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, 2005 or
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to .
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Commission File Number: 0-8667
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PUBLIC STORAGE PROPERTIES, LTD.
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(Exact name of Registrant as specified in its charter)
California 95-3196921
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
701 Western Avenue, Glendale, California 91201-2349
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 244-8080.
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
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(Title of class)
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Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [X] No [ ]
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, 2005:
1
Limited Partner Units, $500.00 Par Value - $12,770,000 (computed on the basis of
$1,700 per unit which was the highest reported sale price prior to the quarter
ended June 30, 2005).
The number of units outstanding of the registrant's classes of common equity as
of March 30, 2006:
Units of Limited Partnership Interest, $500.00 Par Value - 20,000 units
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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PART I
ITEM 1. BUSINESS
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Forward Looking Statements
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When used within this document, the words "expects," "believes,"
"anticipates," "should," "estimates," and similar expressions are intended to
identify "forward-looking statements" within the meaning of that term in Section
27A of the Securities Exchange Act of 1933, as amended, and in Section 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
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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
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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
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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.
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Operating Strategies
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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, together with its
predecessor, 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 91% and 92% in 2005 and 2004, respectively.
Annual realized rents per occupied square foot increased from $13.86 in
2004 to $14.69 in 2005.
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 4,030 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
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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
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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
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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
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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
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There are approximately 15 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
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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.
PUBLIC STORAGE'S PROPOSED ACQUISITION OF SHURGARD MAY SUBJECT THE
PARTNERSHIP TO ADDITIONAL RISKS.
Public Storage announced recently that it had entered into an agreement
to acquire Shurgard Storage Centers, Inc. ("Shurgard"), a publicly held REIT
that has interests in approximately 646 self-storage facilities located in the
United States and Europe.
There would be no change in the financial interests of the Partnership
if this acquisition of Shurgard is completed. However, because the self-storage
facilities of the Partnership and Public Storage are managed by Public Storage,
and the self-storage facilities owned by Shurgard would also be managed by
Public Storage, the merger could have potential negative impacts on the
Partnership, as follows:
o Difficulties in the integration of operations, technologies, and
personnel of Shurgard could negatively impact the operations of the
facilities managed by Public Storage, including the Partnership's.
o Public Storage's management attention to the integration and
acquisition of Shurgard could divert attention away from the
operations of the existing self-storage portfolio that it manages,
including the Partnership's properties.
o Individual Partnership properties could 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 commencing
management of the former Shurgard facilities, particularly with
respect to those facilities that are close to the Partnership's
facilities.
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,
2005. Local market conditions will play a significant part in how competition
7
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.
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.
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
8
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.
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, 2005 financial statements.
ITEM 1B. UNRESOLVED STAFF COMMENTS
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Not applicable.
ITEM 2. PROPERTIES
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The following table sets forth information as of December 31, 2005 about
properties owned by the Partnership:
Net Number Date Completion
Location Size of Parcel Rentable Area of Spaces of Purchase Date
- ---------------------- ---------------- ---------------- -------------- -------------------- ------------------
CALIFORNIA
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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 92% during 2004 and 91% during 2005.
9
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, 2005, the properties were not encumbered.
ITEM 3. LEGAL PROCEEDINGS
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Serrao v. Public Storage, Inc. (filed April 2003) (Superior Court -
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Orange County)
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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
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court of California - Los Angeles County)
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The Brinkley plaintiffs are suing PSI on behalf of a purported class of
California property managers who claim that they were not compensated for all
the hours they worked. The Brinkley suit is based upon California wage and hour
laws. The maximum potential liability cannot be estimated, but would be
increased if a class or classes are certified or, if claims are permitted to be
brought on behalf of others under the California Unfair Business Practices Act.
PSI is vigorously contesting the claims and intend to resist any expansion
beyond the named plaintiffs on the grounds of lack of commonality of claims. 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, 2005.
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, 2005, there were approximately 599 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, 2005 2004 2003 2002 2001
- ---------------------------- ------------------ ----------------- ------------------- ----------------- ------------------
Revenues $ 7,002,000 $ 6,593,000 $ 6,246,000 $ 5,938,000 $ 6,006,000
Depreciation and
amortization 181,000 217,000 454,000 516,000 533,000
Interest expense - - - 14,000 221,000
Net income 4,888,000 4,475,000 3,977,000 3,729,000 3,643,000
Limited partners' share 3,619,000 3,397,000 3,004,000 3,242,000 3,607,000
General partners' share 1,269,000 1,078,000 973,000 487,000 36,000
Limited partners'
per unit data (1):
Net income $180.95 $169.85 $150.20 $162.10 $180.35
Cash Distributions $183.00 $155.00 $140.00 $67.50 -
As of December 31,
- ---------------------------
Cash and cash equivalents $ 1,448,000 $ 1,407,000 $ 1,070,000 $ 538,000 $ 175,000
Total assets $ 4,639,000 $ 4,697,000 $ 4,422,000 $ 4,178,000 $ 4,242,000
Notes payable $ - $ - $ - $ - $ 2,000,000
(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 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,
2005. 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.
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.
12
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, 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.
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.
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003:
The Partnership's net income in 2004 was $4,475,000 compared to $3,977,000
in 2003, representing an increase of $498,000 or 13%. The increase is primarily
attributable to improved property operations at the Partnership's self-storage
facilities.
During 2004, property net operating income (rental income less cost of
operations, management fees paid to an affiliate and depreciation expense)
increased $491,000 or 12% from $4,015,000 in 2003 to $4,506,000 in 2004.
Rental income was $6,537,000 in 2004 compared to $6,201,000 in 2003,
representing an increase of $336,000, or 5%. The increase is attributable to an
increase in average occupancy at the Partnership's self-storage facilities.
Weighted average occupancy levels were 92% during 2004 compared to 90% during
2003. The average annual realized rent per square foot was $13.86 during 2004
compared to $13.43 during 2003.
13
Cost of operations (including management fees paid to an affiliate) was
$1,814,000 and $1,732,000 in 2004 and 2003, respectively, representing an
increase of $82,000, or 5%. This increase is primarily attributable to increases
in repair and maintenance expense, payroll and management fees (as a result of
higher revenues), partially offset by a decrease in office expense and
advertising expenses.
Depreciation expense was $217,000 for the year ended December 31, 2004
compared to $454,000 for the same period in 2003. The decrease in depreciation
expense is primarily related to the Partnership's buildings which were placed in
service in 1978 and 1979 becoming fully depreciated.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash flow from operating activities of $5,018,000 for the year ended
December 31, 2005 have been sufficient to meet all current obligations of the
Partnership. Capital improvements totaled $48,000 for the year ended December
31, 2005 compared to $152,000 in 2004 and $205,000 in 2003.
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
$3,660,000 ($183.00 per unit) and $1,269,000, respectively, for the year ended
December 31, 2005. We paid distributions to the limited and general partners
totaling $3,100,000 ($155.00 per unit) and $1,075,000, respectively, for the
year ended December 31, 2004. 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, 2005, 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.
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,
14
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 2005, 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
John G. Graul Senior Vice President and President, Self-storage Operations
David F. Doll Senior Vice President and President, Real Estate Group
Harvey Lenkin Director
B. Wayne Hughes, Jr. Director
Robert J. Abernethy Director
Dann V. Angeloff Director
William C. Baker Director
John T. Evans Director
Uri P. Harkham Director
Daniel C. Staton Director
B. Wayne Hughes, age 72, has been a director of the Company 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 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 and in the
acquisition and operation of self-storage facilities in Canada. 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 the Company's Board.
Ronald L. Havner, Jr., age 48, has been the Vice-Chairman, Chief Executive
Officer and a director of the Company since November 2002 and President since
July 1, 2005. Mr. Havner joined the Company in 1986 and has held a variety of
positions, including Chairman of the Company'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 of the
National Association of Real Estate Investment Trusts, Inc. (NAREIT) and a
director of Business Machine Security, Inc., The Mobile Storage Group and Union
BanCal Corporation.
Harvey Lenkin, age 69, retired as President and Chief Operating Officer of
the Company on June 30, 2005. Mr. Lenkin was employed by the Company or its
predecessor for 27 years and has been a member of the Board of Directors since
1991. He has been a director of the Company'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.
16
Robert J. Abernethy, age 66, Chairman of the Audit Committee and a member
of the Compensation Committee, has been President of American Standard
Development Company and of Self-Storage Management Company, which develop and
operate self-storage facilities, since 1976 and 1977, respectively. Mr.
Abernethy was controller of a division of Hughes Aircraft from 1972 to 1974. He
has been a director of the Company since its organization. He is a member of the
board of trustees of Johns Hopkins University, a director of the Los Angeles
Music Center, a member of the Board of Overseers of the Los Angeles
Philharmonic, a trustee of Loyola Marymount University, a director of the
Pacific Council on International Policy, a director of the Atlantic Council, a
member of the Council on Foreign Relations and a former California
Transportation Commissioner. Mr. Abernethy is a former member of the board of
directors of the Los Angeles County Metropolitan Transportation Authority and of
the Metropolitan Water District of Southern California, a former member of the
California State Board of Education, a former member of the California State
Arts Council, a former Planning Commissioner, a former Telecommunications
Commissioner and the former Vice-Chairman of the Economic Development Commission
of the City of Los Angeles. He received an M.B.A. from the Harvard University
Graduate School of Business.
Dann V. Angeloff, age 70, Chairman of the Nominating/Corporate Governance
Committee and a member of the Compensation Committee, has been President of the
Angeloff Company, a corporate financial advisory firm, since 1976. Mr. Angeloff
is currently the general partner of a limited partnership that in 1974 purchased
a self-storage facility operated by the Company. Mr. Angeloff has been a
director of the Company since its organization. He is a director of Bjurman,
Barry Fund, Inc., Nicholas/Applegate Fund, ReadyPac Foods, Retirement Capital
Group and SoftBrands, Inc.
William C. Baker, age 72, a member of Nominating/Corporate Governance
Committee, became a director of the Company 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 67, a member of the Audit Committee and of the
Nominating/Corporate Governance Committee, became a director of the Company 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 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 57, a member of the Compensation Committee, became a
director of the Company 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
warehouses and retail and mixed-use real estate in California.
B. Wayne Hughes, Jr., age 46, became a director of the Company in January
1998. He was employed by the Company from 1989 to 2002, serving as Vice
President - Acquisitions of the Company from 1992 to 2002. Mr. Hughes, Jr. is
currently Vice President of American Commercial Equities, LLC, a company engaged
in the acquisition and operation of commercial properties in California and is a
director of Canadian Mini-Ware Properties Ltd., a company engaged in the
acquisition, development and operation of self-storage facilities in Canada. He
is the son of B. Wayne Hughes.
Daniel C. Staton, age 53, Chairman of the Compensation Committee and a
member of the Audit Committee, became a director of the Company in March 1999 in
connection with the merger of Storage Trust Realty, a real estate investment
trust, with the Company. 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 President of
Walnut Capital Partners, 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
17
a director of Duke Realty Investments, Inc. from 1993 until August 1999. From
1981 to 1993, Mr. Staton was a principal owner of Duke Associates, the
predecessor of Duke Realty Investments, Inc. Prior to joining Duke Associates in
1981, he was a partner and general manager of his own moving company, Gateway
Van & Storage, Inc. in St. Louis, Missouri. From 1986 to 1988, Mr. Staton served
as president of the Greater Cincinnati Chapter of the National Association of
Industrial and Office Parks.
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: Robert J.
Abernethy (Chairman), John T. Evans, and Daniel Staton. The Board of PSI has
determined that the Chairman of the Audit Committee, Robert J. Abernethy and
Audit Committee member Daniel C. Staton, 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, 2006, 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
o9f 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 2005, PSI and H-G Family Corporation received $1,015,000
and $254,000, respectively, in distributions related to their general partner's
ownership interests.
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 2005, 2004 and 2003, the
Partnership paid fees of $413,000, $392,000 and $374,000, 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, 2005, 2004 and 2003 were $46,000, $79,000 and $52,000, respectively.
19
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
--------------------------------------
Fees billed to the Partnership by Ernst & Young LLP for 2004 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 $8,000 for 2004 and $11,000 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 $8,000 for 2004 and $10,000 for 2005.
Audit-Related Fees and Other Fees: During 2004 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.
10.3 Credit Agreement dated October 23, 1998 between Public Storage
Properties, Ltd. and First Union Bank. Previously filed with the
Securities and Exchange Commission as an exhibit to the Partnership's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998
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 31, 2006 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 ublic 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 31, 2006
- ---------------------------------------
Ronald L. Havner, Jr.
General Partner and Chairman of the Board of
/s/ B. Wayne Hughes Public Storage, Inc. March 31, 2006
- ---------------------------------------
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 31, 2006
- ---------------------------------------
John Reyes
/s/ Harvey Lenkin Director of Public Storage, Inc. March 31, 2006
- ---------------------------------------
Harvey Lenkin
/s/ B. Wayne Hughes, Jr. Director of Public Storage, Inc. March 31, 2006
- ---------------------------------------
B. Wayne Hughes, Jr.
/s/ Robert J. Abernethy Director of Public Storage, Inc. March 31, 2006
- ---------------------------------------
Robert J. Abernethy
/s/ Dann V. Angeloff Director of Public Storage, Inc. March 31, 2006
- ---------------------------------------
Dann V. Angeloff
/s/ William Baker Director of Public Storage, Inc. March 31, 2006
- ---------------------------------------
William C. Baker
/s/ John T. Evans Director of Public Storage, Inc. March 31, 2006
- ---------------------------------------
John T. Evans
/s/ Uri P. Harkham Director of Public Storage, Inc. March 31, 2006
- ---------------------------------------
Uri P. Harkham
/s/ Daniel C. Staton Director of Public Storage, Inc. March 31, 2006
- ---------------------------------------
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, 2005 and 2004 F-2
For the years ended December 31, 2005, 2004 and 2003:
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, 2005 and 2004, and the related
statements of income, partners' equity and cash flows for each of the three
years in the period ended December 31, 2005. 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, 2005 and 2004, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2005, 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 27, 2006
Los Angeles, California
F-1
PUBLIC STORAGE PROPERTIES, LTD.
BALANCE SHEETS
December 31, 2005 and 2004
2005 2004
---------------------- ---------------------
ASSETS
------
Cash and cash equivalents $ 1,448,000 $ 1,407,000
Rent and other receivables 69,000 35,000
Real estate facilities, at cost:
Building, land improvements and equipment 9,622,000 9,574,000
Land 2,476,000 2,476,000
---------------------- ---------------------
12,098,000 12,050,000
Less accumulated depreciation (9,004,000) (8,823,000)
---------------------- ---------------------
3,094,000 3,227,000
Other assets 71,000 68,000
---------------------- ---------------------
Total assets $ 4,682,000 $ 4,737,000
====================== =====================
LIABILITIES AND PARTNERS' EQUITY
--------------------------------
Accounts payable $ 88,000 $ 82,000
Deferred revenue 163,000 183,000
Commitments and contingencies (Note 8) - -
Partners' equity
Limited partners' equity, $500 per unit, 20,000 units
authorized, issued and outstanding 3,290,000 3,321,000
General partners' equity 1,141,000 1,151,000
---------------------------- ---------------
Total partners' equity 4,431,000 4,472,000
---------------------- ---------------------
Total liabilities and partners' equity $ 4,682,000 $ 4,737,000
====================== =====================
See accompaning notes.
F-2
PUBLIC STORAGE PROPERTIES, LTD.
STATEMENTS OF INCOME
For the years ended December 31, 2005, 2004 and 2003
2005 2004 2003
---------------------- ----------------------- -------------------------
REVENUES:
Rental income $ 6,879,000 $ 6,537,000 $ 6,201,000
Other income 123,000 56,000 45,000
---------------------- ----------------------- -------------------------
7,002,000 6,593,000 6,246,000
---------------------- ----------------------- -------------------------
COSTS AND EXPENSES:
Cost of operations 1,423,000 1,422,000 1,358,000
Management fees paid to affiliate 413,000 392,000 374,000
Depreciation 181,000 217,000 454,000
Administrative 97,000 87,000 83,000
---------------------- ----------------------- -------------------------
2,114,000 2,118,000 2,269,000
---------------------- ----------------------- -------------------------
NET INCOME $ 4,888,000 $ 4,475,000 $ 3,977,000
====================== ======================= =========================
Limited partners' share of net income ($180.95 per
unit in 2005, $169.85 per unit in 2004 and
$150.20 per unit in 2003) $ 3,619,000 $ 3,397,000 $ 3,004,000
General partners' share of net income 1,269,000 1,078,000 973,000
---------------------- ----------------------- -------------------------
$ 4,888,000 $ 4,475,000 $ 3,977,000
====================== ======================= =========================
See accompanying notes.
F-3
PUBLIC STORAGE PROPERTIES, LTD.
STATEMENTS OF PARTNERS' EQUITY
For the years ended December 31, 2005, 2004 and 2003
Total Partners'
Limited Partners General Partners Equity
---------------------- --------------------- ----------------------
Balance at December 31, 2002 2,944,000 1,022,000 3,966,000
Net income 3,004,000 973,000 3,977,000
Distributions paid to partners (2,800,000) (971,000) (3,771,000)
Equity transfer (51,000) 51,000 -
` --------------------- --------------------- ----------------------
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
====================================================================
See accompanying notes.
F-4
PUBLIC STORAGE PROPERTIES, LTD.
STATEMENTS OF CASH FLOWS
For the years ended December 31, 2005, 2004 and 2003
2005 2004 2003
----------------- ----------------- ------------------
Cash flows from operating activities:
Net income $ 4,888,000 $ 4,475,000 $ 3,977,000
Adjustments to reconcile net income to net cash provided by
operating ctivities:
Depreciation 181,000 217,000 454,000
(Increase) decrease in rent and other receivables (34,000) 12,000 2,000
(Increase) decrease in other assets (3,000) (19,000) 23,000
Increase (decrease) increase in accounts payable 6,000 (28,000) 36,000
(Decrease) increase in deferred revenue (20,000) 7,000 16,000
----------------- ----------------- ------------------
Total adjustments 130,000 189,000 531,000
----------------- ----------------- ------------------
Net cash provided by operating activities 5,018,000 4,664,000 4,508,000
----------------- ----------------- ------------------
Cash flows from investing activities:
Additions to real estate facilities (48,000) (152,000) (205,000)
----------------- ----------------- ------------------
Net cash used in investing activities (48,000) (152,000) (205,000)
----------------- ----------------- ------------------
Cash flows from financing activities:
Distributions paid to partners (4,929,000) (4,175,000) (3,771,000)
----------------- ----------------- ------------------
Net cash used in financing activities (4,929,000) (4,175,000) (3,771,000)
----------------- ----------------- ------------------
Net increase in cash and cash equivalents 41,000 337,000 532,000
Cash and cash equivalents at the beginning of the year 1,407,000 1,070,000 538,000
----------------- ----------------- ------------------
Cash and cash equivalents at the end of the year $ 1,448,000 $ 1,407,000 $ 1,070,000
================= ================== ==================
See accompanying notes.
F-5
PUBLIC STORAGE PROPERTIES, LTD.
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
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. Television, yellow page, and other advertising
expenditures totaled $222,000, $226,000 and $233,000 for the years ended
December 31, 2005, 2004 and 2003, 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, 2005
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, 2005, 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, 2005.
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, 2005.
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.
Deferred revenue:
-----------------
Deferred revenue totaling $163,000 and $183,000 for each of
the years ended December 31, 2005 and 2004, respectively, consists of
prepaid rents, which are recognized when earned.
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 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, 2006, there have been no recent accounting
pronouncements and guidance, which were not effective for implementation
prior to December 31, 2005, that would have a material impact upon
reporting the operations or financial position of the Partnership.
F7
PUBLIC STORAGE PROPERTIES, LTD.
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
Segment Reporting:
------------------
The Partnership only has one reportable segment as defined
within Statement of Financial Accounting Standards No. 131.
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 2004, we paid distributions to the limited and general
partners totaling $3,100,000 ($155.00 per unit) and $1,075,000,
respectively. During 2005, we paid distributions to the limited and
general partners totaling $3,660,000 ($183.00 per unit) and $1,269,000,
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 2005, 2004 and 2003,
the Partnership paid PSI $413,000, $392,000 and $374,000, 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 $703,000, $704,000 and $702,000 for the years
ended December 31, 2005, 2004, and 2003, 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, 2005
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, 2005.
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):
2005 2004
------------------- -------------------
(Amount in thousands)
For the year ended December 31,
-------------------------------
Premiums earned (a)............................. $ - $ 3,994
Net investment income........................... 663 677
Loss and loss adjustment expense................ 900 (2,948)
Other expenses.................................. (349) (200)
------------------- -------------------
Net income................................... $ 1,214 $ 1,523
=======================================
At December 31,
---------------
Total assets (primarily cash and other $ 26,876 $ 31,326
investments).................................
Liabilities for losses and loss adjustment 13,784 20,227
expenses.....................................
Other liabilities............................... 208 -
Member's surplus................................ 12,884 11,099
(a) Effective April 1, 2004, STOR-Re ceased providing
insurance for losses occurring after April 1, 2004, and was succeeded
with respect to these activities by PSIC-H, a wholly owned subsidiary of
PSI. Accordingly, premiums and associated loss expense for losses
occurring after March 31, 2004 are not included in this table.
Premiums paid to the Captive Entities for the years ended
December 31, 2005, 2004 and 2003 were $46,000, $79,000 and $52,000,
respectively.
F-9
PUBLIC STORAGE PROPERTIES, LTD.
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
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, $35,000
and $35,000 for the years ended December 31, 2005, 2004 and 2003,
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.
Unaudited taxable net income was $4,874,000, $4,505,000 and
$4,081,000 for the years ended December 31, 2005, 2004 and 2003,
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, 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
Three Months Ended
--------------------------------------------------------------------------------
March 31, 2004 June 30, 2004 September 30, 2004 December 31, 2004
----------------- ------------------- --------------------- --------------------
Rental Income $ 1,572,000 $ 1,601,000 $ 1,666,000 $ 1,698,000
Cost of Operations (including
management fees and depreciation) $ 520,000 $ 523,000 $ 496,000 $ 492,000
Net Income $ 1,039,000 $ 1,063,000 $ 1,166,000 $ 1,207,000
Net Income Per Limited Partner Unit $ 39.75 $ 39.30 $ 44.40 $ 46.40
Distributions $ 943,000 $ 1,077,000 $ 1,078,000 $ 1,077,000
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
F-10
PUBLIC STORAGE PROPERTIES, LTD.
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
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 Brinkley plaintiffs are suing PSI on behalf of a purported
class of California property managers who claim that they were not
compensated for all the hours they worked. The Brinkley suit is based
upon California wage and hour laws. The maximum potential liability
cannot be estimated, but would be increased if a class or classes are
certified or, if claims are permitted to be brought on behalf of
others under the California Unfair Business Practices Act. PSI is
vigorously contesting the claims and intend to resist any expansion
beyond the named plaintiffs on the grounds of lack of commonality of
claims. 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, 2005
Initial Cost
-------------------------------
Building, Costs Subsequent to
Land Imp & construction
Description Land Equipment (Improvements)
- --------------------------- ------------- ------------- --------------------
Pasadena $327,000 $515,000 $297,000
Whittier - El Monte 166,000 763,000 380,000
Fremont 112,000 741,000 376,000
Milpitas 198,000 649,000 279,000
Wilmington 815,000 1,336,000 681,000
Sun Valley 329,000 611,000 335,000
Corona 155,000 757,000 348,000
Norco 95,000 456,000 198,000
North Hollywood 314,000 553,000 312,000
-------------- ------------- --------------------
$2,511,000 $6,381,000 $3,206,000
============== ============== =====================
Gross Carrying Amount
at December 31, 2005
--------------------------------------------
Building,
Land Imp & Accumulated Date
Description Land Equipment Total Depreciation Completed
- --------------------------- ----------------- ----------------- ------------- --------------- -----------
Pasadena $327,000 $812,000 $1,139,000 $769,000 08/78
Whittier - El Monte 134,000 1,175,000 1,309,000 1,115,000 07/78
Fremont 112,000 1,117,000 1,229,000 1,090,000 11/78
Milpitas 195,000 931,000 1,126,000 829,000 11/78
Wilmington 815,000 2,017,000 2,832,000 1,912,000 08/78
Sun Valley 329,000 946,000 1,275,000 914,000 10/78
Corona 155,000 1,105,000 1,260,000 1,009,000 12/78
Norco 95,000 654,000 749,000 586,000 12/78
North Hollywood 314,000 865,000 1,179,000 780,000 12/79
---------------- ----------------- ------------- --------------- -----------
$2,476,000 $9,622,000 $12,098,000 $9,004,000
================= ================= =============== ===============
F-12
Public Storage Properties, Ltd.
Schedule III - Real Estate and Accumulated Depreciation
(continued)
Reconciliation of Real Estate Cost and Accumulated Depreciation
COST RECONCILIATION
2005 2004
---------------- -----------------
Balance at the beginning of the period $ 12,050,000 $ 11,898,000
Additions during the period: Improvements 48,000 152,000
---------------- -----------------
Balance at the close of the period $ 12,098,000 $ 12,050,000
ACCUMULATED DEPRECIATION RECONCILIATION
2005 2004
---------------- -----------------
Balance at the beginning of the period $ 8,823,000 $ 8,606,000
Additions during the period: Depreciation 181,000 217,000
---------------- -----------------
Balance at the close of the period $ 9,004,000 $ 8,823,000
===================================
(a) The aggregate depreciable cost prior to depreciation of real estate
(excluding land) for Federal income tax purposes is $9,291,000 (unaudited
F-13