UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 [Fee Required]
For the fiscal year ended December 31, 1997
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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 0-15800
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PS PARTNERS VII, LTD., a California Limited Partnership
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(Exact name of registrant as specified in its charter)
California 95-4018460
- ---------------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
701 Western Avenue
Glendale, California 91201-2394
- ---------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 244-8080
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [ X ]
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DOCUMENTS INCORPORATED BY REFERENCE
NONE
<PAGE>
PART I
ITEM 1. BUSINESS.
General
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PS Partners VII, Ltd. (the "Partnership") is a publicly held limited
partnership formed under the California Revised Limited Partnership Act.
Commencing in April 1986, 150,000 units of limited partnership interest (the
"Units") were offered to the public in an interstate offering. The offering was
completed in April 1987 with a total of 108,831 Units sold.
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 35% 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 VII 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 Joint Venture were managed by
Public Storage Commercial Properties Group, Inc. ("PSCPG") pursuant to a
Management Agreement. In January 1997, the Joint Venture, 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 Joint
Ventures' business parks 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 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 18 of the Partnership's 20 properties (which excludes the
properties 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 December 31, 1997, PSI owned approximately 58.33% of
the Partnership's limited partnership units and (iv) PSI is the operator of the
20 properties in which the Partnership has an interest (these 20 properties are
referred to collectively hereinafter as the "Mini-Warehouse Properties").
2
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Investments in Facilities
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The Partnership owns interests in 20 properties (excluding the
properties transferred to PSBPLP in January 1997); 18 of such properties owned
by the Joint Venture. The Partnership initially owned interests in 23
properties; 21 mini-warehouses, and 2 business parks. The Partnership purchased
its last property in August, 1987. One of the mini-warehouses, the Homestead,
Florida facility, was completely destroyed by Hurricane Andrew in August 1992.
Reference is made to the table in Item 2 for a summary of information about the
Partnership's properties.
The Partnership believes that its operating results have benefited from
favorable industry trends and conditions. Notably, the level of new
mini-warehouse construction has decreased since 1988 while consumer demand has
increased. In addition, in recent years consolidation has occurred in the
fragmented mini-warehouse industry.
Mini-warehouses
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Mini-warehouses, which comprise the majority of the Partnership's
investments, are designed to offer accessible storage space for personal and
business use at a relatively low cost. A user rents a fully enclosed space which
is for the user's exclusive use and to which only the user has access on an
unrestricted basis during business hours. On-site operation is the
responsibility of resident managers who are supervised by area managers. Some
mini-warehouses also include rentable uncovered parking areas for vehicle
storage. Leases for mini-warehouse space may be on a long-term or short-term
basis, although typically spaces are rented on a month-to-month basis. Rental
rates vary according to the location of the property and the size of the storage
space.
Users of space in mini-warehouses include both individuals and large
and small businesses. Individuals usually employ this space for storage of,
among other things, furniture, household appliances, personal belongings, motor
vehicles, boats, campers, motorcycles and other household goods. Businesses
normally employ this space for storage of excess inventory, business records,
seasonal goods, equipment and fixtures.
Mini-Warehouse Properties generally consist of three to seven buildings
containing an aggregate of between 291 to 1,175 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.
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 two business parks;
one in Mesa, Arizona and one in Tempe, Arizona. These business parks were
transferred to PSBPLP in January 1997 in exchange for a partnership interest in
PSBPLP.
3
<PAGE>
Investment Objectives and Polices; Sale or Financing of Investments
- -------------------------------------------------------------------
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,
2038, unless dissolved earlier.
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
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, 1997, the telephone reservation system was supporting
rental activity at all of the Partnership's properties. PSI's toll-free
telephone referral system services approximately 160,000 calls per
month from potential customers inquiring as to the nearest Public
Storage mini-warehouse.
* Maintain high occupancy levels and increase realized rents. Subject to
market conditions, the Partnership generally seeks to achieve average
occupancy levels in excess of 90% and to eliminate promotions prior to
increasing rental rates. The monthly average realized rent per occupied
square foot for the Mini-Warehouse Properties were $.64 in 1997
compared to $.61 in 1996. The weighted average occupancy levels at the
Mini-Warehouse Properties increased from 89% during 1996 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 150
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 110 district managers, 15 regional
managers and 3 divisional managers (with an average of 13 years
experience in the mini-warehouse industry) who report to the president
of the mini-warehouse property operator (who has 14 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."
4
<PAGE>
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 owner's facilities, including resident managers, assistant
managers, relief managers, and billing and maintenance personnel. Some or all of
these employees may be employed on a part-time basis and may also be employed by
other persons, partnerships, REITs or other entities owning facilities operated
by PSI.
In the purchasing of services such as advertising (including broadcast
media advertising) and insurance, PSI attempts to achieve economies by combining
the resources of the various facilities that it operates. Facilities operated by
PSI have historically carried comprehensive insurance, including fire,
earthquake, liability and extended coverage.
PSI has developed systems for space inventory, accounting and handling
delinquent accounts, including a computerized network linking PSI operated
facilities. Each project manager is furnished with detailed operating procedures
and typically receives facilities management training from PSI. Form letters
covering a variety of circumstances are also supplied to the project managers. A
record of actions taken by the project managers when delinquencies occur is
maintained.
The 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 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 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
5
<PAGE>
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 75 persons who render services on behalf of the Partnership
and Joint Venture. These persons include resident managers, assistant managers,
relief managers, district managers, and administrative personnel. Some of these
employees may be employed on a part-time basis and may also be employed by other
persons, partnerships, REITs, or other entities owning facilities operated by
PSI or PSBPLP.
Impact of Year 2000
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PSI has completed an initial assessment of its computer systems. The
majority of the computer programs were installed or upgraded over the past few
years and are Year 2000 compliant. Some of the older computer programs utilized
by PSI were written without regard for Year 2000 issues and could cause a system
failure or miscalculations with possible disruption of operations. Each of these
computer programs and systems has been evaluated to be upgraded or replaced as
part of PSI's Year 2000 project.
The cost of the Year 2000 project will be allocated to all entities
that use the PSI computer systems. The cost of the Year 2000 project which is
expected to be allocated to the Partnership and the Joint Venture is
approximately $60,000. The cost of new software will be capitalized and the cost
of maintenance to existing systems will be expensed as incurred.
The project is expected to be completed by March 31, 1999 which is
prior to any anticipated impact on operating systems. PSI believes that with
modifications to existing software and, in some instances, the conversion to new
software, the Year 2000 issue will not pose significant operational problems.
However, if such modifications are not made, or are not completed timely, the
Year 2000 issue could have a material impact on the operations of the
Partnership.
The costs of the project and the date on which PSI believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events. There can be
no guarantee that these estimates will be achieved and actual results could
differ materially from those anticipated.
6
<PAGE>
ITEM 2. PROPERTIES.
The following table sets forth information as of December 31, 1997,
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>
Arleta 30,900 299 11/26/86 50.0%
Osborne St.
City of Industry 60,000 565 04/01/87 50.0
Amar Rd.
COLORADO
Denver 104,000 1,022 12/19/86 70.0
Sheridan Blvd.
Lakewood 100,900 780 09/12/86 70.0
W. 6th Ave.
FLORIDA
Homestead - - 10/31/86 100.0
S.W. 157th Ave. (1)
GEORGIA
Marietta 95,100 637 12/10/86 50.0
Cobb Pkwy.
INDIANA
Hammond 45,100 395 08/11/87 40.2
Calumet
OKLAHOMA
Oklahoma City 61,000 608 05/28/87 100.0
Hefner Rd.
OREGON
Gresham 45,400 522 12/18/86 50.0
S.E. Burnside
Hillsboro 36,200 458 12/19/86 50.0
Tualatin Valley Hwy.
Portland 51,400 514 07/01/87 100.0
Moody St.
TEXAS
Austin 75,100 808 10/01/86 70.0
Research Blvd.
Houston 77,400 678 10/01/86 70.0
Long Point
Houston 90,100 709 10/01/86 70.0
N. Freeway
Houston 122,100 1,105 10/01/86 70.0
Old Katy Rd.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Net Number
Rentable of Date of Ownership
Location Square Feet Spaces Acquisition Percentage
- ------------------- ----------- ------ ----------- ----------
TEXAS
<S> <C> <C> <C> <C>
Houston 119,200 1,105 10/01/86 70.0%
Plainfield Rd.
Houston 120,400 1,175 10/01/86 70.0
South Loop 610 West
San Antonio 80,600 788 12/23/86 50.0
Sunset Rd.
VIRGINIA
Annandale 31,400 291 03/16/87 50.0
Ravensworth Rd.
WASHINGTON
Auburn 52,800 605 12/10/86 50.0
Auburn Way N.
Lynwood 75,800 590 12/31/86 70.0
96th St. SW
</TABLE>
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(1) In August 1992, the facility's mini-warehouse buildings were completely
destroyed by Hurricane Andrew.
The weighted average occupancy level for the Mini-Warehouse Properties
was 90% in 1997 compared to 89% in 1996. The monthly average realized rent per
square foot for the Mini-Warehouse Properties was $.64 in 1997 compared to $.61
in 1996.
Substantially all of the facilities were acquired prior to the time
that it was customary to conduct environmental investigations in connection with
property acquisitions. During the fourth quarter of 1995, 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. Based on the
assessments, the Partnership believes that it is probable that costs totaling
$71,000 after December 31, 1997 will be incurred for known environmental
remediation requirements for the Mini-Warehouse Properties. Although there can
be no assurance, the Partnership is not aware of any unaccrued environmental
contamination of any of its property sites which individually or in the
aggregate would be material to the Partnership's overall business, financial
condition, or results of operations.
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 1997.
8
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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, 1997, there were approximately 1,942 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 or capital improvements, or reserves.
Reference is made to Items 6 and 7 hereof for information on the amount
of such distributions.
9
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(In thousands, except per Unit data)
<S> <C> <C> <C> <C> <C>
Total Revenues (a) $ 2,847 $ 2,460 $ 2,579 $ 2,704 $ 2,235
Depreciation and amortization (a) 119 115 112 111 110
Net income 2,314 1,971 2,061 2,230 1,657
Limited partners' share 2,025 1,588 1,505 1,850 1,352
General partners' share 289 383 556 380 305
Limited partners'
per unit data (b)
Net income $ 18.61 $ 14.59 $ 13.83 $ 17.00 $ 12.42
Cash distributions (c) (d) $ 22.00 $ 30.01 $ 44.23 $ 39.35 $ 23.80
As of December 31,
- ------------------
Cash and cash equivalents (a) $ 1,179 $ 11 $ 342 $ 1,670 $ 2,407
Total assets (a) $ 26,989 $ 27,386 $29,028 $ 32,333 $ 35,253
</TABLE>
(a) Restated - See Note 1 to December 31, 1997 financial statements.
(b) Limited partners' per unit data is based on the weighted average number
of units outstanding during the period (108,831 units).
(c) The General Partners distributed, concurrent with the distribution for
the third quarter of 1995, a portion of the operating cash reserve
estimated to be $8.19 per Unit.
(d) The General Partners distributed, concurrent with the distribution for
the second quarter of 1994, the net insurance proceeds received for the
destruction of the Homestead, Florida facility of $9.75 per Unit.
Pursuant to the Partnership agreement, with respect to the 10% incentive
on distributions of Cash Flow from Operations, the General Partners did
not participate in the special distribution.
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996:
The Partnership's net income was $2,314,000 in 1997 compared to
$1,971,000 in 1996, representing an increase of $343,000, 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").
PROPERTY OPERATIONS: Rental income for the Partnership's wholly-owned
mini-warehouse properties was $859,000 in 1997 compared to $799,000 during 1996,
representing an increase of $60,000, or 7.5%. Cost of operations (including
management fees) increased $32,000, or 12.3%, to $292,000 in 1997 from $260,000
during 1996. Accordingly, for the Partnership's mini-warehouse operations,
property net operating income increased by $28,000, or 5.2%, from $539,000 in
1996 to $567,000 in 1997.
EQUITY IN EARNINGS OF REAL ESTATE ENTITIES: Equity in earnings of real
estate entities was $1,959,000 in 1997 as compared to $1,649,000 during 1996,
representing an increase of $310,000, or 18.8%. This increase was due primarily
to the Partnership's share of improved operating results at the Joint Venture's
mini-warehouse properties.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization increased
$4,000, or 3.5% from $115,000 in 1996 to $119,000 during 1997. This increase was
primarily attributable to the depreciation of capital expenditures made during
1996 and 1997.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995:
The Partnership's net income was $1,971,000 in 1996 compared to
$2,061,000 in 1995, representing a decrease of $90,000, or 4.4%. The decrease
was primarily attributable to a reduction in the Partnership's share of
operating results at the Joint Venture's mini-warehouse properties.
PROPERTY OPERATIONS: Rental income for the Partnership's wholly-owned
mini-warehouse operations was $799,000 in 1996 compared to $723,000 in 1995,
representing an increase of $76,000, or 10.5%. Costs of operations (including
management fees) decreased $1,000, or 0.4%, to $260,000 in 1996 from $261,000 in
1995. Accordingly, for the Partnership's mini-warehouse operations, property net
operating income increased by $77,000, or 16.7%, to $539,000 in 1996 from
$462,000 in 1995.
EQUITY IN EARNINGS OF REAL ESTATE ENTITIES: Equity in earnings of real
estate entities was $1,649,000 in 1996 as compared to $1,767,000 during 1995,
representing a decrease of $118,000, or 6.7%. The decrease was primarily
attributable to a reduction in the Partnership's share of operating results at
the Joint Venture's mini-warehouse properties.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization increased
$3,000, or 2.7% to $115,000 in 1996 from $112,000 in 1995. This increase was
primarily attributable to the depreciation of capital expenditures made during
1995 and 1996.
SUPPLEMENTAL PROPERTY DATA
In 1997, most of the Partnership's net income is 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, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31,
1996: Rental income for the Mini-Warehouse Properties was $10,269,000 during
1997 compared to $9,672,000 in 1996, representing an increase of $597,000, or
6.2%. The increase in rental income was primarily attributable to increased
rental rates and occupancy rates at the mini-warehouse facilities. The monthly
11
<PAGE>
average realized rent per square foot for the mini-warehouse facilities was $.64
in 1997 compared to $.61 for 1996. The weighted average occupancy levels at the
mini-warehouse facilities increased from 89% during 1996 to 90% in 1997. Cost of
operations (including management fees) increased $161,000, or 4.6%, to
$3,696,000 in 1997 from $3,535,000 in 1996. This increase was primarily
attributable to increases in advertising, property tax, and management fee
expenses. Accordingly, for the Mini-Warehouse Properties, property net operating
income increased by $436,000, or 7.1%, from $6,137,000 in 1996 to $6,573,000 in
1997.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31,
1995: Rental income for the Mini-Warehouse Properties was $9,672,000 in 1996
compared to $9,412,000 in 1995, representing an increase of $260,000, or 2.8%.
The increase in rental income was primarily attributable to increased average
realized rental rates at the mini-warehouse facilities. The monthly average
realized rent per square foot for the mini-warehouse facilities were $.61 in
1996 compared to $.60 in 1995. The weighted average occupancy levels at the
mini-warehouse facilities remained stable at 89% during 1996 and 1995. Costs of
operations (including management fees) increased $233,000, or 7.1%, to
$3,535,000 in 1996 from $3,302,000 in 1995. This increase was primarily
attributable to increases in property tax, advertising and promotion, and
payroll expenses. Accordingly, for the Mini-Warehouse Properties, property net
operating income increased by $27,000, or 0.4% to $6,137,000 in 1996 from
$6,110,000 in 1995.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Partnership has adequate sources of cash to finance its operations,
both on a short-term and a long-term basis, primarily by internally generated
cash from property operations combined with cash on-hand at December 31, 1997
totaling $1,179,000.
Cash flows from operating activities and distributions from Real Estate
Entities ($3,867,000 for the year ended December 31, 1997) have been sufficient
to meet all current obligations of the Partnership. Total capital improvements
for the Partnership's wholly-owned properties were $12,000, $22,000, and $11,000
in 1997, 1996, and 1995, respectively. During 1998, the Partnership anticipates
incurring approximately $89,000 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.
The Partnership expects to continue making quarterly distributions.
Total distributions paid to the General Partners and the limited partners
(including per Unit amounts) for 1997 and prior years were as follows:
Total Per Unit
------------ --------
1997 $2,687,000 $22.00
1996 3,666,000 30.01
1995 5,403,000 44.23
1994 4,687,000 39.35
1993 2,907,000 23.80
1992 2,701,000 22.10
1991 3,339,000 27.34
1990 2,407,000 19.71
1989 3,053,000 25.00
1988 3,054,000 25.00
1987 2,899,000 24.90
1986 547,000 12.89
The Partnership, in prior years, made distributions based on anticipated
operating cash flows. Beginning with the second quarter of 1990, the
distribution was lowered to a level supported by current operating cash flow
after capital improvements and scheduled debt service. Since then, distributions
have been increased based on improved property performance. The General Partners
12
<PAGE>
distributed, concurrent with the distributions for the fourth quarter of 1991, a
portion of the operating reserve of the Partnership of approximately $8.15 per
Unit. The General Partners distributed, concurrently with the distribution for
the second quarter of 1994, the net insurance proceeds received for the
destruction of the Homestead, Florida facility, of $9.75 per Unit. The General
Partners distributed, concurrently with the distribution for the third quarter
of 1995, a portion of the operating reserve of the Partnership of approximately
$8.19 per Unit. Future distribution levels will be based on cash available for
distributions (cash flow from all sources, less cash necessary for capital
improvement needs and to establish reserves).
Impact of Year 2000
- -------------------
PSI has completed an initial assessment of its computer systems. The
majority of the computer programs were installed or upgraded over the past few
years and are Year 2000 compliant. Some of the older computer programs utilized
by PSI were written without regard for Year 2000 issues and could cause a system
failure or miscalculations with possible disruption of operations. Each of these
computer programs and systems has been evaluated to be upgraded or replaced as
part of PSI's Year 2000 project.
The cost of the Year 2000 project will be allocated to all entities
that use the PSI computer systems. The cost of the Year 2000 project which is
expected to be allocated to the Partnership and the Joint Venture is
approximately $60,000. The cost of new software will be capitalized and the cost
of maintenance to existing systems will be expensed as incurred.
The project is expected to be completed by March 31, 1999 which is
prior to any anticipated impact on operating systems. PSI believes that with
modifications to existing software and, in some instances, the conversion to new
software, the Year 2000 issue will not pose significant operational problems.
However, if such modifications are not made, or are not completed timely, the
Year 2000 issue could have a material impact on the operations of the
Partnership.
The costs of the project and the date on which PSI believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events. There can be
no guarantee that these estimates will be achieved and actual results could
differ materially from those anticipated.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Partnership's financial statements are included elsewhere herein.
Reference is made to the Index to Financial Statements and Financial Statement
Schedules in Item 14(a).
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
13
<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 Joint Venture were managed by a predecessor of PSBPLP., pursuant to
a Management Agreement. In January 1997, the 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
B. Wayne Hughes, age 64, a general partner of the Partnership, has been
a director of PSI since its organization in 1980 and was President and Co-Chief
Executive Officer from 1980 until November 1991 when he became Chairman of the
Board and sole Chief Executive Officer. Mr. Hughes has been active in the real
estate investment field for over 25 years. He is the father of B. Wayne Hughes,
Jr.
Harvey Lenkin, age 61, has been employed by PSI for 20 years and became
President and a director of PSI in November 1991. Mr. Lenkin is a director of
the National Association of Real Estate Investment Trusts (NAREIT).
B. Wayne Hughes, Jr., age 38, became a director of PSI in January 1998.
He has been Vice President Acquisitions of the Company since 1992. He is the son
of B. Wayne Hughes.
John Reyes, age 37, a certified public accountant, joined PSI in 1990
and was controller of PSI from 1992 until December 1996 when he became Chief
Financial Officer. He became a Vice President of PSI in November 1995 and a
Senior Vice President of PSI in December 1996. From 1983 to 1990, Mr. Reyes was
employed by Ernst & Young.
14
<PAGE>
Carl B. Phelps, age 58, became a Senior Vice President of PSI in
January 1998 with overall responsibility for property acquisition and
development. From June 1991 until joining PSI, he was a partner in the law firm
of Andrews & Kurth, L.L.P., which performed legal services for PSI. From
December 1982 through May 1991, his professional corporation was a partner in
the law firm of Sachs & Phelps, then counsel to PSI.
Obren B. Gerich, age 59, a certified public accountant, has been a Vice
President of PSI since 1980 and became Senior Vice President of PSI in November
1995. He was Chief Financial Officer of PSI until November 1991.
Marvin M. Lotz, age 55, has had overall responsibility for Public
Storage's mini-warehouse operations since 1988. He became a Senior Vice
President of PSI in November 1995. Mr. Lotz was an officer of PSI with
responsibility for property acquisitions from 1983 until 1988.
David Goldberg, age 48, joined PSI's legal staff in June 1991. He
became Senior Vice President and General Counsel of PSI in November 1995. From
December 1982 until May 1991, he was a partner in the law firm of Sachs &
Phelps, then counsel to PSI.
A. Timothy Scott, age 46, became a Senior Vice President and Tax
Counsel of PSI and Vice President and Tax Counsel of the Public Storage REITs in
November 1996. From June 1991 until joining PSI, Mr. Scott practiced tax law as
a shareholder of the law firm of Heller, Ehrman, White & McAuliffe, counsel to
PSI. Prior to June 1991, his professional corporation was a partner in the law
firm of Sachs & Phelps, then counsel to PSI.
David P. Singelyn, age 36, a certified public accountant, has been
employed by PSI since 1989 and became Vice President and Treasurer of PSI in
November 1995. From 1987 to 1989, Mr. Singelyn was Controller of Winchell's
Donut Houses, L.P.
Sarah Hass, age 42, became Secretary of PSI in February 1992. She
became a Vice President of PSI in November 1995. She joined PSI's legal
department in June 1991, rendering services on behalf of PSI. From 1987 until
May 1991, her professional corporation was a partner in the law firm of Sachs &
Phelps, then counsel to PSI, and from April 1986 until June 1987, she was
associated with that firm, practicing in the area of securities law. From
September 1979 until September 1985, Ms. Hass was associated with the law firm
of Rifkind & Sterling, Incorporated.
Robert J. Abernethy, age 58, has been President of American Standard
Development Company and of Self-Storage Management Company, which develop and
operate mini-warehouses, since 1976 and 1977, respectively. Mr. Abernethy has
been a director of PSI since its organization in 1980. He is a member of the
board of directors of Johns Hopkins University and of the Los Angeles County
Metropolitan Transportation Authority and a former member of the board of
directors of the Metropolitan Water District of Southern California.
Dann V. Angeloff, age 62, has been President of the Angeloff Company, a
corporate financial advisory firm, since 1976. The Angeloff Company has
rendered, and is expected to continue to render, financial advisory and
securities brokerage services for PSI. Mr. Angeloff is the general partner of a
limited partnership that owns a mini-warehouse operated by PSI and which secures
a note owned by PSI. Mr. Angeloff has been a director of PSI since its
organization in 1980. He is a director of Compensation Resource Group, Eagle
Lifestyle Nutrition, Inc., Nicholas/Applegate Growth Equity Fund,
Nicholas/Applegate Investment Trust, ReadyPac Produce, Inc. and Royce Medical
Company.
William C. Baker, age 64, became a director of PSI in November 1991.
Since November 1997, Mr. Baker has been Chairman of the Board and Chief
Executive Officer of The Santa Anita Companies, Inc., which operates the Santa
Anita Racetrack and is a wholly-owned subsidiary of Meditrust Operating Company.
From August 1996 until November 1997, he was Chairman of the Board and Chief
Executive Officer of Santa Anita Operating Company and Chairman of the Board of
the Board of Santa Anita Realty Enterprises, Inc., the companies which were
merged with Meditrust in November 1992. From April 1993 through May 1995, Mr.
Baker was President of Red Robin International, Inc., an operator and franchiser
15
<PAGE>
of casual dining restaurants in the United States and Canada. From January 1992
through December 1995, he was Chairman and Chief Executive Officer of Carolina
Restaurant Enterprises, Inc., a franchisee of Red Robin International, Inc.
Since 1991, he has been Chairman of the Board of Coast Newport Properties, a
real estate brokerage company. From 1976 to 1988, he was a principal shareholder
and Chairman and Chief Executive Officer of Del Taco, Inc., an operator and
franchiser of fast food restaurants in California. Mr. Baker is a director of
Callaway Golf Company and Meditrust Operating Company.
Thomas J. Barrack, Jr., age 50, became a director of PSI in February
1998. Mr. Barrack has been the Chairman and Chief Executive Officer of Colony
Capital, Inc. since September 1991. Colony Capital, Inc. is one of the largest
real estate investors in America, having acquired properties in the U.S., Europe
and Asia. Prior to founding Colony Capital, Inc., from 1987 to 1991, Mr. Barrack
was a principal with the Robert M. Bass Group, Inc., the principal investment
vehicle for Robert M. Bass of Fort Worth, Texas. From 1985 to 1987, Mr. Barrack
was President of Oxford Ventures, Inc., a Canadian-based real estate development
company. From 1984 to 1985, he was 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.
and Virgin Entertainment Group, Ltd.
Uri P. Harkham, age 49, became a director of PSI in March 1993. Mr.
Harkham has been the President and Chief Executive Officer of the Jonathan
Martin Fashion Group, which specializes in designing, manufacturing and
marketing women's clothing, since its organization in 1976. Since 1978, Mr.
Harkham has been the Chairman of the Board of Harkham Properties, a real estate
firm specializing in buying and managing fashion warehouses in Los Angeles and
Australia.
Pursuant to Articles 16 and 17 of the Partnership's Amended and
Restated 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. 33-1280, each of the General
Partners continues to serve until (i) death, insanity, insolvency, bankruptcy or
dissolution, (ii) withdrawal with the consent of the other general partner and a
majority vote of the limited partners, or (iii) removal by a majority vote of
the limited partners.
Each director of PSI serves until he resigns or is removed from office
by PSI, and may resign or be removed from office at any time with or without
cause. Each officer of PSI serves until he resigns or is removed by the board of
directors of PSI. Any such officer may resign or be removed from office at any
time with or without cause.
There have been no events under any bankruptcy act, no criminal
proceedings, and no judgments or injunctions material to the evaluation of the
ability of any director or executive officer of PSI during the past five years.
ITEM 11. EXECUTIVE COMPENSATION.
The Partnership has no subsidiaries, directors or officers. See Item 13
for a description of certain transactions between the Partnership and the
General Partners and their affiliates.
16
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
(a) At December 31, 1997, 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 Limited Public Storage, Inc.
Partnership 701 Western Avenue
Interest Glendale, CA 91201-2394 (1) 63,478 Units (1) 58.33%
(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 $550,000 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 Agreement, which 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 has acquired interests in 20 properties (which
exclude the properties transferred to PSBPLP in January 1997); 18 of
such properties are held in a general partnership comprised of the
Partnership and PSI. Under the terms of the partnership agreement, PSI
has the right to compel a sale of each property at any time after seven
years from the date of acquisition at not less than its independently
determined fair market value provided the Partnership receives its
share of the net sales proceeds solely in cash. As of December 31,
1997, PSI has the right to require the Partnership to sell a majority
of the Joint Venture's properties.
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.
17
<PAGE>
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 1997, approximately $269,000 was paid to PSI with respect to
items 1, 2, and 3 above. The Partnership owns interests in 20 properties (which
exclude the properties transferred to PSBPLP in January 1997); 18 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.
During 1997, the Partnership and the Joint Venture paid fees of $617,000 to PSI
pursuant to the Management Agreement.
Through 1996, the 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 of 5% of the gross revenues of the
commercial space operated for the Joint Venture. In January 1997, the Joint
Venture, 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 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.
18
<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.
19
<PAGE>
PS PARTNERS VII, LTD.,
A CALIFORNIA LIMITED PARTNERSHIP
INDEX TO EXHIBITS
3.1 Amended and Restated Agreement of Limited Partnership. Previously filed
with the Securities and Exchange Commission as an Exhibit to the
Storage Equities, Inc. Registration Statement No. 33-43750 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 April 2, 1986, 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 the Storage Equities, Inc. Current
Report on Form 8-K dated August 20, 1986 and incorporated herein by
reference.
27 Financial date schedule. Filed herewith.
20
<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 VII, LTD.,
a California Limited Partnership
Dated: March 17, 1999 By: Public Storage, Inc., General Partner
By: /s/ John Reyes
--------------------------------------------
John Reyes
Senior Vice President and Chief Financial
Officer of Public Storage, Inc.
(principal financial and accounting officer)
21
<PAGE>
PS PARTNERS VII, LTD.,
a California Limited Partnership
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
(Item 14 (a))
Page
References
PS PARTNERS VII, LTD.
Report of Independent Auditors F-1
Financial Statements and Schedules:
Balance Sheets as of December 31, 1997 and 1996 F-2
For the years ended December 31, 1997, 1996 and 1995: F-3
Statements of Income F-3
Statements of Partners' Equity F-4
Statements of Cash Flows F-5
Notes to Financial Statements F-6 - F-10
Schedule
Schedule III - Real Estate and Accumulated Depreciation F-11 - F-12
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 VII JOINT VENTURES
Report of Independent Auditors F-13
Financial Statements:
Balance Sheets as of December 31, 1997 and 1996 F-14
For the years ended December 31, 1997, 1996 and 1995:
Statements of Income F-15
Statements of Partners' Equity F-16
Statements of Cash Flows F-17 - F-18
Notes to Financial Statements F-19 - F-22
Schedule
Schedule III - Real Estate and Accumulated Depreciation F-23 - F-24
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.
22
<PAGE>
Report of Independent Auditors
The Partners
PS Partners VII, Ltd., a California Limited Partnership
We have audited the balance sheets of PS Partners VII, Ltd., a California
Limited Partnership, as of December 31, 1997 and 1996 and the related statements
of income, partners' equity, and cash flows for each of the three years in the
period ended December 31, 1997. 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 VII, Ltd., a
California Limited Partnership, at December 31, 1997 and 1996, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
As discussed in Note 1, the financial statements have been restated to account
for certain joint ventures previously consolidated by the Partnership on the
equity method.
ERNST & YOUNG LLP
February 23, 1998
Los Angeles, California
F-1
<PAGE>
PS PARTNERS VII, LTD.
a California Limited Partnership
BALALNCE SHEETS
(Restated - See Note 1)
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
-------------------------------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 1,179,000 $ 11,000
Rent and other receivables 2,000 10,000
Real estate facilities, at cost:
Land 1,122,000 1,122,000
Buildings and equipment 2,716,000 2,704,000
-------------------------------------
3,838,000 3,826,000
Less accumulated depreciation (1,163,000) (1,044,000)
-------------------------------------
2,675,000 2,782,000
Investment in real estate entities 23,115,000 24,567,000
Other assets 18,000 16,000
-------------------------------------
$ 26,989,000 $ 27,386,000
=====================================
LIABILITIES AND PARTNERS' EQUITY
Accounts payable $ 128,000 $ 151,000
Advance payments from renters 47,000 48,000
Partners' equity:
Limited partners' equity, $500 per unit, 150,000
units authorized, 108,831 issued and outstanding 26,475,000 26,844,000
General partners' equity 339,000 343,000
-------------------------------------
Total partners' equity 26,814,000 27,187,000
-------------------------------------
$ 26,989,000 $ 27,386,000
=====================================
</TABLE>
See accompanying notes.
F-2
<PAGE>
PS PARTNERS VII, LTD.
a California Limited Partnership
STATEMENTS OF INCOME
(Restated - See Note 1)
For the years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------------------
REVENUE:
<S> <C> <C> <C>
Rental income $ 859,000 $ 799,000 $ 723,000
Equity in earnings of real estate entities 1,959,000 1,649,000 1,767,000
Interest income 29,000 12,000 89,000
--------------------------------------------------------
2,847,000 2,460,000 2,579,000
--------------------------------------------------------
COSTS AND EXPENSES:
Cost of operations 240,000 212,000 218,000
Management fees 52,000 48,000 43,000
Depreciation and amortization 119,000 115,000 112,000
Administrative 122,000 114,000 120,000
Environmental costs - - 25,000
--------------------------------------------------------
533,000 489,000 518,000
--------------------------------------------------------
NET INCOME $ 2,314,000 $ 1,971,000 $ 2,061,000
========================================================
Limited partners' share of net income
($18.61, $14.59, and $13.83 per unit in
1997, 1996, and 1995, respectively) $ 2,025,000 $ 1,588,000 $ 1,505,000
General partners' share of net income 289,000 383,000 556,000
--------------------------------------------------------
$ 2,314,000 $ 1,971,000 $ 2,061,000
========================================================
</TABLE>
See accompanying notes.
F-3
<PAGE>
PS PARTNERS VII, LTD.
a California Limited Partnership
STATEMENTS OF PARTNERS' EQUITY
For the years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
Limited General
Partners Partners Total
--------------------------------------------------------
<S> <C> <C> <C>
Balances at December 31, 1994 $ 31,831,000 $ 393,000 $ 32,224,000
Net income 1,505,000 556,000 2,061,000
Distributions (4,814,000) (589,000) (5,403,000)
--------------------------------------------------------
Balances at December 31, 1995 28,522,000 360,000 28,882,000
Net income 1,588,000 383,000 1,971,000
Distributions (3,266,000) (400,000) (3,666,000)
--------------------------------------------------------
Balances at December 31, 1996 26,844,000 343,000 27,187,000
Net income 2,025,000 289,000 2,314,000
Distributions (2,394,000) (293,000) (2,687,000)
--------------------------------------------------------
Balances at December 31, 1997 $ 26,475,000 $ 339,000 $ 26,814,000
========================================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
PS PARTNERS VII, LTD.
a California Limited Partnership
STATEMENTS OF CASH FLOWS
(Restated - See Note 1)
For the years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 2,314,000 $ 1,971,000 $ 2,061,000
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 119,000 115,000 112,000
Decrease (increase) in rent and other receivables 8,000 (6,000) 2,000
Increase in other assets (2,000) (5,000) (3,000)
(Decrease) increase in accounts payable (23,000) 69,000 (3,000)
(Decrease) increase in advance payments from renters (1,000) (16,000) 40,000
Equity in earnings of real estate entities (1,959,000) (1,649,000) (1,767,000)
---------------------------------------------------
Total adjustments (1,858,000) (1,492,000) (1,619,000)
---------------------------------------------------
Net cash provided by operating activities 456,000 479,000 442,000
---------------------------------------------------
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES:
Distributions from real estate entities 3,411,000 2,878,000 3,644,000
Additions to real estate facilities (12,000) (22,000) (11,000)
---------------------------------------------------
Net cash provided by investing activities 3,399,000 2,856,000 3,633,000
---------------------------------------------------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Distributions to partners (2,687,000) (3,666,000) (5,403,000)
---------------------------------------------------
Net cash used in financing activities (2,687,000) (3,666,000) (5,403,000)
---------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,168,000 (331,000) (1,328,000)
Cash and cash equivalents at the beginning of the period 11,000 342,000 1,670,000
---------------------------------------------------
Cash and cash equivalents at the end of the period $ 1,179,000 $ 11,000 $ 342,000
===================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
PS PARTNERS VII, LTD.,
a California Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PARTNERSHIP MATTERS
Description of Partnership
--------------------------
PS Partners VII, Ltd., a California Limited Partnership (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"), a California corporation, acquired the
interest of PSA relating to its general partner capital contribution in
the Partnership and was substituted as a co-general partner in place of
PSA.
In 1995, there was a series of mergers among Public Storage
Management, Inc. (which was the Partnership's mini-warehouse operator),
Public Storage, Inc. and their affiliates (collectively, "PSMI"),
culminating in the November 16, 1995 merger (the "PSMI Merger") of PSMI
into Storage Equities, Inc. In the PSMI Merger, Storage Equities, Inc.
was renamed Public Storage, Inc. and it acquired substantially all of
PSMI's United States real estate operations and became the operator of
the Partnership's and the Joint Venture's mini-warehouse properties.
The Partnership has invested in existing mini-warehouse
storage facilities which offer self-service storage spaces for lease,
usually on a month-to-month basis, to the general public and, to a
lesser extent, in existing business park facilities which offer
industrial and office space for lease.
The Partnership has ownership interests in 20 properties in 10
states (collectively referred to as the "Mini-Warehouse Properties"),
which exclude 2 properties transferred to PS Business Parks, L.P.
("PSBPLP") in January 1997. 18 of the properties are owned by SEI/PSP
VII 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 40.2% to 70%.
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 I) PSI has the right to compel the sale of each
property in the Joint Venture and II) PSI has the right to require the
Partnership to submit operating budgets.
F-6
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PARTNERSHIP MATTERS
(CONTINUED)
Previously, the Partnership consolidated the Joint Venture in
its financial statements. The accompanying financial statements for
1997, 1996, and 1995 have been restated to de-consolidate the Joint
Venture. This restatement had no impact upon net income or Partner's
Equity. The primary impact of this change was to reduce total assets by
$22,796,000 and $22,736,000 in 1997 and 1996, respectively; the total
of minority interest and liabilities was reduced by the corresponding
same amount in each period. Total revenues decreased by $7,716,000,
$8,124,000, and $7,822,000, respectively, in the years ended December
31, 1997, 1996, and 1995, respectively; the total of minority interest
in income and expenses were reduced by the corresponding same amount in
each period.
Under the terms of the partnership agreements all depreciation
and amortization with respect to each Joint Venture is allocated solely
to the Partnership until the limited partners recover their initial
capital contribution. Thereafter, all depreciation and amortization is
allocated solely to PSI until it recovers its initial capital
contribution. All remaining depreciation and amortization is allocated
to the Partnership and PSI in proportion to their ownership
percentages.
Under the terms of the partnership agreements, PSI has the
right to compel the sale of each property in the general partnerships
at any time after seven years from the date of acquisition at not less
than its independently determined fair market value provided the
Partnership receives its share of the net proceeds solely in cash.
PSI's right to require the Partnership to sell all of the jointly owned
properties became exercisable during 1993.
Depreciation and Amortization
-----------------------------
The Partnership and 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
------------------------
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 weighted average number of
limited partner units (108,831) outstanding during the year.
F-7
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PARTNERSHIP MATTERS
(CONTINUED)
Cash Distributions
------------------
The Partnership Agreement provides for quarterly distributions
of cash flow from operations (as defined). Cash distributions per
limited partner unit were $22.00, $30.01, and $44.23 for 1997, 1996,
and 1995, respectively.
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 Partnership's properties to evaluate
the environmental condition of, and potential environmental liabilities
of such properties. Based on the assessments, the Partnership believes
that after December 31, 1997 it is probable that the Mini-Warehouse
Properties will incur costs totaling $71,000. During 1997, 1996, and
1995, the Partnership and the Joint Venture paid none, $13,000, and
$25,000, respectively, in connection with the environmental
remediations. Although there can be no assurance, the Partnership is
not aware of any unaccrued environmental contamination of 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.
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 were the Joint Venture's business parks in exchange for a
partnership interest in PSBPLP. The general partner of PSBPLP is PS
Business Parks, Inc.
F-8
<PAGE>
3. INVESTMENT IN REAL ESTATE ENTITIES
During 1997, 1996, and 1995, the Partnership recognized
earnings from the Real Estate Entities of $1,959,000, $1,649,000 and
$1,767,000, respectively, and received cash distributions totaling
$3,411,000, $2,878,000 and $3,644,000, respectively from the Real
Estate Entities.
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:
1997 1996
----------- -----------
For the year ended December 31,
Total revenues $41,253,000 $9,773,000
Minority interest in income $8,566,000 $0
Net income $8,008,000 $3,760,000
At December 31,
Total assets, net of accumulated depreciation $369,365,000 $47,303,000
Total liabilities $12,996,000 $1,196,000
Total minority interest $168,665,000 $0
Total equity $187,704,000 $46,107,000
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, 1997 and at December 31, 1997,
respectively, as compared to prior periods, is the result of the
January 1997 transfer of business parks owned by the Joint Venture to
PSBPLP, which was formed to own and operate business parks. PSI has a
significant interest in PSBPLP.
Financial statements of the Joint Venture are filed with the
Partnership's Form 10-K/A for 1997, 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).
F-9
<PAGE>
5. RELATED PARTY TRANSACTIONS (CONTINUED)
In January 1997, the Joint Venture transferred its business
park facilities to PSBPLP in exchange for a partnership interest in
PSBPLP.
PSI has a significant economic interest in PSBPLP and PSBP.
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 $4,762,000, $1,833,000 and
$1,825,000 for the years ended December 31, 1997, 1996 and 1995,
respectively. The difference between taxable income and book income is
primarily related to timing differences in depreciation expense.
F-10
<PAGE>
PS PARTNERS VII, LTD.
A CALIFORNIA LIMITED PARTNERSHIP
SCHEDULE III - REAL ESTATE
AND ACCUMULATED DEPRECIATION
<TABLE>
<CAPTION>
Costs
Initial Cost subsequent
--------------------------------- to acquisition
Date Building & Building &
Acquired Description Encumbrances Land Improvement Improvements
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
5/87 OK City/Hefner $- 459,000 941,000 206,000
7/86 Portland/Moody - 663,000 1,637,000 (68,000)
---------------------------------------------------------------
$- $1,122,000 $2,578,000 $138,000
===============================================================
</TABLE>
<TABLE>
<CAPTION>
Gross Carrying Amount
At December 31, 1997
---------------------------------------------------------------
Date Building & Accumulated
Acquired Description Land Improvements Total Depreciation
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
5/87 OK City/Hefner 459,000 1,147,000 1,606,000 499,000
7/86 Portland/Moody 663,000 1,569,000 2,232,000 664,000
----------------------------------------------------------------
$1,122,000 $2,716,000 $3,838,000 $1,163,000
================================================================
</TABLE>
F-11
<PAGE>
PS PARTNERS VII, LTD.
A CALIFORNIA LIMITED PARTNERSHIP
REAL ESTATE RECONCILIATION
SCHEDULE III (CONTINUED)
(A) The following is a reconciliation of cost and related accumulated
depreciation.
GROSS CARRYING COST RECONCILIATION
Years Ended December 31,
--------------------------------------
1997 1996 1995
--------------------------------------
Balance at beginning of the period $3,826,000 $3,804,000 $3,793,000
Additions during the period:
Improvements, etc. 12,000 22,000 11,000
--------------------------------------
Balance at the close of the period $3,838,000 $3,826,000 $3,804,000
======================================
ACCUMULATED DEPRECIATION RECONCILIATION
Years Ended December 31,
--------------------------------------
1997 1996 1995
--------------------------------------
Balance at beginning of the period $1,044,000 $ 929,000 $817,000
Additions during the period:
Depreciation 119,000 115,000 112,000
--------------------------------------
Balance at the close of the period $1,163,000 $1,044,000 $929,000
======================================
(B) The aggregate cost of real estate for Federal income tax purposes is
$4,161,000.
F-12
<PAGE>
Report of Independent Auditors
The Partners
SEI/PSP VII Joint Ventures
We have audited the balance sheets of the SEI/PSP VII Joint Ventures as of
December 31, 1997 and 1996 and the related statements of income, partners'
equity and cash flows for each of the three years in the period ended December
31, 1997. 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 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 VII Joint Ventures
at December 31, 1997 and 1996, and the results of its operations and cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
February 23, 1998
Los Angeles, CA
F-13
<PAGE>
SEI/PSP VII JOINT VENTURES
a California Limited Partnership
BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
--------------------------------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $167,000 $131,000
Rent and other receivables 70,000 63,000
Real estate facilities, at cost:
Land 14,908,000 17,660,000
Buildings and equipment 41,715,000 48,960,000
--------------------------------------
56,623,000 66,620,000
Less accumulated depreciation (18,087,000) (19,659,000)
--------------------------------------
38,536,000 46,961,000
Investment in real estate entity 7,046,000 -
Other assets 92,000 148,000
--------------------------------------
$45,911,000 $47,303,000
======================================
LIABILITIES AND PARTNERS' EQUITY
Accounts payable $859,000 $903,000
Advance payments from renters 306,000 293,000
Partners' equity:
PS Partners VII, Ltd. 23,115,000 24,567,000
Public Storage, Inc. 21,631,000 21,540,000
--------------------------------------
Total partners' equity 44,746,000 46,107,000
--------------------------------------
$45,911,000 $47,303,000
======================================
</TABLE>
See accompanying notes.
F-14
<PAGE>
SEI/PSP VII JOINT VENTURES
a California Limited Partnership
STATEMENTS OF INCOME
For the years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------------
REVENUE:
<S> <C> <C> <C>
Rental income $9,410,000 $9,773,000 $9,570,000
Equity in earnings of real estate entity 265,000 - -
Other income - - 19,000
-----------------------------------------------------
9,675,000 9,773,000 9,589,000
-----------------------------------------------------
COSTS AND EXPENSES:
Cost of operations 2,839,000 3,119,000 2,895,000
Management fees 565,000 577,000 566,000
Depreciation and amortization 2,099,000 2,317,000 2,092,000
Environmental costs - - 85,000
-----------------------------------------------------
5,503,000 6,013,000 5,638,000
-----------------------------------------------------
NET INCOME $4,172,000 $3,760,000 $3,951,000
=====================================================
Partners' share of net income:
PS Partners VII, Ltd.'s share $1,959,000 $1,649,000 $1,767,000
Public Storage Inc.'s share 2,213,000 2,111,000 2,184,000
-----------------------------------------------------
$4,172,000 $3,760,000 $3,951,000
=====================================================
</TABLE>
See accompanying notes.
F-15
<PAGE>
SEI/PSP VII JOINT VENTURES
a California Limited Partnership
STATEMENTS OF PARTNERS' EQUITY
For the years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
PS Partners Public Storage
VII., Ltd. Inc. Total
-----------------------------------------------------------
<S> <C> <C> <C>
Balances at December 31, 1994 $27,673,000 $21,073,000 $48,746,000
Net income 1,767,000 2,184,000 3,951,000
Distributions (3,644,000) (2,090,000) (5,734,000)
-----------------------------------------------------------
Balances at December 31, 1995 25,796,000 21,167,000 46,963,000
Net income 1,649,000 2,111,000 3,760,000
Distributions (2,878,000) (1,738,000) (4,616,000)
-----------------------------------------------------------
Balances at December 31, 1996 24,567,000 21,540,000 46,107,000
Net income 1,959,000 2,213,000 4,172,000
Distributions (3,411,000) (2,122,000) (5,533,000)
-----------------------------------------------------------
Balances at December 31, 1997 $23,115,000 $21,631,000 $44,746,000
===========================================================
</TABLE>
See accompanying notes.
F-16
<PAGE>
SEI/PSP VII JOINT VENTURES
a California Limited Partnership
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $4,172,000 $3,760,000 $3,951,000
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 2,099,000 2,317,000 2,092,000
Increase in rent and other receivables (7,000) (19,000) (7,000)
Decrease (increase) in other assets 56,000 (34,000) (4,000)
(Decrease) increase in accounts payable (44,000) 15,000 33,000
Increase (decrease) in advance payments from renters 13,000 (30,000) (26,000)
Equity in earnings of real estate entity (265,000) - -
-------------------------------------------------
Total adjustments 1,852,000 2,249,000 2,088,000
-------------------------------------------------
Net cash provided by operating activities 6,024,000 6,009,000 6,039,000
-------------------------------------------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Proceeds from insurance company for partial
condemnation of real estate facility - - 312,000
Distributions from real estate entity 111,000 - -
Additions to real estate facilities (566,000) (1,455,000) (598,000)
-------------------------------------------------
Net cash used in investing activities (455,000) (1,455,000) (286,000)
-------------------------------------------------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Distributions to partners (5,533,000) (4,616,000) (5,734,000)
-------------------------------------------------
Net cash used in financing activities (5,533,000) (4,616,000) (5,734,000)
-------------------------------------------------
Net increase (decrease) in cash and cash equivalents 36,000 (62,000) 19,000
Cash and cash equivalents at the beginning of the period 131,000 193,000 174,000
-------------------------------------------------
Cash and cash equivalents at the end of the period $167,000 $131,000 $193,000
=================================================
</TABLE>
See accompanying notes.
F-17
<PAGE>
SEI/PSP VII JOINT VENTURES
a California Limited Partnership
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1997, 1996, and 1995
(Continued)
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------
Supplemental schedule of noncash investing and financing activities:
<S> <C> <C> <C>
Investment in real estate entity $(6,892,000) $- $-
Transfer of real estate facilities for interest in real estate entity,
net 6,892,000 - -
</TABLE>
See accompanying notes.
F-18
<PAGE>
SEI/PSP VII JOINT VENTURES
a California Limited Partnership
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
1. DESCRIPTION OF PARTNERSHIP
SEI/PSP VII Joint Ventures (the "Joint Venture") was formed on
December 31, 1990 in connection with the consolidation of 15 separate
general partnerships between Public Storage Inc. ("PSI") and PS
Partners VII, Ltd. ("PSP VII"). 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 18 properties (referred to hereinafter
as the "Mini-Warehouses"), which excludes two properties which was
transferred to PS Business Parks, L.P. ("PSBPLP") in January 1997. PSP
VII is the managing general partner of the Joint Venture, with its
ownership interests in the properties of the Joint Venture ranging from
40.2% to 70%.
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 VII 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 VII 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 VII and PSI
-------------------------------------------
Net income prior to depreciation is allocated to PSP VII 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 VII 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 VII and PSI in proportion to their ownership
percentages.
F-19
<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. Based upon these evaluations, the Joint Venture
accrued a total of $85,000 of environmental expense in 1995. Although
there can be no assurance, the Joint Venture is not aware of any
additional unaccrued environmental contamination of the
Mini-Warehouses.
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 August 1992, the buildings at a mini-warehouse facility
located in Homestead, Florida were completely destroyed by Hurricane
Andrew. The facility was adequately insured with respect to business
interruption and reconstruction of the facility. During 1993, the
Partnership received net insurance settlement proceeds of approximately
$1,212,000. The General Partners decided not to reconstruct the
buildings and have not yet sold the related land. In 1993, the
Partnership recognized a loss of $132,000 on the insurance settlement
and write-off of the net book value of the property.
In 1993, the State of Texas exercised its right of eminent domain and
took possession of a portion of the Houston, North Freeway
mini-warehouse facility, including land and buildings. Since 1993, the
Partnership and the State of Texas have been negotiating an appropriate
amount of compensation to be paid to the Partnership for the portion of
the property which was condemned. In 1995, a final settlement was
reached whereby the Partnership received total condemnation proceeds of
$845,000 (initial proceeds were received in 1993, and the final
settlement was received in 1995). Approximately $413,000 of the
proceeds was utilized to construct additional rental space on the
remaining property. In 1995, the Partnership reduced real estate
facilities by approximately $332,000, representing the net book value
of the property taken in the condemnation.
F-20
<PAGE>
3. REAL ESTATE FACILITIES (CONTINUED)
In 1995, the State of Oregon exercised its right of eminent
domain, and took possession of a portion of the Tualatin Highway,
Hillsboro mini-warehouse facility. Property claimed included utilities,
signage, and drainage easements. The Partnership and the State of
Oregon reached a settlement in 1997, whereby the Partnership received
condemnation proceeds of approximately $100,000. Accordingly, in 1997,
the Partnership reduced real estate facilities by the amount of the
proceeds. Net of capitalized costs previously incurred of approximately
$100,000 (during 1995 and 1996) to cure defects caused by the
condemnation, there was no net change in the overall book value of the
Tualatin real estate facilities, as a result of the partial
condemnation.
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.
In January 1997, the Joint Venture, 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 were the Joint Venture's business parks in exchange for a
partnership interest in PSBPLP. The general partner of PSBPLP is PS
Business Parks, Inc.
4. INVESTMENT IN REAL ESTATE ENTITY
In 1997, the Joint Venture recognized $265,000 in equity in
earnings of real estate entities with respect to the investment in
PSBPLP described in Note 2 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:
1997
-----------
For the year ended December 31,
Total revenues $31,578,000
Minority interest in income $8,566,000
Net income $3,836,000
At December 31,
Total assets, net of accumulated depreciation $323,454,000
Total liabilities $11,831,000
Total minority interest $168,665,000
Total equity $142,958,000
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-21
<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 VII and
PSI and, accordingly, the Joint Venture's financial statements do not
reflect a provision for such taxes.
Unaudited taxable net income was $4,279,000, $3,675,000 and
$3,628,000 for the years ended December 31, 1997, 1996 and 1995,
respectively. The difference between taxable income and book income is
primarily related to timing differences in depreciation expense.
F-22
<PAGE>
SEI/PSP VII JOINT VENTURES
A CALIFORNIA LIMITED PARTNERSHIP
SCHEDULE III - REAL ESTATE
AND ACCUMULATED DEPRECIATION
<TABLE>
<CAPTION>
Costs
Initial Cost subsequent
--------------------------------- to acquisition
Date Building & Building &
Acquired Description Encumbrances Land Improvement Improvements
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
9/86 Lakewood/W. 6th Ave. $- $1,070,000 $3,155,000 $479,000
10/86 Pilgrim/Houston/Loop 610 - 1,299,000 3,491,000 926,000
10/86 Pilgrim/Houston/S.W. Freeway - 904,000 2,319,000 539,000
10/86 Pilgrim/Houston/FM 1960 - 719,000 1,987,000 2,000
10/86 Pilgrim/Houston/Old Katy Rd. - 1,365,000 3,431,000 917,000
10/86 Pilgrim/Houston/Long Point - 451,000 1,187,000 469,000
10/86 Austin/Red Rooster - 1,390,000 1,710,000 393,000
12/86 Lynnwood/196th SW - 1,063,000 1,602,000 314,000
12/86 Auburn/Auburn Way North - 606,000 1,144,000 325,000
12/86 Gresham/Burnside - 351,000 1,056,000 335,000
12/86 Denver/Sheridan Rd. - 1,033,000 2,792,000 589,000
12/86 Marietta/Cobb Pkwy. - 536,000 2,764,000 548,000
12/86 Hillsboro/Tualatin Hwy. - 461,000 574,000 207,000
11/86 Arleta/Osborne St. - 987,000 663,000 230,000
4/87 City of Industry/Amar Rd. - 748,000 2,052,000 363,000
3/87 Annandale/Ravensworth - 679,000 1,621,000 185,000
12/86 San Antonio/Sunst Rd. - 1,206,000 1,594,000 474,000
8/86 Hammond/Calumet - 97,000 751,000 470,000
---------------------------------------------------------------
$- $14,965,000 $33,893,000 $7,765,000
===============================================================
</TABLE>
<TABLE>
<CAPTION>
Gross Carrying Amount
At December 31, 1997
---------------------------------------------------------------
Date Building & Accumulated
Acquired Description Land Improvements Total Depreciation
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
9/86 Lakewood/W. 6th Ave. $1,070,000 $3,634,000 $4,704,000 $1,697,000
10/86 Pilgrim/Houston/Loop 610 1,299,000 4,417,000 5,716,000 1,977,000
10/86 Pilgrim/Houston/S.W. Freeway 904,000 2,858,000 3,762,000 1,261,000
10/86 Pilgrim/Houston/FM 1960 662,000 2,046,000 2,708,000 887,000
10/86 Pilgrim/Houston/Old Katy Rd. 1,365,000 4,348,000 5,713,000 1,886,000
10/86 Pilgrim/Houston/Long Point 451,000 1,656,000 2,107,000 772,000
10/86 Austin/Red Rooster 1,390,000 2,103,000 3,493,000 926,000
12/86 Lynnwood/196th SW 1,063,000 1,916,000 2,979,000 844,000
12/86 Auburn/Auburn Way North 606,000 1,469,000 2,075,000 681,000
12/86 Gresham/Burnside 351,000 1,391,000 1,742,000 613,000
12/86 Denver/Sheridan Rd. 1,033,000 3,381,000 4,414,000 1,479,000
12/86 Marietta/Cobb Pkwy. 536,000 3,312,000 3,848,000 1,477,000
12/86 Hillsboro/Tualatin Hwy. 461,000 781,000 1,242,000 380,000
11/86 Arleta/Osborne St. 987,000 893,000 1,880,000 393,000
4/87 City of Industry/Amar Rd. 748,000 2,415,000 3,163,000 646,000
3/87 Annandale/Ravensworth 679,000 1,806,000 2,485,000 801,000
12/86 San Antonio/Sunst Rd. 1,206,000 2,068,000 3,274,000 871,000
8/86 Hammond/Calumet 97,000 1,221,000 1,318,000 496,000
----------------------------------------------------------------
$14,908,000 $41,715,000 $56,623,000 $18,087,000
================================================================
</TABLE>
F-23
<PAGE>
SEI/PSP VII JOINT VENTURES
A CALIFORNIA LIMITED PARTNERSHIP
REAL ESTATE RECONCILIATION
SCHEDULE III (CONTINUED)
(A) The following is a reconciliation of cost and related accumulated
depreciation.
GROSS CARRYING COST RECONCILIATION
Years Ended December 31,
-------------------------------------------
1997 1996 1995
-------------------------------------------
Balance at beginning of the period $ 66,620,000 $ 65,165,000 $ 65,054,000
Additions during the period:
Improvements, etc. 566,000 1,455,000 598,000
Deductions during the period:
Disposition of real estate (10,563,000) - (487,000)
-------------------------------------------
Balance at the close of the period $ 56,623,000 $ 66,620,000 $ 65,165,000
===========================================
ACCUMULATED DEPRECIATION RECONCILIATION
Years Ended December 31,
-------------------------------------------
1997 1996 1995
-------------------------------------------
Balance at beginning of the period $ 19,659,000 $ 17,342,000 $ 15,405,000
Additions during the period:
Depreciation 2,099,000 2,317,000 2,092,000
Deductions during the period:
Disposition of real estate (3,671,000) - (155,000)
-------------------------------------------
Balance at the close of the period $ 18,087,000 $ 19,659,000 $ 17,342,000
===========================================
(B) The aggregate cost of real estate for Federal income tax purposes is
$55,643,000
F-24
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000781850
<NAME> PS PARTNERS VII, LTD.
<MULTIPLIER> 1
<CURRENCY> U.S. $
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 1,179,000
<SECURITIES> 0
<RECEIVABLES> 2,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,181,000
<PP&E> 3,838,000
<DEPRECIATION> (1,163,000)
<TOTAL-ASSETS> 26,989,000
<CURRENT-LIABILITIES> 175,000
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 26,814,000
<TOTAL-LIABILITY-AND-EQUITY> 26,989,000
<SALES> 0
<TOTAL-REVENUES> 2,847,000
<CGS> 0
<TOTAL-COSTS> 292,000
<OTHER-EXPENSES> 241,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,314,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,314,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,314,000
<EPS-PRIMARY> 18.61
<EPS-DILUTED> 18.61
</TABLE>
