-----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, LzSM/rCjIACENmMIzB3IynIK7P37QKFihWLAwR0LYPgWH0f4O8JBTLy5+s2zJBpi hztbjaA0bOzPOlbYPVVpyw== 0000275915-97-000001.txt : 19970329 0000275915-97-000001.hdr.sgml : 19970329 ACCESSION NUMBER: 0000275915-97-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PUBLIC STORAGE PARTNERS II LTD CENTRAL INDEX KEY: 0000275915 STANDARD INDUSTRIAL CLASSIFICATION: LESSORS OF REAL PROPERTY, NEC [6519] IRS NUMBER: 953146963 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-08676 FILM NUMBER: 97566781 BUSINESS ADDRESS: STREET 1: 701 WESTERN AVE STREET 2: SUITE 200 CITY: GLENDALE STATE: CA ZIP: 91201-2397 BUSINESS PHONE: 8182448080 MAIL ADDRESS: STREET 1: 701 WESTERN AVE STREET 2: SUITE 200 CITY: GLENDALE STATE: CA ZIP: 91201 10-K 1 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [Fee Required] For the fiscal year ended December 31, 1996 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] For the transition period from to ------ ------- Commission File Number 0-8676 PUBLIC STORAGE PARTNERS II, LTD. ---------------------------------------------------- (Exact name of registrant as specified in its charter) California 95-3146963 - ------------------------------- ---------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 701 Western Avenue Glendale, California 91201 - --------------------------------------- ---------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (818) 244-8080 -------------- Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Units of Limited Partnership Interest ------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No -- -- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the form 10-K. [ ] DOCUMENTS INCORPORATED BY REFERENCE NONE PART I ITEM 1. BUSINESS. -------- General - ------- Public Storage Partners II, Ltd. (the "Partnership") is a publicly held limited partnership formed under the California Uniform Limited Partnership Act in November 1976. The Partnership raised $4,945,000 in gross proceeds by selling 9,890 units of limited partnership interest ("Units") in an intrastate offering, available only to California residents, which commenced in February, 1977 and was completed in August 1977. The Partnership was formed to engage in the business of developing and operating storage space for personal and business use ("mini-warehouses"). In 1995, there were a series of mergers among Public Storage Management, Inc. (which was the Partnership's mini-warehouse operator), Public Storage, Inc. (which was the Partnership's general partner) 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 the general partner of the Partnership and the operator of the Partnership's mini-warehouse properties. The Partnership's general partner is PSI (the "General Partner"). B. Wayne Hughes ("Hughes") is chairman of the board and chief executive officer of PSI, and Hughes and members of his family (the "Hughes Family") are the major shareholders of PSI. The Partnership is managed, and its investment decisions are made by the executive officers and directors of PSI, including Hughes. The limited partners of the Partnership have no right to participate in the operation or conduct of its business and affairs. The Partnership's objective are to (i) maximize the potential for appreciation in value of the Partnership's properties and (ii) generate sufficient cash flow from operations to pay all expenses, including the payment of interest to Noteholders. All of the properties were financed in October 1986. The term of the Partnership is until all properties have been sold and, in any event, not later than September 30, 2036. Investment in Facilities - ------------------------ At December 31, 1996, the Partnership owned four properties. The Partnership purchased its last property in October 1977. The Partnership believes that its operating results have benefited from favorable industry trends and conditions. Notably, the level of new mini-warehouse construction has decreased since 1988 while consumer demand has increased. In addition, in recent years consolidation has occurred in the fragmented mini-warehouse industry. Mini-warehouse Properties - ------------------------- Mini-warehouses are designed to offer accessible storage space for personal and business use at a relatively low cost. A user rents a fully enclosed space which is for the user's exclusive use and to which only the user has access on an unrestricted basis during business hours. On-site operation is the responsibility of resident managers who are supervised by area managers. Some mini-warehouses also include rentable uncovered parking areas for vehicle storage. Leases for mini-warehouse space may be on a long-term or short-term basis, although typically spaces are rented on a month-to-month basis. Rental rates vary according to the location of the property and the size of the storage space. 2 Users of space in mini-warehouses include both individuals and large and small businesses. Individuals usually employ this space for storage of, among other things, furniture, household appliances, personal belongings, motor vehicles, boats, campers, motorcycles and other household goods. Businesses normally employ this space for storage of excess inventory, business records, seasonal goods, equipment and fixtures. Mini-warehouses in which the Partnership has invested generally consist of three to seven buildings containing an aggregate of between 350 to 750 storage spaces, most of which have between 25 and 400 square feet and an interior height of approximately 8 to 12 feet. The Partnership experiences minor seasonal fluctuations in the occupancy levels of mini-warehouses with occupancies higher in the summer months than in the winter months. The Partnership believes that these fluctuations result in part from increased moving activity during the summer. The Partnership's mini-warehouses are geographically diversified and are generally located in heavily populated areas and close to concentrations of apartment complexes, single family residences and commercial developments. However, there may be circumstances in which it may be appropriate to own a property in a less populated area, for example, in an area that is highly visible from a major thoroughfare and close to, although not in, a heavily populated area. Moreover, in certain population centers, land costs and zoning restrictions may create a demand for space in nearby less populated areas. As with most other types of real estate, the conversion of mini-warehouses to alternative uses in connection with a sale or otherwise would generally require substantial capital expenditures. However, the Partnership does not intend to convert its mini-warehouses to other uses. Operating Strategies - -------------------- The Partnership's mini-warehouses are operated by PSI under the "Public Storage" name, which the Partnership believes is the most recognized name in the mini-warehouse industry. The major elements of the Partnership's operating strategies are as follows: * CAPITALIZE ON "PUBLIC STORAGE'S" NAME RECOGNITION. PSI, together with its predecessor, has more than 20 years of operating experience in the mini-warehouse business, and is the largest operator of mini-warehouses in the United States. PSI believes that its marketing and advertising programs improve its competitive position in the market. PSI's in-house Yellow Pages staff designs and places advertisements in approximately 700 directories. Commencing in early 1996, PSI began to experiment with a telephone reservation system designed to provide added customer service. Customers calling either PSI's toll-free telephone referral system, (800) 44-STORE, or a mini-warehouse facility are directed to PSI's reservation system where a trained representative discusses with the customer space requirements, price and location preferences and also informs the customer of other products and services provided by PSI. As of December 31, 1996, the telephone reservation system was supporting rental activity at all of the Partnership's properties. PSI's toll-free telephone referral system services approximately 120,000 calls per month from potential customers inquiring as to the nearest Public Storage mini-warehouse. * MAINTAIN HIGH OCCUPANCY LEVELS AND INCREASE REALIZED RENTS. Subject to market conditions, the Partnership generally seeks to achieve average occupancy levels in excess of 90% and to eliminate promotions prior to increasing rental rates. Average occupancy for the Partnership's mini-warehouses has increased from 84% in 1995 to 86% in 1996. Realized monthly rents per square foot increased from $.86 in 1995 to $.88 in 1996. The Partnership has increased rental rates in many markets where it has achieved high occupancy levels and eliminated or minimized promotions. * SYSTEMS AND CONTROLS. PSI has an organizational structure and a property operation system, "CHAMP" (Computerized Help and Management Program), which links its corporate office with each mini-warehouse. This enables PSI to obtain daily information from each mini-warehouse and to achieve efficiencies in operations and maintain control over its space 3 inventory, rental rates, promotional discounts and delinquencies. Expense management is achieved through centralized payroll and accounts payable systems and a comprehensive property tax appeals department, and PSI has an extensive internal audit program designed to ensure proper handling of cash collections. * PROFESSIONAL PROPERTY OPERATION. In addition to the approximately 150 support personnel at the Public Storage corporate offices, there are approximately 2,700 on-site personnel who manage the day-to-day operations of the mini-warehouses in the Public Storage system. These on-site personnel are supervised by approximately 110 district managers, 15 regional managers and three divisional managers (with an average of 13 years' experience in the mini-warehouse industry) who report to the president of the mini-warehouse property operator (who has 12 years of experience with the Public Storage organization). PSI carefully selects and extensively trains the operational and support personnel and offers them a progressive career path. See "Mini-warehouse Property Operator." Mini-warehouse Property Operator - -------------------------------- The Partnership's mini-warehouses are managed by PSI (as successor-in interest to PSMI) under a Management Agreement. PSI has informed the Partnership that it is the largest mini-warehouse facility operator in the United States in terms of both number of facilities and rentable space operated. Under the supervision of the Partnership, PSI coordinates the operation of the facilities, establishes rental policies and rates, directs marketing activity and directs the purchase of equipment and supplies, maintenance activity and the selection and engagement of all vendors, supplies and independent contractors. PSI engages, at the expense of the Partnership, employees for the operation of the Partnership's facilities, including resident managers, assistant managers, relief managers, and billing and maintenance personnel. Some or all of these employees may be employed on a part-time basis and may also be employed by other persons, partnerships, real estate investment trusts or other entities owning facilities operated by PSI. In the purchasing of services such as advertising (including broadcast media advertising) and insurance, PSI attempts to achieve economies by combining the resources of the various facilities that they operate. Facilities operated by PSI have historically carried comprehensive insurance, including fire, earthquake, liability and extended coverage. PSI has developed systems for space inventory, accounting and handling delinquent accounts, including a computerized network linking PSI operated facilities. Each project manager is furnished with detailed operating procedures and typically receives facilities management training from PSI. Form letters covering a variety of circumstances are also supplied to the project managers. A record of actions taken by the project managers when delinquencies occur is maintained. The Partnership's facilities are typically advertised via signage, yellow pages, flyers and broadcast media advertising (television and radio) in geographic areas in which many of the Partnership's facilities are located. Broadcast media and other advertising costs are charged to the Partnership's facilities located in geographic areas affected by the advertising. From time to time, PSI adopts promotional programs, such as temporary rent reductions, in selected areas or for individual facilities. For as long as the Management Agreement is in effect, PSI has granted the Partnership a non-exclusive license to use two PSI service marks and related designs, including the "Public Storage" name, in conjunction with rental and operation of facilities managed pursuant to the Management Agreement. Upon termination of the Management Agreement, the Partnership would no longer have the right to use the service marks and related designs except as described below. The General Partner believes that the loss of the right to use the service marks and related designs could have a material adverse effect on the Partnership's business. The Management Agreement between the Partnership and PSI provides that the Management Agreement may be terminated without cause upon 60 days' written notice by either party. 4 Competition - ----------- Competition in the market areas in which the Partnership operates is significant and affects the occupancy levels, rental rates and operating expenses of certain of the Partnership's facilities. Competition may be accelerated by any increase in availability of funds for investment in real estate. Recent increases in plans for development of mini-warehouses is expected to further intensify competition among mini-warehouse operators in certain market areas. In addition to competition from mini-warehouses operated by PSI, there are three other national firms and numerous regional and local operators. The Partnership believes that the significant operating and financial experience of PSI and the "Public Storage" name, should enable the Partnership to continue to compete effectively with other entities. Other Business Activities - ------------------------- A corporation owned by the Hughes Family reinsures policies against losses to goods stored by tenants in the Partnership's mini-warehouses. The Partnership believes that the availability of insurance reduces the potential liability of the Partnership to tenants for losses to their goods from theft or destruction. This corporation receives the premiums and bears the risks associated with the insurance. A corporation, in which PSI has a 95% economic interest and the Hughes Family has a 5% economic interest, sells locks, boxes and tape to tenants to be used in securing their spaces and moving their goods. PSI believes that the availability of locks, boxes and tape for sale promotes the rental of spaces. Employees - --------- There are 4 persons who render services on behalf of the Partnership on a full-time basis, and 11 persons who render services on a part-time basis. These persons include resident managers, assistant managers, relief managers, area managers, and administrative and maintenance personnel. Some employees may be employed on a part-time basis and may be employed by other persons, Partnerships, REITs or other entities owning facilities operated by PSI. 5 ITEM 2. PROPERTIES. The following table sets forth information as of December 31, 1996 about properties owned by the Partnership:
Net Rentable Number Location Size of Parcel Area of Spaces Date of Purchase Completion Date - ----------------- ---------------- ---------------- ------------ ------------------- --------------- CALIFORNIA Eagle Rock 3.65 acres 70,000 sq. ft. 687 Oct. 21, 1977 Apr. 1978 Long Beach 3.32 acres 70,000 sq. ft. 705 July 22, 1977 Dec. 1977 Los Angeles 3.14 acres 59,000 sq. ft. 568 Mar. 17, 1978 May 1978 San Dimas 2.93 acres 54,000 sq. ft. 537 Aug. 3, 1977 Dec. 1977
The weighted average occupancy levels for the mini-warehouse facilities were 86% and 84% in 1996 and 1995, respectively. Substantially all of the Partnership's facilities were acquired prior to the time that it was customary to conduct environmental investigations in connection with property acquisitions. During 1995, the Partnership completed environmental assessments of its properties to evaluate the environmental condition of, and potential environmental liabilities of such properties. These assessments were performed by an independent environmental consulting firm. Based on the assessments, the Partnership expensed $10,000 in 1995 for known environmental remediation requirements. The properties are held subject to encumbrances which are described in this report under Note 7 of the Notes to the Financial Statements included in Item 14(a). ITEM 3. LEGAL PROCEEDINGS. ------------------ No material legal proceeding is pending against the Partnership. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. ---------------------------------------------------- No matters were submitted to a vote of security holders during the fourth quarter of 1996. PART II ITEM 5. MARKET FOR THE PARTNERSHIP'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. ------------------------------------------------------------------- The Partnership has no common stock. The Units are not listed on any national securities exchange or quoted on the NASDAQ System, and there is no established public trading market for the Units. Secondary sales activity for the Units has been limited and sporadic. The General Partner monitors transfers of the Units (a) because the admission of the transferee as a substitute limited partner requires the consent of the General Partner 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 Partner (and its predecessor-in-interest) and Hughes have purchased Units. However, the General Partner does 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 6 Report summarize and report information (on a monthly, bimonthly or less frequent basis) regarding secondary sales transactions in certain limited partnership interests, including the prices at which such secondary sales transactions are effectuated. Exclusive of the General Partner's interest in the Partnership, as of December 31, 1996, there were approximately 457 record holders of Units. Distributions to the general and limited partners of all cash available for distribution (as defined) are made quarterly. Cash available for distribution is generally funds from operations of the Partnership, without deductions for depreciation, but after deducting funds to pay or establish reserves for all other expenses (other than incentive distributions to the General Partner) and capital improvements, plus net proceeds from any sale or financing of the Partnership's properties. In the fourth quarter of 1990, quarterly distributions were discontinued to enable the Partnership to increase its reserves for principal repayments on its debt that commenced in 1992. Reference is made to Item 6 and 7 hereof for information on the amount of such distributions. 7 ITEM 6. SELECTED FINANCIAL DATA. -----------------------
For the Year Ended December 31, 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------ Revenues (2) $2,300,000 $2,242,000 $2,187,000 $2,532,000 $2,265,000 Depreciation 169,000 148,000 139,000 139,000 136,000 Interest expense 849,000 950,000 1,026,000 1,199,000 1,184,000 Net income 638,000 533,000 433,000 588,000 347,000 Limited partners' share 631,000 528,000 428,000 582,000 343,000 General partner's share 7,000 5,000 5,000 6,000 4,000 Limited partners' per unit data (1): Net income 63.80 53.39 43.28 58.85 34.68 As of December 31 - ----------------- Cash and cash equivalents $163,000 $ - $159,000 $90,000 $275,000 Total assets $2,566,000 $2,585,000 $2,813,000 $2,806,000 $3,625,000 Notes payable $7,984,000 $8,602,000 $9,384,000 $9,815,000 $11,188,000
- ----------------------- (1) Per unit data is based on the weighted average number of the limited partnership units (9,890) outstanding during the period. (2) Revenues for the years ended December 31, 1993 and 1995, include gains on sale of marketable securities of an affiliate of $312,000 ($31.26 per unit) and $21,000 ($2.10 per Unit), respectively. 8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. ---------------------------------------------------------------------- Results of Operations - --------------------- YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995: The Partnership's net income in 1996 was $638,000 compared to $533,000 in 1995, representing an increase of $105,000. This increase is primarily due to a decrease in interest expense and an increase in property net operating income. During 1996, property net operating income (rental income less cost of operations, management fees paid to an affiliate and depreciation expense) increased $21,000 from $1,497,000 in 1995 to $1,518,000 in 1996. This increase is primarily attributable to an increase in rental revenues at the Partnership's mini-warehouse facilities partially offset by increases in cost of operations and depreciation expense. Rental income was $2,296,000 in 1996 compared to $2,211,000 in 1995, representing an increase of $85,000. This increase was primarily attributable to increased occupancies at the Partnership's real estate facilities. Weighted average occupancy levels at the mini-warehouses were 86% and 84% in 1996 and 1995, respectively. The average monthly realized rent per square foot at the mini-warehouses was $0.88 in 1996 compared to $0.86 in 1995. Cost of operations (including management fees paid to an affiliate) was $609,000 and $566,000 in 1996 and 1995, respectively, representing an increase of $43,000, or 8%. This increase was primarily attributable to increases in advertising and repairs and maintenance costs. In 1995, the Partnership prepaid eight months of 1996 management fees on its mini-warehouse operations (based on the management fees for the comparable period during the calendar year immediately preceding the prepayment) discounted at the rate of 14% per year to compensate for early payment. The Partnership has expensed the prepaid management fees during 1996. The amount is included in management fees paid to affiliate in the statements of income. As a result of the prepayment, the Partnership saved approximately $8,000 in management fees, based on the management fees that would have been payable on rental income generated during 1996 compared to the amount prepaid. Interest expense was $849,000 and $950,000 in 1996 and 1995, respectively, representing a decrease of $101,000, or 11%. The decrease was primarily a result of a reduction in the average outstanding debt balance in 1996 compared to 1995. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994: The Partnership's net income in 1995 was $533,000 compared to $433,000 in 1994, representing an increase of $100,000. This increase is primarily due to an increase in property net operating income combined with a decrease in interest expense offset by environmental cost incurred in 1995. During 1995, property net operating income (rental income less cost of operations, management fees paid to an affiliate and depreciation expense) increased $8,000 from $1,489,000 in 1994 to $1,497,000 in 1995. This increase is primarily attributable to an increase in rental revenues at the Partnership's mini-warehouse facilities partially offset by increases in cost of operations and depreciation expense. Rental income was $2,211,000 in 1995 compared to $2,182,000 in 1994, representing an increase of $29,000. This increase was primarily attributable to increased occupancies at the Partnership's real estate facilities. Weighted average occupancy levels at the mini-warehouses were 84% and 80% in 1995 and 1994, respectively. The average monthly realized rent per square foot at the mini-warehouses was $0.86 in 1995 compared to $0.72 in 1994. In November 1995, the Partnership sold its marketable securities for $89,000 and realized a gain on sale of $21,000. 9 Substantially all of the Partnership's facilities were acquired prior to the time that it was customary to conduct environmental investigations in connection with property acquisitions. During the fourth quarter of 1995, the Partnership completed environmental assessments of its properties to evaluate the environmental condition of, and potential environmental liabilities of such properties. These assessments were performed by an independent environmental consulting firm. Based on the assessments, the Partnership expensed $10,000 in 1995 for known environmental remediation requirements. Although there can be no assurance, the Partnership is not aware of any environmental contamination of any of its property sites which individually or in the aggregate would be material to the Partnership's overall business, financial condition, or results of operations. Cost of operations (including management fees paid to an affiliate ) was $566,000 and $554,000 in 1995 and 1994, respectively, representing an increase of $12,000 or 2%. This increase was primarily attributable to increases in payroll cost, and management fees paid to an affiliate as a result of an increase in rental revenues. Interest expense was $950,000 and $1,026,000 in 1995 and 1994, respectively, representing a decrease of $76,000 or 7%. The decrease was primarily a result of a reduction in the average outstanding debt balance in 1995 compared to 1994. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Cash flow from operating activities ($860,000 in 1996) has been sufficient to meet all current obligations of the Partnership. During 1997, the Partnership anticipates approximately $143,000 of capital improvements compared to $79,000 in 1996, $87,000 in 1995 and $45,000 in 1994. In January 1996 the Partnership obtained a $230,000 loan from PSI to repay and terminate an unsecured note payable to Wells Fargo Bank. The PSI loan bore interest at the prime rate plus 1%, payable monthly, in addition to monthly principal payments of $17,708. In December 1996 the loan was paid in full. In November 1995, the Management Agreement was amended to provide that upon demand from PSI or PSMI made prior to December 15, 1995, the Partnership agreed to prepay (within 15 days after such demand) up to 12 months of management fees (based on the management fees for the comparable period during the calendar year immediately preceding such prepayment) discounted at the rate of 14% per year to compensate for early payment. In December 1995, the Partnership prepaid, to PSI, 8 months of 1996 management fees at a cost of $83,000. The amount has been amortized as management fees paid to affiliate during 1996. 10 In the fourth quarter of 1990, quarterly distributions were discontinued to enable the Partnership to increase its reserves for principal payments that commenced in 1992. The distributions to the limited partners and general partner for each of the prior years were as follows: 1977 $88,000 1978 394,000 1979 706,000 1980 843,000 1981 1,032,000 1982 1,087,000 1983 1,128,000 1984 1,481,000 1985 1,800,000 1986 13,352,000 1987 369,000 1988 400,000 1989 417,000 1990 283,000 1991 - 1992 - 1993 - 1994 - 1995 - 1996 - During 1986, the Partnership financed all of its facilities with a $12,075,000 loan. Proceeds of $11,920,000 were distributed to the partners in October 1986 and are included in the 1986 distribution. At December 31, 1996, the outstanding balance of the mortgage note was $7,984,000. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. ------------------------------------------- The Partnership's financial statements are included elsewhere herein. Reference is made to the Index to Financial Statements and Financial Statement Schedules in Item 14(a). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. ---------------------------------------------------------------- None. 11 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE PARTNERSHIP. --------------------------------------------------- The Partnership has no directors or executive officers. The Partnership's general partner is PSI. PSI, acting through its directors and executive officers, including Mr. Hughes, manage and make investment decisions for the Partnership. The names of all directors and executive officers of PSI, the offices held by each of them with PSI, and their ages and business experience during the past five years are as follows: Name Positions with PSI - ---------------------- ------------------------------------------------- B. Wayne Hughes Chairman of the Board and Chief Executive Officer Harvey Lenkin President and Director John Reyes Senior Vice President and Chief Financial Officer Hugh W. Horne Senior Vice President Obren B. Gerich Senior Vice President Marvin M. Lotz Senior Vice President David Goldberg Senior Vice President and General Counsel A. Timothy Scott Senior Vice President and Tax Counsel Sarah Hass Vice President and Secretary Robert J. Abernethy Director Dann V. Angeloff Director William C. Baker Director Uri P. Harkham Director B. Wayne Hughes, age 63, a general partner of the Partnership, has been a director of PSI since its organization in 1980 and was President and Co-Chief Executive Officer from 1980 until November 1991 when he became Chairman of the Board and sole Chief Executive Officer. Mr. Hughes was an officer and director of affiliates of PSMI and a director of PSMI until November 1995. Mr. Hughes has been Chairman of the Board and Chief Executive Officer since 1990 of Public Storage Properties XI, Inc., Public Storage Properties XIV, Inc., Public Storage Properties XV, Inc., Public Storage Properties XVI, Inc., Public Storage Properties XVII, Inc., Public Storage Properties XVIII, Inc., Public Storage Properties XIX, Inc. and Public Storage Properties XX, Inc. (collectively , the "Public Storage REITs"), REITs that were organized by affiliates of PSMI. From 1989-90 until the respective dates of merger, he was Chairman of the Board and Chief Executive Officer of Public Storage Properties VI, Inc., Public Storage Properties VII, Inc., Public Storage Properties VIII, Inc., Public Storage Properties IX, Inc., Public Storage Properties X, Inc., Public Storage Properties XII Inc., PS Business Parks, Inc., Partners Preferred Yield, Inc., Partners Preferred Yield II, Inc., Partners Preferred Yield III, Inc., and Storage Properties, Inc. ("SPI") (collectively, the "Merged Public Storage REITs"), affiliated REITs that were merged into PSI between September 1994 and December 1996. Mr. Hughes has been active in the real estate investment field for over 25 years. Harvey Lenkin, age 60, became President and a director of PSI in November 1991. Mr. Lenkin was an officer and director of PSMI and its affiliates until November 1995. He has been President of the Public Storage REITs since 1990. He was President of the Merged Public Storage REITs from 1989-90 until the respective dates of merger and was also a director of SPI from 1989 until June 1996. John Reyes, age 36, a certified public accountant, joined PSMI in 1990 and was Controller of PSI from 1992 until December 1996 when he became Chief Financial Officer. He became a Vice President of PSI in November 1995 and a Senior Vice President of PSI in December 1996. From 1983 to 1990, Mr. Reyes was employed by Ernst & Young. Hugh W. Horne, age 52, has been a Vice President of PSI since 1980 and was Secretary of PSI from 1980 until February 1992 and became Senior Vice President of PSI in November 1995. He was an officer of PSMI from 1973 to November 1995. Mr. Horne has been a Vice President of the Public Storage REITs 12 since 1993. He was a Vice President of SPI from 1989 until June 1996 and of the other Merged Public Storage REITs from 1993 until the respective dates of merger. He is responsible for managing all aspects of property acquisition for PSI. Obren B. Gerich, age 58, a certified public accountant and certified financial planner, has been a Vice President of PSI since 1980 and became Senior Vice President of PSI in November 1995. He was Chief Financial Officer of PSI until November 1991. Mr. Gerich was an officer of PSMI from 1975 to November 1995. He has been Vice President and Secretary of the Public Storage REITs since 1990 and was Chief Financial Officer until November 1995. Mr. Gerich was Vice President and Secretary of the Merged Public Storage REITs from 1989-90 until the respective dates of merger. Marvin M. Lotz, age 54, has had overall responsibility for Public Storage's mini-warehouse operations since 1988. He became a Senior Vice President of PSI in November 1995. Mr. Lotz was an officer of PSMI with responsibility for property acquisitions from 1983 until 1988. David Goldberg, age 47, joined PSMI's legal staff in June 1991, rendering services on behalf of the PSI and PSMI. He became a Senior Vice President and General Counsel of PSI in November 1995 and Vice President and General Counsel of the Public Storage REITs in December 1995. From December 1982 until May 1991, he was a partner in the law firm of Sachs & Phelps, then counsel to PSI and PSMI. A. Timothy Scott, age 45, became a Senior Vice President and Tax Counsel of PSI and Vice President and Tax Counsel of the Public Storage REITs in November 1996. From June 1991 until joining PSI, Mr. Scott practiced tax law as a shareholder of the law firm of Heller, Ehrman, White & McAuliffe, counsel to PSI and PSMI. Prior to June 1991, his professional corporation was a partner in the law firm of Sachs & Phelps, then counsel to PSI and PSMI. Sarah Hass, age 41, became Secretary of PSI in February 1992. She became a Vice President of PSI in November 1995. She joined PSMI's legal department in June 1991, rendering services on behalf of PSI and PSMI. From 1987 until May 1991, her professional corporation was a partner in the law firm of Sachs & Phelps, then counsel to PSI and PSMI, and from April 1986 until June 1987, she was associated with that firm, practicing in the area of securities law. From September 1979 until September 1985, Ms. Hass was associated with the law firm of Rifkind & Sterling, Incorporated. Robert J. Abernethy, age 57, is President of American Standard Development Company and of Self-Storage Management Company, which develop and operate mini-warehouses. Mr. Abernethy has been a director of PSI since its organization in 1980. He is a member of the board of directors of Johns Hopkins University and of the Los Angeles County Metropolitan Transportation Authority, and a former member of the board of directors of the Metropolitan Water District of Southern California. Dann V. Angeloff, age 61, is President of the Angeloff Company, a corporate financial advisory firm. The Angeloff Company has rendered, and is expected to continue to render, financial advisory and securities brokerage services for PSI. Mr. Angeloff is the general partner of a limited partnership that owns a mini-warehouse operated by PSI and which secures a note owned by PSI. Mr. Angeloff has been a director of PSI since its organization in 1980. He is a director of Bonded Motors Inc., Compensation Resource Group, Datametrics Corporation, Nicholas/Applegate Growth Equity Fund, Nicholas/Applegate Investment Trust, Ready Pac Produce, Inc., Royce Medical Company and Seda Specialty Packaging Corp. He was a director of SPI from 1989 until June 1996. William C. Baker, age 63, became a director of PSI in November 1991. Since April 1996, Mr. Baker has been Chairman of the Board of Santa Anita Realty Enterprises, Inc., a REIT that owns the Santa Anita Racetrack and other real estate assets. In August 1996, he became Chairman of the Board and Chief Executive Officer of Santa Anita Operating Company, which operates the Santa Anita Racetrack through its subsidiary the Los Angeles Turf Club, Incorporated. From April 1993 through May 1995, Mr. Baker was President of Red Robin International, Inc., an operator and franchiser of casual dining restaurants in the United States and Canada. Since January 1992, he has been Chairman and Chief Executive Officer of Carolina Restaurant Enterprises, Inc., a franchisee of Red Robin International, Inc. From 1976 to 1988, he was a principal shareholder and Chairman and Chief Executive Officer of Del Taco, Inc., an operator and franchiser of fast food restaurants in California. Mr. Baker is a director of Callaway Golf Company. 13 Uri P. Harkham, age 48, became a director of PSI in March 1993. Mr. Harkham has been the President and Chief Executive Officer of the Jonathan Martin Fashion Group, which specializes in designing, manufacturing and marketing women's clothing, since its organization in 1976. Since 1978, Mr. Harkham has been the Chairman of the Board of Harkham Properties, a real estate firm specializing in buying and managing fashion warehouses in Los Angeles and Australia. Pursuant to Articles 16 and 22 of the Partnership's Certificate and Agreement of Limited Partnership, a copy of which is included in the Partnership's prospectus included in the Partnership's Registration Statement File No. 2-57750, the General Partner continues to serve until (i) retirement, withdrawal, adjudication of bankruptcy, insolvency or dissolution, or (ii) removal by a majority vote of the limited partners. Each director of PSI serves until he resigns or is removed from office by the shareholders of PSI, and may resign or be removed from office at any time with or without cause. Each officer of PSI serves until he resigns or is removed by the Board of Directors of PSI. Any such officer may resign or be removed from office with or without cause. There have been no events under any bankruptcy act, no criminal proceedings, and no judgments or injunctions material to the evaluation of the ability of any director or executive officer of PSI during the past five years. Section 16 (a) Beneficial Ownership Reporting Compliance - -------------------------------------------------------- Based on a review of the reports filed under Section 16(a) of the Securities and Exchange Act of 1934 with respect to the Units that were submitted to the Partnership, the Partnership believes that with respect to the fiscal year ended December 31, 1996, Hughes (a director and executive officer of PSI, the General Partner, and an owner of more than 10% of the Units) filed one report on Form 4 which disclosed (in addition to transactions that were timely reported) five transactions that were not timely reported. 14 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 Partner and their affiliates. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. -------------------------------------------------------------- (a) At February 28, 1997, the following persons beneficially owned more than 5% of the Units:
Name and Address of Title of Class Beneficial Owners Beneficial Ownership Percent of Class - ----------------------- ---------------------------- ------------------------ ---------------- Units of Limited Public Storage, Inc. 4,038 Units (1) 40.8% Partnership Interest 701 Western Avenue 2nd Floor Glendale, California 91201 Units of Limited B. Wayne Hughes 1,102 Units (2) 11.1% Partnership Interest 701 Western Avenue 2nd Floor Glendale, California 91201
(1) Includes (i) 3,174 Units owned by PSI as to which PSI has sole voting and dispositive power and (ii) 864 Units which PSI has an option to acquire (together with other securities) from BWH Marina Corporation II (a corporation wholly-owned by Hughes) and as to which PSI has sole voting power (pursuant to an irrevocable proxy) and no dispositive power. (2) Includes (i) 238 Units owned by BWH Marina Corporation II, a corporation wholly-owned by Hughes, as to which Hughes has sole voting and dispositive power and (ii) 864 Units owned by BWH Marina Corporation II as to which Hughes has sole dispositive power and no voting power; PSI has an option to acquire these Units and an irrevocable proxy to vote these Units (see footnote 1 above). (b) The Partnership has no officers and directors. The General Partner (or its predecessor-in-interest) have contributed $101,010 to the capital of the Partnership and as a result participates in the distributions to the limited partners and in the Partnership's profits and losses in the same proportion that the General Partner's capital contribution bears to the total capital contribution. Information regarding ownership of Units by PSI , the General Partner, and Hughes, a director and executive officer of PSI, is set forth under section (a) above. The directors and executive officers of PSI (including Hughes), as a group (13 persons), own an aggregate of 1,128 Units, representing 11.4% of the Units (including the 1,102 Units beneficially owned by Hughes as set forth above.). (c) The Partnership knows of no contractual arrangements, the operation of the terms of which may at a subsequent date result in a change in control of the Partnership, except for articles 16, 17 and 21.1 of the Partnership's Amended Certificate and Agreement of Limited Partnership (the "Partnership Agreement"), a copy of which is included in the Partnership's prospectus included in the Partnership's Registration Statement File No. 2-57750. Those articles provide, in substance, that the limited partners shall have the right, by majority vote, to remove the general partner and that the general partner may designate a successor with the consent of a majority of the limited partners. 15 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. ---------------------------------------------- The Partnership Agreement provides that the General Partner will be entitled to cash incentive distributions in an amount equal to (i) 8% of distributions of cash flow from operations until the distributions to all partners from all sources equal their capital contributions; thereafter, 25% of distributions of cash flow from operations, and (ii) 25% of distributions from net proceeds from sale and financing of the Partnership's properties remaining after distribution to all partners of any portion thereof required to cause distributions to partners from all sources to equal their capital contributions. During 1985, the partners received cumulative distributions equal to their capital contributions. During 1996, there were no incentive distributions paid by the Partnership. The Partnership has a Management Agreement with PSI (as successor-in-interest to PSMI). Under the Management Agreement, the Partnership pays PSI a fee of 6% of the gross revenues of the mini-warehouse properties operated for the Partnership. During 1996, the Partnership paid fees of $47,000 to PSI pursuant to the Management Agreement. In November 1995, the Management Agreement was amended to provide that upon demand from PSI or PSMI made prior to December 15, 1995, the Partnership agreed to prepay (within 15 days after such demand) up to 12 months of management fees (based on the management fees for the comparable period during the calendar year immediately preceding such prepayment) discounted at the rate of 14% per year to compensate for early payment. In December 1995, the Partnership prepaid, to PSI, 8 months of 1996 management fees at a cost of $83,000. The amount has been amortized as management fees paid to affiliate during 1996. 16 PART IV ITEM 14. EXHIBITS. FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. ---------------------------------------------------------------- (a) List of Documents filed as part of the Report. 1. Financial Statements. See Index to Financial Statements and Financial Statement Schedule. 2. Financial Statement Schedules. See Index to Financial Statements and Financial Statement Schedule. 3. Exhibits: See Exhibit Index contained below. (b) Reports on Form 8-K: No reports on Form 8-K were filed during the last quarter of fiscal 1996. (c) Exhibits: See Exhibit Index contained below. 17 PUBLIC STORAGE PARTNERS II, LTD. EXHIBIT INDEX (Item 14(c)) 3.1 Amended Certificate and Agreement of Limited Partnership. Previously filed with the Securities and Exchange Commission as an exhibit to the Registrant's Registration Statement of Form 10, filed on May 1, 1978, and incorporated herein by reference. 10.1 Second Amended and Restated Management Agreement dated November 16, 1995 between the Partnership and Public Storage, Inc. Previously filed with the Securities and Exchange Commission as an exhibit to PS Partners, Ltd.'s Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference. 10.2 Loan documents dated October 7, 1986 between the Partnership and Aetna Life Insurance Company. Previously filed with the Securities and Exchange Commission as an exhibit to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. 10.3 Modified loan documents dated September 1, 1993 between the Partnership and Aetna Life Insurance Company. Previously filed with the Securities and Exchange Commission as an exhibit to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. 10.4 Loan documents dated March 17, 1994 between the Partnership and Wells Fargo Bank. Previously filed with the Securities and Exchange Commission as an exhibit to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference. 10.5 Loan documents dated January 26, 1996 between the Partnership and Public Storage, Inc. Previously filed with the Securities and Exchange Commission as an exhibit to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference. 27 Financial Data Schedule. Filed herewith. 18 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 PARTNERS II, LTD. a California Limited Partnership Dated: March 26, 1997 By: Public Storage, Inc., General Partner By: /s/ B. Wayne Hughes -------------------------------------- B. Wayne Hughes, Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Partnership in the capacities and on the dates indicated.
Signature Capacity Date - --------------------------- --------------------------------------------- ----------------- /s/ B. Wayne Hughes Chairman of the Board and March 26, 1997 - --------------------------- Chief Executive Officer of Public Storage, Inc. B. Wayne Hughes (principal executive officer) /s/ Harvey Lenkin President and Director March 26, 1997 - --------------------------- of Public Storage, Inc. Harvey Lenkin /s/ John Reyes Senior Vice President and Chief Financial March 26, 1997 - --------------------------- Officer of Public Storage, Inc. John Reyes (principal financial officer and principal accounting officer) /s/ Robert J. Abernethy Director of Public Storage, Inc. March 26, 1997 - --------------------------- Robert J. Abernethy Dann V. Angeloff Director of Public Storage, Inc. March 26, 1997 - --------------------------- Dann V. Angeloff /s/ William C. Baker Director of Public Storage, Inc. March 26, 1997 - --------------------------- William C. Baker /s/ Uri P. Harkham Director of Public Storage, Inc. March 26, 1997 - --------------------------- Uri P. Harkham
19 PUBLIC STORAGE PARTNERS II, LTD. INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE (Item 14 (a)) Page References Report of Independent Auditors F-1 Financial Statements and Schedule: Balance Sheets as of December 31, 1996 and 1995 F-2 For the years ended December 31, 1996, 1995 and 1994: Statements of Income F-3 Statements of Partner's Deficit F-4 Statements of Cash Flows F-5 Notes to Financial Statements F-6 - F-9 Schedule III - Real Estate and Accumulated Depreciation F-10 - F11 All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements or the notes thereto. Report of Independent Auditors The Partners Public Storage Partners II, Ltd. We have audited the accompanying balance sheets of Public Storage Partners II, Ltd. as of December 31, 1996 and 1995, and the related statements of income, partners' deficit and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the schedule listed in the index at item 14(a). These financial statements and schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Public Storage Partners II, Ltd. at December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP March 24, 1997 Los Angeles, California
PUBLIC STORAGE PARTNERS II, LTD. BALANCE SHEETS December 31, 1996 and 1995 1996 1995 ---------------- ---------------- ASSETS ------ Cash and cash equivalents $ 163,000 $ - Rent and other receivables 17,000 23,000 Real estate facilities: Building, land improvements and equipment 3,360,000 3,281,000 Land 1,267,000 1,267,000 ---------------- ---------------- 4,627,000 4,548,000 Less accumulated depreciation (2,434,000) (2,265,000) ---------------- ---------------- 2,193,000 2,283,000 ---------------- ---------------- Other assets 193,000 279,000 ---------------- ---------------- Total assets $2,566,000 $2,585,000 ================ ================ LIABILITIES AND PARTNERS' DEFICIT --------------------------------- Accounts payable $ 4,000 $ 35,000 Deferred revenue 66,000 74,000 Note payable 7,984,000 8,602,000 Partners' deficit: Limited partners' deficit, $500 per unit, 10,000 units authorized, 9,890 issued and outstanding (4,071,000) (4,544,000) General partner's deficit (1,417,000) (1,582,000) ---------------- ---------------- Total partners' deficit (5,488,000) (6,126,000) ---------------- ---------------- Total liabilities and partners' deficit $2,566,000 $2,585,000 ================ ================
See Accompanying Notes. F-2
PUBLIC STORAGE PARTNERS II, LTD. STATEMENTS OF INCOME For each of the three years in the period ended December 31, 1996 1996 1995 1994 ---------- ---------- ---------- REVENUES: Rental income $2,296,000 $2,211,000 $2,182,000 Gain on sale of marketable securities - 21,000 - Other income 4,000 10,000 5,000 ---------- ---------- ---------- 2,300,000 2,242,000 2,187,000 ---------- ---------- ---------- COSTS AND EXPENSES: Cost of operations 479,000 432,000 423,000 Management fees paid to affiliate 130,000 134,000 131,000 Depreciation 169,000 148,000 139,000 Administrative 35,000 35,000 35,000 Environmental cost - 10,000 - Interest expense 849,000 950,000 1,026,000 ---------- ---------- ---------- 1,662,000 1,709,000 1,754,000 ---------- ---------- ---------- NET INCOME $ 638,000 $ 533,000 $ 433,000 ========== ========== ========== Limited partners' share of net income ($63.80 per unit in 1996, $53.39 per unit in 1995, and $43.28 per unit in 1994) $ 631,000 $ 528,000 $ 428,000 General partner's share of net income 7,000 5,000 5,000 ---------- ---------- ---------- $ 638,000 $ 533,000 $ 433,000 ========== ========== ==========
See Accompanying Notes. F-3
PUBLIC STORAGE PARTNERS II, LTD. STATEMENTS OF PARTNERS' DEFICIT For each of the three years in the period ended December 31, 1996 Unrealized Gain on Limited General Marketable Total Partners' Partners Partner Securities Deficit ---------- ---------- ----------- ---------- Balance at December 31, 1993 $(5,260,000) $(1,832,000) $ - $(7,092,000) Unrealized gain on marketable securities - - 4,000 4,000 Net income 428,000 5,000 - 433,000 Equity transfer (107,000) 107,000 - - ---------- ---------- ----------- ---------- Balance at December 31, 1994 (4,939,000) (1,720,000) 4,000 (6,655,000) Sale of marketable securities - - (4,000) (4,000) Net income 528,000 5,000 - 533,000 Equity transfer (133,000) 133,000 - - ---------- ---------- ----------- ---------- Balance at December 31, 1995 (4,544,000) (1,582,000) - (6,126,000) Net income 631,000 7,000 - 638,000 Equity transfer (158,000) 158,000 - - ---------- ---------- ----------- ---------- Balance at December 31, 1996 $(4,071,000) $(1,417,000) $ - $(5,488,000) ========== ========== =========== ==========
See Accompanying Notes. F-4
PUBLIC STORAGE PARTNERS II, LTD. STATEMENTS OF CASH FLOWS For each of the three years in the period ended December 31, 1996 1996 1995 1994 ----------- ---------- ---------- Cash flows from operating activities: Net income $638,000 $533,000 $433,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 169,000 148,000 139,000 Gain on sale of marketable securities - (21,000) - Decrease (increase) in rent and other receivables 6,000 9,000 (6,000) Amortization of prepaid loan fees 11,000 11,000 47,000 Amortization (payment) of prepaid management fees 83,000 (83,000) - Increase in other assets (8,000) (1,000) (1,000) (Decrease) increase in accounts payable (31,000) 25,000 1,000 Decrease in deferred revenue (8,000) - - ----------- ---------- ---------- Total adjustments 222,000 88,000 180,000 ----------- ---------- ---------- Net cash provided by operating activities 860,000 621,000 613,000 ----------- ---------- ---------- Cash flows from investing activities: Proceeds from sale (purchase costs) of marketable securities - 89,000 (68,000) Additions to real estate facilities (79,000) (87,000) (45,000) ----------- ---------- ---------- Net cash (used in) provided by investing activities (79,000) 2,000 (113,000) ----------- ---------- ---------- Cash flows from financing activities: Proceeds from note payable to bank - - 850,000 Proceeds from note payable to affiliate 230,000 - - Principal payments on note payable to affiliate (230,000) - (850,000) Principal payments on note payable (618,000) (782,000) (431,000) ----------- ---------- ---------- Net cash used in financing activities (618,000) (782,000) (431,000) ----------- ---------- ---------- Net increase (decrease) in cash and cash equivalents 163,000 (159,000) 69,000 Cash and cash equivalents at the beginning of the year - 159,000 90,000 ----------- ---------- ---------- Cash and cash equivalents at the end of the year $163,000 - $159,000 =========== ========== ========== Supplemental schedule of non-cash investing and financing activities: Increase in fair value of marketable securities of affiliate $ - $ - $ (4,000) =========== ========== ========== Unrealized gain on marketable securities of affiliate $ - $ - $ 4,000 =========== ========== ==========
See Accompanying Notes. F-5 PUBLIC STORAGE PARTNERS II, LTD NOTES TO FINANCIAL STATEMENTS December 31, 1996 1. DESCRIPTION OF PARTNERSHIP Public Storage Partners II, Ltd. (the "Partnership") was formed with the proceeds of a public offering. The general partner in the Partnership is Public Storage, Inc., formerly known as Storage Equities, Inc. In 1995, there were a series of mergers among Public Storage Management, Inc. (which was the Partnership's mini-warehouse property operator), Public Storage, Inc. (which was the Partnership's general partner) and their affiliates (collectively, "PSMI"), culminating in the November 16, 1995 merger of PSMI into Storage Equities, Inc., a real estate investment trust listed on the New York Stock Exchange. In the PSMI merger, Storage Equities, Inc.'s name was changed to Public Storage, Inc. ("PSI") and PSI became the general partner of the Partnership and the operator of the Partnership's mini-warehouse properties. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PARTNERSHIP MATTERS Basis of Presentation: -------------------------- Certain prior year amounts have been reclassified to confrom with the 1996 presentation. Mini-Warehouse Facilities: -------------------------- Cost of land includes appraisal fees and legal fees related to acquisition and closing costs. Buildings, land improvements and equipment reflect costs incurred through December 31, 1996 and 1995 to develop mini-warehouse facilities which provide self-service storage spaces for lease, usually on a month-to-month basis, to the general public. The buildings and equipment are depreciated on a straight-line basis over estimated useful lives of 25 and 5 years, respectively. In 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("Statement 121"). Statement 121 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Partnership adopted Statement 121 in 1996 and, the adoption had no effect on the Partnership's financial statements. Allocation of Net Income: ------------------------- The general partner's 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 partner's 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 (9,890) outstanding during the period. Cash and Cash Equivalents: -------------------------- For financial statement purposes, the Partnership considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Gain on Sale of Marketable Securities: -------------------------------------- Through November 1995, the Partnership held 5,000 shares of common stock in PSI. In November 1995, the Partnership sold its 5,000 shares of common stock of PSI and recognized a gain totaling $21,000 on the sale. The Partnership recognized $4,000 in dividends in both 1995 and 1994. F-6 PUBLIC STORAGE PARTNERS II, LTD NOTES TO FINANCIAL STATEMENTS December 31, 1996 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PARTNERSHIP MATTERS (CONTINUED) ------------------------------------------------------------------ Other Assets: ------------- Included in other assets are deferred financing costs of $61,000. In addition, deferred financing costs of approximately $11,000, $11,000 and $47,000 relating to the pre-modified mortgage loan were expensed during 1996, 1995 and 1994, respectively, and included as interest expense. Use of Estimates: ----------------- The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Environmental Cost: ------------------- Substantially all of the Partnership's facilities were acquired prior to the time that it was customary to conduct environmental investigations in connection with property acquisitions. During 1995, the Partnership completed environmental assessments of its properties to evaluate the environmental condition of and potential environmental liabilities of such properties. These assessments were performed by an independent environmental consulting firm. Based on the assessments, the Partnership expensed $10,000 in 1995 for known environmental remediation requirements. Although there can be no assurance, the Partnership is not aware of any environmental contamination of any of its property sites which individually or in the aggregate would be material to the Partnership's overall business, financial condition or results of operations. 3. CASH DISTRIBUTIONS The Partnership Agreement requires that cash available for distribution (cash flow from all sources less cash necessary for any obligations or capital improvement needs) be distributed at least quarterly. Cash distributions have been suspended since the fourth quarter of 1990 in order to build cash reserves for future debt service payments. 4. PARTNERS' EQUITY The general partner has a 1.1% interest in the Partnership. In addition, the general partner has an 8% interest in all 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 partner has a 25% interest in all cash distributions (including sale and financing proceeds). In 1984, the limited partners recovered all of their initial investment. All subsequent cash distributions are being made 25.83% (including the 1.1% interest) to the general partner and 74.17% to the limited partners. Transfers of equity are made periodically to conform the partners' equity accounts to the provisions of the Partnership Agreement. These transfers have no effect on the results of operations or distributions to partners. Concurrent with the financing of the Partnership's properties in 1986 (Note 7), the Partnership made a special distribution totaling $11,920,000 to the partners. This special distribution had no effect on the Partnership's taxable income; however, it resulted in a deficit in the limited and general partner's equity accounts. 5. RELATED PARTY TRANSACTIONS The Partnership has a Management Agreement with PSI (as successor-in-interest to PSMI). Under the terms of the agreement, PSI operates the mini-warehouse facilities for a fee equal to 6% of the facilities' monthly gross revenue (as defined). F-7 PUBLIC STORAGE PARTNERS II, LTD NOTES TO FINANCIAL STATEMENTS December 31, 1996 5. RELATED PARTY TRANSACTIONS (CONTINUED) In November 1995, the Management Agreement was amended to provide that upon demand from PSI or PSMI made prior to December 15, 1995, the Partnership agreed to prepay (within 15 days after such demand) up to 12 months of management fees (based on the management fees for the comparable period during the calendar year immediately preceding such prepayment) discounted at the rate of 14% per year to compensate for early payment. In December 1995, the Partnership prepaid, to PSI, 8 months of 1996 management fees at a cost of $83,000. The amount is included in other assets in the balance sheet at December 31,1995. The amount has been amortized as management fees paid to affiliate during 1996. See footnote 7 on related party note payable. 6. TAXES BASED ON INCOME Taxes based on income are the responsibility of the individual partners and, accordingly, the Partnership's financial statements do not reflect a provision for such taxes. Taxable net income was $675,000, $556,000 and $446,000 for the years ended December 31, 1996, 1995 and 1994, respectively. The difference between taxable net income and net income is primarily related to depreciation expense resulting from difference in depreciation methods. 7. NOTES PAYABLE Notes payable at December 31, 1996 and 1995 consist of the following:
1996 1995 -------------- --------------- 10.3152% (9% after November 1, 1996) mortgage note payable to an insurance company with principal and interest due monthly; remaining principal due November 2002 $7,984,000 $8,356,000 Unsecured note payable, which bore interest at 1% above bank's prime rate with interest payable monthly, and requiring monthly principal payment of $18,000 - 246,000 -------------- --------------- $7,984,000 $8,602,000 ============== ===============
During 1986, the Partnership financed all of its properties with a $12,075,000, ten year nonrecourse note secured by the Partnership's properties. In September 1993, the General Partner and the lender agreed to modify the terms of the mortgage note payable, which the General Partner believed to be favorable to the Partnership. Under the modified terms (i) the interest rate was reduced from 10.3152% to 9.00% (effective November 1, 1996), and (ii) the maturity date was extended from November 1, 1996 to November 1, 2002 and (iii) the monthly debt service payments (principal and interest) were reduced from $112,400 to $100,000 based on a 25 year amortization period. To obtain the mortgage note modifications, the Partnership was required to make an initial prepayment of principal totaling $2,000,000. In order to make such prepayment, the Partnership used funds from cash reserves, the proceeds from a sale of marketable equity securities, and the proceeds from a $950,000 loan from PSI. The related unsecured promissory note bore interest at a rate of 10% (which is less than the interest rate on the pre-modified mortgage note), with interest only payments that were due monthly. Principal payments of $100,000 were made in 1993, and the remaining principal balance was repaid with proceeds obtained from a term loan with Wells Fargo Bank in March 1994. F-8 PUBLIC STORAGE PARTNERS II, LTD NOTES TO FINANCIAL STATEMENTS December 31, 1996 7. NOTES PAYABLE (CONTINUED) In January 1996, the partnership obtained a $230,000 loan from PSI to repay and terminate the unsecured note payable from Wells Fargo Bank. In December 1996, the loan was paid in full. The Partnership believes that it is not practical to estimate the fair value of its long-term fixed rate debt at December 31, 1996 because there is no public market for such debt and although interest rates at December 31, 1996, are lower than when such debt was incurred, the Partnership does not believe it could obtain financing currently on such favorable terms. This is in part due to the reduced sources of real estate financing resulting from a variety of factors, including the present condition of financial institutions. The principal repayment schedule of the above note payable as of December 31, 1996, is as follows: 1997 $502,000 1998 549,000 1999 601,000 2000 657,000 2001 718,000 Thereafter 4,957,000 ----------- $7,984,000 =========== Interest paid on the notes was $838,000, $939,000 and $977,000 for the years ended December 31, 1996, 1995 and 1994, respectively. F-9
Public Storage Partners II, Ltd. Schedule III - Real Estate and Accumulated Depreciation Initial Cost ------------------------ Building, Costs Subsequent Land Imp & to construction Description Encumbrances Land Equipment (Improvements) - ------------------------ ----------------- ------------ -------------- ----------------- Eagle Rock - $531,000 $758,000 $135,000 Long Beach - 343,000 727,000 124,000 Los Angeles - 298,000 686,000 182,000 San Dimas - 95,000 584,000 164,000 ----------------- ------------ -------------- ----------------- Total $7,984,000(1) $1,267,000 $2,755,000 $605,000 ================= ============ ============== =================
Public Storage Partners II, Ltd. Schedule III - Real Estate and Accumulated Depreciation Gross Carrying Amount at December 31, 1996 ------------------------------------ Building, Land Imp & Accumulated Date Description Land Equipment Total Depreciation Completed - ------------------------ --------- ----------- ---------- ------------- --------- Eagle Rock $531,000 $893,000 $1,424,000 $654,000 4/78 Long Beach 343,000 851,000 1,194,000 624,000 12/77 Los Angeles 298,000 868,000 1,166,000 621,000 5/78 San Dimas 95,000 748,000 843,000 535,000 12/77 - ------------------------ --------- ----------- ---------- ------------- --------- Total $1,267,000 $3,360,000 $4,627,000 $2,434,000 ========= =========== ========== =============
(1) All four properties are encumbered by a promissory note. The $7,984,000 listed above is the principal balance remaining on the note at December 31, 1996. F-10
Public Storage Partners II, Ltd. Real Estate Reconciliation Schedule III (continued) (a) The following is a reconciliation of costs and related accumulated depreciation: COST 1996 1995 1994 ------------- ------------ ------------ Balance at the beginning of the period $4,548,000 $4,461,000 $4,416,000 Additions during the period Improvements 79,000 87,000 45,000 Deductions during the period - - - ------------- ------------ ------------ Balance at the close of the period $4,627,000 $4,548,000 $4,461,000 ============= ============ ============ ACCUMULATED DEPRECIATION RECONCILIATION 1996 1995 1994 ------------- ------------ ------------ Balance at the beginning of the period $2,265,000 $2,117,000 $1,978,000 Additions during the period Depreciation 169,000 148,000 139,000 Deductions during the period - - - ------------- ------------ ------------ Balance at the close of the period $2,434,000 $2,265,000 $2,117,000 ============= ============ ============
F-11 EX-27 2 FDS --ARTICLE 5
5 0000275915 PUBLIC STORAGE PARTNERS II, LTD. 1 US 12-Mos Dec-31-1996 Jan-01-1996 Dec-31-1996 1 163,000 0 17,000 0 0 373,000 4,627,000 (2,434,000) 2,566,000 70,000 7,984,000 0 0 0 (5,488,000) 2,566,000 0 2,300,000 0 609,000 204,000 0 849,000 638,000 0 638,000 0 0 0 638,000 63.80 63.80
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