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, 1998
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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
- ---------------------------------------- ----------------------
(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
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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. [ ]
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DOCUMENTS INCORPORATED BY REFERENCE
NONE
<PAGE>
PART I
ITEM 1. BUSINESS.
Forward Looking Statements
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When used within this document, the words "expects," "believes,"
"anticipates," "should," "estimates," and similar expressions are intended to
identify "forward-looking statements" within the meaning of that term in Section
27A of the Securities Exchange Act of 1933, as amended, and in Section 21F of
the Securities Exchange Act of 1934, as amended. Such forward-looking statements
involve known and unknown risks, uncertainties, and other factors, which may
cause the actual results and performance of the Partnership to be materially
different from those expressed or implied in the forward looking statements.
Such factors include the impact of competition from new and existing real estate
facilities which could impact rents and occupancy levels at the real estate
facilities that the Partnership has an interest in; the Partnership's ability to
effectively compete in the markets that it does business in; the impact of the
regulatory environment as well as national, state, and local laws and
regulations including, without limitation, those governing Partnerships; and the
impact of general economic conditions upon rental rates and occupancy levels at
the real estate facilities that the Partnership has an interest in.
General
- -------
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 real estate investments consist of wholly-owned facilities and an
investment in a general partnership (SEI/PSP II Joint Ventures, the "Joint
Venture") with Public Storage, Inc. ("PSI") (formerly known as "Storage
Equities, Inc."), a real estate investment trust ("REIT") organized as a
corporation under the laws of California.
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 mini warehouses of the Partnership and the Joint
Venture.
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. PSI believes that it is the largest operator of mini-warehouse
facilities in the United States.
Through 1996, the business parks of the Partnership and the Joint
Venture 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 PS Business Parks, L.P. ("PSBPLP") (formerly known as "American Office Park
Properties, L.P.,"), an operating partnership formed to own and operate business
parks in which PSI has a significant interest. Included among the properties
transferred were the business parks of the Partnership and Joint Venture in
exchange for a partnership interest in PSBPLP. Until March 17, 1998, the general
partner of PSBPLP was American Office Park Properties, Inc., an affiliate of
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PSI. On March 17, 1998, American Office Park Properties, Inc. was merged into
Public Storage Properties XI, Inc., which changed its name to PS Business Parks,
Inc. ("PSBP"). PSBP is a REIT affiliated with PSI, and is publicly traded on the
American Stock Exchange. As a result of the merger, PSBP became the general
partner of PSBPLP (which changed its name from American Office Park Properties,
L.P. to PS Business Parks, L.P.). 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 property
transferred to PSBPLP 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 January 1, 1999, PSI owned approximately 74.18% of the Partnership's
limited partnership units and (iv) PSI is the operator of the 33 properties in
which the Partnership has an interest (these 33 properties are referred to
collectively hereinafter as the "Mini-Warehouse Properties").
Investments in Facilities
- --------------------------
The Partnership owns interests in 33 properties (excluding the
properties transferred to PSBPLP in January 1997); 27 of such properties are
owned by the Joint Venture. One property is a leasehold interest in a
mini-warehouse property in Raleigh, North 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.
The Mini-Warehouse Properties generally consist of three to seven
buildings containing an aggregate of between 259 and 1,113 storage spaces, most
of which have between 25 and 400 square feet and an interior height of
approximately 8 to 12 feet.
The Mini-Warehouse Properties experience 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 Mini-Warehouse Properties 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.
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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 and
the Joint Venture do not intend to convert the Mini-Warehouse Properties to
other uses.
Business Parks
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Through 1996, the Joint Venture owned and operated an office building
in Lakewood, California and the Partnership directly owned a retail office
warehouse center in Austin, Texas. These business parks were transferred to
PSBPLP in January 1997 in exchange for partnership interests in PSBPLP.
Investment Objectives and Policies
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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
investments, (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, and (iv) provide for cash
distributions from operations.
The Partnership will terminate on December 31, 2020 unless dissolved
earlier. Under the terms of the general partnership agreement with PSI, PSI has
the right to require the Partnership to sell all of the properties owned by the
Joint Venture (see Item 12 (c)).
Charles R. Wilson & Associates, Inc. ("Wilson") was engaged by the
Partnership to appraise the properties of the Partnership and the Joint Venture
(the "Properties") and has delivered a written report of its analysis, based
upon the review, analysis, scope and limitations described therein, as to the
fair market value of the Properties as of November 30, 1998. In valuing the
Properties, Wilson considered the applicability of all three commonly recognized
approaches to value: the cost approach, the income approach and the sales
comparison approach. The type and age of a property, market conditions and the
quantity and quality of data affect the applicability of each approach in a
specific appraisal situation. Wilson did not consider the cost approach to be
applicable to the Properties. Wilson reconciled the values indicated from the
direct sales comparison and income approaches to arrive at a final valuation
conclusion. Wilson gave primary emphasis to the income approach, an emphasis
deemed appropriate based on acquisition criteria currently employed in the
mini-warehouse market. Wilson assigned a market value to the Properties as of
November 30, 1998 of $94,000,000. The resulting effective implied capitalization
rate for the Properties based upon reported property operations (before
non-recurring expenses and after certain property tax adjustments) during the 12
months ended September 30, 1998 averaged 9.36%. Wilson's conclusion as to value
relates to 100% of the Properties, which includes the joint venture interests of
both the Partnership and PSI. Wilson did not separately value the interest of
the Partnership in the Properties.
Limited Partners should recognize that appraisals are opinions as of
the date specified and are subject to certain assumptions and may not represent
the true worth or realizable value of the Properties. There can be no assurance
that if the Properties were sold, they would be sold at the appraised value; the
sales price might be higher or lower than the appraised value.
Operating Strategies
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The Mini-Warehouse Properties 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
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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, 1998, the telephone reservation system was supporting
rental activity at all of the Partnership's properties. PSI's toll-free
telephone referral system services approximately 175,000 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 occupied
square foot for the Mini-Warehouse Properties was $.66 in 1998 compared
to $.64 in 1997. The weighted average occupancy levels at the
Mini-Warehouse Properties were 91% in 1998 compared to 90% in 1997. The
Partnership has increased rental rates in many markets where it has
achieved high occupancy levels and eliminated or minimized promotions.
* Systems and controls. PSI has an organizational structure and a
property operation system, "CHAMP" (Computerized Help and Management
Program), which links its corporate office with each mini-warehouse.
This enables PSI to obtain daily information from each mini-warehouse
and to achieve efficiencies in operations and maintain control over its
space inventory, rental rates, promotional discounts and delinquencies.
Expense management is achieved through centralized payroll and accounts
payable systems and a comprehensive property tax appeals department,
and PSI has an extensive internal audit program designed to ensure
proper handling of cash collections.
* Professional property operation. In addition to the approximately 170
support personnel at the Public Storage corporate offices, there are
approximately 2,700 on-site personnel who manage the day-to-day
operations of the mini-warehouses in the Public Storage system. These
on-site personnel are supervised by 120 district managers, 33 regional
managers and 11 divisional managers who report to the president of the
mini-warehouse property operator (who has 15 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 Mini-Warehouse Properties are managed by PSI pursuant to a
Management Agreement.
Under the supervision of the Partnership and the Joint Venture, 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 property owners, employees for the
operation of the owners' 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.
5
<PAGE>
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 Mini-Warehouse Properties are typically advertised via signage,
yellow pages, flyers and broadcast media advertising (television and radio) in
geographic areas in which many of the facilities are located. Broadcast media
and other advertising costs are charged to the 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 and the Joint Venture 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 and the Joint Venture 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 with PSI provides that the Management
Agreement may be terminated without cause upon 60 days written notice by either
party.
Business Park Operator
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Through 1996, the business parks of the Partnership and the Joint
Venture were managed by PSCPG, now known as PS Business Parks, Inc., pursuant to
a Management Agreement. In January 1997, these properties were transferred to
PSBPLP in exchange for a partnership interest.
Competition
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Competition in the market areas in which the Mini-Warehouse Properties
operate is significant and affects the occupancy levels, rental rates and
operating expenses of certain of the facilities. Competition may be accelerated
by any increase in availability of funds for investment in real estate. Recent
increases in plans for development of mini-warehouses are 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 Mini-Warehouse Properties. The
Partnership believes that the availability of insurance reduces the potential
liability of the Partnership and the Joint Venture 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 had 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
and Joint Venture. These persons include resident managers, assistant managers,
relief managers, area managers, and administrative personnel. Some of these
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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 PSBPLP.
Agreement and Plan of Reorganization
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The Partnership has entered into an Agreement and Plan of
Reorganization by and among PSI, PS Partners II Merger Co., Inc. and the
Partnership, dated as of January 19, 1999 (the "Agreement and Plan of
Reorganization'). Under the Agreement and Plan of Reorganization, each of the
Units held by the public limited partners will be converted into the right to
receive a value of $697 in PSI common stock or, at the limited partner's
election, in cash. The Agreement and Plan of Reorganization is referenced under
Item 14(c) as Exhibit 2 and is incorporated herein by this reference.
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ITEM 2. PROPERTIES.
The following table sets forth information as of December 31, 1998,
about the Mini-Warehouse Properties:
<TABLE>
<CAPTION>
Net Number
Rentable of Date of Ownership
Location Square Feet Spaces Acquisition Percentage
- ------------------------- ----------- ------ ----------- ----------
CALIFORNIA
<S> <C> <C> <C> <C>
Fremont 60,700 597 01/13/84 70.0%
Albrae Street
Pico 47,500 399 03/01/84 50.0
Bermudez Street
GEORGIA
Augusta 40,100 363 12/09/83 81.5
Crescent Drive
Marietta 29,600 259 03/30/84 75.0
S. Cobb Drive
KANSAS
Olathe 41,800 302 01/19/84 74.4
E. Spruce
Shawnee 64,200 418 01/19/84 74.4
W. 63rd St.
Topeka 50,000 368 01/19/84 74.4
SW 41st St.
Merriam 58,800 440 01/19/84 74.4
W. Frontage
MARYLAND
Baltimore 76,900 797 06/27/84 100.0
Shannon Road
Baltimore 48,900 531 06/27/84 100.0
Laurel Bowie Road
MISSOURI
Belton 42,700 358 01/19/84 74.4
S. 71 Fwy.
Gladstone 74,600 597 01/19/84 74.4
N. Oak Trafficway
Independence 78,600 530 01/19/84 74.4
E. 31st St.
Kansas City 73,800 541 01/19/84 74.4
E. 112th Terrace
Kansas City 52,200 469 01/19/84 74.4
Holmes
NORTH CAROLINA
Charlotte 53,900 435 12/09/83 81.5
South Blvd.
Greensboro 42,700 338 12/09/83 81.5
Electra Drive
</TABLE>
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<TABLE>
<CAPTION>
Net Number
Rentable of Date of Ownership
Location Square Feet Spaces Acquisition Percentage
- ------------------------- ----------- ------ ----------- ----------
NORTH CAROLINA
<S> <C> <C> <C> <C>
Greensboro 62,200 655 12/09/83 81.5%
W. Market St.
Raleigh 105,700 539 05/16/84 53.0
Departure Dr.
Raleigh 52,400 425 12/09/83 100.0
Yonkers Rd
OREGON
Milwaukie 34,600 373 04/18/84 100.0
SE McLoughlin Blvd.
PENNSYLVANIA
Philadelphia 110,500 1,113 05/21/84 36.1
Grant Ave.
Trevose 61,600 743 07/03/84 67.8
Old Lincoln Highway
RHODE ISLAND
Cranston 28,700 300 01/24/85 64.6
Pontiac - 71
Freeway Dr.
N. Providence 35,600 389 04/19/84 90.0
Mineral Springs Ave.
SOUTH CAROLINA
Columbia 67,200 575 12/09/83 81.5
Broad River Rd
TENNESSEE
Knoxville 64,000 574 02/16/84 81.9
E. Central
Ave. Pike
Knoxville 97,300 796 02/16/84 81.9
Unicorn Drive
VIRGINIA
Lorton 55,300 561 06/27/84 100.0
Richmond Hwy
Manassas 43,900 431 03/26/84 41.6
Balls Ford Rd.
Richmond 65,400 507 12/09/83 81.5
Jefferson Davis
Virginia Beach 98,900 689 05/18/84 100.0
Independence
WASHINGTON
Tacoma 52,300 626 01/03/84 90.0
24th St. W.
</TABLE>
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<PAGE>
The weighted average occupancy level for the Mini-Warehouse Properties
was 91% in 1998 compared to 90% in 1997. The monthly average realized rent per
square foot for the Mini-Warehouse Properties was $.66 in 1998 compared to $.64
in 1997.
Substantially all of the 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 Mini-Warehouse Properties to evaluate the environmental condition of, and
potential environmental liabilities of such properties. Although there can be no
assurance, the Partnership is not aware of any 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 or the
Joint Venture.
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 1998.
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PART II
ITEM 5. MARKET FOR THE PARTNERSHIP'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Partnership has no common stock.
The Units are not listed on any national securities exchange or quoted
on the NASDAQ System, and there is no established public trading market for the
Units. Secondary sales activity for the Units has been limited and sporadic. The
General Partners monitor transfers of the Units (a) because the admission of the
transferee as a substitute limited partner requires the consent of the General
Partners under the Partnership's Amended and Restated 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, 1998, there were approximately 1,632 record holders of Units.
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.
The Partnership has entered into an Agreement and Plan of
Reorganization by and among PSI, PS Partners II Merger Co., Inc. and the
Partnership, dated as of January 19, 1999 (the "Agreement and Plan of
Reorganization"). Under the Agreement and Plan of Reorganization, each of the
Units held by the public limited partners will be converted into the right to
receive a value of $697 in PSI common stock or, at the limited partner's
election, in cash. The Agreement and Plan of Reorganization is referenced under
Item 14(c) as Exhibit 2 and is incorporated herein by this reference.
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(In thousands, except per Unit data)
<S> <C> <C> <C> <C> <C>
Total Revenues $7,231 $ 6,330 $ 7,103 $ 7,043 $ 6,531
Depreciation and amortization 648 616 1,080 973 930
Income before gain on
disposition of real estate facility
and early extinguishment of debt 5,438 4,634 4,114 4,185 3,498
Net income 5,438 4,634 4,114 4,185 3,722
Limited partners' share 4,908 4,043 3,597 3,262 3,528
General partners' share 530 591 517 923 194
Limited partners' per unit data(a)
Net income $ 38.34 $ 31.59 $ 28.10 $ 25.48 $ 27.56
Cash distributions (b) (c) $ 33.44 $ 38.34 $ 33.44 $ 61.97 $ 11.00
As of December 31,
- ------------------
Cash and cash equivalents $2,785 $888 $1,075 $696 $3,003
Total assets $38,396 $ 37,770 $38,850 $39,606 $44,225
</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.
(c) The General Partners distributed, concurrent with the distribution for the
first quarter of 1997, a portion of the operating reserve of the
Partnership estimated to be $4.90.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
FORWARD LOOKING STATEMENTS
- ---------------------------
When used within this document, the words "expects," "believes,"
"anticipates," "should," "estimates," and similar expressions are intended to
identify "forward-looking statements" within the meaning of that term in Section
27A of the Securities Exchange Act of 1933, as amended, and in Section 21F of
the Securities Exchange Act of 1934, as amended. Such forward-looking statements
involve known and unknown risks, uncertainties, and other factors, which may
cause the actual results and performance of the Partnership to be materially
different from those expressed or implied in the forward looking statements.
Such factors include the impact of competition from new and existing real estate
facilities which could impact rents and occupancy levels at the real estate
facilities that the Partnership has an interest in; the Partnership's ability to
effectively compete in the markets that it does business in; the impact of the
regulatory environment as well as national, state, and local laws and
regulations including, without limitation, those governing Partnerships; and the
impact of general economic conditions upon rental rates and occupancy levels at
the real estate facilities that the Partnership has an interest in.
RESULTS OF OPERATIONS
- ---------------------
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997:
The Partnership's net income was $5,438,000 in 1998 compared to
$4,634,000 in 1997, representing an increase of $804,000, or 17.4%. The increase
is due primarily to the Partnership's share of an improvement in operations of
the mini-warehouses in which the Partnership has an interest (the
"Mini-Warehouse Properties") and a decrease in depreciation allocated to the
Partnership with respect to the Joint Venture.
PROPERTY OPERATIONS: Rental income for the Partnership's wholly-owned
mini-warehouse properties was $2,925,000 in 1998 compared to $2,818,000 during
1997, representing an increase of $107,000, or 3.8%. Cost of operations
(including management fees) increased $56,000, or 6.0%, to $993,000 during 1998
from $937,000 in 1997, respectively. Accordingly, for the Partnership's
wholly-owned mini-warehouse properties, net operating income increased by
$51,000, or 2.7%, from $1,881,000 in 1997 to $1,932,000 during 1998.
EQUITY IN EARNINGS OF REAL ESTATE ENTITIES: Equity in earnings of real
estate entities was $4,180,000 in 1998 as compared to $3,454,000 during 1997,
representing an increase of $726,000, or 21.0%. The increase was due primarily
to the Partnership's share of improved operating results at the Joint Venture's
mini-warehouse properties, as well as a decrease in depreciation expense
allocated to the Partnership with respect to the Joint Venture.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization for the
Partnership's wholly-owned properties increased $32,000 from $616,000 in 1997 to
$648,000 in 1998. This increase was primarily attributable to additional
depreciation on capital expenditures made during 1997 and 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996:
The Partnership's net income was $4,634,000 in 1997 compared to
$4,114,000 in 1996, representing an increase of $520,000, or 12.6%. The increase
is due primarily to the Partnership's share of an improvement in operations of
the mini-warehouses in which the Partnership has an interest.
PROPERTY OPERATIONS: Rental income for the Partnership's wholly-owned
mini-warehouse properties was $2,818,000 in 1997 compared to $2,715,000 during
1996, representing an increase of $103,000, or 3.8%. Cost of operations
(including management fees) increased $37,000, or 4.1%, to $937,000 during 1997
from $900,000 in 1996, respectively. Accordingly, for the Partnership's
wholly-owned mini-warehouse properties, net operating income increased by
$66,000, or 3.6%, from $1,815,000 in 1996 to $1,881,000 during 1997.
13
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As a result of the contribution of the Partnership's business park to
PSBPLP in January 1997 in exchange for operating partnership units, rental
income and cost of operations, respectively, for the Partnership's business park
was reduced to zero and zero, respectively, in 1997 from $1,676,000 and
$857,000, respectively, in 1996.
EQUITY IN EARNINGS OF REAL ESTATE ENTITIES: Equity in earnings of real
estate entities was $3,454,000 in 1997 as compared to $2,652,000 during 1996,
representing an increase of $802,000, or 30.2%. The increase was due primarily
to the impact of the contribution of the business parks of the Partnership and
the Joint Venture to PSBPLP in January 1997.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization for the
Partnership's wholly-owned properties decreased $464,000 from $1,080,000 in 1996
to $616,000 in 1997. This decrease was primarily attributable to the impact of
the contribution of the Partnership's wholly-owned business park facility to
PSBPLP, offset partially by additional depreciation on capital expenditures made
during 1996 and 1997.
SUPPLEMENTAL PROPERTY DATA
- --------------------------
During 1998 and 1997, the majority of the Partnership's net income was
from the Partnership's share of the operating results of the Mini-Warehouse
Properties. Therefore, in order to evaluate the Partnership's operating results,
the General Partners analyze the operating performance of the Mini-Warehouse
Properties.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31,
1997: Rental income for the Mini-Warehouse Properties was $14,203,000 in 1998
compared to $13,617,000 during 1997, representing an increase of $586,000, or
4.3%. The increase in rental income was primarily attributable to increased
rental rates, combined with increased average occupancy levels. The monthly
average realized rent per square foot was $.66 in 1998 compared to $.64 in 1997.
The weighted average occupancy levels increased from 90% in 1997 to 91% in 1998.
Cost of operations (including management fees) increased $283,000, or 5.7%, to
$5,256,000 during 1998 from $4,973,000 in 1997. This increase was primarily
attributable to increases in advertising, property tax, and payroll expenses.
Accordingly, for the Mini-Warehouse Properties, property net operating income
increased by $303,000, or 3.5%, from $8,644,000 in 1997 to $8,947,000 during
1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31,
1996: Rental income for the Mini-Warehouse Properties was $13,617,000 in 1997
compared to $13,049,000 during 1996, representing an increase of $568,000, or
4.4%. The increase in rental income was primarily attributable to increased
rental rates, partially offset by decreased average occupancy levels. The
monthly average realized rent per square foot was $.64 in 1997 compared to $.61
in 1996. The weighted average occupancy levels decreased from 91% in 1996 to 90%
in 1997. Cost of operations (including management fees) increased $222,000, or
4.7%, to $4,973,000 during 1997 from $4,751,000 in 1996. This increase was
primarily attributable to increases in advertising, property tax, and management
expenses. Accordingly, for the Mini-Warehouse Properties, property net operating
income increased by $346,000, or 4.2%, from $8,298,000 in 1996 to $8,644,000
during 1997.
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 and distributions from Real Estate Entities, combined
with cash on hand at December 31, 1998 of $2,785,000.
Cash flows from operating activities and distributions from Real Estate
Entities ($7,019,000 for the year ended December 31, 1998) have been sufficient
to meet all current obligations of the Partnership. Total capital improvements
for the Partnership's wholly-owned properties were $318,000, $260,000 and
$367,000 in 1998, 1997, and 1996, respectively. During 1999, the Partnership
anticipates approximately $129,000 of capital improvements to the Partnership's
wholly-owned properties. 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.
14
<PAGE>
Total distributions paid to the General Partners and the limited
partners (including the per Unit amounts) for 1998 and prior years were as
follows:
Total Per Unit
---------- ----------
1998 $4,804,000 $33.44
1997 5,507,000 38.34
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
Joint Venture to retain operating cash flows which were used to retire 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. The 1997
distribution includes a special distribution of cash reserves of approximately
$4.90 per Unit. Future distribution levels will be based upon cash flows
available for distributions (cash flows from operations and distributions from
real estate entities, less capital improvements and necessary cash reserves).
AGREEMENT AND PLAN OF REORGANIZATION
- ------------------------------------
The Partnership has entered into an Agreement and Plan of
Reorganization by and among PSI, PS Partners II Merger Co., Inc. and the
Partnership, dated as of January 19, 1999 (the "Agreement and Plan of
Reorganization"). Under the Agreement and Plan of Reorganization, each of the
Units held by the public limited partners will be converted into the right to
receive a value of $697 in PSI common stock or, at the limited partner's
election, in cash. The Agreement and Plan of Reorganization is referenced under
Item 14(c) as Exhibit 2 and is incorporated herein by this reference.
IMPACT OF YEAR 2000
- -------------------
The Partnership utilizes PSI's information systems in connection with a
cost sharing and administrative services agreement. PSI has completed an
assessment of all of its hardware and software applications to identify
susceptibility to what is commonly referred to as the "Y2K Issue" whereby
certain computer programs have been written using two digits rather than four to
define the applicable year. Any of PSI's computer programs or hardware with the
Y2K Issue that have date-sensitive applications or embedded chips may recognize
a date using "00" as the year 1900 rather than the Year 2000, resulting in
miscalculations or system failure causing disruptions of operations.
PSI has two phases in its process with respect to each of its systems;
i) assessment, whereby PSI evaluates whether the system is Y2K compliant and
identifies the plan of action with respect to remediating any Y2K issues
identified and ii) implementation, whereby PSI completes the plan of action
prepared in the assessment phase and verifies that Y2K compliance has been
achieved.
15
<PAGE>
Many of PSI's critical applications, relative to the direct management
of properties, have recently been replaced and PSI believes they are already
Year 2000 compliant. PSI has an implementation in process on the remaining
critical applications, including its general ledger and related systems, that
are believed to have Y2K issues. PSI expects the implementation to be complete
by June 1999. Contingency plans have been developed for use in case PSI's
implementations are not completed on a timely basis. While PSI presently
believes that the impact of the Y2K Issue on its systems can be mitigated, if
PSI's plan for ensuring Year 2000 Compliance and the related contingency plans
were to fail, be insufficient, or not be implemented on a timely basis,
Partnership operations could be materially impacted.
Certain of PSI's other non-computer related systems that may be
impacted by the Y2K Issue, such as security systems, are currently being
evaluated, and PSI expects the evaluation to be complete by June 1999. PSI
expects the implementation of any required solutions to be complete in advance
of December 31, 1999. PSI has not fully evaluated the impact of lack of Year
2000 compliance on these systems, but has no reason to believe that lack of
compliance would materially impact the Partnership's operations.
The Partnership exchanges electronic data with certain outside vendors
in the banking and payroll processing areas. The Partnership has been advised by
these vendors that their systems are or will be Year 2000 compliant, but has
requested a Year 2000 compliance certification from these entities. The
Partnership is not aware of any other vendors, suppliers, or other external
agents with a Y2K Issue that would materially impact the Partnership's results
of operations, liquidity, or capital resources. However, the Partnership has no
means of ensuring that external agents will be Year 2000 compliant, and there
can be no assurance that the Partnership has identified all such external
agents. The inability of external agents to complete their Year 2000 compliance
process in a timely fashion could materially impact the Partnership. The effect
of non-compliance by external agents is not determinable.
The cost of the PSI's Year 2000 compliance activities (which primarily
consists of the costs of new systems) to be allocated to the Partnership and the
Joint Venture is estimated at approximately $148,000. These costs are
capitalized. PSI's Year 2000 compliance efforts have not resulted in any
significant deferrals in other information system projects.
The costs of the projects and the date on which PSI and the Partnership
expect to achieve Year 2000 Compliance are based upon management's best
estimates, and were derived utilizing numerous assumptions of future events.
There can be no assurance that these estimates will be achieved, and actual
results could differ materially from those anticipated. There can be no
assurance that the Partnership or PSI has identified all potential Y2K Issues
either within the Partnership, at PSI, or at external agents. In addition, the
impact of the Y2K issue on governmental entities and utility providers and the
resultant impact on the Partnership, as well as disruptions in the general
economy, may be material but cannot be reasonably determined or quantified.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Partnership's financial statements are included elsewhere herein.
Reference is made to the Index to Financial Statements and Financial Statement
Schedules in Item 14(a).
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
16
<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 Mini-Warehouse Properties are
managed by PSI pursuant to a Management Agreement. Through 1996, the business
parks of the Partnership and the Joint Venture were managed by a predecessor of
PSBPLP, pursuant to a Management Agreement. In January 1997, the Partnership and
Joint Venture transferred their business parks to PSBPLP in exchange for a
partnership interest in PSBPLP.
The names of all directors and executive officers of PSI, the offices
held by each of them with PSI, and their ages and business experience during the
past five years are as follows:
Name Positions with PSI
- ------------------------ -------------------------------------------------
B. Wayne Hughes Chairman of the Board and Chief Executive Officer
Harvey Lenkin President and Director
B. Wayne Hughes, Jr. Vice President and Director
John Reyes Senior Vice President and Chief Financial Officer
Carl B. Phelps Senior Vice President
Obren B. Gerich Senior Vice President
Marvin M. Lotz Senior Vice President
David Goldberg Senior Vice President and General Counsel
A. Timothy Scott Senior Vice President and Tax Counsel
David P. Singelyn Vice President and Treasurer
Sarah Hass Vice President and Secretary
Robert J. Abernethy Director
Dann V. Angeloff Director
William C. Baker Director
Thomas J. Barrack Jr. Director
Uri P. Harkham Director
Daniel C. Staton Director
B. Wayne Hughes, age 65, a general partner of the Partnership, has been
a director of PSI since its organization in 1980 and was President and Co-Chief
Executive Officer from 1980 until November 1991 when he became Chairman of the
Board and sole Chief Executive Officer. Mr. Hughes has been active in the real
estate investment field for over 25 years. He is the father of B. Wayne Hughes,
Jr.
Harvey Lenkin, age 62, has been employed by PSI for 21 years and became
President and a director of PSI in November 1991. Mr. Lenkin has been a director
of PS Business Parks, Inc. ("PSBP"), an affiliated REIT, since March 16, 1998
and was President of PSBP (formerly Public Storage Properties XI, Inc.) from
1990 until March 16, 1998. He is a member of the Board of Governors of the
National Association of Real Estate Investment Trusts (NAREIT).
B. Wayne Hughes, Jr., age 39 became director of PSI in January 1998. He
has been a Vice President - Acquisitions of PSI since 1992. He is the son of B.
Wayne Hughes.
John Reyes, age 38, a certified public accountant, joined PSI in 1990
and was Controller of PSI from 1992 until December 1996 when he became Chief
Financial Officer. He became a Vice President of PSI in November 1995 and a
Senior Vice President of PSI in December 1996. From 1983 to 1990, Mr. Reyes was
employed by Ernst & Young.
17
<PAGE>
Carl B. Phelps, age 60, became a Senior Vice President of PSI in
January 1998 with overall responsibility for property acquisition and
development. From June 1991 until joining PSI, he was a partner in the law firm
of Andrews & Kurth, L.L.P., which performed legal services for PSI. From
December 1982 through May 1991, his professional corporation was a partner in
the law firm of Sachs & Phelps, then counsel to PSI.
Obren B. Gerich, age 60, a certified public accountant, has been a Vice
President of PSI since 1980 and became Senior Vice President of PSI in November
1995. He was Chief Financial Officer of PSI until November 1991.
Marvin M. Lotz, age 56, has had overall responsibility for Public
Storage's mini-warehouse operations since 1988. He became a Senior Vice
President of PSI in November 1995. Mr. Lotz was an officer of PSI with
responsibility for property acquisitions from 1983 until 1988.
David Goldberg, age 49, joined PSI's legal staff in June 1991. He
became Senior Vice President and General Counsel of PSI in November 1995. From
December 1982 until May 1991, he was a partner in the law firm of Sachs &
Phelps, then counsel to PSI.
A. Timothy Scott, age 47, became a Senior Vice President and Tax
Counsel of PSI and Vice President and Tax Counsel of the Public Storage REITs in
November 1996. From June 1991 until joining PSI, Mr. Scott practiced tax law as
a shareholder of the law firm of Heller, Ehrman, White & McAuliffe, counsel to
PSI. Prior to June 1991, his professional corporation was a partner in the law
firm of Sachs & Phelps, then counsel to PSI.
David P. Singleyn, age 37, a certified public accountant, has been
employed by PSI since 1989 and became Vice President and Treasurer of PSI in
November 1995. From 1987 to 1989, Mr. Singelyn was Controller of Winchell's
Donut Houses, L.P.
Sarah Hass, age 43, became Secretary of PSI in February 1992. She
became a Vice President of PSI in November 1995. She joined PSI's legal
department in June 1991, rendering services on behalf of PSI. From 1987 until
May 1991, her professional corporation was a partner in the law firm of Sachs &
Phelps, then counsel to PSI, and from April 1986 until June 1987, she was
associated with that firm, practicing in the area of securities law. From
September 1979 until September 1985, Ms. Hass was associated with the law firm
of Rifkind & Sterling, Incorporated.
Robert J. Abernethy, age 59, has been President of American Standard
Development Company and of Self-Storage Management Company, which develop and
operate mini-warehouses, since 1976 and 1977, respectively. Mr. Abernethy has
been a director of PSI since its organization in 1980. He is a member of the
board of trustees of Johns Hopkins University and a director of Marathon
National Bank. Mr. Abernethy is a former member of the board of directors of the
Los Angeles County Metropolitan Transportation Authority and the Metropolitan
Water District of Southern California and a former Planning Commissioner and
Telecommunications Commissioner and former Vice-Chairman of the Economic
Development Commission of the City of Los Angeles.
Dann V. Angeloff, age 63, has been President of the Angeloff Company, a
corporate financial advisory firm, since 1976. The Angeloff Company has
rendered, and is expected to continue to render, financial advisory and
securities brokerage services for PSI. Mr. Angeloff is the general partner of a
limited partnership that owns a mini-warehouse operated by PSI and which secures
a note owned by PSI. Mr. Angeloff has been a director of PSI since its
organization in 1980. He is a director of Balboa Capital Corporation,
Compensation Resource Group, Nicholas/Applegate Growth Equity Fund,
Nicholas/Applegate Mutual Funds, ReadyPac Produce, Inc., Royce Medical Company,
SupraLife International and WorldxChange Communications, Inc. He was a director
of SPI from 1989 until June 1996.
William C. Baker, age 65, became a director of PSI in November 1991.
Since January 1999, Mr. Baker has been President and Chief Executive Officer of
Los Angeles Turf Club, Incorporated, which operates the Santa Anita Racetrack
and is wholly-owned subsidiary of Magna International Inc. Since August 1998, he
has been President of Meditrust Operating Company, a paired share real estate
investment trust. From November 1997 until December 1998, he was Chairman of the
18
<PAGE>
Board and Chief Executive Officer of The Santa Anita Companies, Inc., a
wholly-owned subsidiary of Meditrust Operating Company which then operated the
Santa Anita Racetrack. From August 1996 until November 1997, he was Chairman of
the Board and Chief Executive Officer of Santa Anita Operating Company and
Chairman of the Board of Santa Anita Realty Enterprises, Inc., the companies
which were merged with Meditrust in November 1997. From April 1993 through May
1995, Mr. Baker was President of Red Robin International, Inc., an operator and
franchiser of casual dining restaurants in the United States and Canada. From
January 1992 through December 1995 he was Chairman and Chief Executive Officer
of Carolina Restaurant Enterprises, Inc., a franchisee of Red Robin
International, Inc. Since 1991, he has been Chairman of the Board of Coast
Newport Properties, a real estate brokerage company. From 1976 to 1988, he was a
principal shareholder and Chairman and Chief Executive Officer of Del Taco,
Inc., an operator and franchiser of fast food restaurants in California. Mr.
Baker is a director of Callaway Golf Company and Meditrust Operating Company.
Thomas J. Barrack, Jr., age 51, became a director of PSI in February
1998. Mr. Barrack has been the Chairman and Chief Executive Officer of Colony
Capital, Inc. since September, 1991. Colony Capital, Inc. is one of the largest
real estate investors in America, having acquired properties in the U.S., Europe
and Asia. Prior to founding Colony Capital, Inc., from 1987 to 1991, Mr. Barrack
was a principal with the Robert M. Bass Group, Inc., the principal investment
vehicle for Robert M. Bass of Fort Worth, Texas. From 1985 to 1987, Mr. Barrack
was President of Oxford Ventures, Inc., a Canadian-based real estate development
company. From 1984 to 1985 he was a Senior Vice President at E. F. Hutton
Corporate Finance in New York. Mr. Barrack was appointed by President Ronald
Reagan as Deputy Under Secretary at the U.S. Department of the Interior from
1982 to 1983. Mr. Barrack currently is a director of Continental Airlines, Inc.,
Harvey's Acquisition Corp. and Kennedy-Wilson, Inc.
Uri P. Harkham, age 50, 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.
Daniel C. Staton, age 46, became a director of PSI on March 12, 1999 in
connection with the merger of Storage Trust Realty, a real estate investment
trust, with PSI. Mr. Staton was Chairman of the Board of Trustees of Storage
Trust Realty from February 1998 until March 12, 1999 and a Trustee of Storage
Trust Realty from November 1994 until March 12, 1999. He is President of Walnut
Capital Partners, an investment and venture capital company. Mr. Staton was the
Chief Operating Officer and Executive Vice President of Duke Realty Investments,
Inc. from 1993 to 1997. He has been a director of Duke Realty Investments, Inc.
since 1993. From 1981 to 1993, Mr. Staton was a principal owner of Duke
Associates, the predecessor of Duke Realty Investments, Inc. Prior to joining
Duke Associates in 1981, he was a partner and general manager of his own moving
company, Gateway Van & Storage, Inc. in St. Louis, Missouri. From 1986 to 1988,
Mr. Staton served as president of the Greater Cincinnati Chapter of the National
Association of Industrial and Office Parks.
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.
19
<PAGE>
Section 16 (a) Beneficial Ownership Reporting Compliance
- --------------------------------------------------------
Based on a review of the reports filed under Section 16 (a) of the
Securities Exchange Act of 1934 with respect to the Units that were submitted to
the Partnership, the Partnership believes that with respect to the fiscal year
ended December 31, 1998, B. Wayne Hughes, Jr. and Thomas J. Barrack, Jr., each
of whom is a director of PSI, a General Partner of the Partnership, each filed
his Initial Statement of Beneficial Ownership of Securities on Form 3 after its
due date.
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 January 1, 1999, PSI beneficially owned more than 5% of the
Units of the Partnership:
Title Amount of Percent
of Name and Address of Beneficial of
Class Beneficial Owner Ownership Class
- --------------------- ---------------------------- ---------------- -------
Units of Public Storage, Inc.
Limited 701 Western Avenue
Partnership Interest Glendale, CA 91201-2394 (1) 94,947 Units (1) 74.18%
(1) These Units are held of record by SEI Arlington Acquisition Corporation, a
wholly-owned subsidiary of PSI.
The Partnership is not aware of any other beneficial owners of
more than 5% of the Units.
(b) The Partnership has no officers and directors.
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 PSBPLP 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
20
<PAGE>
sales proceeds solely in cash. As of December 31, 1998, PSI has the
right to require the Partnership to sell all of the Joint Venture's
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 1998, 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 PSBPLP in January 1997); 27 of such
properties are held in a general partnership comprised of the Partnership and
PSI.
The Partnership and the Joint Venture have a Management Agreement with
PSI pursuant to which the Partnership and the Joint Venture pay PSI a fee of 6%
of the gross revenues of the mini-warehouse spaces operated for the Partnership
and the Joint Venture. During 1998, the Partnership and the Joint Venture paid
fees of $853,000 to PSI pursuant to the Management Agreement.
Through 1996, the Partnership's and Joint Venture's business parks were
managed by a predecessor of PSBPLP pursuant to a Management Agreement which
provides for the payment of a fee by the Partnership and Joint Venture of 5% of
the gross revenues of the commercial space operated for the Partnership and the
Joint Venture. In January 1997, the Partnership, the Joint Venture, and PSI and
other related partnerships transferred a total of 35 business parks to PSBPLP,
an operating partnership formed to own and operate business parks in which PSI
has a significant interest. Included among the properties transferred were the
Partnership's and Joint Venture's business parks in exchange for a partnership
interest in PSBPLP. The general partner of PSBPLP is PS Business Parks, Inc., a
REIT traded on the American Stock Exchange.
21
<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 Financial Statements and
Financial Statement Schedules.
2. Financial Statement Schedules: See Index to 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.
22
<PAGE>
PS PARTNERS II, LTD.
EXHIBIT INDEX
2 Agreement and Plan of Reorganization by and among Public Storage, Inc.,
PS Partners II Merger Co., Inc. and the Partnership, dated as of
January 19, 1999. Filed with the Partnership's Current Report on Form
8-K dated January 19, 1999 and incorporated herein by reference.
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.
23
<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 30, 1999 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 30, 1999
- -------------------------------- Executive Officer of Public Storage, Inc. and
B. Wayne Hughes General Partner (principal executive officer)
/s/ Harvey Lenkin President and Director March 30, 1999
- -------------------------------- of Public Storage, Inc.
Harvey Lenkin
/s/ B. Wayne Hughes, Jr. Vice President and Director March 30, 1999
- -------------------------------- of Public Storage, Inc.
B. Wayne Hughes, Jr.
/s/ John Reyes Senior Vice President and Chief Financial Officer March 30, 1999
- -------------------------------- of Public Storage, Inc. (principal financial
John Reyes officer and principal accounting officer)
/s/ Robert J. Abernethy Director of Public Storage, Inc. March 30, 1999
- --------------------------------
Robert J. Abernethy
/s/ Dann V. Angeloff Director of Public Storage, Inc. March 30, 1999
- --------------------------------
Dann V. Angeloff
/s/ William C. Baker Director of Public Storage, Inc. March 30, 1999
- --------------------------------
William C. Baker
Director of Public Storage, Inc.
- --------------------------------
Thomas J. Barrack, Jr.
/s/ Uri P. Harkham Director of Public Storage, Inc. March 30, 1999
- --------------------------------
Uri P. Harkham
Director of Public Storage, Inc.
- --------------------------------
Daniel C. Staton
</TABLE>
24
<PAGE>
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
(Item 14 (a))
Page
References
----------
PS PARTNERS II, LTD.
Report of Independent Auditors F-1
Financial Statements and Schedules:
Balance Sheets as of December 31, 1998 and 1997 F-2
For the years ended December 31, 1998, 1997 and 1996:
Statements of Income F-3
Statements of Partners' Equity F-4
Statements of Cash Flows F-5 - F-6
Notes to Financial Statements F-7 - F-11
Schedule
Schedule III - Real Estate and Accumulated Depreciation F-12 - F-13
Financial Statements of 50 percent or less owned persons required pursuant to
Rule 3-09:
PS BUSINESS PARKS, INC. - PS Business Parks, Inc. is a registrant with the
Securities and Exchange Commission and its filings can be accessed through
the Securities and Exchange Commission.
SEI/PSP II JOINT VENTURES
Report of Independent Auditors F-14
Financial Statements:
Balance Sheets as of December 31, 1998 and 1997 F-15
For the years ended December 31, 1998, 1997 and 1996:
Statements of Income F-16
Statements of Partners' Equity F-17
Statements of Cash Flows F-18 - F-19
Notes to Financial Statements F-20 - F-23
Schedule
Schedule III - Real Estate and Accumulated Depreciation F-24 - F-26
All other schedules have been omitted since the required information is
not present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the financial
statements or the notes thereto.
25
<PAGE>
Report of Independent Auditors
The Partners
PS Partners II, Ltd.
We have audited the balance sheets of PS Partners II, Ltd. as of December 31,
1998 and 1997 and the related statements of income, partners' equity and cash
flows for each of the three years in the period ended December 31, 1998. 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 financial statements referred to above present fairly, in
all material respects, the financial position of PS Partners II, Ltd. at
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, 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
February 10, 1999
Los Angeles, CA
F-1
<PAGE>
PS PARTNERS II, LTD.
BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
--------------------------------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $2,785,000 $888,000
Rent and other receivables 22,000 33,000
Real estate facilities, at cost:
Land 2,319,000 2,319,000
Buildings and equipment 12,902,000 12,584,000
--------------------------------------
15,221,000 14,903,000
Less accumulated depreciation (7,376,000) (6,728,000)
--------------------------------------
7,845,000 8,175,000
Investment in real estate entities 27,641,000 28,599,000
Other assets 103,000 75,000
--------------------------------------
$38,396,000 $37,770,000
======================================
LIABILITIES AND PARTNERS' EQUITY
Accounts payable $9,000 $26,000
Advance payments from renters 83,000 74,000
Partners' equity:
Limited partners' equity, $500 per unit, 128,000
units authorized, issued and outstanding 37,839,000 37,211,000
General partner's equity 465,000 459,000
--------------------------------------
Total partners' equity 38,304,000 37,670,000
--------------------------------------
$38,396,000 $37,770,000
======================================
</TABLE>
See accompanying notes.
F-2
<PAGE>
PS PARTNERS II, LTD.
STATEMENTS OF INCOME
For the years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------------------
REVENUE:
<S> <C> <C> <C>
Rental income $2,925,000 $2,818,000 $4,391,000
Equity in earnings of real estate entities 4,180,000 3,454,000 2,652,000
Interest income 126,000 58,000 60,000
-----------------------------------------------------
7,231,000 6,330,000 7,103,000
-----------------------------------------------------
COSTS AND EXPENSES:
Cost of operations 817,000 768,000 1,510,000
Management fees 176,000 169,000 247,000
Depreciation and amortization 648,000 616,000 1,080,000
Administrative 152,000 143,000 152,000
-----------------------------------------------------
1,793,000 1,696,000 2,989,000
-----------------------------------------------------
NET INCOME $5,438,000 $4,634,000 $4,114,000
=====================================================
Limited partners' share of net income
($38.34, $31.59, and $28.10 per unit in
1998, 1997, and 1996, respectively) $4,908,000 $4,043,000 $3,597,000
General partner's share of net income 530,000 591,000 517,000
-----------------------------------------------------
$5,438,000 $4,634,000 $4,114,000
=====================================================
</TABLE>
See accompanying notes.
F-3
<PAGE>
PS PARTNERS II, LTD.
STATEMENTS OF PARTNERS' EQUITY
For the years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
Limited General
Partners Partners Total
-----------------------------------------------------
<S> <C> <C> <C>
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
Net income 4,043,000 591,000 4,634,000
Distributions (4,909,000) (598,000) (5,507,000)
-----------------------------------------------------
Balances at December 31, 1997 37,211,000 459,000 37,670,000
Net income 4,908,000 530,000 5,438,000
Distributions (4,280,000) (524,000) (4,804,000)
-----------------------------------------------------
Balances at December 31, 1998 $37,839,000 $465,000 $38,304,000
=====================================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
PS PARTNERS II, LTD.
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $5,438,000 $4,634,000 $4,114,000
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 648,000 616,000 1,080,000
Decrease (increase) in rent and other receivables 11,000 43,000 (2,000)
Increase in other assets (28,000) (10,000) (25,000)
Decrease in accounts payable (17,000) (202,000) (61,000)
Increase (decrease) in advance payments from renters 9,000 (5,000) (5,000)
Equity in earnings of real estate entities (4,180,000) (3,454,000) (2,652,000)
-------------------------------------------------
Total adjustments (3,557,000) (3,012,000) (1,665,000)
-------------------------------------------------
Net cash provided by operating activities 1,881,000 1,622,000 2,449,000
-------------------------------------------------
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES:
Investment in real estate entities - (3,000) -
Distributions from real estate entities 5,138,000 3,961,000 3,101,000
Additions to real estate facilities (318,000) (260,000) (367,000)
-------------------------------------------------
Net cash provided by investing activities 4,820,000 3,698,000 2,734,000
-------------------------------------------------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Distributions to partners (4,804,000) (5,507,000) (4,804,000)
-------------------------------------------------
Net cash used in financing activities (4,804,000) (5,507,000) (4,804,000)
-------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,897,000 (187,000) 379,000
Cash and cash equivalents at the beginning of the period 888,000 1,075,000 696,000
-------------------------------------------------
Cash and cash equivalents at the end of the period $2,785,000 $888,000 $1,075,000
=================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
PS PARTNERS II, LTD.
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1998, 1997, and 1996
(Continued)
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------
Supplemental schedule of noncash investing and financing activities:
<S> <C> <C> <C>
Investment in real estate entities $- $(8,539,000) $-
Transfer of real estate facility for interest in real estate entities,
net - 8,539,000 -
</TABLE>
See accompanying notes.
F-6
<PAGE>
PS PARTNERS II, LTD.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
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 mini-warehouse properties in which the Partnership has an interest.
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 in 12
states, which exclude two properties transferred to PS Business Parks,
L.P. ("PSBPLP") in January 1997. 27 of the properties are owned by
SEI/PSP II Joint Ventures (the "Joint Venture"), a general partnership
between the Partnership and PSI. The Partnership is the managing
general partner of the Joint Venture, with ownership interests in the
individual properties of the Joint Venture ranging from 36% to 90%. As
used hereinafter, the Joint Venture and PSBPLP are referred to as the
"Real Estate Entities."
Basis of Presentation
---------------------
The financial statements include the accounts of the
Partnership. The accounts of the Joint Venture, which the Partnership
does not control, are not consolidated with the Partnership and the
Partnership's interest in the Joint Venture is accounted for on the
equity method.
The Partnership does not control the Joint Venture because PSI
has significant control rights with respect to the management of the
properties, including the right to compel the sale of each property in
the Joint Venture and the right to require the Partnership to submit
operating budgets.
Under the terms of the general partnership agreement of the
Joint Venture all depreciation and amortization with respect to each
property 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.
Under the terms of the general partnership agreement of the
Joint Venture, 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
F-7
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PARTNERSHIP MATTERS
(CONTINUED)
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 proceeds to PSI is
subordinated to the return to the Partnership of the amount of its cash
investment and the 7% distribution described above.
Depreciation and amortization
-----------------------------
The Partnership and the Joint Venture depreciate 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 1998, $38.34 for 1997, and $33.44 for 1996.
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 real estate facilities in which the
Partnership has an interest 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 properties of the Partnership and the
Joint Venture to evaluate the environmental condition of, and potential
environmental liabilities of such properties. Although there can be no
assurance, the Partnership is not aware of any environmental
contamination of the Mini-Warehouse Properties which individually or in
the aggregate would be material to the Partnership's overall business,
financial condition, or results of operations.
F-8
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PARTNERSHIP MATTERS
(CONTINUED)
Segment Reporting
-----------------
Effective January 1, 1998, the Partnership adopted SFAS No.
131, "Disclosure about Segments of an Enterprise and Related
Information." SFAS No. 131 established standards for the way public
business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial
reports. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas and major
customers. The Partnership only has one reportable segment as defined
within SFAS No. 131, therefore the adoption of SFAS No. 131 had no
effect on the Partnership's disclosures.
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 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.
In January 1997, the Partnership and PSI and other related
partnerships transferred a total of 35 business parks to PSBPLP, an
operating partnership formed to own and operate business parks in which
PSI has a significant interest. Included among the properties
transferred was the Partnership's business park in exchange for a
partnership interest in PSBPLP. The general partner of PSBPLP is PS
Business Parks, Inc. ("PSBP").
3. INVESTMENT IN REAL ESTATE ENTITIES
During 1998, 1997, and 1996, the Partnership recognized
earnings from the Real Estate Entities of $4,180,000, $3,454,000, and
$2,652,000, respectively, and received cash distributions totaling
$5,138,000, $3,961,000, and $3,101,000, respectively from the Real
Estate Entities.
F-9
<PAGE>
3. INVESTMENT IN REAL ESTATE ENTITIES (CONTINUED)
The accounting policies of the Real Estate Entities are
similar to that of the Partnership. Summarized combined financial data
with respect to the Real Estate Entities are as follows:
1998 1997
------------- ------------
For the year ended December 31,
Total revenues $ 101,804,000 $ 42,564,000
Minority interest in income 11,208,000 8,566,000
Net income 34,275,000 8,515,000
At December 31,
Total assets, net of accumulated depreciation $743,368,000 $358,698,000
Total liabilities 67,252,000 12,347,000
Total minority interest 153,015,000 168,665,000
Total equity 523,101,000 177,686,000
The increase in the size of the combined financial position and
operating results, respectively, of the Real Estate Entities for the
year ended December 31, 1998 and at December 31, 1998, respectively, as
compared to prior periods, is the result of additional properties
acquired by PSBPLP during 1997 and 1998.
Financial statements of the Joint Venture are filed with the
Partnership's Form 10-K for 1998, in Item 14. PS Business Parks, Inc.
is a registrant with the Securities and Exchange Commission, and its
filings can be accessed through the Securities and Exchange Commission.
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.
5. RELATED PARTY TRANSACTIONS
The Partnership has a management agreement with PSI whereby
PSI operates the Mini-Warehouse Properties for a fee equal to 6% of the
facilities' monthly gross revenue (as defined).
In January 1997, the Partnership and the Joint Venture
transferred their business park facilities to PSBPLP in exchange for a
partnership interest in PSBPLP.
PSI has a significant economic interest in PSBPLP and PSBP.
F-10
<PAGE>
6. LEASES
The Partnership has invested primarily in existing
mini-warehouse storage facilities which offer self-service storage
spaces for lease to the general public. Leases for such space are
usually on a month-to-month basis.
7. TAXES BASED ON INCOME
Taxes based on income are the responsibility of the individual
partners and, accordingly, the Partnership's financial statements do
not reflect a provision for such taxes.
Unaudited taxable net income was $6,319,000, $6,509,000 and
$2,637,000 for the years ended December 31, 1998, 1997 and 1996,
respectively. The difference between taxable income and book income is
primarily related to timing differences in depreciation expense.
8 SUBSEQUENT EVENT - AGREEMENT AND PLAN OF REORGANIZATION (UNAUDITED)
The Partnership has entered into an Agreement and Plan of
Reorganization by and among PSI, PS Partners II Merger Co., Inc. and
the Partnership, dated as of January 19, 1999 (the "Agreement and Plan
of Reorganization"). Under the Agreement and Plan of Reorganization,
each of the limited partnership units held by the public limited
partners will be converted into the right to receive a value of $697 in
PSI common stock or, at the limited partner's election, in cash.
F-11
<PAGE>
PS PARTNERS II, LTD.
SCHEDULE III - REAL ESTATE
AND ACCUMULATED DEPRECIATION
<TABLE>
<CAPTION>
Costs
Initial Cost subsequent
------------------------------------ to acquisition
Date Buildings & Buildings &
Acquired Description Encumbrances Land Improvements Improvements
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1/83 Raleigh/Yonkers $- $203,000 $914,000 $409,000
4/84 Milwaukee/Oregon - 289,000 584,000 295,000
5/84 Virginia Beach - 509,000 2,121,000 649,000
6/84 Lorton - 435,000 2,040,000 502,000
6/84 Baltimore - 382,000 1,793,000 571,000
6/84 Laurel - 501,000 2,349,000 675,000
-------------------------------------------------------------------
TOTAL $- $2,319,000 $9,801,000 $3,101,000
===================================================================
</TABLE>
<TABLE>
<CAPTION>
Gross Carrying Amount
At December 31, 1998
---------------------------------------------------------------------
Date Buildings & Accumulated
Acquired Description Land Improvements Total Depreciation
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1/83 Raleigh/Yonkers $203,000 $1,323,000 $1,526,000 $775,000
4/84 Milwaukee/Oregon 289,000 879,000 1,168,000 480,000
5/84 Virginia Beach 509,000 2,770,000 3,279,000 1,557,000
6/84 Lorton 435,000 2,542,000 2,977,000 1,474,000
6/84 Baltimore 382,000 2,364,000 2,746,000 1,363,000
6/84 Laurel 501,000 3,024,000 3,525,000 1,727,000
----------------------------------------------------------------------
TOTAL $2,319,000 $12,902,000 $15,221,000 $7,376,000
======================================================================
</TABLE>
F-12
<PAGE>
PS PARTNERS II, LTD.
REAL ESTATE RECONCILIATION
SCHEDULE III (CONTINUED)
(A) The following is a reconciliation of cost and related accumulated
depreciation.
GROSS CARRYING COST RECONCILIATION
Years Ended December 31,
----------------------------------------
1998 1997 1996
----------------------------------------
Balance at beginning of the period $14,903,000 $28,040,000 $27,673,000
Additions during the period:
Improvements, etc. 318,000 260,000 367,000
Deductions during the period:
Disposition of real estate - (13,397,000) -
----------------------------------------
Balance at the close of the period $15,221,000 $14,903,000 $28,040,000
========================================
ACCUMULATED DEPRECIATION RECONCILIATION
Years Ended December 31,
----------------------------------------
1998 1997 1996
----------------------------------------
Balance at beginning of the period $6,728,000 $10,970,000 $9,890,000
Additions during the period:
Depreciation 648,000 616,000 1,080,000
Deductions during the period:
Disposition of real estate - (4,858,000) -
----------------------------------------
Balance at the close of the period $7,376,000 $6,728,000 $10,970,000
========================================
(B) The aggregate cost of real estate for Federal income tax purposes is
$15,401,000.
F-13
<PAGE>
Report of Independent Auditors
The Partners
SEI/PSP II Joint Ventures
We have audited the balance sheets of the SEI/PSP II Joint Ventures as of
December 31, 1998 and 1997 and the related statements of income, partners'
equity and cash flows for each of the three years in the period ended December
31, 1998. 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 Joint Ventures' management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the SEI/PSP II Joint Ventures
at December 31, 1998 and 1997, and the results of its operations and cash flows
for each of the three years in the period ended December 31, 1998, 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
February 10, 1999
Los Angeles, CA
F-14
<PAGE>
SEI/PSP II JOINT VENTURES
BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
--------------------------------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $272,000 $197,000
Rent and other receivables 59,000 70,000
Real estate facilities, at cost:
Land 8,261,000 8,261,000
Buildings and equipment 47,880,000 46,941,000
--------------------------------------
56,141,000 55,202,000
Less accumulated depreciation (27,826,000) (25,420,000)
--------------------------------------
28,315,000 29,782,000
Investment in real estate entity 5,204,000 5,142,000
Other assets 104,000 54,000
--------------------------------------
$33,954,000 $35,245,000
======================================
LIABILITIES AND PARTNERS' EQUITY
Accounts payable $402,000 $174,000
Advance payments from renters 356,000 342,000
Partners' equity:
PS Partners II, Ltd. 18,635,000 19,763,000
Public Storage, Inc. 14,561,000 14,966,000
--------------------------------------
Total partners' equity 33,196,000 34,729,000
--------------------------------------
$33,954,000 $35,245,000
======================================
</TABLE>
See accompanying notes.
F-15
<PAGE>
SEI/PSP II JOINT VENTURES
STATEMENTS OF INCOME
For the years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------------------
REVENUE:
<S> <C> <C> <C>
Rental income $11,278,000 $10,799,000 $11,005,000
Equity in earnings of real estate entity 266,000 187,000 -
-----------------------------------------------------
11,544,000 10,986,000 11,005,000
-----------------------------------------------------
COSTS AND EXPENSES:
Cost of operations 3,586,000 3,388,000 3,627,000
Management fees 677,000 648,000 653,000
Depreciation and amortization 2,406,000 2,271,000 2,422,000
Interest expense - - 14,000
-----------------------------------------------------
6,669,000 6,307,000 6,716,000
-----------------------------------------------------
NET INCOME $4,875,000 $4,679,000 $4,289,000
=====================================================
Partners' share of net income:
PS Partners II, Ltd.'s share $3,456,000 $2,947,000 $2,652,000
Public Storage Inc.'s share 1,419,000 1,732,000 1,637,000
-----------------------------------------------------
$4,875,000 $4,679,000 $4,289,000
=====================================================
</TABLE>
See accompanying notes.
F-16
<PAGE>
SEI/PSP II JOINT VENTURES
STATEMENTS OF PARTNERS' EQUITY
For the years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
PS Partners Public Storage
II, Ltd. Inc. Total
-------------------------------------------------------------
<S> <C> <C> <C>
Balances at December 31, 1995 $21,013,000 $13,797,000 $34,810,000
Net income 2,652,000 1,637,000 4,289,000
Distributions (3,101,000) (365,000) (3,466,000)
-------------------------------------------------------------
Balances at December 31, 1996 20,564,000 15,069,000 35,633,000
Net income 2,947,000 1,732,000 4,679,000
Distributions (3,748,000) (1,835,000) (5,583,000)
-------------------------------------------------------------
Balances at December 31, 1997 19,763,000 14,966,000 34,729,000
Net income 3,456,000 1,419,000 4,875,000
Distributions (4,584,000) (1,824,000) (6,408,000)
-------------------------------------------------------------
Balances at December 31, 1998 $18,635,000 $14,561,000 $33,196,000
=============================================================
</TABLE>
See accompanying notes.
F-17
<PAGE>
SEI/PSP II JOINT VENTURES
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $4,875,000 $4,679,000 $4,289,000
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 2,406,000 2,271,000 2,422,000
Decrease (increase) in rent and other receivables 11,000 (23,000) (36,000)
(Increase) decrease in other assets (50,000) 124,000 (55,000)
Increase (decrease) in accounts payable 228,000 (117,000) (68,000)
Increase (decrease) in advance payments from renters 14,000 (6,000) (1,000)
Equity in earnings of real estate entity (266,000) (187,000) -
-------------------------------------------------
Total adjustments 2,343,000 2,062,000 2,262,000
-------------------------------------------------
Net cash provided by operating activities 7,218,000 6,741,000 6,551,000
-------------------------------------------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Distributions from real estate entity 204,000 76,000 -
Additions to real estate facilities (939,000) (1,201,000) (869,000)
-------------------------------------------------
Net cash used in investing activities (735,000) (1,125,000) (869,000)
-------------------------------------------------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Principal payments on mortgage notes payable - - (2,260,000)
Distributions to partners (6,408,000) (5,583,000) (3,466,000)
-------------------------------------------------
Net cash used in financing activities (6,408,000) (5,583,000) (5,726,000)
-------------------------------------------------
Net increase (decrease) in cash and cash equivalents 75,000 33,000 (44,000)
Cash and cash equivalents at the beginning of the period 197,000 164,000 208,000
-------------------------------------------------
Cash and cash equivalents at the end of the period $272,000 $197,000 $164,000
=================================================
</TABLE>
See accompanying notes.
F-18
<PAGE>
SEI/PSP II JOINT VENTURES
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1998, 1997, and 1996
(Continued)
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------
Supplemental schedule of noncash investing and financing activities:
<S> <C> <C> <C>
Investment in real estate entity $- $(5,031,000) $-
Transfer of real estate facility for interest in real estate entity, net - 5,031,000 -
</TABLE>
See accompanying notes.
F-19
<PAGE>
SEI/PSP II JOINT VENTURES
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. DESCRIPTION OF PARTNERSHIP
SEI/PSP II Joint Ventures (the "Joint Venture") was formed on
December 31, 1990 in connection with the consolidation of 22 separate
general partnerships between Public Storage Inc. ("PSI") and PS
Partners II, Ltd. ("PSP II"). The Joint Venture, through its
predecessor general partnerships, invested in existing mini-warehouse
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 Joint Venture owns 27 properties (referred to hereinafter
as the "Mini-Warehouses"), which excludes one property which was
transferred to PS Business Parks, L.P. ("PSBPLP") in January 1997. PSP
II is the managing general partner of the Joint Venture, with its
ownership interests in the properties of the Joint Venture ranging from
36% to 90%.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PARTNERSHIP MATTERS
Basis of Presentation
---------------------
The financial statements include the accounts of the Joint
Venture.
Under the terms of the general partnership agreement of the
Joint Venture, for property acquisitions in which PSI issued
convertible securities to the sellers for its interest, PSI's right to
receive cash flow distributions for any year after the first year of
operation are subordinated to cash distributions to PSP II equal to a
cumulative annual 7% of its cash investment (not compounded). In
addition, upon sale or refinancing of a property for more than its
original purchase price, distribution of proceeds to PSI is
subordinated to the return to PSP II of the amount of its cash
investment and the 7% distribution described above.
Depreciation and amortization
-----------------------------
The Joint Venture 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 to PSP II and PSI
------------------------------------------
Net income prior to depreciation is allocated to PSP II and
PSI based upon their relative ownership interest in each property and
the results of each property.
Under the terms of the general partnership agreement of the
Joint Venture all depreciation and amortization with respect to each
Joint Venture is allocated solely to PSP II until it recovers its
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 PSP II and PSI in proportion to their ownership
percentages.
F-20
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PARTNERSHIP MATTERS
(CONTINUED)
Cash Distributions
------------------
The general partnership agreement of the Joint Venture
provides for regular distributions of cash flow from operations (as
defined).
Cash and Cash Equivalents
-------------------------
For financial statement purposes, the Joint Venture considers
all highly liquid investments purchased with a maturity of three months
or less to be cash equivalents.
Environmental Cost
------------------
Substantially all of the real estate facilities in which the
Joint Venture has an interest 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 Joint Venture's properties to evaluate
the environmental condition of, and potential environmental liabilities
of such properties. Although there can be no assurance, the Joint
Venture is not aware of any environmental contamination of the
Mini-Warehouses which individually or in the aggregate would be
material to the Joint Venture's overall business, financial condition,
or results of operations.
Segment Reporting
-----------------
Effective January 1, 1998, the Joint Venture adopted SFAS No.
131, "Disclosure about Segments of an Enterprise and Related
Information." SFAS No. 131 established standards for the way public
business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial
reports. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas and major
customers. The Joint Venture only has one reportable segment as defined
within SFAS No. 131, therefore the adoption of SFAS No. 131 had no
effect on the Joint Venture's disclosures.
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.
3. REAL ESTATE FACILITIES
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 Joint Venture adopted
Statement 121 in 1996 and the adoption had no effect.
F-21
<PAGE>
3. REAL ESTATE FACILITIES (CONTINUED)
In November 1994, the Massachusetts Bay Transportation
Authority exercised its right of eminent domain and took possession of
the Joint Venture's mini-warehouse located in Weymouth, Massachusetts.
The Joint Venture 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 Joint Venture is presently contesting the amount of the
initial condemnation proceeds, however, there is no assurance that
additional condemnation proceeds will be received.
In January 1997, the Joint Venture and PSI and other
affiliated partnerships of PSI transferred a total of 35 business parks
to PSBPLP, an operating partnership formed to own and operate business
parks in which PSI has a significant interest. Included among the
properties transferred was the Joint Venture's business park in
exchange for a partnership interest in PSBPLP. The general partner of
PSBPLP is PS Business Parks, Inc. ("PSBP").
4. INVESTMENT IN REAL ESTATE ENTITY
The Joint Venture recognized $266,000 in 1998 and $187,000 in
1997 in equity in earnings of real estate entity with respect to the
investment in PSBPLP, described in Note 1 above.
The accounting policies of PSBPLP are similar to that of the
Joint Venture. Summarized combined financial data with respect to
PSBPLP is as follows:
1998 1997
------------ ------------
For the year ended December 31,
Total revenues $90,260,000 $31,578,000
Minority interest in income 11,208,000 8,566,000
Net income 29,400,000 3,836,000
At December 31,
Total assets, net of accumulated depreciation $709,414,000 $323,454,000
Total liabilities 66,494,000 11,831,000
Total minority interest 153,015,000 168,665,000
Total equity 489,905,000 142,958,000
The increase in the size of the combined financial position
and operating results, respectively, of the real estate entity for the
year ended December 31, 1998 and at December 31, 1998, respectively, as
compared to prior periods, is the result of additional properties
acquired by PSBPLP during 1997 and 1998.
PS Business Parks, Inc., which owns PSBPLP, is a registrant
with the Securities and Exchange Commission, and its filings can be
accessed through the Securities and Exchange Commission.
F-22
<PAGE>
5. RELATED PARTY TRANSACTIONS
The Joint Venture has a management agreement with PSI whereby
PSI operates the Mini-Warehouses for a fee equal to 6% of the
facilities' monthly gross revenue (as defined).
In January 1997, the Joint Venture transferred its business
park facility to PSBPLP in exchange for a partnership interest in
PSBPLP.
PSI has a significant economic interest in PSBPLP and PSBP.
6. LEASES
The Joint Venture has invested primarily in existing
mini-warehouse storage facilities which offer self-service storage
spaces for lease to the general public. Leases for such space are
usually on a month-to-month basis.
7. TAXES BASED ON INCOME
Taxes based on income are the responsibility of PSP II and PSI
and, accordingly, the Joint Venture's financial statements do not
reflect a provision for such taxes.
Unaudited taxable net income was $4,557,000, $4,468,000, and
$1,152,000 for the years ended December 31, 1998, 1997 and 1996,
respectively. The difference between taxable income and book income is
primarily related to timing differences in depreciation expense.
F-23
<PAGE>
SEI/PSP II JOINT VENTURES
SCHEDULE III - REAL ESTATE
AND ACCUMULATED DEPRECIATION
<TABLE>
<CAPTION>
Costs
Initial Cost subsequent
------------------------------------ to acquisition
Date Buildings & Buildings &
Acquired Description Encumbrances Land Improvements Improvements
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12/83 Charlotte $- $165,000 $1,274,000 $354,000
12/83 Greensboro/Market - 214,000 1,653,000 551,000
12/83 Greensboro/Electra - 112,000 869,000 319,000
12/83 Columbia - 171,000 1,318,000 474,000
12/83 Richmond - 176,000 1,360,000 336,000
12/83 Augusta - 97,000 747,000 283,000
4/84 Providence - 92,000 1,087,000 344,000
1/85 Cranston - 175,000 722,000 285,000
3/84 Marrietta/Cobb - 73,000 542,000 242,000
1/84 Fremont/Albrae - 636,000 1,659,000 437,000
12/83 Tacoma - 553,000 1,173,000 370,000
1/84 Belton - 175,000 858,000 491,000
1/84 Gladstone - 275,000 1,799,000 411,000
1/84 Hickman/112 - 257,000 1,848,000 418,000
1/84 Holmes - 289,000 1,333,000 286,000
1/84 Independence - 221,000 1,848,000 312,000
1/84 Merriam - 255,000 1,469,000 342,000
1/84 Olathe - 107,000 992,000 291,000
1/84 Shawnee - 205,000 1,420,000 372,000
1/84 Topeka - 75,000 1,049,000 212,000
2/84 Unicorn/Knoxville - 662,000 1,887,000 470,000
2/84 Central/Knoxville - 449,000 1,281,000 283,000
3/84 Manassas - 320,000 1,556,000 349,000
3/84 Pico Rivera - 743,000 807,000 323,000
5/84 Raleigh/Departure - 302,000 2,484,000 456,000
</TABLE>
<TABLE>
<CAPTION>
Gross Carrying Amount
At December 31, 1998
---------------------------------------------------------------------
Date Buildings & Accumulated
Acquired Description Land Improvements Total Depreciation
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12/83 Charlotte $165,000 $1,628,000 $1,793,000 $953,000
12/83 Greensboro/Market 214,000 2,204,000 2,418,000 1,299,000
12/83 Greensboro/Electra 112,000 1,188,000 1,300,000 671,000
12/83 Columbia 171,000 1,792,000 1,963,000 1,065,000
12/83 Richmond 176,000 1,696,000 1,872,000 993,000
12/83 Augusta 97,000 1,030,000 1,127,000 588,000
4/84 Providence 92,000 1,431,000 1,523,000 828,000
1/85 Cranston 175,000 1,007,000 1,182,000 572,000
3/84 Marrietta/Cobb 73,000 784,000 857,000 447,000
1/84 Fremont/Albrae 636,000 2,096,000 2,732,000 1,264,000
12/83 Tacoma 553,000 1,543,000 2,096,000 911,000
1/84 Belton 175,000 1,349,000 1,524,000 782,000
1/84 Gladstone 275,000 2,210,000 2,485,000 1,269,000
1/84 Hickman/112 257,000 2,266,000 2,523,000 1,316,000
1/84 Holmes 289,000 1,619,000 1,908,000 925,000
1/84 Independence 221,000 2,160,000 2,381,000 1,261,000
1/84 Merriam 255,000 1,811,000 2,066,000 1,034,000
1/84 Olathe 107,000 1,283,000 1,390,000 733,000
1/84 Shawnee 205,000 1,792,000 1,997,000 1,029,000
1/84 Topeka 75,000 1,261,000 1,336,000 729,000
2/84 Unicorn/Knoxville 662,000 2,357,000 3,019,000 1,364,000
2/84 Central/Knoxville 449,000 1,564,000 2,013,000 903,000
3/84 Manassas 320,000 1,905,000 2,225,000 1,117,000
3/84 Pico Rivera 743,000 1,130,000 1,873,000 692,000
5/84 Raleigh/Departure 302,000 2,940,000 3,242,000 1,691,000
</TABLE>
F-24
<PAGE>
<TABLE>
<CAPTION>
Costs
Initial Cost subsequent
------------------------------------ to acquisition
Date Buildings & Buildings &
Acquired Description Encumbrances Land Improvements Improvements
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
7/84 Trevose/Old Lincoln $- $421,000 $1,749,000 $380,000
5/84 Philadelphia/Grant - 1,041,000 3,262,000 443,000
------------------------------------------------------------------
TOTAL $- $8,261,000 $38,046,000 $9,834,000
==================================================================
</TABLE>
<TABLE>
<CAPTION>
Gross Carrying Amount
At December 31, 1998
---------------------------------------------------------------------
Date Buildings & Accumulated
Acquired Description Land Improvements Total Depreciation
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
7/84 Trevose/Old Lincoln $421,000 $2,129,000 $2,550,000 $1,204,000
5/84 Philadelphia/Grant 1,041,000 3,705,000 4,746,000 2,186,000
----------------------------------------------------------------------
TOTAL $8,261,000 $47,880,000 $56,141,000 $27,826,000
======================================================================
</TABLE>
F-25
<PAGE>
SEI/PSP II JOINT VENTURES
REAL ESTATE RECONCILIATION
SCHEDULE III (CONTINUED)
(A) The following is a reconciliation of cost and related accumulated
depreciation.
GROSS CARRYING COST RECONCILIATION
Years Ended December 31,
-----------------------------------------
1998 1997 1996
-----------------------------------------
Balance at beginning of the period $55,202,000 $62,596,000 $61,727,000
Additions during the period:
Improvements, etc. 939,000 1,201,000 869,000
Deductions during the period:
Disposition of real estate - (8,595,000) -
-----------------------------------------
Balance at the close of the period $56,141,000 $55,202,000 $62,596,000
=========================================
ACCUMULATED DEPRECIATION RECONCILIATION
Years Ended December 31,
-----------------------------------------
1998 1997 1996
-----------------------------------------
Balance at beginning of the period $25,420,000 $26,713,000 $24,291,000
Additions during the period:
Depreciation 2,406,000 2,271,000 2,422,000
Deductions during the period:
Disposition of real estate - (3,564,000) -
-----------------------------------------
Balance at the close of the period $27,826,000 $25,420,000 $26,713,000
=========================================
(B) The aggregate cost of real estate for Federal income tax purposes is
$55,995,000.
F-26
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000727069
<NAME> PS PARTNERS II, LTD.
<MULTIPLIER> 1
<CURRENCY> U.S.$
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 2,785,000
<SECURITIES> 0
<RECEIVABLES> 22,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,807,000
<PP&E> 15,221,000
<DEPRECIATION> (7,376,000)
<TOTAL-ASSETS> 38,396,000
<CURRENT-LIABILITIES> 92,000
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 38,304,000
<TOTAL-LIABILITY-AND-EQUITY> 38,396,000
<SALES> 0
<TOTAL-REVENUES> 7,231,000
<CGS> 0
<TOTAL-COSTS> 993,000
<OTHER-EXPENSES> 800,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,438,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 5,438,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,438,000
<EPS-PRIMARY> 38.34
<EPS-DILUTED> 38.34
</TABLE>
