.
The Partnership is managed, and its investment decisions are made by
Hughes and the executive officers and directors of PSI. The limited partners of
the Partnership have no right to participate in the operation or conduct of its
business and affairs.
The Partnership's objectives are to (i) maximize the potential for
appreciation in value of the Partnership's properties and (ii) generate
sufficient cash flow from operations to pay all expenses, including the payment
of interest to Noteholders. All of the properties were financed in September
1987.
The term of the Partnership is until all properties have been sold and,
in any event, not later than December 31, 2035.
Investment in Facilities
- ------------------------
At December 31, 1997, the Partnership owned nine properties. The
Partnership purchased its last property in June 1978.
The Partnership believes that its operating results have benefited from
favorable industry trends and conditions. Notably, the level of new
mini-warehouse construction has decreased since 1988 while consumer demand has
increased. In addition, in recent years consolidation has occurred in the
fragmented mini-warehouse industry.
Mini-warehouses are designed to offer accessible storage space for
personal and business use at a relatively low cost. A user rents a fully
enclosed space which is for the user's exclusive use and to which only the user
has access on an unrestricted basis during business hours. On-site operation is
the responsibility of resident managers who are supervised by area managers.
Some mini-warehouses also include rentable uncovered parking areas for vehicle
storage. Leases for mini-warehouse space may be on a long-term or short-term
basis, although typically spaces are rented on a month-to-month basis. Rental
rates vary according to the location of the property and the size of the storage
space.
Users of space in mini-warehouses include both individuals and large
and small businesses. Individuals usually employ this space for storage of,
among other things, furniture, household appliances, personal belongings, motor
vehicles, boats, campers, motorcycles and other household goods. Businesses
normally employ this space for storage of excess inventory, business records,
seasonal goods, equipment and fixtures.
2
Mini-warehouses in which the Partnership has invested generally consist
of three to seven buildings containing an aggregate of between 350 to 750
storage spaces, most of which have between 25 and 400 square feet and an
interior height of approximately 8 to 12 feet.
The Partnership experiences minor seasonal fluctuations in the
occupancy levels of mini-warehouses with occupancies higher in the summer months
than in the winter months. The Partnership believes that these fluctuations
result in part from increased moving activity during the summer.
The Partnership's mini-warehouses are geographically diversified and
are generally located in heavily populated areas and close to concentrations of
apartment complexes, single family residences and commercial developments.
However, there may be circumstances in which it may be appropriate to own a
property in a less populated area, for example, in an area that is highly
visible from a major thoroughfare and close to, although not in, a heavily
populated area. Moreover, in certain population centers, land costs and zoning
restrictions may create a demand for space in nearby less populated areas.
As with most other types of real estate, the conversion of
mini-warehouses to alternative uses in connection with a sale or otherwise would
generally require substantial capital expenditures. However, the Partnership
does not intend to convert its mini-warehouses to other uses.
Operating Strategies
- --------------------
The Partnership's mini-warehouses are operated by PSI under the "Public
Storage" name, which the Partnership believes is the most recognized name in the
mini-warehouse industry. The major elements of the Partnership's operating
strategies are as follows:
* Capitalize on "Public Storage's" name recognition. PSI, together
with its predecessor, has more than 20 years of operating experience
in the mini-warehouse business, and is the largest operator of
mini-warehouses in the United States. PSI believes that its marketing
and advertising programs improve its competitive position in the
market. PSI's in-house Yellow Pages staff designs and places
advertisements in approximately 700 directories. Commencing in early
1996, PSI began to experiment with a telephone reservation system
designed to provide added customer service. Customers calling either
PSI's toll-free telephone referral system, (800) 44-STORE, or a
mini-warehouse facility are directed to PSI's reservation system where
a trained representative discusses with the customer space
requirements, price and location preferences and also informs the
customer of other products and services provided by PSI. The telephone
reservation system supports rental activity at all of the
Partnership's properties. PSI's toll-free telephone referral system
services approximately 160,000 calls per month from potential
customers inquiring as to the nearest Public Storage mini-warehouse.
* Maintain high occupancy levels and increase realized rents. Subject
to market conditions, the Partnership generally seeks to achieve
average occupancy levels in excess of 90% and to eliminate promotions
prior to increasing rental rates. Average occupancy for the
Partnership's mini-warehouses has increased from 92% in 1996 to 95% in
1997. Realized monthly rents per square foot increased from $0.72 in
1996 to $0.75 in 1997. The Partnership has increased rental rates in
many markets where it has achieved high occupancy levels and
eliminated or minimized promotions.
* Systems and controls. PSI has an organizational structure and a
property operation system, "CHAMP" (Computerized Help and Management
Program), which links its corporate office with each mini-warehouse.
This enables PSI to obtain daily information from each mini-warehouse
and to achieve efficiencies in operations and maintain control over
its space inventory, rental rates, promotional discounts and
delinquencies. Expense management is achieved through centralized
payroll and accounts payable systems and a comprehensive property tax
appeals department, and PSI has an extensive internal audit program
designed to ensure proper handling of cash collections.
* Professional property operation. There are approximately 3,800
persons who render services for the Public Storage system, primarily
personnel engaged in property operations, substantially all of whom
are employed by a clearing company that provides certain
administrative and cost-sharing services to PSI and other owners of
properties operated by PSI.
3
Mini-warehouse Property Operator
- --------------------------------
The Partnership's mini-warehouses are managed by PSI (as
successor-in-interest to PSMI) under a Management Agreement. PSI has informed
the Partnership that it is the largest mini-warehouse facility operator in the
United States in terms of both number of facilities and rentable space operated.
Under the supervision of the Partnership, PSI coordinates the operation
of the facilities, establishes rental policies and rates, directs marketing
activity and the purchase of equipment and supplies, maintenance activity, and
the selection and engagement of all vendors, supplies and independent
contractors.
PSI engages, at the expense of the Partnership, employees for the
operation of the Partnership's facilities, including resident managers,
assistant managers, relief managers, and billing and maintenance personnel. Some
or all of these employees may be employed on a part-time basis and may also be
employed by other persons, partnerships, real estate investment trusts or other
entities owning facilities operated by PSI.
In the purchasing of services such as advertising (including broadcast
media advertising) and insurance, PSI attempts to achieve economies by combining
the resources of the various facilities that they operate. Facilities operated
by PSI have historically carried comprehensive insurance, including fire,
earthquake, liability and extended coverage.
PSI has developed systems for space inventory, accounting and handling
delinquent accounts, including a computerized network linking PSI operated
facilities. Each project manager is furnished with detailed operating procedures
and typically receives facilities management training from PSI. Form letters
covering a variety of circumstances are also supplied to the project managers. A
record of actions taken by the project managers when delinquencies occur is
maintained.
The Partnership's facilities are typically advertised via signage,
yellow pages, flyers and broadcast media advertising (television and radio) in
geographic areas in which many of the Partnership's facilities are located.
Broadcast media and other advertising costs are charged to the Partnership's
facilities located in geographic areas affected by the advertising. From time to
time, PSI adopts promotional programs, such as temporary rent reductions, in
selected areas or for individual facilities.
For as long as the Management Agreement is in effect, PSI has granted
the Partnership a non-exclusive license to use two PSI service marks and related
designs, including the "Public Storage" name, in conjunction with rental and
operation of facilities managed pursuant to the Management Agreement. Upon
termination of the Management Agreement, the Partnership would no longer have
the right to use the service marks and related designs except as described
below. The General Partners believe that the loss of the right to use the
service marks and related designs could have a material adverse effect on the
Partnership's business.
The Management Agreement between the Partnership and PSI provides that
the Management Agreement may be terminated without cause upon 60 days' written
notice by either party.
Competition
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Competition in the market areas in which the Partnership operates is
significant and affects the occupancy levels, rental rates and operating
expenses of certain of the Partnership's facilities. Competition may be
accelerated by any increase in availability of funds for investment in real
estate. Recent increases in plans for development of mini-warehouses is expected
to further intensify competition among mini-warehouse operators in certain
market areas. In addition to competition from mini-warehouses operated by PSI,
there are three other national firms and numerous regional and local operators.
The Partnership believes that the significant operating and financial experience
of PSI, and the "Public Storage" name, should enable the Partnership to continue
to compete effectively with other entities.
Other Business Activities
- -------------------------
A corporation owned by the Hughes Family reinsures policies against
losses to goods stored by tenants in the Partnership's mini-warehouses. The
Partnership believes that the availability of insurance reduces the potential
liability of the Partnership to tenants for losses to their goods from theft or
destruction. This corporation receives the premiums and bears the risks
associated with the insurance.
4
A corporation, in which PSI has a 95% economic interest and the Hughes
Family has a 5% economic interest, sells locks, boxes and tape to tenants to be
used in securing their spaces and moving their goods. PSI believes that the
availability of locks, boxes and tape for sale promotes the rental of spaces.
Employees
- ---------
There are 9 persons who render services on behalf of the Partnership on
a full-time basis, and 21 persons who render services on a part-time basis.
These persons include resident managers, assistant managers, relief managers,
area managers, and administrative and maintenance personnel. Some employees may
be employed on a part-time basis and may be employed by other persons,
Partnerships, REITs or other entities owning facilities operated by PSI.
Year 2000 Compliance
- --------------------
PSI has completed an initial assessment of its computer systems. The
majority of the computer programs were installed or upgraded over the past few
years and are Year 2000 compliant. Some of the older computer programs utilized
by PSI were written without regard for Year 2000 issues and could cause a system
failure or miscalculations with possible disruption of operations. Each of these
computer programs and systems has been evaluated to be upgraded or replaced as
part of PSI Year 2000 project.
The cost of the Year 2000 project will be allocated to all companies
that use the PSI computer systems. The cost of the Year 2000 project which is
expected to be allocated to the Company is less than $30,000. The cost of new
software will be capitalized and the cost of existing software will be expensed
as incurred.
The project is expected to be completed by March 31, 1999 which is
prior to any anticipated impact on operating systems. PSI believes that with
modifications to existing software and, in some instances, the conversion to new
software, the Year 2000 issue will not pose significant operational problems.
However, if such modifications are not made, or are not completed timely, the
Year 2000 issue could have a material impact on the operations of the Company.
The costs of the project and the date on which PSI believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events. There can be
no guarantee that these estimates will be achieved and actual results could
differ materially from those anticipated.
ITEM 2. PROPERTIES.
-----------
The following table sets forth information as of December 31, 1997
about properties owned by the Partnership:
Net Number
Location Size of Parcel Rentable Area of Spaces Date of Purchase Completion Date
- ------------------ -------------- -------------- --------- ---------------- ---------------
California
- ----------
Corona 2.82 acres 52,000 sq. ft. 471 June 29, 1978 Dec. 1978
Fremont 3.00 acres 53,000 sq. ft. 481 Mar. 21, 1978 Nov. 1978
Milpitas 3.46 acres 54,000 sq. ft 436 May 8, 1978 Nov. 1978
Norco 1.66 acres 29,000 sq. ft 257 July 19, 1978 Dec. 1978
North Hollywood 2.06 acres 38,000 sq. ft. 343 Mar. 17, 1978 Dec. 1979
Pasadena 1.84 acres 38,000 sq. ft. 385 Feb. 24, 1978 Aug. 1978
Sun Valley 2.72 acres 53,000 sq. ft. 477 May 30, 1978 Oct. 1978
Wilmington 6.32 acres 133,000 sq. ft. 1,093 Apr. 18, 1978 Aug. 1978
Whittier -
El Monte 4.06 acres 58,000 sq. ft. 537 Nov. 29, 1977 July 1978
The weighted average occupancy levels for the mini-warehouse facilities
were 95% and 92% in 1997 and 1996, respectively.
5
Substantially all of the Partnership's facilities were acquired prior
to the time that it was customary to conduct environmental investigations in
connection with property acquisitions. During the fourth quarter of 1995, the
Partnership completed environmental assessments of its properties to evaluate
the environmental condition of, and potential environmental liabilities of such
properties. These assessments were performed by an independent environmental
consulting firm. Based on the assessments, the Partnership expensed $22,000 in
1995 for known environmental remediation requirements.
The properties are held subject to encumbrances which are described in
this report under Note 7 of the Notes to the Financial Statements included in
Item 14(a).
ITEM 3. LEGAL PROCEEDINGS.
------------------
No material legal proceeding is pending against the Partnership.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
----------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of 1997.
PART II
ITEM 5. MARKET FOR THE PARTNERSHIP'S COMMON EQUITY AND RELATED STOCKHOLDER
------------------------------------------------------------------
MATTERS.
--------
The Partnership has no common stock.
The Units are not listed on any national securities exchange or quoted
on the NASDAQ System, and there is no established public trading market for the
Units. Secondary sales activity for the Units has been limited and sporadic. The
General Partners monitor transfers of the Units (a) because the admission of the
transferee as a substitute limited partner requires the consent of the General
Partners under the Partnership's Amended and Restated Certificate and Agreement
of Limited Partnership, (b) in order to ensure compliance with safe harbor
provisions to avoid treatment as a "publicly traded partnership" for tax
purposes, and (c) because the General Partners (and their
predecessor-in-interest) have purchased Units. However, the General Partners do
not have information regarding the prices at which all secondary sale
transactions in the Units have been effectuated. Various organizations offer to
purchase and sell limited partnership interests (including securities of the
type such as the Units) in secondary sales transactions. Various publications
such as The Stanger Report summarize and report information (on a monthly,
bimonthly or less frequent basis) regarding secondary sales transactions in
certain limited partnership interests, including the prices at which such
secondary sales transactions are effectuated.
Exclusive of the General Partners' interest in the Partnership, as of
December 31, 1997, there were approximately 956 record holders of Units.
Distributions to the general and limited partners of all cash available
for distribution (as defined) are made quarterly. Cash available for
distribution is generally funds from operations of the Partnership, without
deductions for depreciation, but after deducting funds to pay or establish
reserves for all other expenses (other than incentive distributions to the
General Partners) and capital improvements, plus net proceeds from any sale or
financing of the Partnership's properties. In the fourth quarter of 1990,
quarterly distributions were discontinued to enable the Partnership to increase
its reserves for principal repayments on the Partnership's note payable that
commenced in 1992.
Reference is made to Item 6 and 7 hereof for information on the amount
of such distributions.
6
ITEM 6. SELECTED FINANCIAL DATA.
------------------------
For the Year Ended
December 31, 1997 1996 1995 1994 1993
- ----------------------------- ----------- ------------ ----------- ----------- -----------
Revenues (3) $ 4,337,000 $ 4,007,000 $ 4,235,000 $ 4,181,000 $ 3,672,000
Depreciation and
amortization 446,000 402,000 356,000 296,000 304,000
Interest expense 1,252,000 1,358,000 1,520,000 1,658,000 2,171,000
Net income 1,341,000 1,008,000 1,125,000 1,075,000 101,000
Limited partners' share 1,328,000 998,000 1,114,000 1,064,000 100,000
General partners' share 13,000 10,000 11,000 11,000 1,000
Limited partners' per unit data (1):
Net income $66.40 $49.90 $55.70 $53.20 $5.00
As of December 31,
- ------------------
Cash and cash equivalents $ 546,000 $ 69,000 $ 89,000 $ 162,000 $ 136,000
Total assets $ 5,760,000 $ 5,503,000 $ 5,845,000 $ 6,418,000 $ 7,117,000
Notes payable (2) $14,093,000 $ 15,217,000 $16,351,000 $17,995,000 $20,005,000
- -------------------------------
(1) Per unit data is based on the weighted average number of the limited
partnership units (20,000) outstanding during the period.
(2) At December 31, 1993, notes payable included $4,350,000 due to an
affiliate, which was discharged in June, 1994.
(3) Revenues for the year ended December 31, 1995 and 1994, include a
gain on sale of marketable securities of an affiliate of $361,000
and $479,000 ($18.05 and $23.95 per Unit).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS.
----------------------
Results of Operations
- ---------------------
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996:
The Partnership's net income in 1997 was $1,341,000 compared to
$1,008,000 in 1996, representing an increase of $333,000. This increase is
primarily a result of increased operating results at the Partnership's real
estate facilities combined with a decrease in interest expense.
During 1997, property net operating income (rental income less cost of
operations, management fees paid to an affiliate and depreciation expense)
increased $226,000 from $2,413,000 in 1996 to $2,639,000 in 1997. This increase
is primarily attributable to an increase in rental revenues at the Partnership's
mini-warehouse facilities partially offset by increases in cost of operations
and depreciation expense.
7
Rental income was $4,321,000 in 1997 compared to $4,002,000 in 1996,
representing an increase of $319,000, or 8%. This increase was primarily
attributable to increased occupancies and rental rates at the Partnership's real
estate facilities. Weighted average occupancy levels at the mini-warehouses were
95% and 92% in 1997 and 1996, respectively. The average monthly realized rent
per square foot at the mini-warehouses was $.75 in 1997 compared to $.72 in
1996.
Other income increased from $5,000 in 1996 to $16,000 in 1997. This
increase is primarily due to an increase in invested cash balances.
Cost of operations (including management fees paid to an affiliate) was
$1,236,000 and $1,187,000 in 1997 and 1996, respectively, representing an
increase of $49,000, or 4%. This increase is mainly attributable to increases in
management fees, property tax and advertising and promotion expenses.
In 1995, the Partnership prepaid eight months of 1996 management fees
on its mini-warehouse operations discounted at the rate of 14% effective rate to
compensate for early payment. As a result, management fee expense for the twelve
months ended December 31, 1996 was $20,000 lower than it would have been without
the discounted fee structure.
Interest expense was $1,252,000 and $1,358,000 in 1997 and 1996,
respectively, representing a decrease of $106,000, or 8%. The decrease was
primarily a result of a reduction in the average outstanding debt balance in
1997 compared to 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995:
The Partnership's net income in 1996 was $1,008,000 compared to
$1,125,000 in 1995, representing a decrease of $117,000. This decrease is
primarily due to a gain on sale of marketable securities recognized in 1995,
partially offset by an increase in property net operating income and a decrease
in interest expense.
During 1996, property net operating income (rental income less cost of
operations, management fees paid to an affiliate and depreciation expense)
increased $84,000 from $2,329,000 in 1995 to $2,413,000 in 1996. This increase
is primarily attributable to an increase in rental revenues at the Partnership's
mini-warehouse facilities partially offset by increases in cost of operations
and depreciation expense.
Rental income was $4,002,000 in 1996 compared to $3,848,000 in 1995,
representing an increase of $154,000, or 4%. This increase was primarily
attributable to increased occupancies and rental rates at the Partnership's real
estate facilities. Weighted average occupancy levels at the mini-warehouses were
92% and 91% in 1996 and 1995, respectively. The average monthly realized rent
per square foot at the mini-warehouses was $.72 in 1996 compared to $.70 in
1995.
Other income decreased from $26,000 in 1995 to $5,000 in 1996 as a
result of a decrease in dividend income earned on marketable securities sold in
November 1995 and lower invested cash balances in 1996 compared to 1995.
Cost of operations (including management fees paid to an affiliate) was
$1,187,000 and $1,163,000 in 1996 and 1995, respectively, representing an
increase of $24,000, or 2%. This increase was primarily attributable to
increases in payroll cost.
In 1995, the Partnership prepaid eight months of 1996 management fees
on its mini-warehouse operations (based on the management fees for the
comparable period during the calendar year immediately preceding the prepayment)
discounted at the rate of 14% per year to compensate for early payment. The
Partnership has expensed the prepaid management fees during 1996. The amount is
included in management fees paid to affiliate in the statements of income. As a
result of the prepayment, the Partnership saved approximately $20,000 in
management fees, based on the management fees that would have been payable on
rental income generated during 1996 compared to the amount prepaid.
Interest expense was $1,358,000 and $1,520,000 in 1996 and 1995,
respectively, representing a decrease of $162,000, or 11%. The decrease was
primarily a result of a reduction in the average outstanding debt balance in
1996 compared to 1995.
8
Liquidity and Capital Resources
- -------------------------------
Cash flow from operating activities ($1,881,000 in 1997) has been
sufficient to meet all current obligations of the Partnership. During 1998, the
Partnership anticipates approximately $327,000 of capital improvements compared
to $280,000 in 1997, $228,000 in 1996 and $344,000 in 1995.
In January 1996, the Partnership obtained a $1,500,000 loan from PSI to
repay and terminate an unsecured note payable to Wells Fargo Bank. The PSI loan
bears interest at the prime rate plus 1%, payable monthly, in addition to
monthly principal payments of $50,000.
Distributions to the limited and general partners for the years
1978-1990 aggregated $37,832,000 including $20,202,000 distributed to the
partners in 1987 (see below). During 1990, the partnership stopped paying
distributions to build cash and other liquid assets.
During 1987, the Partnership financed all of its facilities with a
$20,885,000 loan. Proceeds of $20,202,000 were distributed to the partners in
September 1987 and are included in the 1987 distribution. At December 31, 1997,
the outstanding balance of the mortgage note was $13,793,000.
Year 2000 System Issues
- -----------------------
PSI has completed an initial assessment of its computer systems. The
majority of the computer programs were installed or upgraded over the past few
years and are Year 2000 compliant. Some of the older computer programs utilized
by PSI were written without regard for Year 2000 issues and could cause a system
failure or miscalculations with possible disruption of operations. Each of these
computer programs and systems has been evaluated to be upgraded or replaced as
part of PSI Year 2000 project.
The cost of the Year 2000 project will be allocated to all companies
that use the PSI computer systems. The cost of the Year 2000 project which is
expected to be allocated to the Company is less than $30,000. The cost of new
software will be capitalized and the cost of existing software will be expensed
as incurred.
The project is expected to be completed by March 31, 1999 which is
prior to any anticipated impact on operating systems. PSI believes that with
modifications to existing software and, in some instances, the conversion to new
software, the Year 2000 issue will not pose significant operational problems.
However, if such modifications are not made, or are not completed timely, the
Year 2000 issue could have a material impact on the operations of the Company.
The costs of the project and the date on which PSI believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events. There can be
no guarantee that these estimates will be achieved and actual results could
differ materially from those anticipated.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
--------------------------------------------
The Partnership's financial statements are included elsewhere herein.
Reference is made to the Index to Financial Statements and Financial Statement
Schedules in Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE.
---------------------
None.
9
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE PARTNERSHIP.
----------------------------------------------------
The Partnership has no directors or executive officers.
The Partnership's general partners are PSI and B. Wayne Hughes. PSI,
acting through its directors and executive officers and Mr. Hughes manage and
make investment decisions for the Partnership.
The names of all directors and executive officers of PSI, the offices
held by each of them with PSI, and their ages and business experience during the
past five years are as follows:
Name Positions with PSI
- ----------------------- -------------------------------------------------
B. Wayne Hughes Chairman of the Board and Chief Executive Officer
Harvey Lenkin President and Director
B. Wayne Hughes, Jr. Vice President and Director
John Reyes Senior Vice President and Chief Financial Officer
Carl B. Phelps Senior Vice President
Obren B. Gerich Senior Vice President
Marvin M. Lotz Senior Vice President
David Goldberg Senior Vice President and General Counsel
A. Timothy Scott Senior Vice President and Tax Counsel
David P. Singelyn Vice President and Treasurer
Sarah Hass Vice President and Secretary
Robert J. Abernethy Director
Dann V. Angeloff Director
William C. Baker Director
Thomas J. Barrack Jr. Director
Uri P. Harkham Director
B. Wayne Hughes, age 64, a general partner of the Partnership, has been
a director of PSI since its organization in 1980 and was President and Co-Chief
Executive Officer from 1980 until November 1991 when he became Chairman of the
Board and sole Chief Executive Officer. Mr. Hughes has been active in the real
estate investment field for over 25 years. He is the father of B. Wayne Hughes,
Jr.
Harvey Lenkin, age 61, has been employed by PSI for 20 years and became
President and a director of PSI in November 1991. Mr. Lenkin is a director of
the National Association of Real Estate Investment Trusts (NAREIT).
B. Wayne Hughes, Jr., age 38, became director of PSI in January 1998.
He has been a Vice President - Acquisitions of PSI since 1992. He is the son of
B. Wayne Hughes.
John Reyes, age 37, a certified public accountant, joined PSI in 1990
and was Controller of PSI from 1992 until December 1996 when he became Chief
Financial Officer. He became a Vice President of PSI in November 1995 and a
Senior Vice President of PSI in December 1996. From 1983 to 1990, Mr. Reyes was
employed by Ernst & Young.
Carl B. Phelps, age 58, became a Senior Vice President of PSI in
January 1998 with overall responsibility for property acquisition and
development. From June 1991 until joining PSI, he was a partner in the law firm
of Andrews & Kurth, L.L.P., which performed legal services for PSI. From
December 1982 through May 1991, his professional corporation was a partner in
the law firm of Sachs & Phelps, then counsel to PSI.
Obren B. Gerich, age 59, a certified public accountant, has been a Vice
President of PSI since 1980 and became Senior Vice President of PSI in November
1995. He was Chief Financial Officer of PSI until November 1991.
10
Marvin M. Lotz, age 55, has had overall responsibility for Public
Storage's mini-warehouse operations since 1988. He became a Senior Vice
President of PSI in November 1995. Mr. Lotz was an officer of PSI with
responsibility for property acquisitions from 1983 until 1988.
David Goldberg, age 48, joined PSI's legal staff in June 1991. He
became Senior Vice President and General Counsel of PSI in November 1995. From
December 1982 until May 1991, he was a partner in the law firm of Sachs &
Phelps, then counsel to PSI.
A. Timothy Scott, age 46, became a Senior Vice President and Tax
Counsel of PSI and Vice President and Tax Counsel of the Public Storage REITs in
November 1996. From June 1991 until joining PSI, Mr. Scott practiced tax law as
a shareholder of the law firm of Heller, Ehrman, White & McAuliffe, counsel to
PSI. Prior to June 1991, his professional corporation was a partner in the law
firm of Sachs & Phelps, then counsel to PSI.
David P. Singleyn, age 36, a certified public accountant, has been
employed by PSI since 1989 and became Vice President and Treasurer of PSI in
November 1995. From 1987 to 1989, Mr. Singelyn was Controller of Winchell's
Donut Houses, L.P.
Sarah Hass, age 42, became Secretary of PSI in February 1992. She
became a Vice President of PSI in November 1995. She joined PSI's legal
department in June 1991, rendering services on behalf of PSI. From 1987 until
May 1991, her professional corporation was a partner in the law firm of Sachs &
Phelps, then counsel to PSI, and from April 1986 until June 1987, she was
associated with that firm, practicing in the area of securities law. From
September 1979 until September 1985, Ms. Hass was associated with the law firm
of Rifkind & Sterling, Incorporated.
Robert J. Abernethy, age 58, has been President of American Standard
Development Company and of Self-Storage Management Company, which develop and
operate mini-warehouses, since 1976 and 1977, respectively. Mr. Abernethy has
been a director of PSI since its organization in 1980. He is a member of the
board of directors of Johns Hopkins University and of the Los Angeles County
Metropolitan Transportation Authority, and a former member of the board of
directors of the Metropolitan Water District of Southern California.
Dann V. Angeloff, age 62, has been President of the Angeloff Company, a
corporate financial advisory firm, since 1976. The Angeloff Company has
rendered, and is expected to continue to render, financial advisory and
securities brokerage services for PSI. Mr. Angeloff is the general partner of a
limited partnership that owns a mini-warehouse operated by PSI and which secures
a note owned by PSI. Mr. Angeloff has been a director of PSI since its
organization in 1980. He is a director of Compensation Resource Group, Eagle
Lifestyle Nutrition, Inc., Nicholas/Applegate Growth Equity Fund,
Nicholas/Applegate Investment Trust, Ready Pac Produce, Inc. and Royce Medical
Company.
William C. Baker, age 64, became a director of PSI in November 1991.
Since November 1997, Mr. Baker has been Chairman of the Board of and Chief
Executive Officer of The Santa Anita Companies, Inc., which operates the Santa
Anita Racetrack and is a wholly-owned subsidiary of Meditrust Operating Company.
From August 1996 until November 1997, he was Chairman of the Board and Chief
Executive Officer of Santa Anita Operating Company and Chairman of the Board of
Santa Anita Realty Enterprises, Inc., the companies which were merged with
Meditrust in November 1997. From April 1993 through May 1995, Mr. Baker was
President of Red Robin International, Inc., an operator and franchiser of casual
dining restaurants in the United States and Canada. From January 1992 through
December 1995 he was Chairman and Chief Executive Officer of Carolina Restaurant
Enterprises, Inc., a franchisee of Red Robin International, Inc. Since 1991, he
has been Chairman of the Board of Coast Newport Properties, a real estate
brokerage company. From 1976 to 1988, he was a principal shareholder and
Chairman and Chief Executive Officer of Del Taco, Inc., an operator and
franchiser of fast food restaurants in California. Mr. Baker is a director of
Callaway Golf Company and Meditrust Operating Company .
Thomas J. Barrack, Jr., age 50, became a director of PSI in February
1998. Mr. Barrack has been the Chairman and Chief Executive Officer of Colony
Capital, Inc. since September, 1991. Colony Capital, Inc. is one of the largest
real estate investors in America, having acquired properties in the U.S., Europe
and Asia. Prior to founding Colony Capital, Inc., from 1987 to 1991, Mr. Barrack
was a principal with the Robert M. Bass Group, Inc., the principal investment
vehicle for Robert M. Bass of Fort Worth, Texas. From 1985 to 1987, Mr. Barrack
was President of Oxford Ventures, Inc., a Canadian-based real estate development
company. From 1984 to 1985 he was a Senior Vice President at E. F. Hutton
Corporate Finance in New York. Mr. Barrack was appointed by President Roland
Reagan as Deputy Under Secretary at the U.S. Department of the Interior from
1982 to 1983. Mr. Barrack currently is a director of Continental Airlines, Inc.
and Virgin Entertainment Group, Ltd.
11
Uri P. Harkham, age 49, became a director of PSI in March 1993. Mr.
Harkham has been the President and Chief Executive Officer of the Jonathan
Martin Fashion Group, which specializes in designing, manufacturing and
marketing women's clothing, since its organization in 1976. Since 1978, Mr.
Harkham has been the Chairman of the Board of Harkham Properties, a real estate
firm specializing in buying and managing fashion warehouses in Los Angeles and
Australia.
Pursuant to Articles 16 and 22 of the Partnership's Certificate and
Agreement of Limited Partnership, a copy of which is included in the
Partnership's prospectus included in the Partnership's Registration Statement
File No. 2-57750, each of the General Partners continues to serve until (i)
retirement, withdrawal, adjudication of bankruptcy, insolvency or dissolution,
or (ii) removal by a majority vote of the limited partners.
Each director of PSI serves until he resigns or is removed from office
by the shareholders of PSI, and may resign or be removed from office at any time
with or without cause. Each officer of PSI serves until he resigns or is removed
by the Board of Directors of PSI. Any such officer may resign or be removed from
office with or without cause.
There have been no events under any bankruptcy act, no criminal
proceedings, and no judgments or injunctions material to the evaluation of the
ability of any director or executive officer of PSI during the past five years.
ITEM 11. EXECUTIVE COMPENSATION.
-----------------------
The Partnership has no subsidiaries, directors or officers. See Item 13
for a description of certain transactions between the Partnership and its
General Partners and their affiliates.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
---------------------------------------------------------------
(a) At March 10, 1998, the following persons beneficially owned more
than 5% of the Units:
Title Name and Address Percent
of Class of Beneficial Owner Beneficial Ownership of Class
- ------------------------ ---------------------------------------- -------------------------- -------------------------
Units of Limited Public Storage, Inc. 1,658 Units (1) 8.3%
Partnership Interest 701 Western Ave. 6,000 Units (2) 30.0%
Glendale, California 91201
Units of Limited B. Wayne Hughes 6,105 Units (3) 30.5%
Partnership Interest Tamara L. Hughes
701 Western Ave.
Glendale, California 91201
(1) Units owned by PSI as to which PSI has sole voting and dispositive power.
(2) Units which PSI has an option to acquire (together with other securities)
from BWH Marina Corporation II (a corporation wholly-owned by Hughes) and
as to which PSI has sole voting power (pursuant to an irrevocable proxy)
and no dispositive power.
(3) Includes (i) 25 Units owned by BWH Marina Corporation II, a corporation
wholly-owned by Hughes, as to which Hughes has sole voting and dispositive
power, (ii) 6,000 Units owned by BWH Marina Corporation II as to which
Hughes has sole dispositive power and no voting power; PSI has an option
to acquire these Units and an irrevocable proxy to vote these Units and
(iii) 80 Units owned by THG Acquisitions, Inc. a corporation wholly-owned
by Tamara L. Hughes, an adult daughter of Hughes, as to which Tamara L.
Hughes has sole voting and dispositive power.
(b) The Partnership has no officers and directors.
The General Partners (or their predecessor-in-interest) have
contributed $101,010 to the capital of the Partnership and as a result
participates in the distributions to the limited partners and in the
Partnership's profits and losses in the same proportion that the General
Partners' capital contribution bears to the total capital contribution.
Information regarding ownership of Units by PSI and Hughes, the General
Partners, is set forth under section (a) above. Dann V. Angeloff, a director of
12
PSI, beneficially owns 41 Units (0.2% of the Units). The directors and executive
officers of PSI (including Hughes), as a group (16 persons), own an aggregate of
6,084 Units, representing 30.4% of the Units (including the 6,025 Units
beneficially owned by Hughes as set forth above).
(c) The Partnership knows of no contractual arrangements, the operation
of the terms of which may at a subsequent date result in a change in control of
the Partnership, except for articles 16, 17 and 21.1 of the Partnership's
Amended Certificate and Agreement of Limited Partnership (the "Partnership
Agreement"), a copy of which is included in the Partnership's prospectus
included in the Partnership's Registration Statement File No. 2-57750. Those
articles provide, in substance, that the limited partners shall have the right,
by majority vote, to remove a general partner and that a general partner may
designate a successor with the consent of the other general partner and a
majority of the limited partners.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
-----------------------------------------------
The Partnership Agreement provides that the General Partners will be
entitled to cash incentive distributions in an amount equal to (i) 8% of
distributions of cash flow from operations until the distributions to all
partners from all sources equal their capital contributions; thereafter, 25% of
distributions of cash flow from operations, and (ii) 25% of distributions from
net proceeds from sale and financing of the Partnership's properties remaining
after distribution to all partners of any portion thereof required to cause
distributions to partners from all sources to equal their capital contributions.
During 1985, the partners received cumulative distributions equal to their
capital contributions. During 1997, there were no incentive distributions paid
by the Partnership.
The Partnership has a Management Agreement with PSI (as
successor-in-interest to PSMI). Under the Management Agreement, the Partnership
pays PSI a fee of 6% of the gross revenues of the mini-warehouse properties
operated for the Partnership. During 1997, the Partnership paid fees of $259,000
to PSI pursuant to the Management Agreement.
13
PART IV
ITEM 14. EXHIBITS. FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
----------------------------------------------------------------
(a) List of Documents filed as part of the Report.
1. Financial Statements. See Index to Financial
Statements and Financial Statement Schedule.
2. Financial Statement Schedules. See Index to
Financial Statements and Financial Statement
Schedule.
3. Exhibits: See Exhibit Index contained below.
(b) Reports on Form 8-K: No reports on Form 8-K were filed during
the last quarter of fiscal 1996.
(c) Exhibits: See Exhibit Index contained below.
14
PUBLIC STORAGE PROPERTIES, LTD.
EXHIBIT INDEX
(Item 14(c))
3.1 Amended Certificate and Agreement of Limited Partnership.
Previously filed with the Securities and Exchange Commission as
Exhibit A to the Partnership's Prospectus included in
Registration Statement No. 2-57750 and incorporated herein by
reference.
10.1 Second Amended and Restated Management Agreement dated November
16, 1995 between the Partnership and Public Storage, Inc.
Previously filed with the Securities and Exchange Commission as
an exhibit to PS Partners, Ltd.'s Annual Report on Form 10-K
for the year ended December 31, 1996 and incorporated herein by
reference.
10.2 Loan documents dated August 28, 1987 between the Partnership
and The Travelers Insurance Company. Previously filed with the
Securities and Exchange Commission as an exhibit to the
Partnership's Annual Report on Form 10-K for the year ended
December 31, 1993 and incorporated herein by reference.
10.3 Modified loan documents dated September 1, 1993 between the
Partnership and The Travelers Insurance Company. Previously
filed with the Securities and Exchange Commission as an exhibit
to the Partnership's Annual Report on Form 10-K for the year
ended December 31, 1993 and incorporated herein by reference.
10.4 Loan documents dated June 30, 1994 between the Partnership and
Wells Fargo Bank. Previously filed with the Securities and
Exchange Commission as an exhibit to the Partnership's Annual
Report on Form 10-K for the year ended December 31, 1994 and
incorporated herein by reference.
10.5 Loan documents dated January 26, 1996 between the Partnership
and Public Storage, Inc. Previously filed with the Securities
and Exchange Commission as an exhibit to the Partnership's
Annual Report on Form 10-K for the year ended December 31, 1995
and incorporated herein by reference.
10.6 Loan documents dated January 27, 1997 between the Partnership
and Public Storage, Inc. Previously filed with the Securities
and Exchange Commission as an exhibit to the Partnership's
Annual Report on Form 10-K for the year ended December 31, 1996
and incorporated herein by reference.
10.7 Loan documents dated January 27, 1998 between the Partnership
and Public Storage, Inc. Filed herewith.
27 Financial Data Schedule. Filed herewith.
15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PUBLIC STORAGE PROPERTIES, LTD.
a California Limited Partnership
Dated: March 31, 1998 By: Public Storage, Inc., General Partner
By: /s/ B. Wayne Hughes
--------------------------------------
B. Wayne Hughes, Chairman of the Board
/s/ B. Wayne Hughes
--------------------------------------
B. Wayne Hughes, General Partner
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Partnership in the capacities and on the dates indicated.
Signature Capacity Date
- -------------------------- ------------------------------------------ ---------------
/s/ B. Wayne Hughes Chairman of the Board and Chief Executive March 31, 1998
- -------------------------- Officer of Public Storage, Inc. (principal
B. Wayne Hughes executive officer)
/s/ Harvey Lenkin President and Director March 31, 1998
- -------------------------- of Public Storage, Inc.
Harvey Lenkin
/s/ B. Wayne Hughes, Jr. Vice President and Director March 31, 1998
- -------------------------- of Public Storage, Inc.
B. Wayne Hughes, Jr.
/s/ John Reyes Senior Vice President and Chief Financial March 31, 1998
- -------------------------- Officer of Public Storage, Inc.
John Reyes (principal financial officer and principal
accounting officer)
/s/ Robert J. Abernethy Director of Public Storage, Inc. March 31, 1998
- --------------------------
Robert J. Abernethy
/s/ Dann V. Angeloff Director of Public Storage, Inc. March 31, 1998
- --------------------------
Dann V. Angeloff
/s/ William C. Baker Director of Public Storage, Inc. March 31, 1998
- --------------------------
William C. Baker
Director of Public Storage, Inc. March 31, 1998
- --------------------------
Thomas J. Barrack, Jr.
/s/ Uri P. Harkham Director of Public Storage, Inc. March 31, 1998
- --------------------------
Uri P. Harkham
16
PUBLIC STORAGE PROPERTIES, LTD.
INDEX TO
FINANCIAL STATEMENTS
AND
FINANCIAL STATEMENT SCHEDULE
(Item 14 (a))
Page
References
-----------
Report of Independent Auditors F-1
Financial Statements and Schedule:
Balance Sheets as of December 31, 1997 and 1996 F-2
For the years ended December 31, 1997, 1996 and 1995:
Statements of Income F-3
Statements of Partners' Deficit F-4
Statements of Cash Flows F-5
Notes to Financial Statements F-6 - F-9
Schedule:
III - Real Estate and Accumulated Depreciation F-10 - F11
All other schedules have been omitted since the required information is
not present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the financial
statements or the notes thereto.
Report of Independent Auditors
The Partners
Public Storage Properties, Ltd.
We have audited the accompanying balance sheets of Public Storage Properties,
Ltd. as of December 31, 1997 and 1996, and the related statements of income,
partners' deficit and cash flows for each of the three years in the period ended
December 31, 1997. Our audits also included the schedule listed in the index at
item 14(a). These financial statements and schedule are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Public Storage Properties, Ltd.
at December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
ERNST & YOUNG LLP
March 24, 1998
Los Angeles, California
F-1
PUBLIC STORAGE PROPERTIES, LTD.
BALANCE SHEETS
December 31, 1997 and 1996
1997 1996
------------- -------------
ASSETS
------
Cash and cash equivalents $ 546,000 $ 69,000
Rent and other receivables 46,000 48,000
Real estate facilities, at cost:
Building, land improvements and equipment 8,001,000 7,721,000
Land 2,511,000 2,511,000
------------- -------------
10,512,000 10,232,000
Less accumulated depreciation (5,492,000) (5,046,000)
------------- -------------
5,020,000 5,186,000
------------- -------------
Other assets 148,000 200,000
------------- -------------
Total assets $ 5,760,000 $ 5,503,000
============= =============
LIABILITIES AND PARTNERS' DEFICIT
---------------------------------
Accounts payable $ 32,000 $ 5,000
Deferred revenue 131,000 118,000
Notes payable 14,093,000 15,217,000
Partners' deficit:
Limited partners' deficit, $500 per unit, 20,000 units
authorized,issued and outstanding (6,308,000) (7,304,000)
General partners' deficit (2,188,000) (2,533,000)
------------- -------------
Total partners' deficit (8,496,000) (9,837,000)
------------- -------------
Total liabilities and partners' deficit $ 5,760,000 $ 5,503,000
============= =============
See accompanying notes.
F-2
PUBLIC STORAGE PROPERTIES, LTD.
STATEMENTS OF INCOME
For each of the three years in the
period ended December 31, 1997
1997 1996 1995
------------- -------------- --------------
REVENUES:
Rental income $ 4,321,000 $ 4,002,000 $ 3,848,000
Gain on sale of marketable securities of affiliate - - 361,000
Other income 16,000 5,000 26,000
------------- -------------- --------------
4,337,000 4,007,000 4,235,000
------------- -------------- --------------
COSTS AND EXPENSES:
Cost of operations 977,000 967,000 932,000
Management fees paid to affiliate 259,000 220,000 231,000
Depreciation 446,000 402,000 356,000
Administrative 62,000 52,000 49,000
Environmental cost - - 22,000
Interest expense 1,252,000 1,358,000 1,520,000
------------- -------------- --------------
2,996,000 2,999,000 3,110,000
------------- -------------- --------------
NET INCOME $ 1,341,000 $ 1,008,000 $ 1,125,000
------------- -------------- --------------
Limited partners' share of net income ($66.40
per unit in 1997, $49.90 per unit in 1996,
and $55.70 per unit in 1995) $ 1,328,000 $ 998,000 $ 1,114,000
General partners' share of net income 13,000 10,000 11,000
------------- -------------- --------------
$ 1,341,000 $ 1,008,000 $ 1,125,000
============= ============== ==============
See accompanying notes.
F-3
PUBLIC STORAGE PROPERTIES, LTD.
STATEMENTS OF PARTNERS' DEFICIT
For each of the three years in the
period ended December 31, 1997
Unrealized Gain
Limited General on Marketable Total Partners'
Partners Partners Securities Deficit
--------------- --------------- ----------------- ----------------
Balance at December 31, 1994 $ (8,888,000) $ (3,082,000) $ 227,000 $ (11,743,000)
Sale of marketable securities - - (227,000) (227,000)
Net income 1,114,000 11,000 - 1,125,000
Equity transfer (278,000) 278,000 - -
--------------- --------------- ----------------- ----------------
Balance at December 31, 1995 (8,052,000) (2,793,000) - (10,845,000)
Net income 998,000 10,000 - 1,008,000
Equity transfer (250,000) 250,000 - -
--------------- --------------- ----------------- ----------------
Balance at December 31, 1996 (7,304,000) (2,533,000) - (9,837,000)
Net income 1,328,000 13,000 - 1,341,000
Equity transfer (332,000) 332,000 - -
--------------- --------------- ----------------- ----------------
Balance at December 31, 1997 $ (6,308,000) $ (2,188,000) $ - $ (8,496,000)
=============== =============== ================= ===============
See accompanying notes.
F-4
PUBLIC STORAGE PROPERTIES, LTD.
STATEMENTS OF CASH FLOWS
For each of the three years in the
period ended December 31, 1997
1997 1996 1995
-------------- -------------- --------------
Cash flows from operating activities:
Net income $ 1,341,000 $ 1,008,000 $ 1,125,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 446,000 402,000 356,000
Gain on sale of marketable securities - - (361,000)
Decrease (increase) in rent and other receivables 2,000 (6,000) 21,000
Amortization (payment) of prepaid management fees - 138,000 (138,000)
Amortization of prepaid loan fees 33,000 33,000 33,000
Decrease (increase) in other assets 19,000 (17,000) (2,000)
Increase (decrease) in accounts payable 27,000 (72,000) 47,000
Increase (decrease) in deferred revenue 13,000 (14,000) (4,000)
-------------- -------------- --------------
Total adjustments 540,000 464,000 (48,000)
-------------- -------------- --------------
Net cash provided by operating activities 1,881,000 1,472,000 1,077,000
-------------- -------------- --------------
Cash flows from investing activities:
Proceeds from sale of marketable securities - - 708,000
Additions to real estate facilities (280,000) (228,000) (344,000)
-------------- -------------- --------------
Net cash (used in) provided by investing activities (280,000) (228,000) 364,000
-------------- -------------- --------------
Cash flows from financing activities:
Principal (payments) proceeds on note payable to affiliate (600,000) (130,000) 130,000
Principal payments on note payable (524,000) (1,134,000) (1,644,000)
-------------- -------------- --------------
Net cash used in financing activities (1,124,000) (1,264,000) (1,514,000)
-------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents 477,000 (20,000) (73,000)
Cash and cash equivalents at the beginning of the year 69,000 89,000 162,000
-------------- -------------- --------------
Cash and cash equivalents at the end of the year $ 546,000 $ 69,000 $ 89,000
============== ============== ==============
See accompanying notes.
F-5
PUBLIC STORAGE PROPERTIES, LTD.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
1. DESCRIPTION OF PARTNERSHIP
Public Storage Properties, Ltd. (the "Partnership") was formed
with the proceeds of a public offering. The general partners in the
Partnership are Public Storage, Inc. ("PSI") and B. Wayne Hughes
("Hughes"). The Partnership owns nine mini-warehouse facilities located
in California.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PARTNERSHIP MATTERS
Mini-Warehouse Facilities:
--------------------------
Cost of land includes appraisal fees and legal fees related to
acquisition and closing costs. Buildings, land improvements and
equipment reflect costs incurred through December 31, 1997 and 1996 to
develop mini-warehouse facilities which provide self-service storage
spaces for lease, usually on a month-to-month basis, to the general
public. The buildings and equipment are depreciated on a straight-line
basis over estimated useful lives of 25 and 5 years, respectively.
In 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of" ("Statement 121"). Statement 121 requires impairment
losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets'
carrying amount. Statement 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The Partnership
adopted Statement 121 in 1996 and the adoption had no effect on the
Partnership's financial statements.
Allocation of Net Income:
-------------------------
The general partners' share of net income consists of amounts
attributable to their 1% capital contribution and an additional
percentage of cash flow (as defined) which relates to the general
partners' share of cash distributions as set forth in the Partnership
Agreement (Note 4). All remaining net income is allocated to the
limited partners.
Per unit data is based on the weighted average number of the
limited partnership units (20,000) outstanding during the period.
Cash and Cash Equivalents:
--------------------------
For financial statement purposes, the Partnership considers
all highly liquid investments purchased with a maturity of three months
or less to be cash equivalents.
F-6
PUBLIC STORAGE PROPERTIES, LTD.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PARTNERSHIP MATTERS
(CONTINUED)
Gain on Sale of Marketable Securities:
--------------------------------------
The Partnership held marketable securities in PSI. In November
1995, the Partnership sold its 39,911 shares of PSI common stock, and
recognized a gain totaling $361,000 on the sale. The Partnership
recognized $26,000 in dividends in 1995.
Other Assets:
-------------
Included in other assets are deferred financing costs. In
1993, the Partnership incurred deferred financing costs of
approximately $246,000 in connection with the modification of its
mortgage note payable (Note 7). Amortization of deferred financing
costs of $33,000 relating to the pre-modified mortgage loan was
expensed in each of the years 1997, 1996 and 1995, respectively, and is
included in interest expense.
Use of Estimates:
-----------------
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could
differ from those estimates.
Environmental Cost:
-------------------
Substantially all of the Partnership's facilities were
acquired prior to the time that it was customary to conduct
environmental investigations in connection with property acquisitions.
During 1995, the Partnership completed environmental assessments of its
properties to evaluate the environmental condition of, and potential
environmental liabilities of such properties. These assessments were
performed by an independent environmental consulting firm. Based on the
assessments, the Partnership expensed $22,000 in 1995 for known
environmental remediation requirements. Although there can be no
assurance, the Partnership is not aware of any environmental
contamination of any of its property sites which individually or in the
aggregate would be material to the Partnership's overall business,
financial condition or results of operations.
3. CASH DISTRIBUTIONS
The Partnership Agreement requires that cash available for
distribution (cash flow from all sources less cash necessary for any
obligations or capital improvement needs) be distributed at least
quarterly. Cash distributions have been suspended since the fourth
quarter of 1990 for debt service payments.
4. PARTNERS' DEFICIT
The general partners have a 1% interest in the Partnership. In
addition, the general partners have an 8% interest in cash
distributions attributable to operations (exclusive of distributions
attributable to sale and financing proceeds until the limited partners
recover all of their initial investment). Thereafter, the general
partners have a 25% interest in all cash distributions (including sale
and financing proceeds). In 1985, the limited partners recovered all of
their initial investment. All subsequent cash distributions are being
made 25.75% (including the 1% interest) to the general partners and
74.25% to the limited partners. Transfers of equity are made
periodically to conform the partners' equity accounts to the provisions
of the Partnership Agreement. These transfers have no effect on the
results of operations or distributions to partners.
F-7
PUBLIC STORAGE PROPERTIES, LTD.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
4. PARTNERS' DEFICIT (CONTINUED)
Concurrent with the financing of the Partnership's properties
in 1987 (Note 7), the Partnership made a special distribution totaling
$20,202,000 to the partners. This special distribution had no effect on
the Partnership's taxable income, however, resulted in a deficit in the
limited and general partners' equity accounts.
5. RELATED PARTY TRANSACTIONS
The Partnership has a Management Agreement with PSI (as
successor-in-interest to PSMI). Under the terms of the agreement, PSI
operates the mini-warehouse facilities for a fee equal to 6% of the
facilities' monthly gross revenue (as defined).
In November 1995, the Management Agreement was amended to
provide that upon demand from PSI or PSMI made prior to December 15,
1995, the Partnership agreed to prepay (within 15 days after such
demand) up to 12 months of management fees (based on the management
fees for the comparable period during the calendar year immediately
preceding such prepayment) discounted at the rate of 14% per year to
compensate for early payment. In December 1995, the Partnership
prepaid, to PSI, 8 months of 1996 management fees at a cost of
$138,000. The amount is included in other assets in the Balance Sheet
at December 31, 1995. The amount was amortized as management fees paid
to affiliate during 1996.
See footnote 7, on related party note payable.
6. TAXES BASED ON INCOME
Taxes based on income are the responsibility of the individual
partners and, accordingly, the Partnership's financial statements do
not reflect a provision for such taxes.
Taxable net income was $1,553,000, $1,122,000 and $1,209,000
for the years ended December 31, 1997, 1996 and 1995, respectively. The
difference between taxable net income and net income is primarily
related to depreciation expense resulting from difference in
depreciation methods.
7. NOTES PAYABLE
Notes payable at December 31, 1997 and 1996 consist of the
following:
1997 1996
--------------- ---------------
8.25% mortgage note payable to an
insurance company with principal and
interest of $141,000 due monthly;
remaining principal due September, 2001. $ 13,793,000 $ 14,317,000
Unsecured note payable to affiliate,
bearing interest at the prime
rate plus 1%, payable monthly,
and requiring 50,000 principal
payments; remaining principal
due July 1, 1998. 300,000 900,000
--------------- ---------------
$ 14,093,000 $ 15,217,000
=============== ===============
F-8
PUBLIC STORAGE PROPERTIES, LTD.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
7. NOTES PAYABLE (CONTINUED)
During 1987, the Partnership financed all of its properties
with a $20,885,000, nonrecourse note secured by the Partnership's
properties which was scheduled to mature in 1994. In September 1993,
the Partnership and the lender modified the terms of the note whereby
(i) the Partnership was required to make a $5,000,000 principal
repayment, (ii) the interest rate was reduced from 10.25% to 8.25% per
annum, and (iii) the maturity date was extended from September 1, 1994
to September 1, 2001.
In January 1996 the Partnership obtained a $1,510,000 loan
from PSI to repay and terminate the unsecured note payable to a
commercial financial bank. The PSI loan bears interest at the prime
rate plus 1%, payable monthly, in addition to monthly principal
payments of $50,000. In March 1998, the Partnership paid the remaining
balance of the loan.
The estimated fair value of the Partnerhsip's notes payable as of
December 31, 1997 are their current outstanding balances. This value
is based on notes currently available with similar terms and remaining
maturities.
The principal repayment schedule of the above notes payable as
of December 31, 1997, is as follows:
1998 $ 869,000
1999 618,000
2000 671,000
2001 11,935,000
-------------
$ 14,093,000
=============
Interest paid on the notes was $1,219,000, $1,325,000 and
$1,488,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
F-9
Public Storage Properties, Ltd.
Schedule III - Real Estate and Accumulated Depreciation
Gross Carrying Amount
Initial Cost at December 31, 1997
----------------------- Costs ------------------------------------
Building, Subsequent to Building,
Land Imp & construction Land Imp & Accumulated Date
Description Encumbrances Land Equipment (Improvements) Land Equipment Total Depreciation Completed
- ------------------- ------------ ---------- ----------- -------------- ---------- ---------- ------------ ----------- --------
Corona $ - $ 155,000 $ 757,000 $ 163,000 $ 155,000 $ 920,000 $ 1,075,000 $ 616,000 12/78
Fremont - 112,000 741,000 232,000 112,000 973,000 1,085,000 689,000 11/78
Milpitas - 198,000 649,000 155,000 198,000 804,000 1,002,000 529,000 11/78
Norco - 95,000 456,000 69,000 95,000 525,000 620,000 368,000 12/78
North Hollywood - 314,000 553,000 80,000 314,000 633,000 947,000 428,000 12/79
Pasadena - 327,000 515,000 191,000 327,000 706,000 1,033,000 473,000 08/78
Sun Valley - 329,000 611,000 229,000 329,000 840,000 1,169,000 591,000 10/78
Wilmington - 815,000 1,336,000 382,000 815,000 1,718,000 2,533,000 1,164,000 08/78
Whittier - El Monte - 166,000 763,000 119,000 166,000 882,000 1,048,000 634,000 07/78
------------ ---------- ----------- ------------- ---------- ---------- ------------ ------------
$13,793,000(1) $2,511,000 $6,381,000 $1,620,000 $2,511,000 $8,001,000 $10,512,000 $5,492,000
============ ========== =========== ============= ========== ========== ============ ============
(1) All nine properties are encumbered by a promissory note. The $13,793,000
listed above is the principal balance remaining on the note at December 31,
1997.
F-10
Public Storage Properties, Ltd.
Real Estate Reconciliation
Schedule III (continued)
(a) The following is a reconciliation of costs and related accumulated
depreciation:
COST
1997 1996 1995
------------- ------------- -------------
Balance at the beginning of the period $ 10,232,000 $ 10,004,000 $ 9,660,000
Additions during the period
Improvements 280,000 228,000 344,000
Deductions during the period - - -
------------- ------------- -------------
Balance at the close of the period $ 10,512,000 $ 10,232,000 $ 10,004,000
============= ============= =============
ACCUMULATED DEPRECIATION RECONCILIATION
1997 1996 1995
------------- ------------- -------------
Balance at the beginning of the period $ 5,046,000 $ 4,644,000 $ 4,288,000
Additions during the period
Depreciation 446,000 402,000 356,000
Deductions during the period - - -
------------- ------------- -------------
Balance at the close of the period $ 5,492,000 $ 5,046,000 $ 4,644,000
============= ============= =============
(b) The aggregate depreciable cost of real estate (excluding land) for Federal
income tax purposes is $8,001,000.
F-11
Exhibit 10.7
PROMISSORY NOTE
$249,909.03 Glendale, California
January 27, 1998
FOR VALUE RECEIVED, the undersigned PUBLIC STORAGE PROPERTIES, LTD.
("Borrower") promises to pay to the order of PUBLIC STORAGE, INC. ("Lender") at
its offices at 701 Western Avenue, Glendale, California 91201 or at such other
place as the holder hereof may designate, in lawful money of the United States
of America and in immediately available funds, the principal sum of $249,909.03
with interest thereon at a rate per annum (computed on the basis of a 360-day
year, actual days elapsed) 1.0% above the Prime Rate in effect from time to
time. The "Prime Rate" is a base rate that Wells Fargo Bank, National
Association ("Bank"), from time to time establishes and which serves as the
basis upon which effective rates of interest are calculated for those loans by
Bank matching reference thereto. Each change in the rate of interest hereunder
shall become effective on the date each Prime Rate change is announced within
Bank.
Interest accrued on this Note shall be payable on the 1st day of each
month, commencing February 1, 1998 and on June 30, 1998. Principal shall be
payable on the 1st day of each month in installments of $50,000.00 each,
commencing February 1, 1998 and continuing up to and including July 1, 1998,
with a final installment consisting of all remaining unpaid principal due and
payable in full on June 30, 1998. Each payment made on this Note shall be
credited first, to any interest then due and second, to the outstanding
principal balance hereof. All prepayments of principal on this Note shall be
applied on the most remote principal installment or installments then unpaid.
From and after the maturity date of this Note, or such earlier date as
all principal owing hereunder becomes due and payable by acceleration or
otherwise, the outstanding principal balance of this Note shall bear interest
until paid in full at an increased rate per annum (computed on the basis of a
360-day year, actual days elapsed) equal to 4% above the rate of interest from
time to time applicable to this Note.
The occurrence of any of the following shall constitute an "Event of
Default" under this Note:
1. The failure to pay any principal or interest, or other amount,
when due hereunder or under any contract, instrument or document
executed in connection with this Note.
2. The filing of a petition by or against any Borrower, or any
general partner in Borrower (with each such general partner
referred to herein as a "Third Party Obligor") under any
provisions of the Bankruptcy Reform Act Title 11 of the United
States Code, as amended or recodified from time to time, or under
any similar or other law relating to bankruptcy, insolvency,
reorganization or other relief for debtors: the appointment of a
receiver, trustee, custodian or liquidator of or for any part of
the assets or property of Borrower or any Third Party Obligor;
Borrower or any Third Party Obligor becomes insolvent, makes a
general assignment for the benefit of creditors or is generally
not paying its debts as they become due; or any attachment or like
levy on any property of Borrower or any Third Party Obligor.
3. The dissolution or liquidation of Borrower or any Third Party
Obligor which is a corporation.
4. Any default in the payment or performance of any obligation, or
any defined event of default, under any provisions of any
contract, instrument or document pursuant to which Borrower has
incurred any obligation for borrowed money, any purchase
obligation, or any other liability of any kind to any person or
entity, including the holder.
5. Any sale or transfer of all of a substantial or material part of
the assets of Borrower.
6. Any violation or breach of any provision of, or any defined event
of default under, any addendum to this Note or any loan agreement,
guaranty, security agreement, deed of trust or other document
executed in connection with or securing this Note.
Soon the occurrence of any Event of Default, the holder of this Note,
at the holder's option, may declare the sums of principal and interest
outstanding hereunder to be immediately due and payable. Borrower shall pay to
Lender the amount of any expenses, including legal fees, incurred as a result of
an Event of Default and any such amount not paid upon demand by Lender, shall be
added to, and thereafter bear interest as herein provided as part of, principal.
IN WITNESS WHEREOF, the undersigned has executed this Note as of the
date first written above.
PUBLIC STORAGE PROPERTIES, LTD.
By: Public Storage, Inc.
----------------------------
General Partner
By: /s/ John Reyes
----------------------------
John Reyes
Senior Vice President and
Chief Financial Officer