-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DmMajQPaT7vMGHTIbU9GysoAJjuIXb2PrXzplWfClrJPfqcs9e4BWigo1m28PXys X7qhcr1naBOWE15weMA9JA== 0000202953-07-000003.txt : 20070402 0000202953-07-000003.hdr.sgml : 20070402 20070402140724 ACCESSION NUMBER: 0000202953-07-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20061231 FILED AS OF DATE: 20070402 DATE AS OF CHANGE: 20070402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PUBLIC STORAGE PROPERTIES LTD CENTRAL INDEX KEY: 0000202953 STANDARD INDUSTRIAL CLASSIFICATION: LESSORS OF REAL PROPERTY, NEC [6519] IRS NUMBER: 953196912 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-08667 FILM NUMBER: 07737579 BUSINESS ADDRESS: STREET 1: 701 WESTERN AVE STREET 2: SUITE 200 CITY: GLENDALE STATE: CA ZIP: 91201-2397 BUSINESS PHONE: (818) 244-8080 MAIL ADDRESS: STREET 1: 701 WESTERN AVE STREET 2: SUITE 200 CITY: GLENDALE STATE: CA ZIP: 91201 10-K 1 psp3200610k.txt PS PROPERTIES 3 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2006 or ------------------ [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to . ----------------- ----------------- Commission File Number: 0-8667 ------- PUBLIC STORAGE PROPERTIES, LTD. ------------------------------- (Exact name of Registrant as specified in its charter) California 95-3196921 - ------------------------------------------------- ------------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 701 Western Avenue, Glendale, California 91201-2349 - ------------------------------------------------- ------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (818) 244-8080. -------------- Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Units of Limited Partnership Interest ------------------------------------- (Title of class) ------------------------------------- Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [ X] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [X] 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 this Form 10-K. [X] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Large Accelerated Filer [ ] Accelerated Filer [ ] Non-accelerated Filer [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] The aggregate market value of the voting and non-voting common stock held by non-affiliates of the Registrant as of June 30, 2006: 1 Limited Partner Units, $500.00 Par Value - $9,014,000 (computed on the basis of $1,200 per unit which was the highest reported sale price prior to the quarter ended June 30, 2006). The number of units outstanding of the registrant's classes of common equity as of March 30, 2007: Units of Limited Partnership Interest, $500.00 Par Value - 20,000 units DOCUMENTS INCORPORATED BY REFERENCE NONE 2 PART I ITEM 1. BUSINESS -------- Forward Looking Statements - -------------------------- When used within this document, the words "expects," "believes," "anticipates," "should," "estimates," and similar expressions are intended to identify "forward-looking statements" within the meaning of that term in Section 27A of the Securities Exchange Act of 1933, as amended, and in Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors, which may cause the actual results and performance of Public Storage Properties, Ltd. (the "Partnership") to be materially different from those expressed or implied in the forward looking statements. Such factors are described in Item 1A, "Risk Factors" and include changes in general economic conditions and in the markets in which the Partnership operates and the impact of competition from new and existing storage and commercial facilities and other storage alternatives, which could impact rents and occupancy levels at the Partnership's facilities; the impact of the regulatory environment as well as national, state, and local laws and regulations, which could increase the Partnership's expense and reduce the Partnership's cash available for distribution; and economic uncertainty due to the impact of war or terrorism could adversely affect our business plan. We disclaim any obligation to publicly release the results of any revisions to these forward-looking statements reflecting new estimates, events or circumstances after the date of this report. General - ------- The Partnership is a publicly held limited partnership formed under the California Uniform Limited Partnership Act in November 1976. The Partnership raised $10,000,000 in gross proceeds by selling 20,000 units of limited partnership interest ("Units") in an interstate offering, which commenced in October 1977 and completed in January 1978. The Partnership was formed to engage in the business of developing and operating self-storage facilities for personal and business use. The Partnership has reported annually to the Securities and Exchange Commission ("SEC") on form 10-K which includes financial statements certified by independent public accountants. The Partnership has also reported quarterly to the SEC on Form 10-Q and includes unaudited financial statements with such filings. The Partnership expects to continue such reporting. On an annual basis, the Partnership mails the audited financial statements and related footnotes to all limited partners. The public may read and copy any materials this Partnership files with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-732-0330. The partnership does not maintain a website. However, the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers, including the Partnership, that file electronically with the SEC at http://www.sec.gov. In 1995, there were a series of mergers among Public Storage Management, Inc. (which was the Partnership's self-storage facilities operator), Public Storage, Inc. (which was one of the Partnership's general partners) and their affiliates (collectively, "PSMI"), culminating in the November 16, 1995 merger (the "PSMI Merger") of PSMI into Storage Equities, Inc., a real estate investment trust ("REIT") organized as a California corporation. In the PSMI Merger, Storage Equities, Inc. was renamed Public Storage, Inc. ("PSI") and PSI acquired substantially all of PSMI's United States real estate operations and became a co-general partner of the Partnership and the operator of the Partnership's self-storage facilities. The Partnership's general partners are PSI and B. Wayne Hughes ("Hughes") (collectively referred to as the "General Partners"). Hughes has been a general partner of the Partnership since its inception. Hughes is chairman of the board of PSI, and was its chief executive officer through November 7, 2002, 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 operation or conduct of its business and affairs. 3 The term of the Partnership is until all properties have been sold and, in any event, not later than December 31, 2035. Investment Objectives and Policies - ---------------------------------- The Partnership's investment objectives are to (i) preserve and protect invested capital, (ii) maximize the potential for appreciation in value of its investments, and (iii) provide for cash distributions from operations. Following are the Partnership's investment practices and policies. The partnership does not anticipate any new investments, other than maintenance capital expenditures, and does not anticipate liquidating the real estate investments it now holds. While a vote of the limited partners is generally required to change the Partnership's investment policies, the general partners hold a majority of the limited partnership units, and as a result, the General Partners could change these policies through their vote. o Our investments consist of nine self-storage facilities located in the United States. See "Self-storage Facilities" and Item 2 "Properties" for further information. These investments were acquired both for income and capital gains. o There is no limitation on the amount or percentage of assets, which can be invested in any specific person. The Partnership does not anticipate issuing senior securities, making loans to other persons, investing in the securities of other issuers for the purpose of exercising control, underwriting the securities of other issuers, engaging in the purchase and sale of investments, offering securities in exchange for property, or repurchasing or otherwise reacquiring its outstanding securities. The partnership may consider borrowing money with the intent of using the proceeds for distribution to partners. Self-storage Facilities - ----------------------- Self-storage facilities 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 property managers who are supervised by district managers. Some self-storage facilities also include rentable uncovered parking areas for vehicle storage. Leases for self-storage 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 self-storage facilities 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. Self-storage facilities in which the Partnership has invested generally consist of three to seven buildings containing an aggregate of between approximately 250 to 1,100 storage spaces, most of which have between 25 and 400 square feet and an interior height of approximately 8 to 12 feet. The Partnership experiences minor seasonal fluctuations in the occupancy levels of self-storage facilities with occupancies higher in the summer months than in the winter months. The Partnership believes that these fluctuations result in part from increased moving activity during the summer. The Partnership's self-storage facilities are all in California 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 self-storage facilities to alternative uses in connection with a sale or otherwise would generally require substantial investment. However, the Partnership does not intend to convert its self-storage facilities to other uses. 4 Operating Strategies - -------------------- The Partnership's self-storage facilities are operated by PSI under the "Public Storage" brand name, which the Partnership believes is the most recognized name in the self-storage industry. The major elements of the Partnership's operating strategies are as follows: o Capitalize on "Public Storage's" name recognition. PSI has more than 20 years of operating experience in the self-storage business. PSI has informed the Partnership that it is the largest self-storage 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 directories in virtually all markets in which it operates. Customers calling either PSI's toll-free telephone referral system, (800) 44-STORE, or a self-storage facility are directed to PSI's reservation system where a trained representative discusses with the customer space requirements, price and location preferences and also informs the customer of other products and services provided by PSI. The telephone reservation system supports rental activity at all of the Partnership's properties. o Maintain high occupancy levels and increase annual realized rents. Subject to market conditions, the Partnership generally seeks to maximize-revenues through high occupancy levels and to eliminate promotions prior to increasing rental rates. Average occupancy for the Partnership's self-storage facilities was 90% and 91% in 2006 and 2005, respectively. Annual realized rents per occupied square foot increased from $14.69 in 2005 to $15.53 in 2006. o Systems and controls. PSI has an organizational structure and a property operation system which links its corporate office with each self-storage facility. This enables PSI to obtain daily information from each facility 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. o Professional property operation. There are approximately 6,000 persons who render services for the Public Storage system, primarily personnel engaged in property operations, substantially all of whom are employed by a clearing company that provides certain administrative and cost-sharing services to PSI and other owners of properties operated by PSI. Property Operator - ----------------- The Partnership's self-storage facilities are managed by PSI (as successor to PSMI) pursuant to a Management Agreement. Under the supervision of the Partnership, PSI coordinates the operation of the facilities, establishes rental policies and rates, directs marketing activity and directs the purchase of equipment and supplies, maintenance activity and the selection and engagement of all vendors, supplies and independent contractors. PSI engages, at the expense of the Partnership, employees for the operation of the Partnership's facilities, including property managers, assistant managers, relief managers, and billing and maintenance personnel. Some or all of these employees may be employed on a part-time basis and may also be employed by other persons, partnerships, real estate investment trusts or other entities owning facilities operated by PSI. In the purchasing of services such as advertising (including broadcast media advertising) and insurance, PSI attempts to achieve economies by combining the resources of the various facilities that it operates. Facilities operated by PSI have historically carried comprehensive insurance, including fire, earthquake, liability and extended coverage. PSI has systems for managing space inventories, 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. 5 The Partnership's facilities are typically advertised via signage, yellow pages, flyers, broadcast media advertising (i.e. television and radio) in geographic areas in which many of the Partnership's facilities are located, as well as on the internet. Broadcast media and other advertising costs are charged to the Partnership's facilities located in geographic areas affected by the advertising. From time to time, PSI adopts promotional programs, such as temporary rent reductions, in selected areas or for individual facilities. For as long as the Management Agreement between the Partnership and PSI is in effect, PSI has granted the Partnership a non-exclusive license to use two PSI service marks and related designs including the "Public Storage" name in conjunction with rental and operation of facilities managed pursuant to the Management Agreement. Upon termination of the Management Agreement, the Partnership would no longer have the right to use the service marks and related designs. The General Partners believe that the loss of the right to use the service marks and related designs could have a material adverse effect on the Partnership's business. The Management Agreement between the Partnership and PSI provides that the Management Agreement may be terminated without cause upon 60 days written notice by the Partnership or six months notice by PSI. Competition - ----------- Local market conditions play a significant role in how competition will affect the Partnership's operations. Competition from other self-storage and other storage alternatives in the market areas in which the Partnership operates is significant and affects the occupancy levels, rental rates and operating expenses of certain of the Partnership's facilities. Any increase in availability of funds for investment in real estate may accelerate competition. Further development of self-storage facilities may intensify competition among self-storage facilities in the market areas in which the Partnership operates. In addition to competition from self-storage facilities operated by PSI, there are other publicly traded REITs and numerous regional and local operators. The Partnership believes that the significant operating and financial experience of PSI, and the "Public Storage" brand name recognition should enable the Partnership to continue to compete effectively with other entities. Other Business Activities - ------------------------- A corporation that reinsures policies against losses to goods stored by tenants in PSI's storage facilities was purchased by PSI from Mr. Hughes and members of his family (the "Hughes Family") on December 31, 2001. We believe that the availability of insurance reduces our potential liability to tenants for losses to their goods from theft or destruction. This corporation receives the premiums and bears the risks associated with the re-insurance. A subsidiary of PSI sells locks and boxes and rents trucks to the general public and tenants to be used in securing their spaces and moving their goods. The subsidiary of PSI receives the revenues and bears the cost of the activities. We believe that the availability of locks and boxes for sale and the rental of trucks promote the rental of spaces. Federal Income Tax - ------------------ Public Storage Properties, Ltd. is treated as a partnership for Federal income tax purposes with the taxable income of the entity allocated to each partner in accordance with the partnership agreement. Employees - --------- There are approximately 36 persons who render services on behalf of the Partnership. These persons include resident managers, assistant managers, relief managers, area managers, and administrative and maintenance personnel. Some employees may be employed on a part-time basis and may be employed by other persons, partnerships, REITs or other entities owning facilities operated by PSI. 6 ITEM 1A. RISK FACTORS ------------ In addition to the other information in our Form 10-K, you should consider the following factors in evaluating the Partnership: THE GENERAL PARTNERS CONTROL THE PARTNERSHIP AS A GROUP. Public Storage, Inc. is a general partner and beneficially owns approximately 31.4% of our outstanding limited partnership units. In addition, B. Wayne Hughes, General Partner of the Partnership, and Chairman of PSI and members of his family beneficially own 31.5% of the limited partnership units. As a result, the General Partners, as a group, control matters submitted to a vote of our unitholders, including amending our organizational documents, dissolving the Partnership and approving other such transactions. SINCE OUR BUSINESS CONSISTS PRIMARILY OF OPERATING REAL ESTATE, WE ARE SUBJECT TO REAL ESTATE OPERATING RISKS. The value of our investments may be reduced by general risks of real estate ownership. Since we derive substantially all of our income from real estate operations, we are subject to the general risks of owning real estate-related assets, including: o lack of demand for rental spaces or units in a locale; o changes in general economic or local conditions; o natural disasters, such as earthquakes; o potential terrorist attacks; o changes in supply of or demand for similar or competing facilities in an area; o the impact of environmental protection laws; o changes in interest rates and availability of permanent mortgage funds which may render the sale or financing of a property difficult or unattractive; and o changes in tax, real estate and zoning laws. There is significant competition among self-storage facilities and from other storage alternatives. All of our properties are self-storage facilities, which generated substantially all of our revenue for the year ended December 31, 2006. Local market conditions will play a significant part in how competition will affect us. Competition in the market areas in which many of our properties are located from other self-storage facilities and other storage alternatives is significant and has affected the occupancy levels, rental rates and operating expenses of our properties. Any increase in availability of funds for investment in real estate may accelerate competition. Further development of self-storage facilities may intensify competition among operators of self-storage facilities in the market areas in which we operate. We may incur significant environmental costs and liabilities. As an owner and operator of real properties, under various federal, state and local environmental laws, we are required to clean up spills or other releases of hazardous or toxic substances on or from our properties. Certain environmental laws impose liability whether or not the owner knew of, or was responsible for, the presence of the hazardous or toxic substances. In some cases, liability may not be limited to the value of the property. The presence of these substances, or the failure to properly remediate any resulting contamination, whether from environmental or microbial issues, also may adversely affect the owner's or operator's ability to sell, lease or operate its property or to borrow using its property as collateral. We have conducted preliminary environmental assessments on the Partnership's properties to evaluate the environmental condition of, and potential environmental liabilities associated with, our properties. These assessments generally consist of an investigation of environmental conditions at the property (not including soil or groundwater sampling or analysis), as well as a review of available information regarding the site and publicly available data regarding conditions at other sites in the vicinity. In connection with these property assessments, we have become aware that prior operations or activities at some facilities or from nearby locations have or may have resulted in contamination to the soil or groundwater at these facilities. In this regard, some of our facilities are or may be the subject of federal or state environment investigations or remedial actions. Although we cannot provide any assurance, based on the preliminary environmental assessments, we believe we have funds available to cover any liability from environmental contamination or potential contamination and we are not aware of any environmental contamination of our facilities material to our overall business, financial condition or results of operation. 7 There has been an increasing number of claims and litigation against owners and managers of rental properties relating to moisture infiltration, which can result in mold or other property damage. When we receive a complaint concerning moisture infiltration, condensation or mold problems and/or become aware that an air quality concern exists, we implement corrective measures in accordance with guidelines and protocols we have developed with the assistance of outside experts. We seek to work proactively with our tenants to resolve moisture infiltration and mold-related issues, subject to our contractual limitations on liability for such claims. However, we can provide no assurance that material legal claims relating to moisture infiltration and the presence of, or exposure to, mold will not arise in the future. Property taxes can increase and cause a decline in yields on investments. Each of our properties is subject to real property taxes. These real property taxes may increase in the future as property tax rates change and as our properties are assessed or reassessed by tax authorities. Such increases could adversely impact our profitability. We must comply with the Americans with Disabilities Act and fire and safety regulations, which can require significant expenditures. All our properties must comply with the Americans with Disabilities Act and with related regulations (the "ADA"). The ADA has separate compliance requirements for "public accommodations" and "commercial facilities," but generally requires that buildings be made accessible to persons with disabilities. Various state laws impose similar requirements. A failure to comply with the ADA or similar state laws could result in government imposed fines on us and the award of damages to individuals affected by the failure. In addition, we must operate our properties in compliance with numerous local fire and safety regulations, building codes, and other land use regulations. Compliance with these requirements can require us to spend substantial amounts of money, which would reduce cash otherwise available for distribution to shareholders. Failure to comply with these requirements could also affect the marketability of our real estate facilities. PUBLIC STORAGE'S ACQUISITION OF SHURGARD MAY SUBJECT THE PARTNERSHIP TO ADDITIONAL RISKS. In August 2006, Public Storage completed the acquisition of Shurgard Storage Centers, Inc. ("Shurgard"), a publicly held REIT that had interests in approximately 646 self-storage facilities located in the United States and Europe. The Shurgard merger did not change the financial interests of the Partnership. However, because the self-storage facilities of the Partnership and Public Storage are managed by Public Storage, together with the self-storage facilities previously owned by Shurgard, individual Partnership properties may experience a decrease in move-ins, reductions to rental rates, increases to promotional discounts, or other negative impacts to revenues in the short and/or long term due to the competitive impact of Public Storage management of the former Shurgard facilities, particularly with respect to those facilities that are close to the Partnership's facilities. TERRORIST ATTACKS AND THE POSSIBILITY OF WIDER ARMED CONFLICT MAY HAVE AN ADVERSE IMPACT ON OUR BUSINESS AND OPERATING RESULTS AND COULD DECREASE THE VALUE OF OUR ASSETS. Terrorist attacks and other acts of violence or war, such as those that took place on September 11, 2001, could have a material adverse impact on our business and operating results. There can be no assurance that there will not be further terrorist attacks against the United States or its businesses or interests. Attacks or armed conflicts that directly impact one or more of our properties could significantly affect our ability to operate those properties and thereby impair our operating results. Further, we may not have insurance coverage for losses caused by a terrorist attack. Such insurance may not be available, or if it is available and we decide to obtain such terrorist coverage, the cost for the insurance may be significant in relationship to the risk overall. In addition, the adverse effects that such violent acts and threats of future attacks could have on the U.S. economy could similarly have a material adverse effect on our business and results of operations. Finally, further terrorist acts could cause the United States to enter into a wider armed conflict, which could further impact our business and operating results. 8 DEVELOPMENTS IN CALIFORNIA MAY HAVE AN ADVERSE IMPACT ON OUR BUSINESS AND OPERATING RESULTS AND COULD DECREASE THE VALUE OF OUR ASSETS. All of the Partnership's properties are located in California. California is facing budgetary problems. Action that may be taken in response to these problems, such as an increase in property taxes on commercial properties, could adversely impact our business and results of operations. In addition, the Partnership could be adversely impacted by efforts to reenact legislation mandating medical insurance for employees of California businesses and members of their families. INCREASES IN INTEREST RATES MAY ADVERSELY AFFECT THE PRICE OF OUR PARTNERSHIP UNITS. One of the factors that influences the market price of our partnership units is the annual rate of distributions that we pay on the securities, as compared with interest rates. An increase in interest rates may lead purchasers of partnership units to demand higher annual distribution rates, which could adversely affect the market price of our partnership units. OUR OWNERSHIP INTEREST IN STOR-RE MAY LOSE VALUE OR BECOME A LIABILITY. The Partnership has a 0.9% ownership interest in STOR-Re Mutual Insurance Corporation ("STOR-Re"), which was formed in 1994 as an association captive insurance company, and is controlled by PSI. STOR-Re provided limited property and liability insurance coverage to the Partnership, PSI, and affiliates of PSI for losses occurring prior to April 1, 2004. Liabilities for losses and loss adjustment expenses include an amount determined from loss reports and individual cases and an amount, based on recommendations from an outside actuary that is a member of the American Academy of Actuaries, using a frequency and severity method, for losses incurred but not reported. Determining the liability for unpaid losses and loss adjustment expense is based upon estimates and while we believe that the amount is adequate, the ultimate loss may be in excess of or less than the amounts provided, which may result in a reduction in the value of the Partnership's investment or could result in future payments to STOR-Re if its reserves were determined to be inadequate. Financial data with respect to STOR-Re is included in Note 5 to the Partnership's December 31, 2006 financial statements. ITEM 1B. UNRESOLVED STAFF COMMENTS ------------------------- Not applicable. ITEM 2. PROPERTIES ---------- The following table sets forth information as of December 31, 2006 about properties owned by the Partnership:
Net Number Date Completion Location Size of Parcel Rentable Area of Spaces of Purchase Date - --------------- ----------------- --------------- ------------ ---------------- ------------- CALIFORNIA - ---------- Corona 2.82 acres 52,000 sq. ft. 467 June 29, 1978 Dec. 1978 Fremont 3.00 acres 53,000 sq. ft. 464 Mar. 21, 1978 Nov. 1978 Milpitas 3.40 acres 40,000 sq. ft 419 May 8, 1978 Nov. 1978 Norco 1.66 acres 29,000 sq. ft 257 July 19, 1978 Dec. 1978 North Hollywood 2.06 acres 38,000 sq. ft. 343 Mar. 17, 1978 Dec. 1979 Pasadena 1.84 acres 37,000 sq. ft. 385 Feb. 24, 1978 Aug. 1978 Sun Valley 2.72 acres 53,000 sq. ft. 477 May 30, 1978 Oct. 1978 Wilmington 6.32 acres 133,000 sq. ft. 1,089 Apr. 18, 1978 Aug. 1978 Whittier - El Monte 3.28 acres 58,000 sq. ft. 532 Nov. 29, 1977 July 1978
The weighted average occupancy level for the self-storage facilities was 91% during 2005 and 90% during 2006. The Partnership does not have any agreements to buy or sell any real estate. The partnership does not anticipate any new investments, other than maintenance capital expenditures, and does not anticipate liquidating the real estate investments it now holds. As of December 31, 2006, none of the properties were encumbered. 9 ITEM 3. LEGAL PROCEEDINGS ----------------- Serrao v. Public Storage, Inc. (filed April 2003) (Superior Court - ---------------------------------------------------------------------- Orange County) -------------- The plaintiff in this case filed a suit against PSI on behalf of a putative class of renters who rented self-storage units from PSI. Plaintiff alleges that PSI misrepresented the size of its storage units, has brought claims under California statutory and common law relating to consumer protection, fraud, unfair competition, and negligent misrepresentation, and is seeking monetary damages, restitution, and declaratory and injunctive relief. The claim in this case is substantially similar to those in Henriquez v. Public Storage, Inc., which was disclosed in prior reports. In January 2003, the plaintiff caused the Henriquez action to be dismissed. Based upon the uncertainty inherent in any putative class action, PSI cannot presently determine the potential damages, if any, or the ultimate outcome of this litigation. On November 3, 2003, the court granted PSI's motion to strike the plaintiff's nationwide class allegations and to limit any putative class to California residents only. In August 2005, PSI filed a motion to remove the case to federal court, but the case has been remanded to the Superior Court. PSI is vigorously contesting the claims upon which this lawsuit is based, including class certification efforts. Brinkley et al v. Public Storage, Inc. (filed April, 2005) (Superior ----------------------------------------------------------------------- court of California - Los Angeles County) ----------------------------------------- The plaintiff sued PSI on behalf of a purported class of California non-exempt employees based on various California wage and hour laws and seeking monetary damages and injunctive relief. In May 2006, a motion for class certification was filed seeking to certify five subclasses. Plaintiff sought certification for alleged meal period violations, rest period violations, failure to pay for travel time, failure to pay for mileage reimbursement, and for wage statement violations. In October 2006, the Court declined to certify three out of the five subclasses. The Court did, however, certify subclasses based on alleged meal period and wage statement violations. The maximum potential liability cannot presently be estimated. PSI intends to vigorously contest the substantive merits of the two remaining subclasses that were certified. PSI does not believe that this matter will have any material adverse effect on the results of operations of the Partnership. Other Items ----------- PSI and the Partnership are a party to various claims, complaints, and other legal actions that have arisen in the normal course of business from time to time, that are not described above. We believe that it is unlikely that the outcome of these other pending legal proceedings including employment and tenant claims, in the aggregate, will have a material adverse effect upon the operations or financial position of the Partnership. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2006. 10 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER -------------------------------------------------------------- MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES ------------------------------------------------- The Partnership has no common stock. The Units are not listed on any national securities exchange or quoted on the NASDAQ System and there is no established public trading market for the Units. Secondary sales activity for the Units has been limited and sporadic. The General Partners monitor transfers of the Units (a) because the admission of the transferee as a substitute limited partner requires the consent of the General Partners under the Partnership's Amended and Restated Certificate and Agreement of Limited Partnership, (b) in order to ensure compliance with safe harbor provisions to avoid treatment as a "publicly traded partnership" for tax purposes, and (c) because the General Partners (and their affiliates) have purchased Units. However, the General Partners do not have information regarding the prices at which all secondary sale transactions in the Units have been effectuated. Various organizations offer to purchase and sell limited partnership interests (including securities of the type such as the Units) in secondary sales transactions. Various publications such as The Stanger Report summarize and report information (on a monthly, bimonthly or less frequent basis) regarding secondary sales transactions in 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, 2006, there were approximately 591 unitholders of record. Distributions to the general and limited partners of all cash available for distribution (as defined) are made quarterly. Cash available for distribution is generally funds from operations of the Partnership, without deduction for depreciation, but after deducting funds to pay or establish reserves for all other expenses (other than incentive distributions to the general partner) and capital improvements, plus net proceeds from any sale or financing of the Partnership's properties. Reference is made to Item 6 and 7 hereof for information on the amount of such distributions. ITEM 6. SELECTED FINANCIAL DATA -----------------------
For the Year Ended December 31, 2006 2005 2004 2003 2002 - ----------------------------- ------------------- ------------------- ---------------- ------------------- ----------------- Revenues $ 7,371,000 $ 7,002,000 $ 6,593,000 $ 6,246,000 $ 5,938,000 Depreciation and amortization 165,000 181,000 217,000 454,000 516,000 Interest expense - - - - 14,000 Net income 5,042,000 4,888,000 4,475,000 3,977,000 3,729,000 Limited partners' share 3,751,000 3,619,000 3,397,000 3,004,000 3,242,000 General partners' share 1,291,000 1,269,000 1,078,000 973,000 487,000 Limited partners' per unit data (1): Net income $187.55 $180.95 $169.85 $150.20 $162.10 Cash Distributions $186.00 $183.00 $155.00 $140.00 $67.50 As of December 31, - ------------------ Cash and cash equivalents $ 1,483,000 $ 1,448,000 $ 1,407,000 $ 1,070,000 $ 538,000 Total assets $ 4,720,000 $ 4,682,000 $ 4,737,000 $ 4,422,000 $ 4,178,000 (1) Per unit data is based on the weighted average number of the limited partnership units (20,000) outstanding during each period.
11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- The following discussion should be read in conjunction with the Partnership's financial statements and notes thereto. FORWARD LOOKING STATEMENTS - -------------------------- When used within this document, the words "expects," "believes," "anticipates," "should," "estimates," and similar expressions are intended to identify "forward-looking statements" within the meaning of that term in Section 27A of the Securities Exchange Act of 1933, as amended, and in Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors, which may cause the actual results and performance of the Partnership to be materially different from those expressed or implied in the forward looking statements. Such factors are described in Item 1A, "Risk Factors" and include changes in general economic conditions and in the markets in which the Partnership operates and the impact of competition from new and existing storage and commercial facilities and other storage alternatives, which could impact rents and occupancy levels at the Partnership's facilities; the impact of the regulatory environment as well as national, state, and local laws and regulations, which could increase the Partnership's expense and reduce the Partnership's cash available for distribution; and economic uncertainty due to the impact of war or terrorism could adversely affect our business plan. We disclaim any obligation to publicly release the results of any revisions to these forward-looking statements reflecting new estimates, events or circumstances after the date of this report. OVERVIEW - -------- The self-storage industry is highly fragmented and is composed predominantly of numerous local and regional operators. Competition in the markets in which we operate is significant and has increased over the past several years due to additional development of self-storage facilities. We believe that the increase in competition has had a negative impact to the Partnership's occupancy levels and rental rates in many markets. However, we believe that the Partnership's affiliation with PSI provides several distinguishing characteristics that enable the Partnership to compete effectively with other owners and operators. PSI is the largest owner and operator of self-storage facilities in the United States. All of PSI's facilities in the United States are operated under the "Public Storage" brand name, which we believe is the most recognized and established name in the self-storage industry. Market concentration establishes PSI as one of the dominant providers of self-storage space in most markets in which PSI operates and enables PSI to use a variety of promotional activities, such as television advertising as well as targeted discounting and referrals, which are generally not economically viable to most of PSI's competitors. We will continue to focus our growth strategies on improving the operating performance of our existing self-storage properties primarily through increases in revenues achieved through the telephone reservation center and associated marketing efforts. We expect potential future increases in rental income to come primarily from increases in realized rent, although there can be no assurance. CRITICAL ACCOUNTING POLICIES - ---------------------------- IMPAIRMENT OF REAL ESTATE Substantially all of our assets consist of real estate. On a quarterly basis, we evaluate our real estate for impairment. The evaluation of real estate for impairment requires determining whether indicators of impairment exist, which is a subjective process. When any indicators of impairment are found, the evaluation then entails projections of future operating cash flows, which also involves significant judgment. We identified no such impairments at December 31, 2006. However, future events, or facts and circumstances that currently exist that we have not yet identified, could cause us to conclude in the future that our real estate is impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations. 12 ESTIMATED USEFUL LIVES OF LONG-LIVED ASSETS Substantially all of our assets consist of depreciable, long-lived assets. We record depreciation expense with respect to these assets based upon their estimated useful lives. Any change in the estimated useful lives of those assets, caused by functional or economic obsolescence or other factors, could have a material adverse impact on our financial condition or results of operations. ACCRUALS FOR CONTINGENCIES We are exposed to business and legal liability risks with respect to events that have occurred, but in accordance with generally accepted accounting principles in the U.S., we have not accrued for such potential liabilities because the loss is either not probable or not estimable or because we are not aware of the event. Future events and the result of pending litigation could result in such potential losses becoming probable and estimable, which could have a material, adverse impact on our financial condition or results of operations. Some of these potential losses, which we are aware of, are described in Notes 5 and 8 to the Partnership's financial statements. ACCRUALS FOR OPERATING EXPENSES We accrue for property tax expense and other operating expenses based upon estimates and historical trends and current and anticipated local and state government rules and regulations. If these estimates and assumptions are incorrect, the timing of the recognition our expenses could be incorrect. Cost of operations, interest expense, general and administrative expense, as well as television, yellow page, and other advertising expenditures are expensed as incurred. RESULTS OF OPERATIONS - --------------------- YEAR ENDED DECEMBER 31, 2006 COMPARED TO YEAR ENDED DECEMBER 31, 2005: The Partnership's net income in 2006 was $5,042,000 compared to $4,888,000 in 2005, representing an increase of $154,000 or 3.2%. The increase is primarily attributable to improved property operations at the Partnership's self-storage facilities. During 2006, property net operating income (rental income less cost of operations, management fees paid to an affiliate and depreciation expense) increased $160,000 or 3.3% from $4,862,000 in 2005 to $5,022,000 in 2006. Rental income was $7,220,000 in 2006 compared to $6,879,000 in 2005, representing an increase of $341,000, or 5.0%. The increase is attributable to an increase in realized rent per occupied square foot at the Partnership's self-storage facilities. Weighted average occupancy levels were 90% during 2006 compared to 91% during 2005. The average annual realized rent per square foot was $15.53 during 2006 compared to $14.69 during 2005. Cost of operations (including management fees paid to an affiliate) was $2,033,000 and $1,836,000 in 2006 and 2005, respectively, representing an increase of $197,000, or 10.7%. This increase is primarily attributable to increases in advertising, repairs and maintenance, payroll and management fees. Depreciation expense was $165,000 for the year ended December 31, 2006 compared to $181,000 for the same period in 2005. Depreciation expense comparisons for 2006, and in future periods, will fluctuate based upon the timing and amount of new capital expenditures and the extent to which past capital expenditures become fully depreciated. Administrative expense was $131,000 and $97,000 in 2006 and 2005, respectively, representing an increase of $34,000, or 35%. This increase is primarily attributable to a cost of $32,000 for termination of a contract. YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004: The Partnership's net income in 2005 was $4,888,000 compared to $4,475,000 in 2004, representing an increase of $413,000 or 9%. The increase is primarily attributable to improved property operations at the Partnership's self-storage facilities. During 2005, property net operating income (rental income less cost of operations, management fees paid to an affiliate and depreciation expense) increased $356,000 or 8% from $4,506,000 in 2004 to $4,862,000 in 2005. 13 Rental income was $6,879,000 in 2005 compared to $6,537,000 in 2004, representing an increase of $342,000, or 5%. The increase is attributable to an increase in realized rent per occupied square foot at the Partnership's self-storage facilities. Weighted average occupancy levels were 91% during 2005 compared to 92% during 2004. The average annual realized rent per square foot was $14.69 during 2005 compared to $13.86 during 2004. Cost of operations (including management fees paid to an affiliate) was $1,836,000 and $1,814,000 in 2005 and 2004, respectively, representing an increase of $22,000, or 1%. This increase is primarily attributable to increases in management fees (as a result of higher revenues) and property and casualty insurance expense, partially offset by a decrease in repairs and maintenance and advertising expenses. Depreciation expense was $181,000 for the year ended December 31, 2005 compared to $217,000 for the same period in 2004. The decrease in depreciation expense is primarily related to the Partnership's buildings, which were fully depreciated in 2004, as such, depreciation expense for 2005 is entirely for capital improvements, which generally are depreciated over an estimated five-year average useful life. The level of depreciation expense in future periods will depend upon the timing and amount of new capital expenditures and the extent to which past capital expenditures become fully depreciated. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Cash flows from operating activities of $5,188,000 for the year ended December 31, 2006 were sufficient to meet all current obligations of the Partnership. Capital improvements totaled $143,000 for the year ended December 31, 2006 compared to $48,000 in 2005 and $152,000 in 2004. The Partnership does not anticipate issuing senior securities, making loans to other persons, investing in the securities of other issuers for the purpose of exercising control, underwriting the securities of other issuers, engaging in the purchase and sale of investments, offering securities in exchange for property, or repurchasing or otherwise reacquiring its outstanding securities. The partnership may consider borrowing money with the intent of using the proceeds for distribution to partners. DISTRIBUTIONS Distributions to the limited and general partners for the years 1978-1990 aggregated $37,832,000 including $20,202,000 distributed to the partners in 1987 in connection with the financing of the properties. The Partnership Agreement requires that cash available for distribution (cash flow from all sources less cash necessary for any obligations or capital improvement) needs to be distributed at least quarterly. Cash distributions were suspended during the fourth quarter of 1990 for debt service payments. Because all debt service was repaid as of September 30, 2002, the Partnership resumed quarterly distributions beginning in the third quarter of 2002. We paid distributions to the limited and general partners totaling $3,720,000 ($186.00 per unit) and $1,290,000, respectively, for the year ended December 31, 2006. We paid distributions to the limited and general partners totaling $3,660,000 ($183.00 per unit) and $1,269,000, respectively, for the year ended December 31, 2005. Future distribution rates may be adjusted to levels which are supported by operating cash flow after capital improvements and any other necessary obligations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ---------------------------------------------------------- As of December 31, 2006, the Partnership had no outstanding debt. 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 15(a). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND --------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- Not applicable. 14 ITEM 9A. CONTROLS AND PROCEDURES ----------------------- Public Storage, Inc. maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports the Partnership files and submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in accordance with SEC guidelines and that such information is communicated to the Partnership's management, including its Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure based on the definition of "disclosure controls and procedures" in Rule 13a-15(e) of the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. At the end of the period covered by this report, Public Storage, Inc. carried out an evaluation, under the supervision and with the participation of the Partnership's management, including Public Storage, Inc.'s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Partnership's disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Partnership's disclosure controls and procedures were effective. During the fourth quarter of 2006, there were no significant changes in the Partnership's internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Partnership's internal control over financial reporting. ITEM 9B. OTHER INFORMATION ----------------- Not applicable. 15 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 self-storage facilities are managed by PSI pursuant to a Management Agreement. Pursuant to the Partnership's Amended Certificate and Agreement of Limited Partnership (the "Partnership Agreement"), a copy of which is included in the Partnership's prospectus included in the Partnership's Registration Statement, 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. 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 Chief Executive Officer, Vice Chairman of the Board Ronald L. Havner, Jr. and President John Reyes Senior Vice President and Chief Financial Officer John S. Baumann Senior Vice President and Chief Legal Officer Senior Vice President and President, John E. Graul Self-storage Operations Candace N. Krol Senior Vice President of Human Resources David F. Doll Senior Vice President and President, Real Estate Group Harvey Lenkin Director B. Wayne Hughes, Jr. Director Dann V. Angeloff Director William C. Baker Director John T. Evans Director Uri P. Harkham Director Gary E. Pruitt Director Daniel C. Staton Director B. WAYNE HUGHES, age 73, has been a director of PSI since its organization in 1980. Mr. Hughes 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 retired as Chief Executive Officer in November 2002 and remains Chairman of the Board. Mr. Hughes is currently engaged in the acquisition and operation of commercial properties in California. Mr. Hughes has been active in the real estate investment field for over 30 years. He is the father of B. Wayne Hughes, Jr., a member of PSI's Board. RONALD L. HAVNER, JR., age 49, has been the Vice-Chairman, Chief Executive Officer and a director of PSI since November 2002 and President since July 1, 2005. Mr. Havner joined PSI in 1986 and held a variety of senior management positions until his appointment as Vice-Chairman and Chief Executive Officer in 2002. Mr. Havner has been Chairman of PSI's affiliate, PS Business Parks, Inc. (PSB), since March 1998 and was Chief Executive Officer of PSB from March 1998 until August 2003. He is also a member of the Board of Governors and the Executive Committee of the National Association of Real Estate Investment Trusts, Inc. (NAREIT) and a director of Union BanCal Corporation and Pac Van, Inc. DANN V. ANGELOFF, age 71, Chairman of the Nominating/Corporate Governance Committee and a member of the Compensation Committee, has been a director of PSI since its organization in 1980. Mr. Angeloff has been President of the Angeloff Company, a corporate financial advisory firm, since 1976. Mr. Angeloff is currently the general partner and owner of a 20% interest in a limited partnership that in 1974 purchased a self-storage facility operated by PSI. He is a director of Bjurman, Barry Fund, Inc., Electronic Recyclers International, Nicholas/Applegate Fund, ReadyPac Foods, Retirement Capital Group and SoftBrands, Inc. 16 WILLIAM C. BAKER, age 73, a member of Nominating/Corporate Governance Committee, became a director of PSI in November 1991. Mr. Baker was Chairman and Chief Executive Officer of Callaway Golf Company from August 2004 until August 2005. From August 1998 through April 2000, he was President and Treasurer of Meditrust Operating Company, a real estate investment trust. From April 1996 to December 1998, Mr. Baker was Chief Executive Officer of Santa Anita Companies, which then operated the Santa Anita Racetrack. From April 1993 through May 1995, he was President of Red Robin International, Inc., an operator and franchisor of casual dining restaurants in the United States and Canada. From January 1992 through December 1995, Mr. Baker was Chairman and Chief Executive Officer of Carolina Restaurant Enterprises, Inc., a franchisee of Red Robin International, Inc. From 1991 to 1999, he was Chairman of the Board of Coast Newport Properties, a real estate brokerage company. From 1976 to 1988, Mr. Baker was a principal shareholder and Chairman and Chief Executive Officer of Del Taco, Inc., an operator and franchisor of fast food restaurants in California. He is a director of La Quinta, Inc., California Pizza Kitchen, Javo Beverage Company and Callaway Golf Company. JOHN T. EVANS, age 68, Chairman of the Audit Committee and member of the Nominating/Corporate Governance Committee, became a director of PSI in August 2003. Mr. Evans has been a partner in the law firm of Osler, Hoskin & Harcourt LLP, Toronto, Canada from April 1993 to the present and in the law firm of Blake, Cassels & Graydon LLP, Toronto, Canada from April 1966 to April 1993. Mr. Evans specializes in business law matters, securities, restructurings, mergers and acquisitions and advising on corporate governance. Mr. Evans is a director of Cara Operations Inc., Kubota Metal Corporation, and Vice-Chairman of Toronto East General Hospital. Until August 2003, Mr. Evans was a director of Canadian Mini-Warehouse Properties Ltd., a Canadian corporation owned by B. Wayne Hughes and members of his family. URI P. HARKHAM, age 58, a member of the Compensation Committee, became a director of PSI in March 1993. Mr. Harkham has been the President and Chief Executive Officer of Harkham Industries, which specializes in designing, manufacturing and marketing women's clothing under its four labels, Harkham, Hype, Jonathan Martin and Johnny Martin, since its organization in 1976. Since 1978, Mr. Harkham has been the Chief Executive Officer of Harkham Family Enterprises, a real estate firm specializing in buying and rebuilding retail and mixed use real estate throughout Southern California. B. WAYNE HUGHES, JR., age 47, became a director of PSI in January 1998. He was employed by PSI from 1989 to 2002, serving as Vice President - Acquisitions of PSI from 1992 to 2002. Mr. Hughes, Jr. is currently Vice President of American Commercial Equities, LLC and its affiliates, companies engaged in the acquisition and operation of commercial properties in California. He is the son of B. Wayne Hughes. HARVEY LENKIN, age 70, became a director of PSI in 1991. Mr. Lenkin retired as President and Chief Operating Officer of PSI in 2005, and was a consultant for Public Storage until July 1, 2006. Mr. Lenkin was employed by PSI or its predecessor for 27 years. He has been a director of PSI's affiliate, PS Business Parks, Inc., since March 1998 and was President of PSB from 1990 until March 1998. He is also a director of Paladin Realty Income Properties I, Inc. and a director of Huntington Memorial Hospital, Pasadena, California and a former member of the Executive Committee of the Board of Governors of NAREIT. GARY E. PRUITT, age 57, a member of the Audit Committee and of the Compensation Committee, became a director of PSI in August 2006 in connection with the merger of Shurgard Storage Centers, Inc. with PSI. Mr. Pruitt was previously a director of Shurgard. He is the Chief Executive Officer of Univar N.V., a chemical distribution company based in Bellevue, Washington with distribution centers in the United States, Canada and Europe. Mr. Pruitt joined Univar in 1978 and held a variety of senior management positions until his appointment as Chairman and Chief Executive Officer in 2002. He was a certified public accountant prior to joining Univar. DANIEL C. STATON, age 54, Chairman of the Compensation Committee and a member of the Audit Committee, became a director of PSI in March 1999 in connection with the merger of Storage Trust Realty, with PSI. Mr. Staton was Chairman of the Board of Trustees of Storage Trust Realty from February 1998 until March 1999 and a Trustee of Storage Trust Realty from November 1994 until March 1999. He is Chairman of Staton Capital, an investment and venture capital company and the Co-Chief Executive Officer of PMGI (formerly Media General, Inc.), a print and electronic media company. Mr. Staton was the Chief Operating Officer and Executive Vice President of Duke Realty Investments, Inc. from 1993 to 1997 and a director of Duke Realty Investments, Inc. from 1993 until August 1999. 17 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. The members of the PSI Audit Committee of the Board are: John T. Evans (Chairman), Daniel C. Staton, and Gary E. Pruitt. The Board of PSI has determined that Audit Committee members Daniel C. Staton and Gary E. Pruitt, each qualify as an audit committee financial expert within the meaning of the rules of the Securities and Exchange Commission. The Board has further determined that Messrs. Abernethy and Staton are each independent within the meaning of Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act. The financial records of the Partnership are maintained and prepared by employees of PSI. The Board of Directors of PSI has adopted a code of ethics for its senior financial officers. The Code of Ethics applies to those persons serving as PSI's principal executive officer, principal financial officer and principal accounting officer. A copy of the Code of Ethics is available by written request from the Secretary of PSI at 701 Western Ave., Glendale, CA 91201-2349. ITEM 11. EXECUTIVE COMPENSATION ---------------------- The Partnership has no subsidiaries, directors or officers. See Item 13 for a description of certain transactions between the Partnership and its General Partners and their affiliates. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND ------------------------------------------------------------------ RELATED STOCKHOLDER MATTERS --------------------------- (a) At March 30, 2007, the following beneficially owned more than 5% of the Units:
Title Name and Address Beneficial Percent of Class of Beneficial Owner Ownership of Class - ------------------- -------------------------------------------- ------------------- ------------- Units of Limited Public Storage, Inc. 6,274 Units (1) 31.4% Partnership Interest 701 Western Ave. Glendale, California 91201 Units of Limited H-G Family Corporation, Tamara Hughes 6,301 Units (2) 31.5% Partnership Interest Gustavson, PS Orangeco Partnerships, Inc. 701 Western Ave. Glendale, California 91201 (1) Includes (i) 6,169 Units owned by PSI as to which PSI has sole voting and dispositive power, (ii) 25 Units which PSI has an option to acquire from a corporation of which Hughes' children are shareholders and (iii) 80 Units which PSI has an option to acquire from Tamara Hughes Gustavson, an adult daughter of Hughes. (2) Includes (i) 6,025 Units owned by H-G Family Corporation, a corporation of which Hughes' children are shareholders; PSI has an option to acquire 25 of these Units, (ii) 80 Units owned by Tamara Hughes Gustavson as to which Tamara Hughes Gustavson has sole voting and dispositive power; PSI has an option to acquire these 80 Units, and (iii) 196 Units owned by PS Orangeco Partnerships, Inc., a corporation in which Hughes and members of his family own approximately 48% of the voting stock, PSI owns 46% and members of PSI's management and related individuals own approximately 6%.
18 (b) The Partnership has no officers and directors. The General Partners (or their predecessor-in-interest) have contributed $101,010 to the capital of the Partnership and as a result 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 (approximately $80,808 was contributed by PSI and $20,202 was contributed by Mr. Hughes). In 1995, Mr. Hughes contributed his ownership and rights to distributions from the Partnership to BWH Marina Corporation II, a corporation wholly-owned by Mr. Hughes. In 2002, BWH Marina Corporation II sold its interest to H-G Family Corporation. As such, Mr. Hughes continues to act as a general partner but receives no direct compensation or other consideration from the Partnership. Information regarding ownership of Units by PSI and Hughes, the General Partners, is set forth under section (a) above. The directors and executive officers of PSI (including Hughes), as a group (17 persons), beneficially own an aggregate of 6,239 Units, representing 31.2% of the Units (including the 6,025 Units owned by H-G Family Corporation and the 196 Units owned by PS Orangeco Partnerships, Inc.). (c) The Partnership knows of no contractual arrangements, the operation of the terms of which may at a subsequent date result in a change in control of the Partnership, except for articles 16, 17 and 21.1 of the Partnership's Amended Certificate and Agreement of Limited Partnership (the "Partnership Agreement"), a copy of which is included in the Partnership's prospectus included in the Partnership's Registration Statement File No. 2-57750. Those articles provide, in substance, that the limited partners shall have the right, by majority vote, to remove a general partner and that a general partner may designate a successor with the consent of the other general partner and a majority of the limited partners. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- The Partnership Agreement provides that the General Partners will be entitled to cash incentive distributions in an amount equal to (i) 8% of distributions of cash flow from operations until the distributions to all partners from all sources equal their capital contributions; thereafter, 25% of distributions of cash flow from operations, and (ii) 25% of distributions from net proceeds from sale and financing of the Partnership's properties remaining after distribution to all partners of any portion thereof required to cause distributions to partners from all sources to equal their capital contributions. During 1985, the partners received cumulative distributions equal to their capital contributions. Mr. Hughes has assigned his ownership and distribution rights in the Partnership to BWH Marina Corporation II ("BWH Marinas"), and BWH Marinas sold its interests to H-G Family Corporation in 2002. In addition to their distribution rights with respect to their general partner's interests, PSI and H-G Family Corporation own 6,169 and 6,025 Limited Partner Units, respectively. During 2006, PSI and H-G Family Corporation received approximately $1,032,000 and $258,000, respectively, in distributions related to their general partner's ownership interests. As described above, the General Partners also hold Limited Partnership Units. Through these holdings, PSI and the Hughes Family, respectively, received $1,147,000 and $1,121,000 of cash distributions. The Partnership has a Management Agreement with PSI (as successor-in-interest to PSMI). Under the Management Agreement, the Partnership pays PSI a fee of 6% of the gross revenues of the mini-warehouse properties operated for the Partnership. For as long as the Management Agreement is in effect, PSI has granted the Partnership a non-exclusive license to use two PSI service marks and related designs, including the "Public Storage" name, in conjunction with rental and operation of facilities managed pursuant to the Management Agreement. Upon termination of the Management Agreement, the Partnership would no longer have the right to use the service marks and related designs. The General Partners believe that the loss of the right to use the service marks and related designs could have a material adverse effect on the Partnership's business. The Management Agreement with PSI provides that the Management Agreement may be terminated without cause upon 60 days written notice by the Partnership or 6 months notice by PSI. During 2006, 2005 and 2004, the Partnership paid fees of $433,000, $413,000 and $392,000, respectively, to PSI pursuant to the Management Agreement. In addition, the Partnership combines its insurance purchasing power with PSI through captive insurance entities controlled by PSI (see Note 5 to the Partnership's financial statements). These captive entities provide limited property and liability insurance to the Partnership at commercially competitive rates. The Partnership and PSI also utilize unaffiliated insurance carriers to provide property and liability insurance in excess of the captive entities' limitations. Premiums paid to the captive entities for the years ended December 31, 2006, 2005 and 2004 were $54,000, $46,000 and $79,000, respectively. The Partnership's facilities, along with facilities owned by PSI and its affiliates, are managed and marketed jointly by PSI in order to take advantage of scale and other efficiencies. As a result, significant components of cost of operations, such as payroll costs, advertising and promotion, data processing and insurance expenses are shared and allocated among the properties using methodologies meant to fairly allocate such costs based upon the related activities. The total of such expenses, substantially all of which are included in Cost of Operations, amounted to $867,000, $703,000 and $704,000 for the years ended December 31, 2006, 2005, and 2004, respectively. 19 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES -------------------------------------- Fees billed to the Partnership by Ernst & Young LLP for 2006 and 2005, as are follows: Audit Fees: Audit fees billed (or expected to be billed) to the Partnership by Ernst & Young LLP for the audit of the Partnership's annual financial statements and reviews of the quarterly financial statements included in the Partnership's quarterly reports on Form 10-Q totaled $18,000 for 2006 and $16,000 for 2005. Tax Fees: Tax fees billed (or expected to be billed) to the Partnership by Ernst & Young LLP for tax services (primarily federal and state income tax preparation) totaled $10,000 for 2006 and $10,000 for 2005. Audit-Related Fees and Other Fees: During 2006 and 2005 Ernst & Young LLP did not bill the Partnership for audit-related services or any other services, except audit services and tax services denoted above. The Audit Committee of PSI pre-approves all services performed by Ernst & Young LLP, including those listed above. At this time, the Audit Committee has not delegated pre-approval authority to any member or members of the Audit Committee. 20 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES ------------------------------------------ (a) List of documents filed as part of this Report. 1. Financial Statements. See Index to Financial Statements and Financial Statement Schedule. 2. Financial Statement Schedules. See Index to Financial Statements and Financial Statement Schedule. 3. Exhibits: See Exhibit Index contained below. (b) Exhibits: See Exhibit Index contained below. (c) Not applicable. 21 PUBLIC STORAGE PROPERTIES, LTD. EXHIBIT INDEX (Items 15(a)(3) and 15(b)) 3.1 Amended Certificate and Agreement of Limited Partnership. Previously filed with the Securities and Exchange Commission as Exhibit A to the Partnership's Prospectus included in Registration Statement No. 2-57750 and incorporated herein by reference. 10.1 Second Amended and Restated Management Agreement dated November 16, 1995 between the Partnership and Public Storage, Inc. Previously filed with the Securities and Exchange Commission as an exhibit to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference. 10.2 Loan documents dated January 27, 1998 between the Partnership and Public Storage, Inc. Previously filed with the Securities and Exchange Commission as an exhibit to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference. 14 Code of Ethics for Senior Financial Officers of Public Storage, Inc. Filed with the Partnership's Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by reference. 31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed and dated by Ronald L. Havner, Jr. Filed herewith. 31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed and dated by John Reyes. Filed herewith. 32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith. 22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Partnership has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PUBLIC STORAGE PROPERTIES, LTD. a California Limited Partnership Dated: March 30, 2007 By: Public Storage, Inc., General Partner By: /s/ Ronald L. Havner, Jr. ---------------------------------------- Ronald L. Havner, Jr., Vice Chairman of the Board, Chief Executive Officer and President of Public Storage, Inc., Corporate General Partner By: /s/ B. Wayne Hughes --------------------------------------------- B. Wayne Hughes,General Partner and Chairman of the Board of Public Storage, Inc. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Partnership in the capacities and on the dates indicated. 23
Signature Capacity Date - --------------------------------------- -------------------------------------------------- -------------------- Vice Chairman of the Board, Chief Executive Officer and President of Public Storage, Inc., /s/ Ronald L. Havner Jr. Corporate General Partner March 30, 2007 - --------------------------------------- Ronald L. Havner, Jr. General Partner and Chairman of the Board of /s/ B. Wayne Hughes Public Storage, Inc. March 30, 2007 - --------------------------------------- B. Wayne Hughes Senior Vice President and Chief Financial Officer of Public Storage, Inc. (principal financial /s/ John Reyes officer and principal accounting officer) March 30, 2007 - --------------------------------------- John Reyes /s/ Harvey Lenkin Director of Public Storage, Inc. March 30, 2007 - --------------------------------------- Harvey Lenkin /s/ B. Wayne Hughes, Jr. Director of Public Storage, Inc. March 30, 2007 - --------------------------------------- B. Wayne Hughes, Jr. /s/ Dann V. Angeloff Director of Public Storage, Inc. March 30, 2007 - --------------------------------------- Dann V. Angeloff /s/ William Baker Director of Public Storage, Inc. March 30, 2007 - --------------------------------------- William C. Baker /s/ John T. Evans Director of Public Storage, Inc. March 30, 2007 - --------------------------------------- John T. Evans /s/ Uri P. Harkham Director of Public Storage, Inc. March 30, 2007 - --------------------------------------- Uri P. Harkham /s/ Gary E. Pruitt Director of Public Storage, Inc. March 30, 2007 - --------------------------------------- Gary E. Pruitt /s/ Daniel C. Staton Director of Public Storage, Inc. March 30, 2007 - --------------------------------------- Daniel C. Staton
24 PUBLIC STORAGE PROPERTIES, LTD. INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE (Item 15 (a)) Page References ---------- Report of Independent Registered Public Accounting Firm F-1 Financial Statements and Schedule: Balance Sheets as of December 31, 2006 and 2005 F-2 For the years ended December 31, 2006, 2005 and 2004: Statements of Income F-3 Statements of Partners' Equity F-4 Statements of Cash Flows F-5 Notes to Financial Statements F-6 - F-11 Schedule: III - Real Estate and Accumulated Depreciation F-12 - F-13 All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements or the notes thereto. 25 Report of Independent Registered Public Accounting Firm The Partners Public Storage Properties, Ltd. We have audited the accompanying balance sheets of Public Storage Properties, Ltd. (the "Partnership") as of December 31, 2006 and 2005, and the related statements of income, partners' equity and cash flows for each of the three years in the period ended December 31, 2006. Our audits also included the schedule listed in the index at item 15(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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Partnership's internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership's internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Public Storage Properties, Ltd. at December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP March 28, 2007 Los Angeles, California F-1
PUBLIC STORAGE PROPERTIES, LTD. BALANCE SHEETS December 31, 2006 and 2005 2006 2005 ------------------ ------------------ ASSETS ------ Cash and cash equivalents $ 1,483,000 $ 1,448,000 Rent and other receivables 73,000 69,000 Real estate facilities, at cost: Building, land improvements and equipment 9,765,000 9,622,000 Land 2,476,000 2,476,000 ------------------ ------------------ 12,241,000 12,098,000 Less accumulated depreciation (9,169,000) (9,004,000) ------------------ ------------------ 3,072,000 3,094,000 Other assets 92,000 71,000 ------------------ ------------------ Total assets $ 4,720,000 $ 4,682,000 ================== ================== LIABILITIES AND PARTNERS' EQUITY -------------------------------- Accounts payable $ 98,000 $ 88,000 Deferred revenue 159,000 163,000 ------------------ ------------------ Total liabilities 257,000 251,000 Commitments and contingencies (Note 8) Partners' equity: Limited partners' equity, $500 per unit, 20,000 units authorized, issued and outstanding 3,314,000 3,290,000 General partners' equity 1,149,000 1,141,000 ------------------ ------------------ Total partners' equity 4,463,000 4,431,000 ------------------ ------------------ Total liabilities and partners' equity $ 4,720,000 $ 4,682,000 ================== ==================
See accompanying notes. F-2
PUBLIC STORAGE PROPERTIES, LTD. STATEMENTS OF INCOME For the years ended December 31, 2006, 2005 and 2004 2006 2005 2004 -------------------- ----------------------- ----------------------- REVENUES: Rental income $ 7,220,000 $ 6,879,000 $ 6,537,000 Other income 151,000 123,000 56,000 -------------------- ----------------------- ----------------------- 7,371,000 7,002,000 6,593,000 -------------------- ----------------------- ----------------------- COSTS AND EXPENSES: Cost of operations 1,600,000 1,423,000 1,422,000 Management fees paid to affiliate 433,000 413,000 392,000 Depreciation 165,000 181,000 217,000 Administrative 131,000 97,000 87,000 -------------------- ----------------------- ----------------------- 2,329,000 2,114,000 2,118,000 -------------------- ----------------------- ----------------------- NET INCOME $ 5,042,000 $ 4,888,000 $ 4,475,000 ==================== ======================= ======================= Limited partners' share of net income ($187.55 per unit in 2006, $180.95 per unit in 2005 and $169.85 per unit in 2004) $ 3,751,000 $ 3,619,000 $ 3,397,000 General partners' share of net income 1,291,000 1,269,000 1,078,000 -------------------- ----------------------- ----------------------- $ 5,042,000 $ 4,888,000 $ 4,475,000 ==================== ======================= =======================
See accompanying notes. F-3
PUBLIC STORAGE PROPERTIES, LTD. STATEMENTS OF PARTNERS' EQUITY For the years ended December 31, 2006, 2005 and 2004 Total Partners' Limited Partners General Partners Equity ---------------- ------------------- ------------------- Balance at December 31, 2003 3,097,000 1,075,000 4,172,000 Net income 3,397,000 1,078,000 4,475,000 Distributions paid to partners (3,100,000) (1,075,000) (4,175,000) Equity transfer (73,000) 73,000 - ---------------- ------------------- ------------------- Balance at December 31, 2004 3,321,000 1,151,000 4,472,000 Net income 3,619,000 1,269,000 4,888,000 Distributions paid to partners (3,660,000) (1,269,000) (4,929,000) Equity transfer 10,000 (10,000) - ---------------- ------------------- ------------------- Balance at December 31, 2005 3,290,000 1,141,000 4,431,000 Net income 3,751,000 1,291,000 5,042,000 Distributions paid to partners (3,720,000) (1,290,000) (5,010,000) Equity transfer (7,000) 7,000 - ---------------- ------------------- ------------------- Balance at December 31, 2006 $ 3,314,000 $ 1,149,000 $ 4,463,000 ================ =================== ===================
See accompanying notes. F-4 PUBLIC STORAGE PROPERTIES, LTD. STATEMENTS OF CASH FLOWS For the years ended December 31, 2006, 2005 and 2004
2006 2005 2004 ---------------- ----------------- ---------------- Cash flows from operating activities: Net income $ 5,042,000 $ 4,888,000 $ 4,475,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 165,000 181,000 217,000 (Increase) decrease in rent and other receivables (4,000) (34,000) 12,000 Increase in other assets (21,000) (3,000) (19,000) Increase (decrease) in accounts payable 10,000 6,000 (28,000) (Decrease) increase in deferred revenue (4,000) (20,000) 7,000 ---------------- ----------------- ---------------- Total adjustments 146,000 130,000 189,000 ---------------- ----------------- ---------------- Net cash provided by operating activities 5,188,000 5,018,000 4,664,000 ---------------- ----------------- ---------------- Cash flows from investing activities: Additions to real estate facilities (143,000) (48,000) (152,000) ---------------- ----------------- ---------------- Net cash used in investing activities (143,000) (48,000) (152,000) ---------------- ----------------- ---------------- Cash flows from financing activities: Distributions paid to partners (5,010,000) (4,929,000) (4,175,000) ---------------- ----------------- ---------------- Net cash used in financing activities (5,010,000) (4,929,000) (4,175,000) ---------------- ----------------- ---------------- Net increase in cash and cash equivalents 35,000 41,000 337,000 Cash and cash equivalents at the beginning of the year 1,448,000 1,407,000 1,070,000 ---------------- ----------------- ---------------- Cash and cash equivalents at the end of the year $ 1,483,000 $ 1,448,000 $ 1,407,000 ================ ================= ================
See accompanying notes. F-5 PUBLIC STORAGE PROPERTIES, LTD. NOTES TO FINANCIAL STATEMENTS December 31, 2006 1. DESCRIPTION OF PARTNERSHIP Public Storage Properties, Ltd. (the "Partnership") is a publicly held limited partnership formed under the California Uniform Limited Partnership Act in November 1976. The Partnership raised $10,000,000 in gross proceeds by selling 20,000 units of limited partnership interest ("Units") in an interstate offering, which commenced in October 1977 and completed in January 1978. The general partners in the Partnership are Public Storage, Inc. ("PSI") and B. Wayne Hughes ("Hughes"). The Partnership was formed to engage in the business of developing and operating self-storage facilities for personal and business use. The Partnership owns nine self-storage facilities located in California. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PARTNERSHIP MATTERS Use of Estimates: ----------------- The preparation of the financial statements in conformity with U.S. 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. Revenue and Expense Recognition: -------------------------------- Rental income, which is generally earned pursuant to month-to-month leases for storage space, is recognized as earned. Promotional discounts are recognized as a reduction to rental income over the promotional period, which is generally during the first month of occupancy. Late charges and administrative fees are recognized as income when collected. Interest income is recognized as earned. We accrue for property tax expense based upon estimates and historical trends. If these estimates are incorrect, the timing of expense recognition could be affected. Cost of operations, general and administrative expense, as well as television, yellow page, and other advertising expenditures are expensed as incurred. Included in cost of operations are television, yellow page, and other advertising expenditures totaling $281,000, $222,000 and $226,000 for the years ended December 31, 2006, 2005 and 2004, respectively. Allocation of Net Income: ------------------------- The general partners' share of net income consists of amounts attributable to their 1% capital contribution and an additional percentage of cash flow (as defined) which relates to the general partners' share of cash distributions as set forth in the Partnership Agreement (Note 4). All remaining net income is allocated to the limited partners. Per unit data is based on the weighted average number of the limited partnership units (20,000) outstanding during the period. Cash and Cash Equivalents: -------------------------- For financial statement purposes, the Partnership considers all highly liquid financial instruments such as short-term treasury securities or investment grade short-term commercial paper to be cash equivalents. F-6 PUBLIC STORAGE PROPERTIES, LTD. NOTES TO FINANCIAL STATEMENTS December 31, 2006 Real Estate Facilities and Evaluation of Asset Impairment: ---------------------------------------------------------- Real estate facilities are recorded at cost. Costs associated with the development, construction, renovation and improvement of properties are capitalized. Interest, property taxes, and other costs associated with the development incurred during the construction period are capitalized as building cost. Expenditures for repairs and maintenance are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the buildings and improvements, which are generally between 5 and 25 years. At December 31, 2006, all of the real estate facilities have been in service longer than 25 years, and accordingly the original development cost of such buildings are fully depreciated at December 31, 2006. We evaluate our real estate for impairment on a quarterly basis. We first evaluate these assets for indicators of impairment such as a) a significant decrease in the market price of real estate, b) a significant adverse change in the extent or manner in which real estate is being used or in its physical condition, c) a significant adverse change in legal factors or the business climate that could affect the value of the real estate, d) an accumulation of costs significantly in excess of the amount originally projected for the acquisition of or construction of the real estate, or e) a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of the real estate. When any such indicators of impairment are noted, we compare the carrying value of the real estate to the future estimated undiscounted cash flows attributable to the real estate. If the real estate's recoverable amount is less than the carrying value of the asset, then an impairment charge is booked for the excess of carrying value over the real estate's fair value. Our evaluations have identified no such impairments at December 31, 2006. Any real estate facility, which we expect to sell or dispose of prior to its previously estimated useful life is stated at the lower of its estimated net realizable value, less cost to sell, or its carrying value. Environmental Cost: ------------------- The Partnership's policy is to accrue environmental assessments and/or remediation costs when it is probable that such efforts will be required and the related costs can be reasonably estimated. Although there can be no assurance, we are not aware of any environmental contamination at any of our facilities, which, individually or in the aggregate, would be material to our overall business, financial condition or results of operations. Income Taxes: ------------- Public Storage Properties, Ltd. is treated as a partnership for Federal and state income tax purposes with the taxable income of the entity allocated to each partner in accordance with the partnership agreement. Accordingly no Federal income tax expense is recorded by the Partnership. Recent Accounting Pronouncements and Guidance: ---------------------------------------------- As of March 30, 2007, there have been no recent accounting pronouncements and guidance, which were not effective for implementation prior to December 31, 2006, that would have a material impact upon reporting the operations or financial position of the Partnership. Segment Reporting: ------------------ The Partnership only has one reportable segment as defined within Statement of Financial Accounting Standards No. 131. F-7 PUBLIC STORAGE PROPERTIES, LTD. NOTES TO FINANCIAL STATEMENTS December 31, 2006 3. CASH DISTRIBUTIONS The Partnership Agreement requires that cash available for distribution (cash flow from all sources less cash necessary for any obligations or capital improvements) needs to be distributed at least quarterly. During 2005, we paid distributions to the limited and general partners totaling $3,660,000 ($183.00 per unit) and $1,269,000, respectively. During 2006, we paid distributions to the limited and general partners totaling $3,720,000 ($186.00 per unit) and $1,290,000, respectively. Future distribution rates may be adjusted to levels which are supported by operating cash flow after capital improvements and any other obligations. 4. PARTNERS' EQUITY PSI and Hughes are general partners of the Partnership. In 1995, Hughes contributed his ownership and rights to distributions from the Partnership to BWH Marina Corporation II, a corporation wholly-owned by Hughes. In 2002, BWH Marina Corporation II sold its interests to H-G Family Corporation. As such, Mr. Hughes continues to act as a general partner but receives no direct compensation or other consideration from the Partnership. The general partners have a 1% interest in the Partnership. In addition, the general partners have an 8% interest in cash distributions attributable to operations (exclusive of distributions attributable to sale and financing proceeds until the limited partners recover all of their initial investment). Thereafter, the general partners have a 25% interest in all cash distributions (including sale and financing proceeds). In 1985, the limited partners recovered all of their initial investment. All subsequent cash distributions are being made 25.75% (including the 1% interest) to the general partners and 74.25% to the limited partners. Transfers of equity are made periodically to reconcile the partners' equity accounts to the provisions of the Partnership Agreement. These transfers have no effect on the results of operations or distributions to partners. 5. RELATED PARTY TRANSACTIONS Management Agreement and Shared Expenses with PSI: -------------------------------------------------- The Partnership has a Management Agreement with PSI pursuant to which PSI operates the self-storage facilities for a fee equal to 6% of the facilities' gross revenue (as defined). For 2006, 2005 and 2004, the Partnership paid PSI $433,000, $413,000 and $392,000, respectively, under this management agreement. The Management Agreement between the Partnership and PSI provides that the Management Agreement may be terminated without cause upon 60 days written notice by the Partnership or six months notice by PSI. The Partnership's facilities, along with facilities owned by PSI and its affiliates, are managed and marketed jointly by PSI in order to take advantage of scale and other efficiencies. As a result, significant components of cost of operations, such as payroll costs, advertising and promotion, data processing and insurance expenses are shared and allocated among the properties using methodologies meant to fairly allocate such costs based upon the related activities. The total of such expenses, substantially all of which are included in Cost of Operations, amounted to $867,000, $703,000 and $704,000 for the years ended December 31, 2006, 2005, and 2004, respectively. Ownership Interest by the General Partners ------------------------------------------ PSI owns 6,169 Limited Partnership Units ("Units"), as to which PSI has sole voting and dispositive power. F-8 PUBLIC STORAGE PROPERTIES, LTD. NOTES TO FINANCIAL STATEMENTS December 31, 2006 Hughes and members of his family (the "Hughes Family") own 6,105 Units. Hughes owns 6,025 Units, as to which Hughes has sole voting and dispositive power, through a wholly-owned corporation and Tamara Hughes Gustavson, an adult daughter of Hughes, owns 80 Units as to which Tamara Hughes Gustavson has sole voting and dispositive power. PSI has an option to acquire 25 of the Units held by Hughes and the 80 Units held by Tamara Hughes Gustavson. In addition, there are 196 Units owned by PS Orangeco Partnerships, Inc., a corporation in which Hughes Family owns approximately 48% of the voting stock, PSI owns 46% and members of PSI's management and related individuals own approximately 6%. Captive Insurance Activities with PSI ------------------------------------- The Partnership has a 0.9% ownership interest in STOR-Re Mutual Insurance Corporation ("STOR-Re"), which was formed in 1994 as an association captive insurance company, and is controlled by PSI. The Partnership accounts for its investment in STOR-Re, which is included in other assets, on the cost method, and has received no distributions during the three years ended December 31, 2006. STOR-Re provides limited property and liability insurance coverage to the Partnership, PSI, and affiliates for losses occurring before April 1, 2004. STOR-Re was succeeded with respect to these activities for losses occurring after March 31, 2004 by a wholly owned subsidiary of PSI (collectively, this entity and STOR-Re are referred to as the "Captive Entities"). Liabilities for losses and loss adjustment expenses include an amount determined from loss reports and individual cases and an amount, based on recommendations from an outside actuary that is a member of the American Academy of Actuaries, using a frequency and severity method, for losses incurred but not reported. Determining the liability for unpaid losses and loss adjustment expense is based upon estimates and while we believe that the amount is adequate, the ultimate loss may be in excess of or less than the amounts provided. The methods for making such estimates and for establishing the resulting liability are continually reviewed. The following table sets forth certain condensed consolidated financial information with respect to STOR-Re (representing 100% of this entity's operations and not the Partnership's pro-rata share): 2006 2005 ----------- ---------- (Amounts in thousands) For the year ended December 31, Net investment income........................... $ 890 $ 663 Loss and loss adjustment expense................ (1,053) 900 Other expenses.................................. (234) (349) ----------- ---------- Net income (loss)............................ $ (397) $ 1,214 =========== ========== At December 31, Total assets (primarily cash and other investments)................................. $ 27,772 $ 26,876 Liabilities for losses and loss adjustment expenses..................................... 11,470 13,784 Other liabilities............................... 1,314 208 Member's surplus................................ 14,988 12,884 Premiums paid to the Captive Entities for the years ended December 31, 2006, 2005 and 2004 were $54,000, $46,000 and $79,000, respectively. F-9 PUBLIC STORAGE PROPERTIES, LTD. NOTES TO FINANCIAL STATEMENTS December 31, 2006 Other Activities with PSI ------------------------- A corporation that reinsures policies against losses to goods stored by tenants in PSI's storage facilities was purchased by PSI from Mr. Hughes and members of his family (the "Hughes Family") on December 31, 2001. This corporation receives the premiums and bears the risks associated with the re-insurance. The Partnership receives an access fee from this corporation in return for providing tenant listings. This fee is based on number of spaces the Partnership has to rent. Included in other income on our income statement for these fees are $58,000, $58,000 and $35,000 for the years ended December 31, 2006, 2005 and 2004, respectively. A subsidiary of PSI sells locks and boxes and rents trucks to the general public and tenants to be used in securing their spaces and moving their goods. The subsidiary of PSI receives the revenues and bears the cost of the activities. 6. TAXES BASED ON INCOME Taxes based on income are the responsibility of the individual partners and, accordingly, the Partnership's financial statements do not reflect a provision for such taxes. Taxable net income (unaudited) was $5,030,000, $4,874,000 and $4,505,000 for the years ended December 31, 2006, 2005 and 2004, respectively. The difference between taxable net income and net income is primarily related to depreciation expense resulting from differences in depreciation and capitalization methodologies. 7. SUPPLEMENTARY QUARTERLY FINANCIAL DATA (UNAUDITED)
Three Months Ended -------------------------------------------------------------------------------- March 31, 2006 June 30, 2006 September 30, 2006 December 31, 2006 ----------------- ------------------- --------------------- -------------------- Rental Income $ 1,758,000 $ 1,808,000 $ 1,835,000 $ 1,819,000 Cost of Operations (including management fees and depreciation) $ 556,000 $ 565,000 $ 531,000 $ 546,000 Net Income $ 1,201,000 $ 1,245,000 $ 1,296,000 $ 1,300,000 Net Income Per Limited Partner Unit $ 45.10 $ 47.30 $ 49.80 $ 45.35 Distributions $ 1,158,000 $ 1,158,000 $ 1,159,000 $ 1,535,000 Three Months Ended -------------------------------------------------------------------------------- March 31, 2005 June 30, 2005 September 30, 2005 December 31, 2005 ----------------- ------------------- --------------------- -------------------- Rental Income $ 1,681,000 $ 1,710,000 $ 1,749,000 $ 1,739,000 Cost of Operations (including management fees and depreciation) $ 501,000 $ 498,000 $ 497,000 $ 521,000 Net Income $ 1,172,000 $ 1,205,000 $ 1,255,000 $ 1,256,000 Net Income Per Limited Partner Unit $ 44.70 $ 45.30 $ 47.75 $ 43.20 Distributions $ 1,077,000 $ 1,159,000 $ 1,158,000 $ 1,535,000
F-10 PUBLIC STORAGE PROPERTIES, LTD. NOTES TO FINANCIAL STATEMENTS December 31, 2006 8. COMMITMENTS AND CONTINGENCIES Serrao v. Public Storage, Inc. (filed April 2003) (Superior Court - -------------------------------------------------------------------- Orange County) -------------- The plaintiff in this case filed a suit against PSI on behalf of a putative class of renters who rented self-storage units from PSI. Plaintiff alleges that PSI misrepresented the size of its storage units, has brought claims under California statutory and common law relating to consumer protection, fraud, unfair competition, and negligent misrepresentation, and is seeking monetary damages, restitution, and declaratory and injunctive relief. The claim in this case is substantially similar to those in Henriquez v. Public Storage, Inc., which was disclosed in prior reports. In January 2003, the plaintiff caused the Henriquez action to be dismissed. Based upon the uncertainty inherent in any putative class action, PSI cannot presently determine the potential damages, if any, or the ultimate outcome of this litigation. On November 3, 2003, the court granted PSI's motion to strike the plaintiff's nationwide class allegations and to limit any putative class to California residents only. In August 2005, PSI filed a motion to remove the case to federal court, but the case has been remanded to the Superior Court. PSI is vigorously contesting the claims upon which this lawsuit is based, including class certification efforts. Brinkley et al v. Public Storage, Inc. (filed April, 2005) (Superior --------------------------------------------------------------------- court of California - Los Angeles County) ----------------------------------------- The plaintiff sued PSI on behalf of a purported class of California non-exempt employees based on various California wage and hour laws and seeking monetary damages and injunctive relief. In May 2006, a motion for class certification was filed seeking to certify five subclasses. Plaintiff sought certification for alleged meal period violations, rest period violations, failure to pay for travel time, failure to pay for mileage reimbursement, and for wage statement violations. In October 2006, the Court declined to certify three out of the five subclasses. The Court did, however, certify subclasses based on alleged meal period and wage statement violations. The maximum potential liability cannot presently be estimated. PSI intends to vigorously contest the substantive merits of the two remaining subclasses that were certified. PSI does not believe that this matter will have any material adverse effect on the results of operations of the Partnership. Other Items ----------- PSI and the Partnership are a party to various claims, complaints, and other legal actions that have arisen in the normal course of business from time to time, that are not described above. We believe that it is unlikely that the outcome of these other pending legal proceedings including employment and tenant claims, in the aggregate, will have a material adverse effect upon the operations or financial position of the Partnership. F-11
Public Storage Properties, Ltd. Schedule III - Real Estate and Accumulated Depreciation For the year ended December 31, 2006 Gross Carrying Amount Initial Cost at December 31, 2006 ----------------------- ----------------------------------- Building, Costs Subsequent to Building, Land Imp & construction Land Imp & Accumulated Date Description Land Equipment (Improvements) Land Equipment Total Depreciation Completed - ----------------------- ------------- ------------ ----------------- ---------- ------------ ----------- --------------- ----------- Pasadena $327,000 $515,000 306,000 327,000 821,000 1,148,000 779,000 08/78 Whittier - El Monte 166,000 763,000 389,000 134,000 1,184,000 1,318,000 1,141,000 07/78 Fremont 112,000 741,000 382,000 112,000 1,123,000 1,235,000 1,098,000 11/78 Milpitas 198,000 649,000 352,000 195,000 1,004,000 1,199,000 853,000 11/78 Wilmington 815,000 1,336,000 700,000 815,000 2,036,000 2,851,000 1,937,000 08/78 Sun Valley 329,000 611,000 350,000 329,000 961,000 1,290,000 925,000 10/78 Corona 155,000 757,000 354,000 155,000 1,111,000 1,266,000 1,031,000 12/78 Norco 95,000 456,000 200,000 95,000 656,000 751,000 603,000 12/78 North Hollywood 314,000 553,000 316,000 314,000 869,000 1,183,000 802,000 12/79 ------------- ------------ ----------------- ---------- ------------ ----------- --------------- $2,511,000 $6,381,000 3,349,000 2,476,000 9,765,000 12,241,000 9,169,000 ============= ============ ================= ========== ============ =========== ===============
F-12 Public Storage Properties, Ltd. Schedule III - Real Estate and Accumulated Depreciation (continued) Reconciliation of Real Estate Cost and Accumulated Depreciation COST RECONCILIATION 2006 2005 --------------- ---------------- Balance at the beginning of the year $ 12,098,000 $ 12,050,000 Additions during the year: Improvements 143,000 48,000 --------------- ---------------- Balance at the close of the year $ 12,241,000 $ 12,098,000 =============== ================ ACCUMULATED DEPRECIATION RECONCILIATION 2006 2005 Balance at the beginning of the year $ 9,004,000 $ 8,823,000 Additions during the year: Depreciation 165,000 181,000 --------------- ---------------- Balance at the close of the year $ 9,169,000 $ 9,004,000 =============== ================ (a) The aggregate depreciable cost prior to depreciation of real estate (excluding land) for Federal income tax purposes is $9,382,000 (unaudited). F-13 EX-31 2 psp32006ex311.txt EXHIBIT 31.1 Exhibit 31.1 CERTIFICATION OF CEO AND CFO PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Ronald L. Havner, Jr., certify that: 1. I have reviewed this annual report on Form 10-K of Public Storage Properties, Ltd.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this year-end report; 3. Based on my knowledge, the financial statements, and other financial information included in this year-end report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this year-end report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. /s/ Ronald L. Havner, Jr. - ------------------------- Name: Ronald L. Havner, Jr. Title: Chief Executive Officer and President of Public Storage, Inc., Corporate General Partner Date: March 30, 2007 EX-31 3 psp32006ex312.txt EXHIBIT 31.2 Exhibit 31.2 CERTIFICATION OF CEO AND CFO PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, John Reyes, certify that: 1. I have reviewed this annual report on Form 10-K of Public Storage Properties, Ltd.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this year-end report; 3. Based on my knowledge, the financial statements, and other financial information included in this year-end report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this year-end report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. /s/ John Reyes - ---------------------------- Name: John Reyes Title: Chief Financial Officer of Public Storage, Inc., Corporate General Partner Date: March 30, 2007 EX-32 4 psp32006ex32.txt EXHIBIT 32 Exhibit 32 CERTIFICATION OF CEO AND CFO PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of Public Storage Properties, Ltd. (the "Partnership") for the year ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Ronald L. Havner, Jr., as Chief Executive Officer of Public Storage, Inc., and John Reyes, as Chief Financial Officer of Public Storage, Inc., each hereby certifies, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership. /s/ Ronald L. Havner, Jr. - ------------------------------------ Name: Ronald L. Havner, Jr. Title: Chief Executive Officer and President of Public Storage, Inc., Corporate General Partner Date: March 30, 2007 /s/ John Reyes - ------------------------------------ Name: John Reyes Title: Chief Financial Officer of Public Storage, Inc., Corporate General Partner Date: March 30, 2007 This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Partnership for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. -----END PRIVACY-ENHANCED MESSAGE-----