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, 1996
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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 0-11981
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PS PARTNERS II, LTD.
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(Exact name of registrant as specified in its charter)
California 95-3878680
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
701 Western Avenue
Glendale, California 91201-2394
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(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
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(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. [X]
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DOCUMENTS INCORPORATED BY REFERENCE
NONE
<PAGE>
PART I
ITEM 1. BUSINESS.
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General
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PS Partners II, Ltd. (the "Partnership") is a publicly held limited
partnership formed under the California Uniform Limited Partnership Act in
August 1983. Commencing in November 1983, 128,000 units of limited partnership
interest (the "Units") were offered to the public in an interstate offering. The
offering was completed in June 1984.
The Partnership was formed to invest in and operate existing self-service
facilities offering storage space for personal and business use (the
"mini-warehouses") and to invest up to 30% of the net proceeds of the offering
in and operate existing office and industrial properties. The Partnership's
investments were made through general partnerships with Storage Equities, Inc.,
now known as Public Storage, Inc. ("PSI"), a real estate investment trust
("REIT") organized as a corporation under the laws of California. For tax
administrative efficiency, the original general partnerships with PSI were
consolidated into a single general partnership effective December 31, 1990.
In 1995, there was a series of mergers among Public Storage Management,
Inc. (which was the Partnership's mini-warehouse operator), Public Storage, Inc.
and their affiliates (collectively, "PSMI"), culminating in the November 16,
1995 merger (the "PSMI Merger") of PSMI into Storage Equities, Inc. In the PSMI
Merger, Storage Equities, Inc. was renamed Public Storage, Inc. and it acquired
substantially all of PSMI's United States real estate operations and became the
operator of the Partnership's mini-warehouse properties.
The Partnership's general partners (the "General Partners") are PSI and B.
Wayne Hughes ("Hughes"). PSI became a co-general partner in September 1993, when
PSI acquired the interest of PSI Associates, Inc. ("PSA"), an affiliate of PSMI,
relating to PSA's general partner capital contribution in the Partnership.
Hughes has been a general partner of the Partnership since its inception. Hughes
is the chairman of the board and chief executive officer of PSI, and Hughes and
members of his family (the "Hughes Family") are the major shareholders 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 management or conduct of its
business affairs.
The Partnership's mini-warehouse properties are managed by PSI pursuant to
a Management Agreement. PSI believes that it is the largest operator of
mini-warehouse facilities in the United States.
Through 1996, the Partnership's commercial properties were managed by
Public Storage Commercial Properties Group, Inc. ("PSCPG") pursuant to a
Management Agreement. In January 1997, the Partnership and PSI and other related
partnerships transferred a total of 35 business parks to American Office Park
Properties, L.P. ("AOPPLP"), an operating partnership formed to own and operate
business parks in which PSI has approximately an 85% economic interest. Included
among the properties transferred were the Partnership's transfer of its business
parks to AOPPLP in exchange for a 8.6% interest in AOPPLP. The general partner
of AOPPLP is PSCPG, now known as American Office Park Properties, Inc. Ronald L.
Havner, Jr., formerly Senior Vice-President and Chief Financial Officer of PSI,
is the Chief Executive Officer of American Office Park Properties, Inc. See Item
13.
PSI's current relationship with the Partnership includes (i) the joint
ownership of 27 of the Partnership's 33 properties (which excludes the
properties transferred to AOPPLP in January 1997), (ii) PSI is a co-general
partner along with Hughes, who is chairman of the board and chief executive
officer of PSI, (iii) as of February 19, 1997, PSI owned approximately 73.57% of
the Partnership's limited partnership units and (iv) PSI is the operator of the
Partnership's mini-warehouse facilities.
Investments in Facilities
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The Partnership owns interests in 33 properties (which exclude the
properties transferred to AOPPLP in January 1997); 27 of such properties are
held in a general partnership comprised of the Partnership and PSI . One
property is a leasehold interest in a mini-warehouse property in Raleigh, North
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Carolina. The Partnership purchased its last property in July, 1984. Reference
is made to the table in Item 2 for a summary of information about the
Partnership's properties.
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
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Mini-warehouses, which comprise the majority of the Partnership's
investments, 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.
Mini-warehouses in which the Partnership has invested generally consist of
three to seven buildings containing an aggregate of between 258 to 1,178 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.
Commercial Properties
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Through 1996, the Partnership owned and operated an office building in
Lakewood, California and a retail office warehouse center in Austin, Texas which
were transferred to AOPPLP in January 1997 in exchange for a 8.6% interest in
AOPPLP.
Investment Objectives and Polices; Sale or Financing of Investments
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The Partnership's objectives are to (i) preserve and protect invested
capital, (ii) maximize the potential for appreciation in value of its
properties, (iii) provide Federal income tax deductions so that during the early
years of property operations a portion of cash distributions may be treated as a
return of capital for tax purposes, and therefore, may not represent taxable
income to the limited partners, (iv) provide for cash distributions from
operations and (v) build up equity through the reduction of mortgage loans on
the Partnership's properties.
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<PAGE>
The Partnership will terminate on December 31, 2020 unless dissolved
earlier. Under the terms of the general partnership agreement with PSI, as of
December 31, 1996, PSI has the right to require the Partnership to sell all
their properties held in joint venture with PSI (see Item 12(c)). The General
Partners have no present intention to seek the liquidation of the Partnership
because they believe that it is not an opportune time to sell mini-warehouses.
Although the General Partners originally anticipated a liquidation of the
Partnership in 1990-1993, since the completion of the Partnership's offering in
1983, significant changes have taken place in the financial and real estate
markets that must be taken into account in considering the timing of any
proposed sale or financing, including: (i) the increased construction of
mini-warehouses from 1984 to 1988, which has increased competition, (ii) the
general deterioration of the real estate market (resulting from a variety of
factors, including changes in tax laws), which has significantly affected
property values and decreased sales activities and (iii) the reduced sources of
real estate financing.
The Partnership engaged Lawrence R. Nicholson, MAI, a principal with the
firm of Nicholson-Douglas Realty Consultants, Inc. ("NDRC") to perform a limited
investigation and appraisal of the Partnership's property portfolio. In a letter
appraisal report dated May 13, 1996, NDRC indicated that, based on the
assumptions contained in the report, the aggregate market value of the
Partnership's 35 properties (consisting not only of the Partnership's interest
but also including PSI's interest), as of January 31, 1996, was $91,400,000
($80,100,000 for the 33 mini-warehouses, $8,200,000 for a business park and
$3,100,000 for a low-rise office building). (In January 1997, after the date of
the appraisal, the Partnership transferred its business parks to AOPPLP in
exchange for a 8.6% interest in AOPPLP.) NDRC's report is limited in that NDRC
did not inspect the properties and relied primarily upon the income
capitalization approach in arriving at its opinion. NDRC's aggregate value
conclusion represents the 100% property interests, and although not valued
separately, includes both the interest of the Partnership in the properties, as
well as the interest of PSI, which owns a joint venture interest (ranging from
about 10% to 64%) in 28 of the 35 properties. The analytical process that was
undertaken in the appraisal included a review of the properties' unit mix,
rental rates and historical financial statements. Following these reviews, a
stabilized level of net operating income was projected for the properties (an
aggregate of $8,274,000 for the 33 mini-warehouses, $819,000 for the business
park and $331,000 for the low-rise office building). In the case of the
mini-warehouses and the low-rise office building, value estimates were then made
using both a direct capitalization analysis ($82,900,000 for the mini-warehouses
and $3,200,000 for the low-rise office building) and a discounted cash flow
analysis ($79,000,000 for the mini-warehouses and $3,100,000 for the low-rise
office building). In applying the discounted cash flow analysis to the
mini-warehouses and the low-rise office building, projections of cash flow from
each property were developed for an 11-year period ending in the year 2007.
Growth rates for income and expenses were assumed to be 3.5% per year. NDRC then
used a terminal capitalization rate of 10.5% to capitalize each property's 11th
year net operating income into a residual value at the end of the holding
period. The 10 yearly cash flows plus the residual or reversionary proceeds net
of sales costs were then discounted to present worth using a discount rate of
13.25% in the case of the mini-warehouses and the business park and 12.5% in the
case of the low-rise office building. In the direct capitalization analysis,
NDRC applied a 10.0% capitalization rate to the stabilized net operating income
of the mini-warehouses. The overall capitalization rate used for the low-rise
office building was 10.5%; from this estimate, a $50,000 deduction was made for
stabilization costs and an additional $60,000 adjustment was made to reflect
above market income. In the case of the mini-warehouses, these value estimates
were then compared to an estimated value ($78,300,000) using a regression
analysis applied to approximately 300 sales of mini-warehouses to evaluate the
reasonableness of the estimates using the direct capitalization and discounted
cash flow analysis.
The business park was valued using a direct capitalization analysis by
applying a 10.0% capitalization rate to the business park's stabilized net
operating income. NDRC has prepared other appraisals for the General Partners
and their affiliates and is expected to continue to prepare appraisals for the
General Partners and their affiliates. No environmental investigations were
conducted with respect to the limited investigation of the Partnership's
properties. Accordingly, NDRC's appraisal did not take into account any
environmental cleanup or other costs that might be incurred in connection with a
disposition of the properties. Although there can be no assurance, based on
recently completed environmental investigations (see Item 2), the Partnership is
not aware of any environmental contamination of its facilities material to its
overall business or financial condition. In addition to assuming compliance with
applicable environmental laws, the appraisal also assumed, among other things,
compliance with applicable zoning and use regulations and the existence of
required licenses.
4
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Limited Partners should recognize that appraisals are opinions as of the
date specified, are subject to certain assumptions and the appraised value of
the Partnership's properties may not represent their true worth or realizable
value. There can be no assurance that, if these properties were sold, they would
be sold at the appraised values; the sales price might be higher or lower than
the appraised values.
Based on NDRC's limited appraisal (as of January 1996), the General
Partners have estimated a liquidation value per Unit of $520. This liquidation
value was calculated assuming (i) the properties owned by the Partnership and
PSI were sold at the values reflected in NDRC's report, (ii) costs of 5% of the
sales price of the properties were incurred in the sale of the properties, (iii)
the proceeds from the properties held jointly by the Partnership and PSI were
allocated between them in accordance with the joint venture agreement and (iv)
the Partnership's other net assets were liquidated at their book value at June
30, 1996.
In October 1996, PSI completed a cash tender offer, which had commenced in
August 1996, pursuant to which PSI acquired a total of 9,013 additional limited
partnership units at $520 per Unit.
Operating Strategies
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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. 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. 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 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. As of December 31, 1996, the telephone
reservation system was supporting rental activity at all of the
Partnership's properties. PSI's toll-free telephone referral system
services approximately 120,000 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. The monthly average realized rent per square
foot for the mini-warehouse facilities was $.61 in 1996 compared to $.59
in 1995. The weighted average occupancy levels at the mini-warehouse
facilities were 91% in 1996 compared to 90% in 1995. 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. In addition to the approximately 120
support personnel at the Public Storage corporate offices, there are
approximately 2,700 on-site personnel who manage the day-to-day
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operations of the mini-warehouse in the Public Storage system. These
on-site personnel are supervised by 110 district managers, 15 regional
managers and three divisional managers (with an average of 13 years
experience in the mini-warehouse industry) who report to the president of
the mini-warehouse property operator (who has 13 years of experience with
the Public Storage organization). PSI carefully selects and extensively
trains the operational and support personnel and offers them a
progressive career path. See "Mini-warehouse Property Operator."
Mini-warehouse Property Operator
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The Partnership's mini-warehouse properties are managed by PSI pursuant to
a Management Agreement.
Under the supervision of the Partnership, PSI coordinates the operation of
the facilities, establishes rental policies and rates, directs marketing
activity and directs 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, REITs 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 it operates. 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. 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.
Commercial Property Operator
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Through 1996, the Partnership's commercial properties were managed by
PSCPG, now known as American Office Park Properties, Inc., pursuant to a
Management Agreement. In January 1997, the Partnership transferred its
commercial properties to AOPPLP.
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 facilities. Competition may be
6
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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's executive officers and directors and the "Public Storage" name, should
enable the Partnership to continue to compete effectively with other entities.
Other Business Activities
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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.
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
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There are 114 persons who render services on behalf of the Partnership.
These persons include resident managers, assistant managers, relief managers,
area managers, and administrative personnel. Some of these employees may be
employed on a part-time basis and may also be employed by other persons,
partnerships, REITs or other entities owning facilities operated by PSI or
AOPPLP.
ITEM 2. PROPERTIES.
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The following table sets forth information as of December 31, 1996, about
properties owned by the Partnership. Twenty eight of these properties were
acquired jointly with PSI and were contributed to general partnerships comprised
of the Partnership and PSI.
<TABLE>
<CAPTION>
Net Number
Rentable of Date of Ownership
Location Square Feet Spaces Acquisition Percentage
- -------------------------- ------------- ------------ ------------- -------------
CALIFORNIA
<S> <C> <C> <C> <C>
Fremont 60,700 604 01/13/84 70.0%
Albrae Street
Lakewood (1) (3) 56,700 31 12/29/83 90.0
Watson Plaza Drive
Pico 47,400 398 03/01/84 50.0
Bermudez Street
GEORGIA
Augusta 40,300 395 12/09/83 81.5
Crescent Drive
Marietta 29,700 258 03/30/84 75.0
S. Cobb Drive
KANSAS
Olathe 41,800 287 01/19/84 74.4
E. Spruce
Shawnee 64,100 432 01/19/84 74.4
W. 63rd St.
Topeka 50,000 376 01/19/84 74.4
SW 41st St.
Merriam 59,000 458 01/19/84 74.4
W. Frontage
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Net Number
Rentable of Date of Ownership
Location Square Feet Spaces Acquisition Percentage
- -------------------------- ------------- ------------ ------------- -------------
MARYLAND
<S> <C> <C> <C> <C>
Baltimore 77,200 807 06/27/84 100.0%
Shannon Road
Baltimore 49,000 600 06/27/84 100.0
Laurel Bowie Road
Belton 42,900 366 01/19/84 74.4
S. 71 Fwy.
Gladstone 74,900 590 01/19/84 74.4
N. Oak Trafficway
Independence 78,300 554 01/19/84 74.4
E. 31st St.
Kansas City 74,100 534 01/19/84 74.4
E. 112th Terrace
Kansas City 52,300 465 01/19/84 74.4
Holmes
NORTH CAROLINA
Charlotte 53,900 435 12/09/83 81.5
South Blvd.
Greensboro 41,900 406 12/09/83 81.5
Electra Drive
Greensboro 62,200 651 12/09/83 81.5
W. Market St.
Raleigh 105,100 567 05/16/84 53.0
Departure Dr.
Raleigh 52,300 439 12/09/83 100.0
Yonkers Rd
OREGON
Milwaukee 34,400 384 04/18/84 100.0
SE McLoughlin Blvd.
PENNSYLVANIA
Philadelphia 110,300 1,178 05/21/84 36.1
Grant Ave.
Trevose 62,500 787 07/03/84 67.8
Old Lincoln Highway
RHODE ISLAND
Cranston 28,700 302 01/24/85 64.6
Pontiac - 71
Freeway Dr.
N. Providence 35,600 386 04/19/84 90.0
Mineral Springs Ave.
SOUTH CAROLINA
Columbia 67,300 596 12/09/83 81.5
Broad River Rd
</TABLE>
8
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<TABLE>
<CAPTION>
Net Number
Rentable of Date of Ownership
Location Square Feet Spaces Acquisition Percentage
- -------------------------- ------------- ------------ ------------- -------------
TENNESSEE
<S> <C> <C> <C> <C>
Knoxville 62,100 578 02/16/84 81.9%
E. Central
Ave. Pike
Knoxville 97,400 801 02/16/84 81.9
Unicorn Drive
TEXAS
Austin (2) (3) 214,100 99 03/27/84 100.0
Lamar Blvd.
VIRGINIA
Lorton 55,500 576 06/27/84 100.0
Richmond Hwy
Manassas Balls 44,000 435 03/26/84 41.6
Ford Rd.
Richmond 65,700 518 12/09/83 81.5
Jefferson Davis
Virginia Beach 99,400 762 05/18/84 100.0
Independence
WASHINGTON
Tacoma 52,300 666 01/03/84 90.0
24th St. W.
</TABLE>
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(1) Office Building
(2) Business Park Facility
(3) In January 1997, the Partnership contributed its business park facilities
to AOPPLP in exchange for a 8.6% interest in AOPPLP. See Item 1.
Weighted average occupancy levels for the mini-warehouse and business
park/office building properties were 91% and 95%, respectively, in 1996 compared
to 90% and 97%, respectively, in 1995. In 1996, the monthly realized rent per
square foot for the mini-warehouse and business park/office building properties
averaged $.61 and $.81, respectively, compared to $.59 and $.81, respectively,
in 1995.
Substantially all of the Partnership's facilities were acquired prior to
the time that it was customary to conduct extensive environmental investigations
in connection with the property acquisitions. During the fourth quarter of 1995,
an independent environmental consulting firm completed environmental assessments
on the Partnership's properties to evaluate the environmental condition of, and
potential environmental liabilities of such properties. Based on the
assessments, the Partnership expensed in 1995 an estimated $80,000 for known
environmental remediation requirements. Although there can be no assurance, the
Partnership is not aware of any unaccrued environmental contamination of its
facilities which individually or in the aggregate would be material to the
Partnership's overall business, financial condition, or results of operations.
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 1996.
9
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PART II
ITEM 5. MARKET FOR THE PARTNERSHIP'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
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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 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 PSI has 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 limited partnership
interests (including the Units), including the prices at which such secondary
sales transactions are effectuated.
Exclusive of the General Partners' interest in the Partnership, as of
December 31, 1996, there were approximately 1,659 record holders of Units.
In October 1996, PSI completed a cash tender offer, which had commenced in
August 1996, pursuant to which PSI acquired a total of 9,013 additional limited
partnership units at $520 per Unit.
The Partnership makes quarterly distributions of all "Cash Available for
Distribution" and will make distributions of "Cash from Sales or Refinancing".
Cash Available for Distribution is cash flow from all sources less cash
necessary for any obligations, capital improvements, or reserves.
Reference is made to Items 6 and 7 hereof for information on the amount of
such distributions.
10
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ITEM 6. SELECTED FINANCIAL DATA.
-----------------------
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ------------- ------------- ------------ -------------
(In thousands, except per Unit data)
<S> <C> <C> <C> <C> <C>
Revenues $ 15,456 $ 15,088 $ 14,881 $ 13,827 $12,464
Depreciation and amortization 3,502 3,293 3,419 3,688 3,241
Interest expense 14 177 285 698 1,331
Income before gain on - 4,114 4,185 3,498 2,106 1,365
disposition of real estate facility
and early extinguishment of debt
Net income 4,114 4,185 3,722 3,053 1,365
Limited partners' share 3,597 3,262 3,528 2,866 1,194
General partners' share 517 923 194 187 171
Limited partners' per unit data(a)
Net income $ 28.10 $ 25.48 $ 27.56 $ 22.39 $ 9.33
Cash distributions (b) $ 33.44 $ 61.97 $ 11.00 $ 11.00 $ 11.00
As of December 31,
- ------------------
Cash and cash equivalents $ 1,239 $ 904 $ 3,258 $ 1,083 $ 2,391
Total assets $ 54,558 $ 56,371 $ 61,149 $ 63,334 $ 67,042
Mortgage notes payable $ - $ 2,260 $ 2,326 $ 7,285 $ 12,771
</TABLE>
- ---------------
(a) Limited partners' per Unit data is based on the number of units (128,000)
outstanding during the year.
(b) The General Partners distributed, concurrent with the distributions for the
second and third quarters of 1995, a portion of the operating reserve of
the Partnership and the proceeds from the Weymouth property condemnation
estimated to be $13.92 and $17.40, respectively.
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
----------------------------------------------------------------------
Results of Operations
- ---------------------
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995:
The Partnership's net income in 1996 was $4,114,000 compared to $4,185,000
in 1995, representing a decrease of $71,000, or 2%. The decrease was primarily
due to an increase in depreciation expense, an increase in minority interest in
income for those properties held jointly with PSI, and a decrease in interest
income, partially offset by improved property operations at the Partnership's
real estate facilities combined with a reduction in environmental costs.
Property net operating income (rental income less cost of operations and
management fees and excluding depreciation expense) increased approximately
$82,000 in 1996 compared to 1995, as rental income increased by $468,000, or 3%,
and cost of operations (including management fees) increased by $386,000, or 7%.
Rental income for the Partnership's mini-warehouse operations was
$13,049,000 in 1996 compared to $12,564,000 in 1995, representing an increase of
$485,000, or 4%. The increase in rental income was primarily attributable to
increased average realized rental rates combined with increased average
occupancy levels at the mini-warehouse facilities. The monthly average realized
rent per square foot for the mini-warehouse facilities were $.61 in 1996
compared to $.59 in 1995. The weighted average occupancy levels at the
mini-warehouse facilities were 91% in 1996 compared to 90% in 1995. Costs of
operations (including management fees) increased $232,000, or 5%, to $4,751,000
in 1996 from $4,519,000 in 1995. This increase was primarily attributable to
increases in advertising and promotion, repairs and maintenance, and office
expenses. Accordingly, for the Partnership's mini-warehouse operations, property
net operating income increased by $253,000, or 3%, to $8,298,000 in 1996 from
$8,045,000 in 1995.
Rental income for the Partnership's business park operations was $2,347,000
in 1996 compared to $2,364,000 in 1995, representing a decrease of $17,000. The
decrease in rental income is attributable to decreased average occupancy levels
at the business park facilities. The weighted average occupancy levels at the
business park facilities were 95% in 1996 compared to 97% in 1995. The monthly
average realized rent per square foot for the business park remained stable at
$.81 for both 1996 and 1995. Cost of operations (including management fees)
increased $154,000, or 14%, to $1,286,000 in 1996 from $1,132,000 in 1995. The
increase in cost of operations is primarily due to increases in property taxes,
lease commissions, utilities, and repairs and maintenance expenses. Accordingly,
for the Partnership's business park facilities, property net operating income
decreased by $171,000, or 14%, to $1,061,000 in 1996 from $1,232,000 in 1995.
Interest income decreased in 1996 over 1995 as a result of a decrease in
average invested cash balances.
Depreciation and amortization increased $209,000 to $3,502,000 in 1996 from
$3,293,000 in 1995. This increase is principally attributable to depreciation of
capital expenditures made during 1995 and 1996.
Interest expense decreased approximately $163,000 to $14,000 in 1996 from
$177,000 in 1995 as a result of the payoff of the Partnership's mortgage note
payable in the first quarter of 1996.
Minority interest in income increased by $138,000, or 9%, in 1996 compared
to 1995. This increase was primarily attributable to an increase in operations
at the Partnership's real estate facilities owned jointly with PSI, partially
offset by the allocation of depreciation and amortization expense (pursuant to
the partnership agreement with respect to those real estate facilities which are
jointly owned with PSI) to PSI of $347,000 compared to $328,000 for 1996 and
1995, respectively.
12
<PAGE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994:
The Partnership's net income in 1995 was $4,185,000 compared to $3,722,000
in 1994, representing an increase of $463,000. Net income in 1994 included an
extraordinary gain on the disposition of real estate facilities of $224,000. Net
income before this gain increased by $687,000 or 20% in 1995 compared to 1994.
The increase was primarily due to improved property operations at the
Partnership's real estate facilities combined with reductions in depreciation
and interest expenses and minority interest in income for those properties held
jointly with PSI, partially offset by an increase in environmental costs.
Property net operating income (rental income less cost of operations and
management fees and excluding depreciation expense) increased approximately
$218,000 or 2% in 1995 compared to 1994, as rental income increased by $96,000
or 1%, and cost of operations (including management fees) decreased by $122,000
or 2%. However, net property income for 1994 includes $300,000 (none in 1995)
relating to the condemned mini-warehouse facility. Accordingly, for those
facilities which were in operation throughout both 1995 and 1994, net property
income increased $518,000, or 6%, rental income increased $543,000, or 4%, and
cost of operations increased $25,000, or 0.4%.
Rental income for the Partnership's mini-warehouse operations was
$12,564,000 in 1995 compared to $12,659,000 in 1994, representing a decrease of
$95,000. The decrease in rental income was primarily attributable to the
condemned facility which had rental income of $447,000 in 1994 (none in 1995),
accordingly, rental income for the remaining mini-warehouse facilities increased
$352,000, or 3%. This increase is primarily due to increased average realized
rental rates at the mini-warehouse facilities. The weighted average occupancy
levels at the mini-warehouse facilities were 90% in 1995 compared to 92% in
1994. The monthly average realized rent per square foot for the mini-warehouse
facilities were $.59 in 1995 compared to $.56 in 1994. Costs of operations
(including management fees) decreased $50,000 or 1%, to $4,519,000 in 1995 from
$4,569,000 in 1994. Costs of operations for the condemned facility were $147,000
in 1994, accordingly, costs of operations for the remaining mini-warehouse
facilities increased $97,000, or 2%. Accordingly, for the Partnership's
mini-warehouse operations, property net operating income decreased by $45,000
from $8,090,000 in 1994 to $8,045,000 in 1995. Property net operating income
excluding the condemned facility increased $255,000, or 3%.
Rental income for the Partnership's business park operations was $2,364,000
in 1995 compared to $2,173,000 in 1994, representing an increase of $191,000 or
9%. The increase in rental income is attributable to improved occupancy levels
and realized rents per square foot. The weighted average occupancy levels at the
business park facilities were 97% in 1995 compared to 96% in 1994. The monthly
average realized rent per square foot for the business park facilities were $.81
in 1995 compared to $.71 in 1994. Cost of operations (including management fees)
decreased $72,000 or 6% to $1,132,000 in 1995 from $1,204,000 in 1994. The
decrease in cost of operations is primarily due to a decrease in property taxes
and repairs and maintenance at the Lakewood property. Accordingly, for the
Partnership's business park facilities, property net operating income increased
by $263,000 or 27% from $969,000 in 1994 to $1,232,000 in 1995.
Substantially all of the Partnership's facilities were acquired prior to
the time that it was customary to conduct extensive environmental investigations
in connection with the property acquisitions. During the fourth quarter of 1995,
an independent environmental consulting firm completed environmental assessments
on the Partnership's properties to evaluate the environmental condition of, and
potential environmental liabilities of such properties. Based on the
assessments, the Partnership expensed in 1995 an estimated $80,000 for known
environmental remediation requirements. Although there can be no assurance, the
Partnership is not aware of any unaccrued environmental contamination of its
facilities which individually or in the aggregate would be material to the
Partnership's overall business, financial condition, or results of operations.
Minority interest in income decreased by $229,000 in 1995 compared to 1994.
This decrease was primarily attributed to the allocation of depreciation and
amortization expense (pursuant to the partnership agreement with respect to
13
<PAGE>
those real estate facilities which are jointly owned by PSI) to PSI of $328,000
compared to $95,000 for 1995 and 1994, respectively, partially offset by an
increase in operations at the Partnership's real estate facilities owned jointly
with PSI.
In 1991, the Lakewood, California business park, which is owned jointly
between the Partnership and PSI , was occupied by one tenant which leased 100%
of the available net rentable area. The tenant vacated the premises in April,
1991, upon the expiration of its lease. Subsequently, the Partnership built-out
the facility to accommodate multiple tenants. The property's net operating
income has increased from a net loss of $237,000 in 1992 to a net income of
$55,000 and $235,000 in 1993 and 1994, respectively.
Liquidity and Capital Resources
- -------------------------------
The Partnership has adequate sources of cash to finance its operations,
both on a short-term and long-term basis, primarily by internally generated cash
from property operations combined with cash on hand at December 31, 1996 of
$1,239,000.
Cash flows from operating activities ($9,000,000 for the year ended
December 31, 1996) have been sufficient to meet all current obligations of the
Partnership. Total capital improvements were $1,236,000, $803,000 and $727,000
in 1996, 1995, and 1994, respectively. The increase in 1996 capital improvements
is primarily attributable to painting and roofing improvements at the
Partnership's mini-warehouse facilities, combined with tenant improvements at
the Partnership's Lakewood, CA business park facility. During 1997, the
Partnership anticipates approximately $1,252,000 of capital improvements
(including PSI 's joint venture share of $257,000). During 1995, the
Partnership's property manager commenced a program to enhance the visual
appearance of the mini-warehouse facilities. Such enhancements include new
signs, exterior color schemes, and improvements to the rental offices.
In March 1996, the Partnership repaid early its remaining mortgage note
payable, utilizing cash reserves.
Total distributions paid to the General Partners and the limited partners
(including the per Unit amounts) for 1996 and prior years were as follows:
Total Per Unit
----------------- --------------
1996 $4,804,000 $33.44
1995 8,902,000 61.97
1994 1,582,000 11.00
1993 1,582,000 11.00
1992 1,582,000 11.00
1991 2,708,000 18.85
1990 1,077,000 7.50
1989 4,310,000 30.00
1988 4,309,000 30.00
1987 4,310,000 30.00
1986 4,669,000 32.50
1985 5,747,000 40.00
1984 3,239,000 22.54
During 1990 and 1992, distribution levels were reduced to enable the
Partnership to retire short term borrowings due to PSI and prepay mortgage notes
which were scheduled to mature in 1992, 1993 and 1994 (such mortgage notes
having balloon payments at maturity). The 1992 distribution includes a special
distribution of cash reserves of approximately $3.60 per Unit The 1995
distribution includes a special distribution of cash reserves and proceeds from
the Weymouth property condemnation of approximately $31.32 per Unit. Future
distribution levels will be based upon cash flows available for distributions
(cash flows from operations less capital improvements, distributions to minority
interest and necessary cash reserves).
14
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-------------------------------------------
The Partnership's financial statements are included elsewhere herein.
Reference is made to the Index to Consolidated Financial Statements and
Financial Statement Schedules in Item 14(a).
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
----------------------------------------------------
None.
15
<PAGE>
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 Partnership's mini-warehouse
properties are managed by PSI pursuant to a Management Agreement. Through 1996,
the Partnership's commercial properties were managed by PSCPG, now known as
American Office Park Properties, Inc., pursuant to a Management Agreement. In
January 1997, the Partnership transferred its business parks to AOPPLP in
exchange for a 8.6% interest in AOPPLP.
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
John Reyes Senior Vice President and Chief Financial Officer
Hugh W. Horne 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
Sarah Hass Vice President and Secretary
Robert J. Abernethy Director
Dann V. Angeloff Director
William C. Baker Director
Uri P. Harkham Director
B. Wayne Hughes, age 63, 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 was an officer and director
of affiliates of PSMI and a director of PSMI until November 1995. Mr. Hughes has
been Chairman of the Board and Chief Executive Officer since 1990 of Public
Storage Properties XI, Inc., Public Storage Properties XIV, Inc., Public Storage
Properties XV, Inc., Public Storage Properties XVI, Inc., Public Storage
Properties XVII, Inc., Public Storage Properties XVIII, Inc., Public Storage
Properties XIX, Inc. and Public Storage Properties XX, Inc. (collectively, the
"Public Storage REITs"), REITs that were organized by affiliates of PSMI. From
1989-90 until the respective dates of merger, he was Chairman of the Board and
Chief Executive Officer of Public Storage Properties VI, Inc., Public Storage
Properties VII, Inc., Public Storage Properties VIII, Inc., Public Storage
Properties IX, Inc., Public Storage Properties X, Inc. and Public Storage
Properties XII, Inc., PS Business Parks, Inc., Partners Preferred Yield, Inc.,
Partners Preferred Yield II, Inc., Partners Preferred Yield III, Inc. and
Storage Properties, Inc. ("SPI") (collectively, the "Merged Public Storage
REITs"), affiliated REITs that were merged into PSI between September 1994 and
December 1996. Mr. Hughes has been active in the real estate investment field
for over 25 years.
Harvey Lenkin, age 60, became President and a director of PSI in November
1991. Mr. Lenkin was an officer and director of PSMI and its affiliates until
November 1995. He has been President of the Public Storage REITs since 1990. He
was President of the Merged Public Storage REITs from 1989-90 until the
respective dates of merger and was also a director of SPI from 1989 until June
1996.
16
<PAGE>
John Reyes, age 36, a certified public accountant, joined PSMI 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.
Hugh W. Horne, age 52, has been a Vice President of PSI since 1980 and was
Secretary of PSI from 1980 until February 1992 and became Senior Vice President
of PSI in November 1995. He was an officer of PSMI from 1973 to November 1995.
Mr. Horne has been a Vice President of the Public Storage REITs since 1993. He
was a Vice president of SPI from 1989 until June 1996 and of the other Merged
Public Storage REITs from 1993 until the respective dates of merger. He is
responsible for managing all aspects of property acquisition for PSI.
Obren B. Gerich, age 58, a certified public accountant and certified
financial planner, 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. Mr. Gerich was an officer of PSMI from 1975 to November
1995. He has been Vice President and Secretary of the Public Storage REITS since
1990 and was Chief Financial Officer until November 1995. Mr. Gerich was Vice
President and Secretary of the Merged Public Storage REITs from 1989-90 until
the respective dates of merger.
Marvin M. Lotz, age 54, 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 PSMI with responsibility for
property acquisitions from 1983 until 1988.
David Goldberg, age 47, joined PSMI's legal staff in June 1991, rendering
services on behalf of PSI and PSMI. He became a Senior Vice President and
General Counsel of PSI in November 1995 and Vice President and General Counsel
of the Public Storage REITs in December 1995. From December 1982 until May 1991,
he was a partner in the law firm of Sachs & Phelps, then counsel to PSI and
PSMI.
A. Timothy Scott, age 45, 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
and PSMI. Prior to June 1991, his professional corporation was a partner in the
law firm of Sachs & Phelps, then counsel to PSI and PSMI.
Sarah Hass, age 41, became Secretary of PSI in February 1992. She became a
Vice President of PSI in November 1995. She joined PSMI's legal department in
June 1991, rendering services on behalf of PSI and PSMI. From 1987 until May
1991, her professional corporation was a partner in the law firm of Sachs &
Phelps, then counsel to PSI and PSMI, 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 57, is President of American Standard Development
Company and of Self-Storage Management Company, which develop and operate
mini-warehouses. 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 61, is President of the Angeloff Company, a corporate
financial advisory firm. 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 Bonded Motors, Inc., Compensation Resource Group, Datametrics
Corporation, Nicholas/Applegate Growth Equity Fund, Nicholas/Applegate
Investment Trust, ReadyPac Produce, Inc., Royce Medical Company and Seda
Specialty Packaging Corp. He was a director of SPI from 1989 until June 1996.
William C. Baker, age 63, became a director of PSI in November 1991. Since
April 1996, Mr. Baker has been Chairman of the Board of Santa Anita Realty
Enterprises, Inc., a REIT that owns the Santa Anita Racetrack and other real
17
<PAGE>
estate assets. In August 1996, he became Chairman of the Board and Chief
Executive Officer of Santa Anita Operating Company, which operates the Santa
Anita Racetrack through its subsidiary the Los Angeles Turf Club, Incorporated.
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. Since January 1992, he has been Chairman and Chief
Executive Officer of Carolina Restaurant Enterprises, Inc., a franchisee of Red
Robin International, Inc. 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.
Uri P. Harkham, age 48, 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 17 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. 2-86355, each of the General Partners continues
to serve until (i) death, insanity, insolvency, bankruptcy or dissolution, (ii)
withdrawal with the consent of the other general partner and a majority vote of
the limited partners, or (iii) removal by a majority vote of the limited
partners.
Each director of PSI serves until he resigns or is removed from office by
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 at any
time 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 the General
Partners and their affiliates.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
--------------------------------------------------------------
(a) At February 19, 1997, PSI beneficially owned more than 5% of the Units
of the Partnership:
<TABLE>
<CAPTION>
Title Amount of Percent
of Name and Address of Beneficial of
Class Beneficial Owner Ownership Class
- --------------------- ----------------------------------------- ------------------- -------------
<S> <C> <C> <C>
Units of Public Storage, Inc.
Limited 701 Western Avenue
Partnership Interest Glendale, CA 91201-2394 (1) 94,171 Units (1) 73.57%
- -------------------------
(1) These Units are held of record by SEI Arlington Acquisition
Corporation, a wholly-owned subsidiary of PSI.
</TABLE>
The Partnership is not aware of any other beneficial owners of more
than 5% of the Units.
In October 1996, PSI completed a cash tender offer, which had
commenced in August 1996, pursuant to which PSI acquired a total of 9,013
additional limited partnership units at $520 per Unit.
(b) The Partnership has no officers and directors.
18
<PAGE>
The General Partners (or their predecessor-in-interest) have
contributed $646,000 to the capital of the Partnership representing 1% of
the aggregate capital contributions and as a result participate 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 the Units by PSI , a General Partner, is set forth under
section (a) above. The directors and executive officers of PSI , as a
group, do not own any Units.
(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, a
copy of which is included in the Partnership's prospectus included in the
Partnership's Registration Statement File No. 2-86355. 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.
The Partnership owns interests in 33 properties (which exclude the
properties transferred to AOPPLP in January 1997); 27 of such properties
are held in a general partnership comprised of the Partnership and PSI.
Under the terms of the partnership agreement relating to the ownership of
the properties, PSI has the right to compel a sale of each property at any
time after seven years from the date of acquisition at not less than its
independently determined fair market value provided the Partnership
receives its share of the net sales proceeds solely in cash. As of December
31, 1996, PSI has the right to require the Partnership to sell all of the
joint venture properties on these terms.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
----------------------------------------------
The Partnership Agreement provides that the General Partners and their
affiliates are entitled to the following compensation:
1. Incentive distributions equal to 10% of Cash Flow from Operations.
2. Provided the limited partners have received distributions equal to
100% of their investment plus a cumulative 8% per year (not
compounded) on their investment (reduced by distributions other
than from Cash Flow from Operations), subordinated incentive
distributions equal to 15% of remaining Cash from Sales or
Refinancings.
3. Provided the limited partners have received distributions equal to
100% of their capital contributions plus a cumulative 6% per year
(not compounded) on their investment (reduced by distributions
other than distributions from Cash Flow from Operations),
brokerage commissions at the lesser of 3% of the sales price of a
property or 50% of a competitive commission.
During 1996, approximately $480,000 was paid to PSI with respect to items
1, 2, and 3 above. The Partnership owns interests in 33 properties (which
exclude the properties transferred to AOPPLP in January 1997); 27 of such
properties are held in a general partnership comprised of the Partnership and
PSI.
The Partnership has a Management Agreement with PSI pursuant to which the
Partnership pays PSI a fee of 6% of the gross revenues of the mini-warehouse
spaces operated for the Partnership. During 1996, the Partnership paid fees of
$783,000 to PSI pursuant to the Management Agreement.
Through 1996, the Partnership's commercial properties were managed by PSCPG
pursuant to a Management Agreement which provides for the payment of a fee by
the Partnership of 5% of the gross revenues of the commercial space operated for
the Partnership. During 1996, the Partnership paid $117,000 to PSCPG pursuant to
the Management Agreement. PSI has a 95% economic interest (represented by voting
preferred stock) in PSCPG and the Hughes Family had a 5% economic interest
(represented by voting common stock) in PSCPG until December 1996, when the
Hughes Family sold its interest to Ronald L. Havner, Jr., formerly Senior Vice
President and Chief Financial Officer of PSI, who became the Chief Executive
Officer of PSCPG. PSCPG issued additional voting common stock to two other
19
<PAGE>
unaffiliated investors. In January 1997, the Partnership and PSI and other
related partnerships transferred a total of 35 business parks to AOPPLP, an
operating partnership formed to own and operate business parks in which PSI has
an approximate 85% economic interest. Included among the properties transferred
was the Partnership's transfer of its business parks to AOPPLP in exchange for a
8.6% interest in AOPPLP. The general partner of AOPPLP is PSCPG, now known as
American Office Park Properties, Inc.
20
<PAGE>
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 Consolidated Financial
Statements and Financial Statement Schedules.
2. Financial Statement Schedules: See Index to Consolidated
Financial Statements and Financial Statement Schedules.
3. Exhibits: See Exhibit Index contained herein.
(b) Reports on Form 8-K:
None
(c) Exhibits: See Exhibit Index contained herein.
21
<PAGE>
PS PARTNERS II, LTD.
INDEX TO EXHIBITS
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. 2-86355 and
incorporated herein by reference.
10.1 Second Amended and Restated Management Agreement dated November 16, 1995,
between the Partnership and Public Storage Management, 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 Amended Management Agreement dated February 21, 1995 between Storage
Equities, Inc. and Public Storage Commercial Properties Group, 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, 1994 and incorporated herein by reference.
10.3 Participation Agreement dated as of November 9, 1984, among Storage
Equities, Inc. the Partnership, Public Storage, Inc., B. Wayne Hughes and
Kenneth Q. Volk, Jr. Previously filed with the Securities and Exchange
Commission as an exhibit to Storage Equities, Inc. Annual Report on Form
10-K for the year ended December 31, 1983 and incorporated herein by
reference.
27 Financial data schedule, Filed herewith.
22
<PAGE>
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.
PS PARTNERS II, LTD.
Dated: March 26, 1997 By: Public Storage, Inc., General Partner
By: /s/ B. Wayne Hughes
--------------------------------------
B. Wayne Hughes, Chairman of the Board
By: /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.
<TABLE>
<CAPTION>
Signature Capacity Date
- ------------------------------- --------------------------------------------- --------------
<S> <C> <C>
/s/ B. Wayne Hughes Chairman of the Board and Chief March 26, 1997
- ------------------------------- Executive Officer of Public Storage, Inc. and
B. Wayne Hughes General Partner (principal executive officer)
/s/ Harvey Lenkin President and Director March 26, 1997
- ------------------------------- of Public Storage, Inc.
Harvey Lenkin
/s/ John Reyes Senior Vice President and Chief Financial Officer March 26, 1997
- ------------------------------- of Public Storage, Inc. (principal financial
John Reyes officer and principal accounting officer)
/s/ Robert J. Abernethy Director of Public Storage, Inc. March 26, 1997
- -------------------------------
Robert J. Abernethy
/s/ Dann V. Angeloff Director of Public Storage, Inc. March 26, 1997
- -------------------------------
Dann V. Angeloff
/s/ William C. Baker Director of Public Storage, Inc. March 26, 1997
- -------------------------------
William C. Baker
/s/ Uri P. Harkham Director of Public Storage, Inc. March 26, 1997
- -------------------------------
Uri P. Harkham
</TABLE>
23
<PAGE>
PS PARTNERS II, LTD.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
(Item 14 (a))
Page
References
----------
Report of Independent Auditors F-1
Consolidated Financial Statements and Schedules:
Consolidated Balance Sheets as of December 31, 1996
and 1995 F-2
For the years ended December 31, 1996, 1995 and 1994:
F-3
Consolidated Statements of Income
Consolidated Statements of Partners' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6 - F-9
Schedule
III - Real Estate and Accumulated Depreciation F-10 - F-13
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 consolidated
financial statements or the notes thereto.
24
<PAGE>
Report of Independent Auditors
The Partners
PS Partners II, Ltd.
We have audited the consolidated balance sheets of PS Partners II, Ltd. as of
December 31, 1996 and 1995 and the related consolidated statements of income,
partners' equity and cash flows for each of the three years in the period ended
December 31, 1996. Our audits also included the financial statement 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of PS
Partners II, Ltd. at December 31, 1996 and 1995, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996, 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
Los Angeles, CA
March 18, 1997
F-1
<PAGE>
<TABLE>
<CAPTION>
PS PARTNERS II, LTD.
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
1996 1995
--------------------------------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 1,239,000 $ 904,000
Rent and other receivables 123,000 85,000
Real estate facilities, at cost:
Land 17,414,000 17,414,000
Buildings and equipment 73,222,000 71,986,000
--------------------------------------
90,636,000 89,400,000
Less accumulated depreciation (37,683,000) (34,181,000)
--------------------------------------
52,953,000 55,219,000
Other assets 243,000 163,000
--------------------------------------
$ 54,558,000 $ 56,371,000
======================================
LIABILITIES AND PARTNERS' EQUITY
Accounts payable $ 519,000 $ 648,000
Advance payments from renters 427,000 433,000
Mortgage notes payable - 2,260,000
Minority interest in general partnerships 15,069,000 13,797,000
Partners' equity:
Limited partners' equity, $500 per unit, 128,000
units authorized, issued and outstanding 38,077,000 38,760,000
General partners' equity 466,000 473,000
--------------------------------------
Total partners' equity 38,543,000 39,233,000
--------------------------------------
$ 54,558,000 $ 56,371,000
======================================
</TABLE>
See accompanying notes.
F-2
<PAGE>
<TABLE>
<CAPTION>
PS PARTNERS II, LTD.
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1996, 1995, and 1994
1996 1995 1994
-----------------------------------------------------
REVENUE:
<S> <C> <C> <C>
Rental income $ 15,396,000 $ 14,928,000 $ 14,832,000
Interest income 60,000 160,000 49,000
-----------------------------------------------------
15,456,000 15,088,000 14,881,000
-----------------------------------------------------
COSTS AND EXPENSES:
Cost of operations 5,137,000 4,779,000 4,905,000
Management fees 900,000 872,000 868,000
Depreciation and amortization 3,502,000 3,293,000 3,419,000
Interest expense 14,000 177,000 285,000
Administrative 152,000 159,000 178,000
Environmental costs - 124,000 -
-----------------------------------------------------
9,705,000 9,404,000 9,655,000
-----------------------------------------------------
Income before minority interest and gain on disposition
of a real estate facility 5,751,000 5,684,000 5,226,000
Minority interest in income (1,637,000) (1,499,000) (1,728,000)
-----------------------------------------------------
Income before gain on disposition of real
estate facility 4,114,000 4,185,000 3,498,000
Extraordinary gain on disposition of a real estate facility,
net of minority interests' share - - 224,000
-----------------------------------------------------
NET INCOME $ 4,114,000 $ 4,185,000 $ 3,722,000
=====================================================
Limited partners' share of net income
($28.10, $25.48, and $27.56 per unit in
1996, 1995, and 1994, respectively) $ 3,597,000 $ 3,262,000 $ 3,528,000
General partners' share of net income 517,000 923,000 194,000
-----------------------------------------------------
$ 4,114,000 $ 4,185,000 $ 3,722,000
=====================================================
</TABLE>
See accompanying notes.
F-3
<PAGE>
<TABLE>
<CAPTION>
PS PARTNERS II, LTD.
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY
For the years ended December 31, 1996, 1995, and 1994
Limited General
Partners Partners Total
----------------------------------------------------------
<S> <C> <C> <C>
Balances at December 31, 1993 $ 41,310,000 $ 500,000 $ 41,810,000
Net income 3,528,000 194,000 3,722,000
Distributions (1,408,000) (174,000) (1,582,000)
----------------------------------------------------------
Balances at December 31, 1994 43,430,000 520,000 43,950,000
Net income 3,262,000 923,000 4,185,000
Distributions (7,932,000) (970,000) (8,902,000)
----------------------------------------------------------
Balances at December 31, 1995 38,760,000 473,000 39,233,000
Net income 3,597,000 517,000 4,114,000
Distributions (4,280,000) (524,000) (4,804,000)
----------------------------------------------------------
Balances at December 31, 1996 $ 38,077,000 $ 466,000 $ 38,543,000
==========================================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
<TABLE>
<CAPTION>
PS PARTNERS II, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1996, 1995, and 1994
1996 1995 1994
------------------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 4,114,000 $ 4,185,000 $ 3,722,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 3,502,000 3,293,000 3,419,000
Gain on disposition of real estate facilities - - (224,000)
(Increase) decrease in rent and other receivables (38,000) (57,000) 2,000
Increase in other assets (80,000) (9,000) (20,000)
(Decrease) increase in accounts payable (129,000) 215,000 102,000
Decrease in advance payments from renters (6,000) (6,000) (30,000)
Minority interest in income 1,637,000 1,499,000 1,728,000
------------------------------------------------
Total adjustments 4,886,000 4,935,000 4,977,000
------------------------------------------------
Net cash provided by operating activities 9,000,000 9,120,000 8,699,000
------------------------------------------------
Cash flows from investing activities:
Proceeds from disposition of real estate facilities - - 1,910,000
Additions to real estate facilities (1,236,000) (803,000) (727,000)
------------------------------------------------
Net cash (used in) provided by investing activities (1,236,000) (803,000) 1,183,000
------------------------------------------------
Cash flows from financing activities:
Principal payments on mortgage notes payable (2,260,000) (66,000) (4,959,000)
Distributions to holder of minority interest (365,000) (1,703,000) (1,166,000)
Distributions to partners (4,804,000) (8,902,000) (1,582,000)
------------------------------------------------
Net cash used in financing activities (7,429,000) (10,671,000) (7,707,000)
------------------------------------------------
Net increase (decrease) in cash and cash equivalents 335,000 (2,354,000) 2,175,000
Cash and cash equivalents at the beginning of the year 904,000 3,258,000 1,083,000
------------------------------------------------
Cash and cash equivalents at the end of the year $ 1,239,000 $ 904,000 $ 3,258,000
================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
PS PARTNERS II, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
1. Summary of Significant Accounting Policies and Partnership Matters
Description of Partnership
--------------------------
PS Partners II, Ltd. (the "Partnership") was formed with the proceeds
of an interstate public offering. PSI Associates II, Inc.("PSA"), an
affiliate of Public Storage Management, Inc., organized the Partnership
along with B. Wayne Hughes ("Hughes"). In September 1993, Storage Equities,
Inc., now known as Public Storage, Inc. ("PSI ") acquired the interest of
PSA relating to its general partner capital contribution in the Partnership
and was substituted as a co-general partner in place of PSA.
In 1995, there was a series of mergers among Public Storage
Management, Inc. (which was the Partnership's mini-warehouse operator),
Public Storage, Inc. and their affiliates (collectively, "PSMI"),
culminating in the November 16, 1995 merger (the "PSMI Merger") of PSMI
into Storage Equities, Inc. In the PSMI Merger, Storage Equities, Inc. was
renamed Public Storage, Inc. and it acquired substantially all of PSMI's
United States real estate operations and became the operator of the
Partnership's mini-warehouse properties.
The Partnership has invested in existing mini-warehouse storage
facilities which offer self-service storage spaces for lease, usually on a
month-to-month basis, to the general public and, to a lesser extent, in
existing business park facilities which offer industrial and office space
for lease.
The Partnership has ownership interests in 33 properties, which
exclude two properties transferred to American Office Park Properties, L.P.
("AOPPLP") in January 1997 (see Note 7). 27 of the properties are owned
jointly through 22 general partnerships (the "Joint Ventures") with PSI.
For tax administrative efficiency the Joint Ventures were subsequently
consolidated into a single general partnership. The Partnership is the
managing general partner of the Joint Ventures, with ownership interests in
the Joint Ventures ranging from 36% to 90%.
Basis of Presentation
---------------------
The consolidated financial statements include the accounts of the
Partnership and the Joint Ventures. PSI 's ownership interest in the Joint
Ventures is shown as minority interest in general partnerships in the
accompanying consolidated balance sheets. All significant intercompany
balances and transactions have been eliminated.
Minority interest in income represents PSI 's share of net income with
respect to the Joint Ventures. Under the terms of the partnership
agreements all depreciation and amortization with respect to each Joint
Venture is allocated solely to the Partnership until the limited partners
recover their initial capital contribution. Thereafter, all depreciation
and amortization is allocated solely to PSI until it recovers its initial
capital contribution. All remaining depreciation and amortization is
allocated to the Partnership and PSI in proportion to their ownership
percentages.
Depreciation and amortization allocated to PSI was $347,000, $328,000
and $95,000 in 1996, 1995 and 1994, respectively. The allocation of
depreciation and amortization to PSI has the effect of reducing minority
interest in income and has no effect on the reported depreciation and
amortization expense.
Under the terms of the partnership agreements, for property
acquisitions in which PSI issued convertible securities to the sellers for
its interest, PSI 's rights to receive cash flow distributions from the
partnerships for any year after the first year of operation are
subordinated to cash distributions to the Partnership equal to a cumulative
annual 7% of its cash investment (not compounded). These agreements also
specify that upon sale or refinancing of a property for more than its
original purchase price, distribution of
F-6
<PAGE>
PS PARTNERS II, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
1. Summary of Significant Accounting Policies and Partnership Matters
(continued)
------------------------------------------------------------------
Basis of Presentation (continued)
---------------------------------
proceeds to PSI is subordinated to the return to the Partnership of the
amount of its cash investment and the 7% distribution described above.
In addition to the above provisions, PSI has the right to compel the
sale of each property in the general partnerships at any time after seven
years from the date of acquisition at not less than its independently
determined fair market value provided the Partnership receives its share of
the net sales proceeds solely in cash. PSI 's right to require the
Partnership to sell all of the properties owned jointly with the
Partnership became exercisable in 1991.
Depreciation and amortization
-----------------------------
The Partnership depreciates the buildings and equipment on a
straight-line method over estimated useful lives of 25 and 5 years,
respectively. Leasing commissions relating to business park properties are
expensed when incurred.
Revenue Recognition
-------------------
Property rents are recognized as earned.
Allocation of Net Income
------------------------
The General Partners' share of net income consists of an amount
attributable to their 1% capital contribution and an additional percentage
of cash flow (as defined, see Note 4) which relates to the General
Partners' share of cash distributions as set forth in the Partnership
Agreement. All remaining net income is allocated to the limited partners.
Per Unit Data
-------------
Per unit data is based on the number of limited partnership units
(128,000) outstanding during the year.
Cash Distributions
------------------
The Partnership Agreement provides for quarterly distributions of cash
flow from operations (as defined). Cash distributions per unit were $33.44
for 1996, $61.97 for 1995 and $11.00 for 1994.
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.
Environmental Cost
------------------
Substantially all of the Partnership's facilities were acquired prior
to the time that it was customary to conduct extensive environmental
investigations in connection with the property acquisitions. During the
fourth quarter of 1995, an independent environmental consulting firm
completed environmental assessments on the Partnership's properties to
evaluate the environmental condition of, and potential environmental
liabilities of such properties. Based on the assessments, the Partnership
believes that it is probable that it will incur costs totaling $80,000 for
known environmental remediation requirements which the Partnership has
accrued and expensed in 1995. During 1996 and 1995, the Partnership paid
$12,000 and $44,000, respectively, in connection with the environmental
remediations. Although there can be no assurance, the Partnership is not
aware of any unaccrued environmental contamination of its facilities which
individually or
F-7
<PAGE>
PS PARTNERS II, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
1. Summary of Significant Accounting Policies and Partnership Matters
(continued)
------------------------------------------------------------------
Environmental Cost (continued)
------------------------------
in the aggregate would be material to the Partnership's overall
business, financial condition, or results of operations.
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.
2. Real Estate Facilities
----------------------
In November 1994, the Massachusetts Bay Transportation Authority
exercised its right of eminent domain and took possession of the
mini-warehouse property located in Weymouth, Massachusetts which was owned
jointly by the Partnership and PSI. The Partnership received initial
condemnation proceeds of approximately $1,910,000, resulting in the
recognition of a gain on disposition of real estate facilities of $224,000.
The Partnership is presently contesting the amount of the initial
condemnation proceeds, however, there is no assurance that the Partnership
will obtain additional condemnation proceeds.
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("Statement 121"), "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of." 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 method of accounting for long-lived assets that are expected
to be disposed. The Partnership adopted Statement 121 in 1996 and the
adoption had no effect.
3. Mortgage Notes Payable
----------------------
Mortgage notes payable at December 31, 1995 consisted of a variable
rate mortgage note due to a group of banks and secured by a real estate
facility with a net book value of $2,963,000 at December 31, 1995. The
balance was paid off in March 1996.
Interest paid during 1996, 1995 and 1994 was $14,000, $177,000 and
$285,000, respectively.
4. General Partners' Equity
------------------------
The General Partners have a 1% interest in the Partnership. In
addition, the General Partners have a 10% interest in cash distributions
attributable to operations, exclusive of distributions attributable to
sales and refinancing proceeds.
Proceeds from sales and refinancings will be distributed entirely to
the limited partners until the limited partners recover their investment
plus a cumulative 8% annual return (not compounded); thereafter, the
General Partners have a 15% interest in remaining proceeds.
F-8
<PAGE>
5. Related Party Transactions
The Partnership has a management agreement with PSI pursuant
to which PSI operates the Partnership's mini-warehouses for a fee equal
to 6% of the facilities' monthly gross revenue (as defined). Through
1996, the Partnership's commercial properties were operated by Public
Storage Commercial Properties Group, Inc. ("PSCPG") pursuant to a
management agreement which provides for a fee equal to 5% of the
facilities' monthly gross revenue (as defined).
PSI has a 95% economic interest in PSCPG and the Hughes Family
had a 5% economic interest in PSCPG until December 1996, when the
Hughes Family sold its interest to Ronald L. Havner, Jr., formerly
Senior Vice President and Chief Financial Officer of PSI, who became
the Chief Executive Officer of PSCPG. PSCPG, now known as American
Office Park Properties, Inc., issued additional voting common stock to
two other unaffiliated investors. See Note 7.
6. Taxes Based on Income
Taxes based on income are the responsibility of the individual
partners and, accordingly, the Partnership's consolidated financial
statements do not reflect a provision for such taxes.
Taxable net income was $2,637,000, $4,068,000 and $4,038,000
for the years ended December 31, 1996, 1995 and 1994, respectively. The
difference between taxable income and book income is primarily related
to timing differences in depreciation expense.
7. Subsequent Event
In January 1997, the Partnership and PSI and other related
partnerships transferred a total of 35 business parks to AOPPLP, an
operating partnership formed to own and operate business parks in which
PSI has an approximate 85% economic interest. Included among the
properties transferred was the Partnership's transfer of its business
parks to AOPPLP in exchange for a 8.6% interest in AOPPLP. The general
partner of AOPPLP is PSCPG, now known as American Office Park
Properties, Inc.
F-9
<PAGE>
<TABLE>
PS PARTNERS II, LTD
SCHEDULE III - REAL ESTATE
AND ACCUMULATED DEPRECIATION
<CAPTION>
Costs
Initial Cost subsequent
---------------------------------- to acquisition
Date Building & Building &
Acquired Description Encumbrances Land Improvement Improvements
------------------------------------------------------------------------------------------------------------
Mini-warehouses
<S> <C> <C> <C> <C> <C>
12/83 Charlotte - $ 165,000 $ 1,274,000 $ 298,000
12/83 Greensboro/Market - 214,000 1,653,000 386,000
12/83 Greensboro/Electra - 112,000 869,000 219,000
1/83 Raleigh/Yonkers - 203,000 914,000 293,000
12/83 Columbia - 171,000 1,318,000 403,000
12/83 Richmond - 176,000 1,360,000 282,000
12/83 Augusta - 97,000 747,000 198,000
4/84 Providence - 92,000 1,087,000 258,000
1/85 Cranston - 175,000 722,000 239,000
3/84 Marrietta/Cobb - 73,000 542,000 200,000
1/84 Fremont/Albrae - 636,000 1,659,000 381,000
12/83 Tacoma - 553,000 1,173,000 336,000
</TABLE>
<TABLE>
PS PARTNERS II, LTD
SCHEDULE III - REAL ESTATE
AND ACCUMULATED DEPRECIATION
<CAPTION>
Gross Carrying Amount
At December 31, 1996
-----------------------------------------------------------------
Date Building & Accumulated
Acquired Description Land Improvements Total Depreciation
-----------------------------------------------------------------------------------------------------------
Mini-warehouses
<S> <C> <C> <C> <C> <C>
12/83 Charlotte $ 165,000 $ 1,572,000 $ 1,737,000 $ 794,000
12/83 Greensboro/Market 214,000 2,039,000 2,253,000 1,080,000
12/83 Greensboro/Electra 112,000 1,088,000 1,200,000 553,000
1/83 Raleigh/Yonkers 203,000 1,207,000 1,410,000 611,000
12/83 Columbia 171,000 1,721,000 1,892,000 885,000
12/83 Richmond 176,000 1,642,000 1,818,000 843,000
12/83 Augusta 97,000 945,000 1,042,000 482,000
4/84 Providence 92,000 1,345,000 1,437,000 682,000
1/85 Cranston 175,000 961,000 1,136,000 480,000
3/84 Marrietta/Cobb 73,000 742,000 815,000 352,000
1/84 Fremont/Albrae 636,000 2,040,000 2,676,000 1,061,000
12/83 Tacoma 553,000 1,509,000 2,062,000 754,000
</TABLE>
F-10
<PAGE>
<TABLE>
PS PARTNERS II, LTD
SCHEDULE III - REAL ESTATE
AND ACCUMULATED DEPRECIATION
<CAPTION>
Costs
Initial Cost subsequent
---------------------------------- to acquisition
Date Building & Building &
Acquired Description Encumbrances Land Improvement Improvements
-----------------------------------------------------------------------------------------------------------
Mini-warehouses
<S> <C> <C> <C> <C> <C>
1/84 Belton - 175,000 858,000 385,000
1/84 Gladstone - $ 275,000 $ 1,799,000 $ 292,000
1/84 Hickman/112 - 257,000 1,848,000 336,000
1/84 Holmes - 289,000 1,333,000 196,000
1/84 Independence - 221,000 1,848,000 239,000
1/84 Merriam - 255,000 1,469,000 267,000
1/84 Olathe - 107,000 992,000 210,000
1/84 Shawnee - 205,000 1,420,000 311,000
1/84 Topeka - 75,000 1,049,000 164,000
2/84 Unicorn/Knoxville - 662,000 1,887,000 323,000
2/84 Central/Knoxville - 449,000 1,281,000 186,000
3/84 Manassas - 320,000 1,556,000 311,000
3/84 Pico Rivera - 743,000 807,000 288,000
5/84 Raleigh/Departure - 302,000 2,484,000 326,000
4/84 Milwaukie/Oregon - 289,000 584,000 207,000
</TABLE>
<TABLE>
PS PARTNERS II, LTD
SCHEDULE III - REAL ESTATE
AND ACCUMULATED DEPRECIATION
<CAPTION>
Gross Carrying Amount
At December 31, 1996
------------------------------------------------------------------
Date Building & Accumulated
Acquired Description Land Improvements Total Depreciation
-----------------------------------------------------------------------------------------------------------
Mini-warehouses
<S> <C> <C> <C> <C> <C>
1/84 Belton 175,000 1,243,000 1,418,000 607,000
1/84 Gladstone $ 275,000 $ 2,091,000 $ 2,366,000 $ 1,057,000
1/84 Hickman/112 257,000 2,184,000 2,441,000 1,094,000
1/84 Holmes 289,000 1,529,000 1,818,000 775,000
1/84 Independence 221,000 2,087,000 2,308,000 1,065,000
1/84 Merriam 255,000 1,736,000 1,991,000 854,000
1/84 Olathe 107,000 1,202,000 1,309,000 604,000
1/84 Shawnee 205,000 1,731,000 1,936,000 856,000
1/84 Topeka 75,000 1,213,000 1,288,000 614,000
2/84 Unicorn/Knoxville 662,000 2,210,000 2,872,000 1,127,000
2/84 Central/Knoxville 449,000 1,467,000 1,916,000 758,000
3/84 Manassas 320,000 1,867,000 2,187,000 943,000
3/84 Pico Rivera 743,000 1,095,000 1,838,000 557,000
5/84 Raleigh/Departure 302,000 2,810,000 3,112,000 1,417,000
4/84 Milwaukie/Oregon 289,000 791,000 1,080,000 395,000
</TABLE>
F-11
<PAGE>
<TABLE>
PS PARTNERS II, LTD
SCHEDULE III - REAL ESTATE
AND ACCUMULATED DEPRECIATION
<CAPTION>
Costs
Initial Cost subsequent
---------------------------------- to acquisition
Date Building & Building &
Acquired Description Encumbrances Land Improvement Improvements
-----------------------------------------------------------------------------------------------------------
Mini-warehouses
<S> <C> <C> <C> <C> <C>
7/84 Trevose/Old Lincoln - 421,000 1,749,000 305,000
5/84 Virginia Beach - $ 509,000 $ 2,121,000 $ 537,000
5/84 Philadelphia/Grant - 1,041,000 3,262,000 355,000
6/84 Lorton - 435,000 2,040,000 427,000
6/84 Baltimore - 382,000 1,793,000 491,000
6/84 Laurel - 501,000 2,349,000 568,000
Business
parks
12/83 Lakewood 2,513,000 4,238,000 1,844,000
3/84 Austin - 4,321,000 5,937,000 3,139,000
--------------------------------------------------------------------
TOTAL - $ 17,414,000 $ 58,022,000 $ 15,200,000
====================================================================
</TABLE>
<TABLE>
PS PARTNERS II, LTD
SCHEDULE III - REAL ESTATE
AND ACCUMULATED DEPRECIATION
<CAPTION>
Gross Carrying Amount
At December 31, 1996
------------------------------------------------------------------
Date Building & Accumulated
Acquired Description Land Improvements Total Depreciation
----------------------------------------------------------------------------------------------------------
Mini-warehouses
<S> <C> <C> <C> <C> <C>
7/84 Trevose/Old Lincoln 421,000 2,054,000 2,475,000 996,000
5/84 Virginia Beach $ 509,000 $ 2,658,000 $ 3,167,000 $ 1,309,000
5/84 Philadelphia/Grant 1,041,000 3,617,000 4,658,000 1,859,000
6/84 Lorton 435,000 2,467,000 2,902,000 1,229,000
6/84 Baltimore 382,000 2,284,000 2,666,000 1,145,000
6/84 Laurel 501,000 2,917,000 3,418,000 1,423,000
Business
parks
12/83 Lakewood 2,513,000 6,082,000 8,595,000 3,564,000
3/84 Austin 4,321,000 9,076,000 13,397,000 4,858,000
-------------------------------------------------------------------
TOTAL $ 17,414,000 $ 73,222,000 $ 90,636,000 $ 37,683,000
===================================================================
</TABLE>
F-12
<PAGE>
<TABLE>
PS PARTNERS II, LTD.
A CALIFORNIA LIMITED PARTNERSHIP
REAL ESTATE RECONCILIATION
SCHEDULE III (CONTINUED)
(a) The following is a reconciliation of cost and related accumulated
depreciation.
GROSS CARRYING COST RECONCILIATION
<CAPTION>
Years Ended December 31,
------------------------------------------------
1996 1995 1994
------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of the period $ 89,400,000 $ 88,597,000 $ 90,507,000
Additions during the period:
Improvements, etc. 1,236,000 803,000 727,000
Deductions during the period - - (2,637,000)
------------------------------------------------
Balance at the close of the period $ 90,636,000 $ 89,400,000 $ 88,597,000
================================================
ACCUMULATED DEPRECIATION RECONCILIATION
Years Ended December 31,
------------------------------------------------
1996 1995 1994
------------------------------------------------
Balance at beginning of the period $ 34,181,000 $ 30,887,000 $ 28,486,000
Additions during the period:
Depreciation 3,502,000 3,294,000 3,376,000
Deductions during the period - - (975,000)
------------------------------------------------
Balance at the close of the period $ 37,683,000 $ 34,181,000 $ 30,887,000
================================================
(b) The aggregate cost of real estate for Federal income tax purposes is
$90,126,000 at December 31, 1996.
</TABLE>
F-13
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000727069
<NAME> PS PARTNERS II, LTD.
<MULTIPLIER> 1
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-1-1996
<PERIOD-END> Dec-31-1996
<EXCHANGE-RATE> 1
<CASH> 1,239,000
<SECURITIES> 0
<RECEIVABLES> 123,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,362,000
<PP&E> 90,636,000
<DEPRECIATION> (37,683,000)
<TOTAL-ASSETS> 54,558,000
<CURRENT-LIABILITIES> 946,000
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 38,543,000
<TOTAL-LIABILITY-AND-EQUITY> 54,558,000
<SALES> 0
<TOTAL-REVENUES> 15,456,000
<CGS> 0
<TOTAL-COSTS> 6,037,000
<OTHER-EXPENSES> 3,654,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,000
<INCOME-PRETAX> 4,114,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,114,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,114,000
<EPS-PRIMARY> 28.10
<EPS-DILUTED> 28.10
</TABLE>
