ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Armored Storage Income Investors 2 Limited Partnership (the "Registrant") is a limited partnership formed on January 13, 1986 under the laws of the State of California to acquire, develop, own and operate self-storage facilities using a minimum of mortgage indebtedness. The Registrant sold $2,105,000 in Limited Partnership Interests to the public pursuant to a Registration Statement on Form S-18 under the Securities Act of 1933 (Registration Statement No. 33-2732 as amended. The offering commenced on April 4, 1986 and terminated on April 3, 1987.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Registrant operates in only one industry segment, the acquisition, development, operation and holding for investment of self-storage facilities. Information relating to the Registrant's revenues, operating profit (loss) and identifiable assets attributable thereto for the fiscal year ended December 31, 1998 is set forth under Item 8 below.
(c) NARRATIVE DESCRIPTION OF BUSINESS
The Self-Service Storage Association (SSSA) estimates that approximately one-half of the population relocates every three years. Urban areas are becoming more congested, houses are getting smaller and people are requiring outside storage space to meet their needs. Business owners, too, are feeling the crunch as the square foot cost of office space increases. They need an affordable alternative to using expensive office space for the storage of records and supplies.
Self-storage is an innovation responding to the needs of the community. The facility owned and operated by the Registrant is designed to offer low cost, accessible and secure storage space for business and personal use. In addition to some indoor units, on-site, live-in managers provide an extra measure of security. The facility of the Registrant is designed for a comfortable architectural blend with the surrounding residential, commercial and retail areas.
The Partnership's principal investment objectives are: (i) to provide distributions of Cash Flow from operations; (ii) realize capital appreciation of the Partnership's Property; and (iii) to preserve and protect the Limited Partners' capital. There can be no assurance that these objectives will be attained.
MARKETS AND COMPETITION. The metropolitan Phoenix market has one of the greatest saturations of storage facilities per capita in the country. This increased competition has required delaying anticipated rental increases which may reduce availability of cash distributions. To meet the competition, the Registrant is, and intends to continue, taking steps to maximize efficient operations and to differentiate its facilities from the competition.
GENERAL RISKS OF REAL ESTATE OWNERSHIP. The Registrant's investments are subject to the risks generally incident to the ownership of real property. These risks include the uncertainty of cash flow to meet fixed obligations, adverse changes in national economic conditions, changes in the relative demand for space in the locale of the facility (and thus the relative price which can be charged), adverse local market conditions due to changes in general or local economic conditions or neighborhood values, changes in interest rates and in the availability, cost and terms of mortgage funds, the financial condition of tenants and sellers of properties, changes in real estate tax rates and other operating expenses, governmental rules and fiscal policies including possible proposals for rent controls, as well as acts of God, uninsured losses and other factors.
SEASONALITY. The business of the Registrant is not generally subject to seasonal variations.
EMPLOYEES. The Registrant has no full-time employees.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
The registrant does not derive any revenue from foreign operations or export sales.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTY
The Partnership owns one self-storage facility located in Phoenix, Arizona.
WASHINGTON STREET The Registrant's self-storage facility is located at 3036 E. Washington Street, Phoenix, Arizona, in the central part of the city, with close proximity to Sky Harbor International Airport and the downtown business center. The facility, which consists of both one and two level storage buildings, is approximately 44,000 gross square feet, built on approximately 1.82 acres of land. The property was acquired on December 23, 1986, for a total purchase price of $1,122,000. The facility was approximately 10 years old at the time of the Registrant's purchase, and had maintained an occupancy level averaging 90% for the past several years. As of February 28, 1999 the facility was 81% occupied.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
The registrant is not subject to any material pending legal proceedings.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS
(a) MARKET INFORMATION. No market for Limited Partnership Units exists or is expected to develop.
(b) HOLDERS. The approximate number of holders of the Registrant's Limited Partnership Units as of the close of business on December 31, 1998 was 337.
(c) DIVIDENDS. During the years ended December 31, 1992, through 1998, the Partnership made distributions of cash to the limited partners. The source of these distributions were as follows:
1992 1993 1994 1995 1996 1997 1998 ------- ------- ------- ------- ------- ------- ------- From net income $10,502 $ -0- $26,704 $ 9,585 $39,914 $35,115 $19,971 From partners' capital 23,481 33,975 7,271 28,305 2,186 28,035 43,179 ------- ------- ------- ------- ------- ------- ------- $33,983 $33,975 $33,975 $37,890 $42,100 $63,150 $63,150 ======= ======= ======= ======= ======= ======= =======
The Registrant will make annual distributions, to the extent available, of Cash Available for Distribution. There is, however, no assurance as to when or whether such cash will be available for distribution.
Cash Available for Distribution is generally the Partnership's Excess Reserves and Cash Flow after reduction for any additions to reserves, and after payment of all operating cash expenses.
To the extent available, Cash Available for Distribution for any Partnership fiscal year will be distributed 95% to the Limited Partners and 5% to the General Partner.
If in any period the General Partner determines that Partnership working capital reserves are in excess of the amount deemed necessary for Partnership operations (such excess being called "Excess Reserves"), such Excess Reserves may be distributed as Cash Available for Distribution.
Cash Available for Distribution will be distributed to the Limited Partners of record as of the end of the applicable period in the ratio which the Units owned by such Limited Partner bears to the total Units owned by all Limited Partners entitled to such distribution.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the financial statements and notes thereto included under Item 8 of this report. This data is not covered by the opinion of independent certified public accountants.
For the Period ------------------------------------------------------- From Inception Jan 1, 1991 Jan 1, 1992 Jan 1, 1993 Jan 1, 1994 Statement of Income Thru Thru Thru Thru Information: Dec 31, 1991 Dec 31, 1992 Dec 31, 1993 Dec 31, 1994 ------------ ------------ ------------ ------------ Total Revenues $ 174,295 $ 178,981 $ 168,868 $ 192,084 Net Income (Loss) $ (3,944) $ 11,055 $ (13,369) $ 28,109 Net Income (Loss) Per Limited Partnership Unit $ (.93) $ 2.49 $ (3.14) $ 6.34
Jan 1, 1995 Jan 1, 1996 Jan 1, 1997 Jan 1, 1998 Thru Thru Thru Thru Dec 31, 1995 Dec 31, 1996 Dec 31, 1997 Dec 31, 1998 ------------ ------------ ------------ ------------ Total Revenues $ 191,603 $ 222,536 $ 232,967 $ 217,933 Net Income (Loss) $ 10,089 $ 42,015 $ 36,963 $ 21,022 Net Income (Loss) Per Limited Partnership Unit $ 2.28 $ 9.48 $ 8.34 $ 4.74
Balance Sheet As of As of As of As of Information: Dec 31, 1991 Dec 31, 1992 Dec 31, 1993 Dec 31, 1994 ------------ ------------ ------------ ------------ Total Assets $ 1,145,802 $ 1,117,739 $ 1,076,397 $ 1,070,340 Long-Term Debt $-0- $-0- $-0- $-0- Partners' Capital $ 1,123,515 $ 1,103,365 $ 1,059,051 $ 1,055,872 Distributions Per Unit $ 8.07 $ 8.07 $ 8.07 $ 8.07
As of As of As of As of Dec 31, 1995 Dec 31, 1996 Dec 31, 1997 Dec 31, 1998 ------------ ------------ ------------ ------------ Total Assets $ 1,047,288 $ 1,051,247 $ 1,028,366 $ 990,763 Long-Term Debt $-0- $-0- $-0- $-0- Partners' Capital $ 1,027,688 $ 1,030,966 $ 1,006,757 $ 967,365 Distributions Per Unit $ 9.00 $ 10.00 $ 15.00 $ 15.00
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(a)(1) and (a)(2) LIQUIDITY AND CAPITAL RESOURCES
The Registrant was organized in January, 1986 and its offering of Limited Partnership Units was declared effective April 13, 1986. The Registrant raised $2,105,000 during the offering period.
The cash balance at December 31, 1998 of $63,113 will be used primarily as working capital reserves and, when appropriate, for distributions to the Limited Partners. Capital resources will only increase during the coming year as a result of a corresponding increase rental activity.
The registrant has acquired and developed all of its properties, therefore, no significant additional outlays of funds are expected beyond those items already budgeted.
(a)(3) RESULTS OF OPERATIONS
Rental income for 1998 was slightly lower than in 1997. An increase in vacancies was primarily responsible for the decrease. The Washington Street facility maintained an overall occupancy level of approximately 85%. During the year occupancy ranged from 78% to 88%. Occupancy at December 31, 1998 was 79%.
Expenses relating to property operations were similar to 1997. Partnership administration expenses were also similar to 1997.
The registrant anticipates that rental income in 1999 will be increased over 1998 as occupancies rebound. Our market studies indicate that our rates are competitive and future rent increases will be made on a selective basis. Expenses for 1999 should be similar to 1998 unless unforeseen circumstances occur.
Inflation has historically been a contributing factor to the increase in rental income levels and capital appreciation of income producing real estate. The most significant trends or uncertainties having an impact on the Partnership's revenues are those associated with inflation, changes in demand for self-storage spaces and fluctuations in rental and occupancy rates of the Partnership property. The modest inflation levels of the past several years have kept rent increases to a minimum. We continue to monitor the property's performance to maximize long-term capital appreciation which is consistent with the Partnership's objectives.
The Company's Assessment of its Year 2000 issues is complete. The Company has determined that there is likely to be no material adverse consequence of Year 2000 issues on the Company's business, results of operations, or financial condition. The Company has few information technology or non-information technology aspects which may be affected by Year 2000; those that may be affected are the computing system used to administer operations. Investigation and queries of the software and hardware supplier's have determined by written statements or other assurances that they are Year 2000 compliant. The Company has no major supplier, vendor, or customers which is likely to materially affect the Company if it is affected by the Year 2000 problem. The Company has determined that it is at little risk of material disruption of its business due to Year 2000 issues.
In the event the computing system fails, the company will purchase and replace the necessary hardware and software for critical systems and contact the software and hardware suppliers to replace, at their cost, the failed components for remaining computers. Costs for Year 2000 compliance have been for investigation only and no remedial actions have or will be taken. The costs have been minimal and are not material to the financial condition of the Company.
ITEM 8:
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Financial Statements and Schedules attached hereto.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership is managed by Armored Management, L.L.C., a limited liability company whose members include Carl R. Spiekerman and Dale D. Ulrich. Armored Management, L.L.C. was elected as general partner by a vote of the limited partners in the fourth quarter of 1993. The new general partner succeeds Armored Storage Ltd., which dissolved because of the dissolution of its sole general partner.
The partnership entered into an agreement with Armored Management, LLC to manage the Partnership's self-storage facility. The terms of the agreement are for one year and shall be renewed on a month-to-month basis unless and until either party terminates the agreement. The agreement provides that the manager shall receive, as compensation for services, the greater of $1000 per month or 6% of the actual gross cash receipts from the prior month.
The Partnership entered into an agreement with Armored Management, LLC to provide administrative services to the Partnership, such as investor relations, database management (including data processing of investor subscriptions, fund distributions, ownership changes, and subscription input), accounting, preparation and/or coordinating the preparation of periodic regulatory reports and tax related forms. The term of the agreement is one year and shall continue on a month-to-month basis unless either party terminates the agreement. The agreement provides that Armored Management, LLC shall receive a fixed fee of $3,000 per month as compensation for its services. Additionally, Armored Management, LLC bills the Partnership for its cost of providing assistance in the annual Partnership audit.
(a) IDENTIFICATION OF DIRECTORS
Carl R. Spiekerman and Dale D. Ulrich are the managing members of Armored Management L.L.C. Mr. Spiekerman, 55, is the sole shareholder and Chief Executive Officer of The Environmental Group, Inc., a Phoenix based real estate development firm. Mr. Spiekerman holds a Bachelor's Degree from the University of Puget Sound, Tacoma, Washington, and a Master's Degree from the University of Washington. Mr. Ulrich, 45, is a C.P.A. and also a panel trustee for the District of Arizona Bankruptcy Court and former president of the Arizona Society of CPA's. Mr. Ulrich graduated from Marquette University, Milwaukee, Wisconsin.
(b) IDENTIFICATION OF EXECUTIVE OFFICERS
None
(c) SIGNIFICANT EMPLOYEES
None
(d) FAMILY RELATIONSHIPS
None
(e) LEGAL PROCEEDINGS
None
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The General Partner, and its affiliates, earned fees, commissions, and expense reimbursements, as permitted in the Limited Partnership Agreement, as follows:
For the Year Ended: 12/31/98 12/31/97 12/31/96 -------- -------- -------- Direct expenses relating to administration of the Partnership which were reimbursed or are to be reimbursed to the Managing General Partner, or affiliates thereof None $2000 None
General Partner's distributive share of cash available for distribution $3325(1) $3323 425
Real estate commission upon the sale of Partnership property payable to the General Partner None(2) None None
General Partner's share of sale or refinancing proceeds None(3) None None
(1) Cash Available for Distribution, if any, shall be Distributed 95% to the Limited Partners, and 5% to the General Partner, with the General Partner's share subordinated to a 10% annual cumulative, noncompounded return with respect to the Limited Partners' Adjusted Capital Contribution.
If at any time the allocation and distribution provisions of the Limited Partnership Agreement do not result in the allocation or distribution to the General Partners of an aggregate of at least one percent (1%) of the item being allocated or distributed, the Limited Partnership Agreement states that the General Partners are to be allocated or distributed so much more of such item as will cause the General Partners to be allocated or distributed one percent (1%) thereof.
(2) The General Partner, or an affiliate, are entitled to receive a subordinated real estate commission in an amount not to exceed the lesser of one-half the amount customarily charged by others rendering similar services or 3% of the sale price.
(3) Sale or refinancing proceeds will be distributed to Limited Partners in accordance with their Capital Accounts in an amount equal to their Adjusted Capital Contributions, then to the Limited Partners in an amount, if any, by which actual Distributions of Cash Available for Distribution were less than the preferred 10% return, then to the General Partner, a subordinated unpaid 5% of Cash Available for Distribution, and the remaining 80% to the Limited Partners, and 20% to the General Partner.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is no person known to the Registrant who owns beneficially or of record more than 10% of the voting securities of the Registrant. However, the General Partner has discretionary control over most of the decisions made by or for the Registrant pursuant to the terms of the Partnership Agreement. The Registrant has no directors or officers.
As of December 31, 1998 Dale D. Ulrich, one of the members of the managing general partner, owns 43 limited partnership units constituting 1% of the total outstanding units.
There are no arrangements known to the Registrant, the operation of which may, at a subsequent date, result in a change in control of the Registrant.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended December 31, 1998 the General Partner received payment of $13,219 for property management fees, $36,000 for partnership administration services, and $5000 for assistance in the annual audit of the partnership.
During the year ended December 31, 1997 The Environmental Group, Inc., an affiliate of the General Partner, received or incurred $2000 in direct expense reimbursement for the administration of the Partnership.
During the years ended December 31, 1997 and 1996, QuestCor, Inc., an affiliate of the General Partner, was paid the following fees:
1997 1996 ------- ------- Property management $13,918 $13,313 Partnership administration $30,000 $30,000 Audit assistance $ 5,000 $ 5,000
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (a)(2) LIST OF FINANCIAL STATEMENTS AND SCHEDULES AS A PART OF THIS REPORT
Report of Independent Certified Public Accountants
FINANCIAL STATEMENTS Balance sheet Statement of operations Statement of changes in partners' equity Statement of cash flows Notes to financial statements
(a)(3) LIST OF EXHIBITS FILED AS PART OF THIS REPORT
None
(b) REPORTS ON FORM 8-K
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ARMORED STORAGE INCOME INVESTORS 2 LIMITED PARTNERSHIP
By: Armored Management, L.L.C.
Its: General partner
Dated: 3/24/99 By: /s/ Carl R. Spiekerman --------- -------------------------------- Carl R. Spiekerman, Member
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person in the capacity on the date indicated.
SIGNATURE TITLE DATE
/s/ Carl R. Spiekerman Member of Armored Management 3/24/99 - -------------------------- L.L.C., general partner ---------------- Carl R. Spiekerman
[LETTERHEAD OF TOBACK CPAs P.C.]
To the Partners of Armored Storage Income Investors 2 Phoenix, Arizona
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying balance sheets of Armored Storage Income Investors 2 (a California limited partnership) as of December 31, 1998 and 1997, and the related statements of operations, changes in partners' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Armored Storage Income Investors 2 as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles.
/s/ Toback CPAs, P.C.
TOBACK CPAs, P.C. Phoenix, Arizona January 27, 1999
ARMORED STORAGE INCOME INVESTORS 2 (A CALIFORNIA LIMITED PARTNERSHIP)
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
ASSETS
1998 1997 ----------- ----------- Rental property and equipment: Land $ 242,825 $ 242,825 Building 1,100,520 1,068,145 Furniture and fixtures 25,446 22,655 ----------- ----------- 1,368,791 1,333,625 Less accumulated depreciation (444,341) (407,462) ----------- -----------
924,450 926,163
Cash and cash equivalents 63,113 99,503 Accounts receivable, net of allowance of $3,200 and $2,700 3,200 2,700 ----------- -----------
Total assets $ 990,763 $ 1,028,366 =========== ===========
LIABILITIES AND PARTNERS' EQUITY
Accounts payable and accrued expenses $ 18,398 $ 15,609
Unearned rent 5,000 6,000 ----------- -----------
Total liabilities 23,398 21,609 ----------- ----------- Commitments (Note 3)
Partners' equity (Note 4): General partner (6,015) (3,742) Limited partners; 4,210 units outstanding 1,019,366 1,062,545 ----------- ----------- 1,013,351 1,058,803 Less amount due from former general partner (Note 5) (45,986) (52,046) ----------- ----------- 967,365 1,006,757 ----------- -----------
Total liabilities and partners' equity $ 990,763 $ 1,028,366 =========== ===========
The accompanying notes are an integral part of these financial statements.
ARMORED STORAGE INCOME INVESTORS 2 (A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 -------- -------- --------
Rental income $216,513 $231,117 $221,032 Interest income 1,420 1,850 1,504 -------- -------- --------
217,933 232,967 222,536 -------- -------- -------- Expenses: Property operations 103,495 107,676 95,154 Partnership administration (Note 3) 56,537 52,718 49,875 Depreciation 36,879 35,610 35,492 -------- -------- --------
196,911 196,004 180,521 -------- -------- --------
Net income $ 21,022 $ 36,963 $ 42,015 ======== ======== ======== Net income allocated to general partner $ 1,051 $ 1,848 $ 2,101
Net income allocated to limited partners 19,971 35,115 39,914 -------- -------- --------
Net income $ 21,022 $ 36,963 $ 42,015 ======== ======== ======== Net income allocated to limited partners per limited partnership unit (Note 4) $ 4.74 $ 8.34 $ 9.48 ======== ======== ======== Distributions per limited partnership unit $ 14.98 $ 14.98 $ 10.00 ======== ======== ======== Number of limited partnership units outstanding $ 4,210 4,210 4,210 ======== ======== ========
The accompanying notes are an integral part of these financial statements.
ARMORED STORAGE INCOME INVESTORS 2 (A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF CHANGES IN PARTNERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Amount due from former general General Limited partner partner partners Total ------- ------- -------- -----
Balance, December 31, 1995 (61,137) (3,941) 1,092,766 1,027,688
Distributions to partners -- (425) (42,100) (42,525) Payments received from former general partner 3,788 -- -- 3,788 Net income -- 2,101 39,914 42,015 -------- ------- ---------- ----------
Balance, December 31, 1996 (57,349) (2,265) 1,090,580 1,030,966
Distributions to partners -- (3,325) (63,150) (66,475) Payments received from former general partner 5,303 -- -- 5,303 Net income -- 1,848 35,115 36,963 -------- ------- ---------- ----------
Balance, December 31, 1997 (52,046) (3,742) 1,062,545 1,006,757
Distributions to partners -- (3,324) (63,150) (66,474) Payments received from former general partner 6,060 -- -- 6,060 Net income -- 1,051 19,971 21,022 -------- ------- ---------- ----------
Balance, December 31, 1998 $(45,986) $(6,015) $1,019,366 $ 967,365 ======== ======= ========== ==========
The accompanying notes are an integral part of these financial statements.
ARMORED STORAGE INCOME INVESTORS 2 (A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ---- ---- ---- Cash flows from operating activities: Cash received from customers $ 215,013 $ 231,017 $ 222,463
Cash paid to suppliers and service providers (157,243) (160,066) (144,979) Interest received 1,420 1,850 1,504 --------- --------- ---------
Net cash provided by operating activities 59,190 72,801 78,988 --------- --------- --------- Cash flows from investing activities: Purchase of rental property and equipment (35,166) -- (8,175) --------- --------- --------- Cash flows from financing activities: Distributions to limited partners (63,150) (63,150) (42,100) Distributions to general partner (3,324) (3,325) (425) Payments received on due from former general partner 6,060 5,303 3,788 --------- --------- ---------
Net cash used in financing activities (60,414) (61,172) (38,737) --------- --------- --------- (Decrease) increase in cash and cash equivalents (36,390) 11,629 32,076 Cash and cash equivalents: Beginning 99,503 87,874 55,798 --------- --------- ---------
Ending $ 63,113 $ 99,503 $ 87,874 ========= ========= =========
The accompanying notes are an integral part of these financial statements.
ARMORED STORAGE INCOME INVESTORS 2 (A CALIFORNIA LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ---- ---- ---- Reconciliation of net income to net cash provided by operating activities Net income $21,022 $36,963 $42,015 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 36,879 35,610 35,492 Changes in assets and liabilities: (Increase) decrease in accounts receivable (500) (1,100) 800 Increase in accounts payable and accrued expenses 2,789 328 50 (Decrease) increase in unearned rent (1,000) 1,000 631 ------- ------- ------- Net cash provided by operating activities $59,190 $72,801 $78,988 ======= ======= =======
The accompanying notes are an integral part of these financial statements.
ARMORED STORAGE INCOME INVESTORS 2 (A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
1. Partnership organization:
Armored Storage Income Investors 2 (the Partnership), was organized under the laws of the State of California pursuant to an agreement of limited partnership filed January 13, 1986, for the purpose of acquiring, developing, and operating self-service storage facilities in Phoenix, Arizona. As of December 31, 1993, the General Partner was Armored Storage, Ltd., a California Limited Partnership. Sales of the Partnership units commenced in April of 1986 as the Partnership was authorized to issue a total of 20,000 units for a total offering of $10,000,000. The Partnership reached its minimum funding requirement of 2,400 units of limited partnership interests on September 22, 1986, and has sold 4,210 units in total. The Partnership's offering period closed on April 3, 1987. In January 1994, Armored Management L.L.C. assumed the general partnership interest from Armored Storage, Ltd. as a result of a majority vote of the limited partners.
2. Summary of significant accounting policies:
Rental property and equipment:
Rental property and equipment are stated at cost. Depreciation is provided on the straight-line method over the following estimated useful lives:
Years ----- Building 30 Furniture and fixtures 5
Rental income and accounts receivable:
The Partnership generates rental income from month-to-month rental agreements for space at its self-storage facility on the accrual basis.
Accounts receivable are recorded for rental payments that are delinquent at year end. An allowance is recorded for management's estimate of uncollectible rental receivables. After a receivable is 90 days delinquent the contents of the units are generally sold and the proceeds are used to reduce the receivable balance.
Advertising:
Advertising costs are charged to operations as incurred.
ARMORED STORAGE INCOME INVESTORS 2 (A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. Summary of significant accounting policies, continued:
Accounting estimates:
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Income taxes:
The Partnership does not record a provision for income taxes as any income or loss from the Partnership is recognized by the individual partners for tax reporting purposes.
Differences between the tax bases and reported amounts of the Partnership assets and liabilities result from a difference in accumulated depreciation of approximately $50,000 at December 31, 1998 and capitalized syndication costs for tax purposes of approximately $280,000.
Cash and cash equivalents:
For reporting in the statements of cash flows, the Partnership considers all certificates of deposit and money market funds with a maturity of three months or less to be cash equivalents.
3. Commitments and related party transactions:
Prior to January 1, 1998, the Partnership operated under an agreement with Chris Cap Corporation dba QuestCor, Inc. (QuestCor) to manage the Partnership's self-storage facility. The agreement provided that the manager receive, as compensation for services, the greater of $1,000 per month or 6% of the gross cash receipts. On January 1, 1998, the Partnership entered into an agreement with similar terms for these services with Armored Management, L.L.C. The term of the agreement is for one year through December 31, 1998.
ARMORED STORAGE INCOME INVESTORS 2 (A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. Commitments and related party transactions, continued:
Prior to January 1, 1998, the Partnership had contracted with QuestCor to provide administrative services to the Partnership, such as investor relations, database management (including data processing of investor subscriptions, fund distributions, ownership changes, and subscription input), accounting, preparation and coordinating the preparation of periodic regulatory reports and tax related forms. The agreement provided for payment by the Partnership to QuestCor of $2,500 per month as compensation for its services. Additionally, the Partnership paid QuestCor $5,000 per year for providing assistance in the annual Partnership audit. A 50% member of Armored Management, L.L.C. is also a 50% shareholder of QuestCor. On January 1, 1998, the Partnership entered into a similar agreement for these services with Armored Management, L.L.C. The current year agreement provided for payment by the Partnership to Armored Management, L.L.C. of $3,000 per month as compensation for its services. Additionally, the Partnership pays Armored Management, L.L.C. $5,000 per year for providing assistance in the annual Partnership audit. The term of the agreement is for one year through December 31, 1998 and shall continue on a month-to-month basis unless either party terminates the agreement.
The following are the approximate fees paid to the related management companies for the years ended December 31, 1998, 1997 and 1996:
1998 1997 1996 ------- ------- ------- Property management $13,000 $14,000 $13,000 Partnership administration 36,000 30,000 30,000 Audit assistance 5,000 5,000 5,000
During the year ended December 31, 1997, the Partnership paid an affiliate of the General Partner $2,500 in direct expense reimbursements associated with a market study for the facility.
4. Partners' equity:
The Limited Partnership Agreement provides that profits, losses, and cash available for distribution shall be allocated as follows:
ARMORED STORAGE INCOME INVESTORS 2 (A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. Partners' equity, continued:
Allocation of net income:
Net income is to be allocated to the Limited Partners, ninety-five percent (95%) in accordance with their capital percentages and to the General Partner, five percent (5%), until such time as the Limited Partners have received in cash from all sources (other than cash available for distribution) an amount equal to one hundred percent (100%) of their capital contribution; thereafter to the Limited Partners, eighty percent (80%) in accordance with their capital percentages, and to the General Partner, twenty percent (20%).
Allocation of net loss:
Net losses are to be allocated to the Limited Partners, ninety-nine percent (99%) in accordance with their capital percentages and to the General Partner, one percent (1%), until such time as the Limited Partners have received distributions of cash from all sources (other than cash available for distribution) in an amount equal to one hundred percent (100%) of their capital contributions; thereafter to the Limited Partners, eighty percent (80%) in accordance with their capital percentages and to the General partner, twenty percent (20%).
Cash available for distribution:
Cash available for distribution, if any, realized by or available to the Partnership, shall be distributed no less frequently than annually in the following percentages: (1) to the Limited Partners, ninety-five percent (95%) in accordance with their capital percentages; and (2) to the General Partner five percent (5%).
Cash available for distribution is generally the Partnership's net cash flow less amounts set aside as reserves.
If in any period the General Partner determines that Partnership working capital reserves are in excess of the amount deemed necessary for Partnership operations, such excess reserves may be distributed as cash available for distribution.
Minimum allocation and distribution to the General Partners:
If, at any time, the allocation and distribution provisions of the Limited Partnership Agreement do not result in the allocation or distribution to the General Partner of an aggregate of at least one percent (1%) of the item being allocated or distributed, the Limited Partnership Agreement states that the General Partner is to be allocated or distributed so much more of such item as will cause the General Partner to be allocated or distributed one percent (1%) thereof.
ARMORED STORAGE INCOME INVESTORS 2 (A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. Partners' equity, continued:
Sale or refinancing proceeds:
Any sale or refinancing proceeds will be distributed to yield a 10% annual cumulative noncompounded return on Limited Partners' adjusted capital contributions determined as of the first day of each calendar year before the General Partner is entitled to participate.
5. Due from former General Partner:
Due from former General Partner (Armored Storage, Ltd.) represents a receivable of the Partnership for those amounts reimbursed to the former Managing General Partner for syndication fees incurred in excess of the percentage allowable by the Partnership's prospectus which was based on the total amount of limited partners' capital raised. At December 31, 1986, syndication fees of approximately $309,000 had been paid. On April 3, 1987, the offering was terminated. Based on actual units sold through the date of termination, excess syndication fees totaling approximately $113,000 were recorded as amounts due from the former General Partner.
Ascollateral for the receivable, Armored Storage One Limited Partnership (a related partnership through common general partners) assigned its partnership interests in any proceeds or distributions from Armored Storage Income Investors Limited Partnership to Armored Storage Income Investors 2 until such time as the indebtedness is satisfied.
6. Partnership administration and property operations:
Included in partnership administration and property operations are the following expenses:
1998 1997 1996 ------- ------- ------- Partnership administration: Accounting $13,835 $13,275 $12,860
Property operations: Advertising 2,092 18,145 4,479 Insurance 2,494 2,369 2,233 Management fee 13,219 13,918 13,313 Property taxes 36,183 30,460 29,467 Repairs and maintenance 5,756 2,933 6,343 Utilities 7,119 6,616 6,950 Wages and payroll taxes 26,330 23,774 22,975
ARMORED STORAGE INCOME INVESTORS 2 (A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. Impact of year 2000 (unaudited):
The Company's assessment of its Year 2000 issues is complete. The Company has determined that there is likely to be no material adverse consequence of Year 2000 issues on the Company's business, results of operations, or financial condition. The Company has few information technology or non-information technology aspects which may be affect by Year 2000; those that may be affected are the computing system used to administer operations. Investigation and queries of the software and hardware suppliers have determined by written statements or other assurances that they are Year 2000 compliant. The Company has no major supplier, vendor, or customers which is likely to materially affect the Company if it is affected by the Year 2000 problem. The Company has determined that it is at little risk of material disruption of its business due to Year 2000 issues.
In the event the computing system fails, the Company will purchase and replace the necessary hardware and software for critical systems and contact the software and hardware suppliers to replace, at their cost, the failed components for remaining computers. Costs for the Year 2000 compliance have been for investigation only and no remedial actions have or will be taken. The costs have been minimal and are not material to the financial condition of the Company.