Item 1. BUSINESS
INTRODUCTION
Argonaut Group, Inc. ("Argonaut Group") is a holding company whose subsidiaries are primarily engaged in the selling, underwriting, and servicing of workers compensation and other lines of property-casualty insurance. Workers compensation accounted for 86% of premiums in 1994. See "Item 6. Selected Financial Data" for certain financial information regarding industry segments in which the Company operates. Argonaut Group was incorporated in Delaware and was a wholly-owned subsidiary of Teledyne, Inc. ("Teledyne") until 1986, when Teledyne distributed to its shareholders all of the outstanding shares of common stock of Argonaut Group. Argonaut Group's executive offices are located at 1800 Avenue of the Stars, Suite 1175, Los Angeles, California 90067, telephone 310.553.0561. The term "the Company" refers to Argonaut Group and all its subsidiaries.
Argonaut Insurance Company ("Argonaut Insurance"), Argonaut Group's larger insurance subsidiary, was established in California in 1948. Workers compensation is the primary line of insurance written by Argonaut Insurance and its subsidiaries: Argonaut-Midwest Insurance Company, Argonaut-Northwest Insurance Company, Argonaut-Southwest Insurance Company, and Georgia Insurance Company. Argonaut Insurance and these subsidiaries also write complementary lines of commercial insurance for their clients, primarily consisting of general and automobile liability.
Great Central Insurance Company ("Great Central") is Argonaut Group's other principal insurance subsidiary. Established in Illinois in 1948, Great Central specializes in providing commercial multiple peril insurance for certain classes of insureds. Argonaut Insurance is Great Central's immediate parent.
AGI Properties, Inc. ("AGI Properties"), a non-insurance company, owns and leases certain real properties. AGI Properties was incorporated in California in 1970. Argonaut Insurance is AGI Properties' immediate parent.
PRODUCTS
The Company has two primary product lines: workers compensation insurance and other property-casualty insurance. Incorporated herein by reference is the information appearing as "Note 9 - Business Segments" in the Notes to the Consolidated Financial Statements of the Annual Report. See Exhibit Index.
WORKERS COMPENSATION
Workers compensation insurance is a statutory system which provides for compensation of a policyholder's employees and their dependents for injuries (other than self-inflicted wounds) arising out of or suffered in the course of the employee's
employment, even though the injuries may have resulted from the negligence or wrongful conduct of the employee himself or any other person. Workers compensation insurance is sold primarily by Argonaut Insurance. Premiums for this line of business were $240.2 million, $280.0 million, and $289.6 million, in 1994, 1993, and 1992, respectively.
OTHER PROPERTY-CASUALTY INSURANCE
This product includes general and automobile liability, commercial multiple- peril, and various other insurance coverages.
Argonaut Insurance offers general and automobile liability and other insurance to commercial clients in conjunction with workers compensation insurance. Liability insurance compensates third parties for damages resulting from the actions of the insured.
Commercial multiple-peril insurance, Great Central's primary product, is a composite product designed for the small-to-medium sized business which needs basic insurance coverage and simple insurance administration. Commercial multiple-peril policies generally cover property, plant, inventory, general liability, and associated coverages. Premiums for these product lines were $39.5 million, $35.4 million, and $38.8 million, in 1994, 1993, and 1992, respectively.
CEDED REINSURANCE
The Company's policy regarding reinsurance is based upon the capitalization of the subsidiaries. The goal is to limit the exposure to surplus from losses resulting from catastrophes and large or unusually hazardous risks.
As is the case with direct premiums written, premium revenue on reinsurance contracts is recognized ratably over the period to which the premium relates.
Argonaut Insurance's limit of retention on its primary reinsurance treaty is $2 million. Great Central's limit of retention on its primary reinsurance treaty is $300,000.
Incorporated herein by reference is the information appearing as "Note 3 - Reinsurance" in the Notes to the Consolidated Financial Statements of the Annual Report. See Exhibit Index.
COMPETITION
The property-casualty insurance industry is characterized by a large number of competing companies and modest market shares by industry participants. According to A.M. Best, a leading insurance industry rating and analysis firm, there are about 2,300 property-casualty insurance companies operating in the United States, with the 200 largest companies writing about 80% of the industry's premiums.
The Company's principal competitors cannot be easily classified. The Company's
principal lines of business are written by numerous insurance companies. Competition for any one account may come from a very large national firm or a smaller regional company selling either directly or through agents and brokers. For the Company's principal line of business, workers compensation, additional competition comes from state workers compensation funds.
REGULATION
On November 8, 1988, California voters passed an initiative known as Proposition 103. The Proposition, in part, provides for a roll-back of rates for certain lines of business (excluding workers compensation) to 20% below rate levels of November 8, 1987. The new California Insurance Commissioner has requested that the Company meet with the Insurance Department to resolve what liability, if any, it has under Proposition 103. While we have agreed to do so, management believes that the Company is in compliance with such roll-back requirements, and that any potential contingent liability would be immaterial. Therefore, there is no provision in the accompanying financial statements for any liability or loss related to Proposition 103.
Beginning in 1994, the Company's insurance subsidiaries are subject to the Risk- Based Capital (RBC) for Insurers Model Act. The RBC calculation takes into account: (1) asset risk, (2) credit risk, (3) underwriting risk, and (4) all other relevant risks. The RBC for Insurers Model Act provides for four levels of regulatory authority: (1) Company Action Level Event, (2) Regulatory Action Level Event, (3) Authorized Control Level Event, and (4) Mandatory Control Level Event. These four levels of authority provide for ever increasing regulatory remedies for companies that fail to comply with the RBC for Insurers Model Act.
As of December 31, 1994, preliminary calculations show that the Company's insurance subsidiaries RBC coverage far exceeds the minimum required.
The Company's insurance subsidiaries are members of the statutorily created insolvency guarantee associations in all states where they are authorized to transact business. These associations were formed for the purpose of paying claims of insolvent companies. The Company is assessed its pro rata share of such claims based upon its premium writings, subject to a maximum annual assessment per line of insurance. Such costs can generally be recovered through surcharges on future premiums. The Company does not believe that assessments on current insolvencies will have a material effect on its financial condition or results of operations.
The Company has no policyholder dividend restrictions.
Under the provisions of the California Insurance Code, there is a maximum amount of shareholder dividends which can be paid without prior approval of the Insurance Commissioner. Under these provisions, as of December 31, 1994, Argonaut Insurance could pay to Argonaut Group a maximum dividend of $57.6 million without the Insurance Commissioner's approval.
MARKETING
Argonaut Insurance and Great Central Insurance operate in substantially different markets.
Argonaut Insurance is licensed to write insurance in 50 states and the District of Columbia. Its products are distributed primarily through agents and brokers. Argonaut Insurance's target markets are companies whose workers compensation needs will result in annual premiums of between $250,000 and $5 million and classes of insurance which require specialized knowledge to (a) underwrite prudently and (b) control losses through cooperative efforts to enhance the safety of the workplace. These classes include (a) contractors, (b) wholesalers, retailers, light manufacturers and service firms, and (c) clients who use self-insurance plans to meet some or all of their insurance needs.
Argonaut Insurance's primary line of business, workers compensation insurance, accounts for 91% of its premiums (81% of total consolidated premiums). These policies are written on a retrospectively rated basis. Argonaut Insurance's risk regarding inadequate price levels is mitigated to a certain extent as the insured will have to pay additional premiums (or will be refunded premiums) based upon their actual loss experience.
Great Central is authorized to operate in 33 states and considers itself to be a specialty company with a defined target market. Great Central's dominant product is commercial multiple-peril. Great Central's policies are marketed through agents.
Neither Argonaut Insurance nor Great Central market any of their policies through managing general agents.
RUN OFF LINES
Incorporated herein by reference is the information appearing as "Note 12 - Run Off Lines" in the Notes to the Consolidated Financial Statements of the Annual Report. See Exhibit Index.
Loss ratios for the run off line of business are not meaningful as there are no premiums associated with this line of business.
INVESTMENTS
The Company's investment portfolio continues to emphasize high quality fixed income investments. As a percentage of the total investment portfolio, U.S. Treasury securities continue to comprise the majority of the Company's holdings. Obligations of states and political subdivisions have decreased from 1993 as a result of maturities and sales. The proceeds from these maturities and sales were re-invested in high quality non-redemptive preferred stocks. Corporate securities continue to decrease as a result of maturities.
The Company's investment policy is to invest only in investment-grade securities. We do not invest in high-yield or so called "junk bonds". We have no derivatives, speculative real estate, or mortgage obligations.
Incorporated herein by reference is the information appearing as "Note 2 - Investments" and "Note 7 - Net Investment Income" in the Notes to the Consolidated Financial Statements of the Annual Report. See Exhibit Index.
RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
Incorporated herein by reference is the information appearing as "Note 4 - Reserves for Losses and Loss Adjustment Expenses" in the Notes to the Consolidated Financial Statements of the Annual Report. See Exhibit Index.
Reserves for environmental claims were $23.4 million and $32.8 million at December 31, 1994 and 1993, respectively.
The following tables indicate the manner in which reserves for losses and loss adjustment expenses at the end of a particular year change as time passes. The first table presented is net of the effects of reinsurance. The second table presented includes only amounts related to direct insurance. Reserves for losses and loss adjustment expenses and cumulative paid amounts on direct insurance are not available prior to 1989; therefore, the second table reflects only the past 6 years development.
The first line shows the reserves as originally reported at the end of the stated year. The second section shows the cumulative amounts paid as of the end of successive years related to those reserves. The third section shows the original recorded reserves as of the end of successive years adjusted to reflect facts and circumstances later discovered. The last line, cumulative deficiency or redundancy, compares the adjusted reserves to the reserves as originally established and shows that the reserves as originally recorded were either inadequate or excessive to cover the estimated cost of claims as of December 31, 1994.
Conditions and trends that have affected the development of these reserves in the past will not necessarily recur in the future. It would not be appropriate to use this cumulative history in the projection of future performance.
CAPITAL ADEQUACY
Several measures of capital adequacy are common in the property-casualty industry. The two most often used are (a) premium-to-surplus (which measures pressures on capital from inadequate pricing) and, (b) reserves-to-surplus (which measures pressure on capital from inadequate loss and loss adjustment expense reserves).
The following table shows the consolidated premium-to-surplus and reserves-to- surplus ratios of the Company's insurance subsidiaries (on a statutory basis).
Year Ended December 31, ------------------------------ 1994 1993 1992 ----- ----- ----- Ratio of: Premium-to-surplus 0.4 0.5 0.5 ==== ==== ====
Reserves-to-surplus 1.6 1.9 2.3 ==== ==== ====
The Company believes that its 1994 capital ratios are satisfactory.
RATINGS
The Company's insurance subsidiaries are rated annually by A.M. Best. A.M. Best is generally considered to be the leading insurance rating agency, and its ratings are used by insurance buyers, agents and brokers, and other insurance companies as an indicator of financial strength and security, and are not intended to reflect the quality of the rated company for investment purposes. Argonaut Insurance and its pooled subsidiaries were awarded an "A+" (Superior) rating in 1994 and 1993. An "A+" rating is the second highest rating A.M. Best awards. Great Central is rated separately and was awarded an "A-" (Excellent) rating in both 1994 and 1993. "A-" is the fourth highest of A.M. Best's ratings.
During 1994, Standard & Poor's assigned its "AA+" rating to the claims-paying ability of Argonaut Insurance and its pooled subsidiaries.
EMPLOYEES
At December 31, 1994, the Company employed 631 full-time employees. Of this total, Argonaut Insurance employed 523 people (389 professional managerial and 134 clerical/operational). Great Central employed 94 people (56 professional managerial and 38 clerical/operational). Argonaut Group employed 14 people (11 professional managerial and 3 clerical/operational). The Company is not a party to any collective bargaining agreements.
Item 2.

Item 2. PROPERTIES
Argonaut Insurance's headquarters are located in a facility which consists of an office building on approximately two acres of land in Menlo Park, California. Great Central's headquarters are located in a facility in Peoria, Illinois. Argonaut Insurance and Great Central own the buildings in which their headquarters are located. In addition, the Company has entered into short term leases in conjunction with its operations at various locations throughout the country. The Company believes that its properties are adequate for its present needs.
Item 3

Item 3 LEGAL PROCEEDINGS
The insurance subsidiaries of Argonaut Insurance are parties to various legal proceedings which are considered routine and incidental to their business and are not material to the Company's financial condition or results of operations.
Item 4.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Argonaut Group's security holders during the last quarter of its fiscal year ended December 31, 1994.
Part II
Item 5.

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's common stock is traded in the over-the-counter market and is included in the NASDAQ National Market System. The closing price on February 28, 1995 was $30.750 per share. The information on high and low common stock prices set forth under the caption "Common Stock Market Prices" in the Annual Report to Shareholders of Argonaut Group for the fiscal year ended December 31, 1994, is incorporated herein by reference. See Exhibit Index.
HOLDERS OF COMMON STOCK
The number of holders of record of the Company's Common Stock as of February 28, 1995 was 10,291.
DIVIDENDS
The information set forth under the caption "Management's Discussion and Analysis of Results of Operations and Financial Condition - Liquidity and Capital Resources" in the Annual Report to Shareholders of Argonaut Group for the fiscal year ended December 31, 1994 and in "Note 6 - Shareholders' Equity" in the Notes to the Consolidated Financial Statements of the Annual Report, is incorporated herein by reference. See Exhibit Index.
Item 6.

Item 6. SELECTED FINANCIAL DATA
The information set forth under the caption "Selected Financial Data" in the Annual Report to Shareholders of Argonaut Group for the fiscal year ended December 31, 1994, is incorporated herein by reference. See Exhibit Index.
Item 7.

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information set forth under the caption "Management's Discussion and Analysis of Results of Operations and Financial Condition" in the Annual Report to Shareholders of Argonaut Group for the fiscal year ended December 31, 1994, is incorporated herein by reference. See Exhibit Index.
Item 8.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Public Accountants and consolidated financial statements and related notes of Argonaut Group, Inc. and subsidiaries listed on the index to financial statements set forth in Item 14(a)1 of this Form 10-K Report are incorporated herein by reference to the Annual Report to Shareholders of Argonaut Group for the fiscal year ended December 31, 1994.
The Company does not identify each asset with any one line of business and any such allocation would be arbitrary.
Item 9.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Part III
Item 10.

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference is the information appearing under the captions "Election of Directors", "Executive Officers", and "Security Ownership of Principal Shareholders and Management" in the registrant's Proxy Statement to be filed with the Securities and Exchange Commission relating to the registrant's Annual Meeting of Shareholders to be held on April 25, 1995.
Item 11.

Item 11. EXECUTIVE COMPENSATION
Incorporated herein by reference is the information appearing under the captions "Compensation of Executive Officers", "Indemnity Agreements", "Pension Plan", and "Compensation of Directors" in the registrant's Proxy Statement to be filed with the Securities and Exchange Commission relating to the registrant's Annual Meeting of Shareholders to be held on April 25, 1995.
Item 12.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference is the information appearing under the caption "Security Ownership of Principal Shareholders and Management" in the registrant's Proxy Statement to be filed with the Securities and Exchange Commission relating to the registrant's Annual Meeting of Shareholders to be held on April 25, 1995.
Item 13.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference is the information appearing under the caption "Compensation and Stock Option Committee Interlocks and Insider Participation" in the registrant's Proxy Statement to be filed with the Securities and Exchange Commission relating to the registrant's Annual Meeting of Shareholders to be held on April 25, 1995.
Part IV
Item 14.

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, and REPORTS ON FORM 8-K
(a)1. Financial Statements
Selected Financial Data
Report of Independent Public Accountants
Consolidated Balance Sheets - December 31, 1994 and 1993
Consolidated Statements of Income For the Years Ended December 31, 1994, 1993, and 1992
Consolidated Statements of Shareholders' Equity For the Years Ended December 31, 1994, 1993, and 1992
Consolidated Statements of Cash Flows For the Year Ended December 31, 1994, 1993, and 1992
Notes to Consolidated Financial Statements
Quarterly Financial Data (Unaudited)
Common Stock Market Prices (Unaudited)
Management's Discussion and Analysis of Results of Operations and Financial Condition
(a)2. Financial Statement Schedules
Report of Independent Public Accountants on Schedules
Schedule I - Condensed Financial Information of Registrant December 31, 1994 and 1993
Schedule V - Supplementary Insurance Information December 31, 1994, 1993, and 1992
All other schedules and notes specified under Regulation S-X are omitted because they are either not applicable, not required, or the information called for therein appears in response to the items of Form 10-K or in the financial statements or notes thereto.
(a)3. Exhibits
The following exhibits are numbered in accordance with Item 601 of Regulation S- K and, except as noted, are filed herewith.
2. Information Statement of Registrant (incorporated by reference to the Exhibit 2 to the Registrant's Form 10 Registration Statement dated September 3, 1986, filed with the Securities and Exchange Commission on September 4, 1986).
3.1 Certificate of Incorporation of Registrant (incorporated by reference to the Exhibit 3.1 to the Registrant's Form 10 Registration Statement dated September 3, 1986, filed with the Securities and Exchange Commission on September 4, 1986).
3.2 Bylaws of the Registrant (incorporated by reference to the Exhibit 3.2 to the Registrant's Form 10 Registration Statement dated September 3, 1986, filed with the Securities and Exchange Commission on September 4, 1986).
10.1 Argonaut Group, Inc. 1986 Stock Option Plan (incorporated by reference to the Exhibit 10.1 to the Registrant's Form 10 Registration Statement dated September 3, 1986, filed with the Securities and Exchange Commission on September 4, 1986).
10.2 Argonaut Group, Inc. Retirement Plan (incorporated by reference to the Exhibit 10.2 to the Registrant's Form 10 Registration Statement dated September 3, 1986, filed with the Securities and Exchange Commission on September 4, 1986).
10.3 Tax Agreement by and among Registrant and its subsidiaries and Teledyne, Inc. (incorporated by reference to the Exhibit 10.3 to the Registrant's Form 10 Registration Statement dated September 3, 1986, filed with the Securities and Exchange Commission on September 4, 1986).
10.4 1986 Stock Option Plan, as amended (incorporated by reference to the Exhibit 4.3 to the Registrant's Registration Statement on Form S-8 filed with the Securities and Exchange Commission on February 13, 1987).
10.5 401(k) Retirement Savings Plan (incorporated by reference to the Exhibit 10.4 to the Registrant's Form 10-K filed with the Securities and Exchange Commission on February 28, 1989).
10.6 Employee Stock Investment Plan (incorporated by reference to the Exhibit 4.3 to the Registrant's Registration Statement on Form S-8 filed with the Securities and Exchange Commission on October 10, 1989).
13. The following materials are excerpted from the Annual Report to Shareholders of Argonaut Group, Inc. for the fiscal year ended December 31, 1994:
a) Selected Financial Data b) Financial Statements c) Common Stock Market Prices d) Management's Discussion and Analysis of Results of Operations and Financial Condition
21. Subsidiaries of Registrant (incorporated by reference to the Exhibit 21 to the Registrant's Form 10 Registration Statement dated September 3, 1986, filed with the Securities and Exchange Commission on September 4, 1986).
23. Consent of Independent Public Accountants
27. Financial Data Schedule for December 31, 1994 Form 10-K
28P. Combined Statutory Schedule P of Argonaut Insurance Company and Great Central Insurance Company
(b) Reports on Form 8-K
There were no Reports filed on Form 8-K for the quarter ended December 31, 1994.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ARGONAUT GROUP, INC.
By /s/ Charles E. Rinsch -------------------------- Charles E. Rinsch President
Date: March 17, 1995
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 registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ----
/s/ Charles E. Rinsch President, Chief Executive March 17, 1995 - ---------------------- Officer, and Director Charles E. Rinsch
/s/ James B Halliday Vice President, Secretary, March 17, 1995 - ---------------------- and Treasurer (principal James B Halliday financial and accounting officer)
/s/ George A. Roberts Director March 17, 1995 - ---------------------- George A. Roberts
/s/ Henry E. Singleton Director March 17, 1995 - ---------------------- Henry E. Singleton
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES
To the Shareholders of Argonaut Group, Inc.
We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in Argonaut Group, Inc.'s annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 5, 1995. Our audit was made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedules listed in Part IV, Item 14(a)(2) are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic consolidated financial statements. These schedules have been subjected to the auditing procedures applied in our audit of the basic consolidated financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Francisco, California January 5, 1995
ARGONAUT GROUP, INC. SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT ($ in millions)
BALANCE SHEET December 31, 1994 1993 ------ ------ Assets Short-term investments $ - $ 9.8 Cash & cash equivalents 0.6 4.7 Investment in subsidiary 609.0 556.0 Cost in excess of net assets purchased 46.6 49.4 Deferred Federal income taxes receivable 87.6 105.6 Due from/to subsidiaries (10.5) 3.7 Other assets 10.5 2.5 ------ ------ $743.8 $731.7 ====== ======
Liabilities & Shareholders' Equity Income taxes payable (receivable) $ (1.8) $ (3.2) Other liabilities - 5.3 Shareholders' equity 745.6 729.6 ------ ------ $743.8 $731.7 ====== ======
STATEMENT OF OPERATIONS For The Year Ended December 31, 1994 1993 1992 ------ ------ ------ Revenues $ 3.2 $ 3.1 $ 3.2
Expenses: Amortization of cost in excess of net assets 2.8 2.8 2.8 Other expenses 4.1 7.7 3.2 ------ ------ ------ Loss before tax and undistributed earnings (3.7) (7.4) (2.8) Provision for income taxes 14.8 (0.8) 5.7 ------ ------ ------ Net loss before equity in earnings of subsidiary (18.5) (6.6) (8.5) Equity in earnings of subsidiary 95.2 95.7 94.8 ------ ------ ------ Income before cumulative effect of change in accounting for income taxes 76.7 89.1 86.3 Cumulative effect of change in accounting for income taxes - - 61.8 ------ ------ ------ Net Income $ 76.7 $ 89.1 $148.1 ====== ====== ======
ARGONAUT GROUP, INC. SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT ($ in millions)
STATEMENT OF CASH FLOWS For The Year Ended December 31, 1994 1993 1992 ------ ------ ------ Cash flows from operating activities: Net income $ 76.7 $ 89.1 $148.1 Adjustments to reconcile net income to net cash provided by operations: Cumulative effect of change in accounting for income taxes - - (61.8) Amortization 2.8 2.8 2.8 Earnings in subsidiary (95.2) (95.7) (94.8) Dividend from subsidiary 31.6 31.5 31.5 Decrease in deferred Federal income taxes receivable 18.0 7.7 5.7 Decrease (increase) in due from/ to subsidiaries 14.2 (2.5) (0.2) Decrease in income taxes payable 1.4 (8.1) (0.8) Other, net (13.1) 6.9 (0.2) ------ ------ ------ 36.4 31.7 30.3 ------ ------ ------ Cash flows from investing activities: Decrease (increase) in short-term investments 9.8 (9.8) - ------ ------ ------ 9.8 (9.8) - ------ ------ ------ Cash flows from financing activities: Repurchase of common stock (21.9) - (24.5) Payment of cash dividend (28.7) (24.6) (20.8) Exercise of stock options 0.3 1.1 0.5 ------ ------ ------ (50.3) (23.5) (44.8) ------ ------ ------ Increase (decrease) in cash & cash equivalents (4.1) (1.6) (14.5) Cash & cash equivalents, beginning of period 4.7 6.3 20.8 ------ ------ ------ Cash & cash equivalents, end of period $ 0.6 $ 4.7 $ 6.3 ====== ====== ======


Item 1. Business
Balcor/Colonial Storage Income Fund - 86 (the "Registrant") is a limited partnership formed in May 1986 under the laws of the State of Illinois, which raised $64,226,000 from sales of Limited Partnership Interests. The Registrant's operations consist exclusively of investment in and operation of income-producing mini-warehouse and office/warehouse facilities, and all financial information included in this report relates to that industry segment.
The principal purpose of the Registrant is to acquire and develop, own, maintain, operate, lease and hold for capital appreciation and current income, mini-warehouse facilities offering storage space for business and personal use and office/warehouses offering a combination of office and commercial warehouse space. The Registrant acquired four mini-warehouse properties in 1986 and seven mini-warehouse properties in 1987, from affiliates of one of the General Partners. In addition, the Registrant acquired from non-affiliated entities four mini- warehouse facilities in 1987 and nine mini-warehouse facilities in 1988.
The Partnership Agreement provides that the proceeds of any sale, financing, or refinancing, will not be reinvested in new acquisitions, except that net proceeds may be used to purchase or finance improvements or additions to the Registrant's properties.
The real estate industry continues to experience cyclical downturns in many cities and regions of the country. Historically, real estate investments have experienced the same cyclical characteristics affecting most other types of long-term investments. While real estate values have generally risen over time, the cyclical character of real estate investments, together with local, regional, and national market conditions, has resulted in periodic devaluation of real estate in particular markets. In light of the competitiveness in the rental markets, the General Partners' goals have been to maintain high occupancy levels, while increasing rents where possible, and to monitor and control operating expenses and capital improvements.
The Registrant, by virtue of its ownership of real estate, is subject to federal and state laws and regulations covering various environmental issues. Management of the Registrant utilizes the services of environmental consultants to assess a wide range of environmental issues and to conduct tests for environmental contamination as appropriate. The General Partners are not aware of any potential liability due to environmental issues or conditions that would be material to the Registrant.
The officers, directors, and employees of Balcor Storage Partners-86 and Colonial Storage 86, Inc., the General Partners of the Registrant, and their affiliates perform certain services for the Registrant. The Registrant currently has 18 full time and 45 part-time employees engaged in its operations.
Item 2.

Item 2. Properties
As of December 31, 1994, the Registrant owns the properties described below:
Net Rentable Land Area No. of Area (Square Rentable Location (Acres) Feet) Spaces
201 Cobb Parkway Marietta, Georgia 3.1 47,980 431
6390 Winchester Road Memphis, Tennessee 2.3 39,444 360
5675 Summer Avenue Memphis, Tennessee (1) 2.4 46,010 377
2064 Briarcliff Atlanta, Georgia (2) 2.8 45,700 174
4333 Jackson Drive Garland, Texas 3.1 72,572 612
321 East Buckingham Road Garland, Texas 2.1 40,701 299
3218 South Garnett Road Tulsa, Oklahoma 3.7 57,540 464
5708 Fort Caroline Road Jacksonville, Florida 3.7 67,925 768
3401 Avenue K Plano, Texas (3) 4.7 87,654 897
4301 and 4324 Poplar Level Road Louisville, Kentucky 4.2 81,982 798
2719 Morse Road Columbus, Ohio 4.3 62,190 518
5036 Cleveland Avenue Fort Myers, Florida 5.0 65,086 583
3281 Western Branch Boulevard Chesapeake, Virginia 5.5 75,201 747
2300 Kangaroo Drive Durham, North Carolina 4.0 47,502 657
28 W 650 Roosevelt Road Winfield, Illinois (4) 5.6 48,145 550
1131 Semoran Boulevard Casselberry, Florida 3.9 67,159 641
36 Pine Knoll Road Greenville, South Carolina (5) 4.2 50,325 446
750 East Third Street Lexington, Kentucky 3.3 55,700 450
1900 U.S. Highway 19 South Tarpon Springs, Florida 5.4 80,732 748
7415 West Dean Road Milwaukee, Wisconsin (6) 11.7 205,190 1,107
W229 N590 Foster Court and N5 W22966 Bluemound Road Waukesha, Wisconsin (7) 3.0 49,632 219
3120 Breckenridge Lane Louisville, Kentucky 2.1 34,490 329
2275 South Semoran Boulevard Orlando, Florida 1.9 30,050 345
11195 Alpharetta Highway Roswell, Georgia 9.1 113,310 680
(1) The property consists of 374 units of mini-warehouse space and 3 units of office/warehouse space.
(2) The property consists of 156 units of mini-warehouse space and 18 units of office/warehouse space.
(3) The property consists of 855 units of mini-warehouse space and 42 paved parking spaces.
(4) The property consists of 455 units of mini-warehouse space and 95 parking spaces.
(5) The property consists of 433 units of mini-warehouse space and 13 units of office/warehouse space.
(6) The property consists of 694 units of mini-warehouse space and 413 paved parking spaces.
(7) The property consists of 209 units of mini-warehouse space and 10 units of office/warehouse space.
In the opinion of the General Partners, the Registrant has provided for adequate insurance coverage for its real estate investment properties.
Item 3.

Item 3. Legal Proceedings
The Registrant is not subject to any material pending legal proceedings, nor were any such proceedings terminated during the fourth quarter of 1994.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Limited Partners of the Registrant during 1994.
PART II
Item 5.

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
There has not been an established public market for Limited Partnership Interests, and it is not anticipated that one will develop. For information regarding previous distributions, see Statements of Partners' Capital, page, and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources, below.
As of December 31, 1994, the number of record holders of Limited Partnership Interests of the Registrant was approximately 8,961.
Item 6.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Summary of Operations
Improved market conditions in cities where many of Balcor/Colonial Storage Income Fund-86's (the "Partnership") properties are located as well as increased rental income resulting from ongoing capital improvement programs were primarily responsible for the increases in net income generated by the Partnership in 1994, 1993 and 1992. No material events occurred during these periods which significantly impacted the net income of the Partnership. Further discussion of the Partnership's operations is summarized below.
Operations
1994 Compared to 1993
Rental income increased during 1994 as compared to 1993 due to increased occupancies and rental rates, particularly in Kentucky, Tennessee, Georgia and Florida. As a result of this increase, property management fees also increased during this period.
Due to higher interest rates and amounts available for investment, interest income on short term investments increased during 1994 as compared to 1993.
Increased payroll and maintenance expenses resulted in an increase in property operating expenses for 1994 as compared to 1993. Payroll expenses increased due to an increase in incentive payments to property managers and an increase in salary rates for new employees. Maintenance expenses increased due primarily to snow removal in February and March at sites in Wisconsin, Illinois, Ohio, Kentucky and Virginia.
The full amortization of non-compete agreements in 1993 resulted in a decrease in depreciation and amortization expenses in 1994 as compared to 1993.
General and administrative expenses increased during 1994 as compared to 1993 primarily due to an increase in accounting and asset management costs.
1993 Compared to 1992
Rental income and, correspondingly, property management fees increased for 1993 as compared to 1992 due to increased occupancy levels and rental rates at certain of the Partnership's mini-warehouse facilities, particularly those located in Kentucky, Tennessee, Georgia and Virginia.
Due to lower interest rates during 1993, interest income on short-term investments decreased during 1993 as compared to 1992.
Increases in legal fees and real estate taxes were the primary reasons for the increase in property operating expenses during 1993 as compared to 1992. The increase in legal expense was due to a settlement in 1992 which resulted in lower expenses for that year. Real estate taxes increased due to an increase in the assessed value and rates at certain of the Partnership's properties.
Depreciation and amortization decreased as non-compete agreements were fully amortized during 1993.
Increased administrative salaries and portfolio management expenses resulted in an increase in general and administrative expenses for 1993 as compared to 1992.
Liquidity and Capital Resources
The cash position of the Partnership increased from December 31, 1993 to December 31, 1994 as cash from operations exceeded distributions to Limited Partners and capital expenditures. The Partnership's cash flow provided by operating activities in 1994 was generated primarily by the operations of the mini-warehouse properties and interest income earned on the Partnership's short-term investments, which was partially offset by administrative expenses. This cash flow was used in investing activities to make capital improvements to the properties and in financing activities to provide distributions to the Limited Partners.
In January 1995, the Partnership paid $1,197,172 ($4.66 per Interest) to the Limited Partners, representing the distribution for the fourth quarter of 1994. Quarterly distributions increased from $4.44 per Interest for the first and second quarters of 1994 to $4.66 per Interest for the third and fourth quarters of 1994 due to improved operating results at several of the Partnership's mini-warehouse facilities. To date, the Partnership has distributed $126.31 per $250 Interest, of which $124.92 represents Net Cash Receipts and $1.39 represents Net Cash Proceeds. The General Partners believe the cash generated from property operations should enable the Partnership to continue making quarterly distributions to Limited Partners. However, the level of future cash distributions to Limited Partners will be dependent upon the amount of cash flow generated by the Partnership's properties as to which there can be no assurance. Pursuant to the Partnership Agreement, the General Partners are entitled to 10% of Net Cash Receipts available for distribution, subject to certain subordinations in the periods following the termination of the offering. From the inception of the offering through December 31, 1994, the General Partners' share of Net Cash Receipts totaled approximately $3,472,000, of which $3,135,000 is subordinated. The General Partners are entitled to receive such subordinated amounts only from distributed Net Cash Proceeds.
The General Partners intend to retain on behalf of the Partnership cash reserves deemed adequate to meet working capital requirements as they may arise.
One of the General Partners has recently completed the outsourcing of the transfer agent and investor records services, and computer operations and systems development functions that provided services to the Partnership. All of these functions are now being provided by independent third parties. Each of these transactions occurred after extensive due diligence and competitive bidding processes. The General Partners do not believe that the cost of providing these services to the Partnership, in the aggregate, will be materially different to the Partnership during 1995 when compared to 1994.
Inflation has several types of potentially conflicting impacts on real estate investments. Short-term inflation can increase real estate operating costs, which may or may not be recovered through increased rents and/or sales prices, depending on general or local economic conditions. In the long-term, inflation can be expected to increase operating costs and replacement costs and may lead to increased rental revenue and real estate values.
Item 8.

Item 8. Financial Statements and Supplementary Data
See Index to Financial Statements on Page of this Form 10-K.
The supplemental financial information specified by Item 302 of Regulation S-K is not applicable.
The net effect of the differences between the financial statements and the tax information is summarized as follows:
December 31, 1994 December 31, 1993 Financial Tax Financial Tax Statements Return Statements Return
Total assets $ 46,504,585 57,361,197 47,121,971 57,644,701 Partners' capital accounts: General Partners $ 178,093 199,771 138,994 157,333 Limited Partners $ 45,340,046 56,174,980 46,065,280 56,679,691 Net income: General Partners $ 39,099 42,438 31,491 34,831 Limited Partners $ 3,870,779 4,201,322 3,117,624 3,448,327 Per Limited Partnership Interest $ 15.07 16.35 12.14 13.42
Item 9.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There have been no changes in or disagreements with accountants on any matter of accounting principles, practices or financial statement disclosure.
PART III
Item 10.

Item 10. Directors and Executive Officers of the Registrant
(a) Neither the Registrant nor Balcor Storage Partners-86, one of the General Partners, has a Board of Directors.
The other General Partner, Colonial Storage 86, Inc., has a Board of Directors. The sole member is James R. Pruett (see b, c, e, & f below) who has been a director since the formation of Colonial Storage 86, Inc.
(b,c, &e) The names, ages, and business experience of the executive officers and significant employees of the General Partners of the Registrant are as follows:
Balcor Storage Partners-86
TITLE OFFICERS
Chairman, President and Chief Thomas E. Meador Executive Officer Executive Vice President, Allan Wood Chief Financial Officer and Chief Accounting Officer Senior Vice President Alexander J. Darragh First Vice President Daniel A. Duhig First Vice President Josette V. Goldberg First Vice President Alan G. Lieberman First Vice President Brian D. Parker and Assistant Secretary First Vice President John K. Powell, Jr. First Vice President Reid A. Reynolds First Vice President Thomas G. Selby
Thomas E. Meador (July 1947) joined Balcor in July 1979. He is Chairman, President and Chief Executive Officer and has responsibility for all ongoing day-to-day activities at Balcor. He is a Director of The Balcor Company. Prior to joining Balcor, Mr. Meador was employed at the Harris Trust and Savings Bank in the commercial real estate division where he was involved in various lending activities. Mr. Meador received his M.B.A. degree from the Indiana University Graduate School of Business.
Allan Wood (January 1949) joined Balcor in August 1983 and, as Balcor's Chief Financial Officer and Chief Accounting Officer, is responsible for the financial and administrative functions. He is also a Director of The Balcor Company. Mr. Wood is a Certified Public Accountant. Prior to joining Balcor, he was employed by Price Waterhouse where he was involved in auditing public and private companies. Alexander J. Darragh (February 1955) joined Balcor in September 1988 and has primary responsibility for the Portfolio Advisory Group. He is responsible for due diligence analysis and real estate advisory services in support of asset management, institutional advisory and capital markets functions. Mr. Darragh has supervisory responsibility of Balcor's Investor Services, Investment Administration, Fund Management and Land Management departments. Mr. Darragh received masters' degrees in Urban Geography from Queens's University and in Urban Planning from Northwestern University.
Daniel A. Duhig (October 1956) joined Balcor in November 1986 and is responsible for the Asset Management Department relating to real estate investments made by Balcor and its affiliated partnerships, including negotiations for modifications or refinancings of real estate mortgage investments and the disposition of real estate investments.
Josette V. Goldberg (April 1957) joined Balcor in January 1985 and has primary responsibility for all human resources matters. In addition, she has supervisory responsibility for Balcor's administrative and MIS departments. Ms. Goldberg has been designated as a Senior Human Resources Professional (SHRP).
Alan G. Lieberman (June 1959) joined Balcor in May 1983 and is responsible for the Property Sales and Capital Markets Groups. Mr. Lieberman is a Certified Public Accountant.
Brian D. Parker (June 1951) joined Balcor in March 1986 and is responsible for Balcor's corporate and property accounting, treasury and budget activities. Mr. Parker is a Certified Public Accountant and holds an M.S. degree in Accountancy from DePaul University.
John K. Powell, Jr. (June 1950) joined Balcor in September 1985 and is responsible for the administration of the investment portfolios of Balcor's partnerships and for Balcor's risk management functions. Mr. Powell received a Master of Planning degree from the University of Virginia. He has been designated a Certified Real Estate Financier by the National Society for Real Estate Finance and is a full member of the Urban Land Institute.
Reid A. Reynolds (April 1950) joined Balcor in March 1981 and is involved with the asset management of residential properties for Balcor. Mr. Reynolds is a licensed Real Estate Broker in the State of Illinois.
Thomas G. Selby (July 1955) joined Balcor in February 1984 and has responsibility for various Asset Management functions, including oversight of the residential portfolio. From January 1986 through September 1994, Mr. Selby was Regional Vice President and then Senior Vice President of Allegiance Realty Group, Inc., an affiliate of Balcor providing property management services. Mr. Selby was responsible for supervising the management of residential properties in the western United States.
Colonial Storage 86, Inc.
Name Title
James R. Pruett President, Vice President, Director James N. Danford Secretary, Treasurer
James R. Pruett (September 1942) received his Bachelor of Science degree from McMurry College in Abilene, Texas, in 1965. He is the president, sole director, and sole shareholder of James R. Pruett, Inc., one of the corporate general partners of Colonial Storage Centers Group, Colonial Storage Centers Group II, and Colonial Storage Centers Group III, the managing general partner of Colonial Storage Centers I, Ltd. (Colonial I), Colonial Storage Centers II, Ltd. (Colonial II) and Colonial Storage Centers III, Ltd. (Colonial III), respectively. Mr. Pruett is also President and a Director of Colonial Storage 85, Inc., which serves as a General Partner of Balcor/Colonial Storage Income Fund - 85 (BCSIF-85). Mr. Pruett developed the first Atlanta, Georgia, Colonial Self Storage mini-warehouse facility in 1972. Since that time, he has handled substantially all business aspects of mini-warehouse development, construction, operation, and management. Mr. Pruett has directed the site selection and development or acquisition of numerous locations for mini-warehouses and office warehouses, including the facilities of Colonial I, Colonial II and Colonial III. Mr. Pruett is President and a Director of Colonial Storage Management, Inc. ("CSM"), Colonial Properties Management, Inc. ("CPM"), Colonial Storage Management 85, Inc.("CSM- 85), and Colonial Storage Management 86, Inc.("CSM-86), which manage the properties of Colonial I and Colonial II, Colonial III, BCSIF-85, and the Registrant, respectively.
James N. Danford (January 1959) received his Bachelor of Business Administration degree from The University of Texas at Arlington. Mr. Danford was a senior accountant with a public accounting firm prior to joining Colonial Storage Centers in June of 1986. Mr. Danford is a Certified Public Accountant, member of the Texas Society of Certified Public Accountants, and is chief financial officer of CSM-86, Colonial I, Colonial II, Colonial III, Registrant, BCSIF-85, CSM, CPM, and CSM-85.
The sole director of Colonial Storage 86, Inc. is not a director in any company with a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934 or subject to the requirements of Section 15 (b) of the Act or any company registered as an investment company under the Investment Company Act of 1940, but is a director of four other corporations which act as general partners of limited partnerships which have a class of securities registered pursuant to Section 12 of the Act.
(d) There is no family relationship between any of the foregoing officers or director.
(f) To the best of the Registrant's knowledge, there have been no events under any bankruptcy act, no criminal proceedings, and no judgements or injunctions material to the evaluation of the ability and integrity of any current director or executive officer of Colonial Storage Management 86, Inc., Colonial Storage 86, Inc., or any current executive officer of Balcor Storage Partners-86, during the past five years.
Item 11.

Item 11. Executive Compensation
(a,b,c, d&e) The Registrant has not paid and does not propose to pay any remuneration to the executive officers and directors of the General Partners. Certain of these officers receive compensation from The Balcor Company and Colonial Storage 86, Inc. (but not from the Registrant) for services performed for various affiliated entities, which may include services performed for the Registrant. However, the General Partners believe that any such compensation attributable to services performed for the Registrant is immaterial to the Registrant. See Note 3 of Notes to Financial Statements for the information relating to transactions with affiliates.
Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) No person owns of record or is known by the Registrant to own beneficially more than 5% of the outstanding Limited Partnership Interests of the Registrant.
(b) Balcor Storage Partners-86 and Colonial Storage 86, Inc. and their officers and director own no Limited Partnership Interests in the Registrant.
Relatives and affiliates of the officers or director of the General Partners own twenty Limited Partnership Interests in the Registra- nt.
(c) The Registrant is not aware of any arrangements, the operation of which may result in a change of control of the Registrant.
Item 13.

Item 13. Certain Relationships and Related Transactions
(a & b) See Note 1 of Notes to Financial Statements for information relating to the Partnership Agreement and the allocation of distributions and profits and losses.
See Note 2 of Notes to Financial Statements for additional information relating to transactions with affiliates.
(c) No management person is indebted to the Registrant.
(d) The Registrant has no outstanding agreements with any promoters.
PART IV
Item 14.

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1&2) See Index to Financial Statements on page of this Form 10-K.
(3) Exhibits:
(3) The Amended and Restated Agreement and Certificate of Limited Partnership set forth as Exhibit 3 to Amendment No. 1 to the Registrant's Registration Statement on Form S-11 dated October 10, 1986, (Registration No. 33-6669) is incorporated herein by reference.
(4) Form of Subscription Agreement previously filed as Exhibit 4.1 included in the Amendment No. 1 to the Registrant's Registration Statement on Form S-11, dated October 10, 1986, (Registration No. 33-6669) and Form of Confirmation regarding Interests in the Registrant set forth as Exhibit 4.2 to the Registrant's Report on Form 10-Q for the quarter ended June 30, 1992 (Commission File No. 0-15639) are incorporated herein by reference.
(27) Financial Data Schedule of the Registrant for the year ended December 31, 1994 is attached hereto.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Registrant during the quarter ended December 31, 1994.
(c) Exhibits: See Item 14 (a)(3) above.
(d) Financial Statement Schedules: See Index to Financial Statements on Page of this Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
BALCOR/COLONIAL STORAGE INCOME FUND -86
By: /s/ James N. Danford James N. Danford Secretary/Treasurer (Principal Financial and Accounting Officer) of Colonial Storage 86, Inc., a General Partner Date: March 28, 1995
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 Registrant and in the capacities and on the dates indicated.
Signature Title Date
President and Chief Executive Officer (Principal Executive Officer) of Balcor /s/ Thomas E. Meador Storage Partners-86, a General Partner March 28, 1995 Thomas E. Meador
Executive Vice President, and Chief Accounting and Financial Officer (Principal Accounting and Financial Officer) of Balcor Storage Partners-86, /s/ Allan Wood a General Partner March 28, 1995 Allan Wood
President and Director of Colonial /s/ James Pruett Storage 86 Inc., a General Partner March 28, 1995 James Pruett
Secretary/Treasurer (Principal Financial and Accounting Officer) of Colonial /s/ James N. Danford Storage 86, Inc., a General Partner March 28, 1995 James N. Danford
Pages
Independent Auditors' Report
Financial Statements:
Balance Sheets as of December 31, 1994 and 1993
Statements of Income, years ended December 31, 1994, 1993 and 1992
Statements of Partners' Capital, years ended December 31, 1994, 1993 and 1992
Statements of Cash Flows, years ended December 31, 1994, 1993 and 1992
Notes to Financial Statements to
Schedules are omitted for the reason that they are inapplicable or equivalent information has been included elsewhere herein.
Financial Statements and Supplementary Data
INDEPENDENT AUDITORS' REPORT
The Partners Balcor/Colonial Storage Income Fund - 86:
We have audited the financial statements of Balcor/Colonial Storage Income Fund - 86 (an Illinois Limited Partnership) as listed in the accompanying index. These financial statements are the responsibility of the Partnership'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 Balcor/Colonial Storage Income Fund - 86 as of December 31, 1994 and 1993, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Fort Worth, Texas February 9, 1995
Balcor/Colonial Storage Income Fund - 86 (An Illinois Limited Partnership)
Balance Sheets
December 31, 1994 and 1993
1994 1993 Assets Cash and cash equivalents $ 3,242,344 2,648,551 Accounts receivable, net of allowance for doubtful accounts of $20,781 and $23,136 in 1994 and 1993, respectively 72,413 82,903 Other 114,697 137,260 3,429,454 2,868,714
Mini-warehouse facilities, at cost: Land 16,925,647 16,925,647 Buildings 36,456,425 36,184,971 Furniture, fixtures and equipment 815,712 757,211 54,197,784 53,867,829 Less accumulated depreciation 11,122,653 9,614,572 Mini-warehouse facilities, net of accumulated depreciation 43,075,131 44,253,257 $ 46,504,585 47,121,971
Liabilities and Partners' Capital Accounts payable $ 11,086 18,149 Due to affiliates (note 2) 154,794 51,913 Accrued liabilities, principally real estate taxes 382,684 394,271 Security deposits 93,321 130,736 Deferred income 344,561 322,628 Total liabilities 986,446 917,697 Partners' capital (256,904 Limited Partnership Interests issued and outstanding) 45,518,139 46,204,274 $ 46,504,585 47,121,971
See accompanying notes to financial statements.
Balcor/Colonial Storage Income Fund - 86 (An Illinois Limited Partnership)
Statements of Income
Years ended December 31, 1994, 1993 and 1992
1994 1993 1992 Income: Rental $ 8,385,428 7,703,850 7,174,918 Interest 96,709 59,644 76,739 8,482,137 7,763,494 7,251,657
Expenses: Property operating 2,207,178 2,118,600 2,032,809 Depreciation and amortization 1,508,081 1,704,614 1,853,239 Property management fees (note 2) 477,153 447,627 419,535 General and administrative (note 2) 379,847 343,538 295,811 4,572,259 4,614,379 4,601,394 Net income $ 3,909,878 3,149,115 2,650,263 Limited Partners' share of net income ($15.07, $12.14 and $10.21 per Interest for 1994, 1993 and 1992, respectively) $ 3,870,779 3,117,624 2,623,760 General Partners' share of net income 39,099 31,491 26,503 $ 3,909,878 3,149,115 2,650,263
See accompanying notes to financial statements.
Balcor/Colonial Storage Income Fund - 86 (An Illinois Limited Partnership)
Statements of Partners' Capital
Years ended December 31, 1994, 1993 and 1992
Limited General Partners Partners Total
Balance at December 31, 1991 $ 48,945,603 81,000 49,026,603
Net income 2,623,760 26,503 2,650,263
Cash distributions ($16.49 per Interest) (4,236,355) - (4,236,355)
Balance at December 31, 1992 47,333,008 107,503 47,440,511
Net income 3,117,624 31,491 3,149,115
Cash distributions ($17.07 per Interest) (4,385,352) - (4,385,352)
Balance at December 31, 1993 46,065,280 138,994 46,204,274
Net income 3,870,779 39,099 3,909,878
Cash distributions ($17.89 per Interest) (4,596,013) - (4,596,013)
Balance at December 31, 1994 $ 45,340,046 178,093 45,518,139
See accompanying notes to financial statements.
Balcor/Colonial Storage Income Fund - 86 (An Illinois Limited Partnership)
Statements of Cash Flows
Years ended December 31, 1994, 1993 and 1992
1994 1993 1992 Operating activities: Net income $ 3,909,878 3,149,115 2,650,263 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,508,081 1,704,614 1,853,239 Net change in: Net accounts receivable 10,490 12,330 5,558 Other assets 22,563 (50,844) 38,546 Accounts payable (7,063) 7,442 (2,067) Due to affiliates 102,881 10,402 (10,748) Accrued liabilities (11,587) (63,197) 85,111 Security deposits (37,415) (27,874) (9,402) Deferred income 21,933 46,422 (6,564) Net cash provided by operating activities 5,519,761 4,788,410 4,603,936
Investing activities: Additions to mini-warehouse facilities (329,955) (365,528) (147,923) Net cash used in investing activities (329,955) (365,528) (147,923)
Financing activities: Distributions to Limited Partners (4,596,013) (4,385,352) (4,236,355) Net cash used in financing activities (4,596,013) (4,385,352) (4,236,355)
Net change in cash and cash equivalents 593,793 37,530 219,658 Cash and cash equivalents at beginning of year 2,648,551 2,611,021 2,391,363 Cash and cash equivalents at end of year $ 3,242,344 2,648,551 2,611,021
See accompanying notes to financial statements.
Balcor/Colonial Storage Income Fund - 86 (An Illinois Limited Partnership)
Notes to Financial Statements
December 31, 1994, 1993 and 1992
(1) Summary of Significant Accounting Policies
(a) Description of Partnership
Balcor/Colonial Storage Income Fund - 86 (the "Partnership"), is a limited partnership formed in May 1986. The Partnership Agreement provides that Balcor Storage Partners-86 (an Illinois general partnership) and Colonial Storage 86, Inc. (a Texas corporation) are the General Partners of the Partnership and provides for the admission of Limited Partners through the sale of up to 400,000 Limited Partnership Interests at $250 per Interest, of which 256,904 ($64,226,000) Limited Partnership Interests were sold prior to the termination of the offering.
The principal purpose of the Partnership is to acquire, develop, own, maintain, operate, lease and hold for capital appreciation and current income, mini-warehouse facilities offering storage space for business and personal use and office/warehouses offering a combination of office and commercial warehouse space. The Partnership acquired from affiliates four mini-warehouse facilities in 1986 and seven mini-warehouse facilities in 1987. Additionally, the Partnership acquired from nonaffiliated parties four mini- warehouse facilities in 1987 and nine mini-warehouse facilities in 1988.
(b) Allocation of Net Income and Profits
The Partnership Agreement provides that net income (after a deduction for any incentive management fees) from operations shall be allocated 99% and 1% to the Limited Partners and General Partners, respectively.
Additionally, when a property is sold or otherwise disposed of, the General Partners will be allocated profits equal to the greater of 1% of total profits or the amount of Net Cash Proceeds distributable to the General Partners from the sale (in excess of subordinated Net Cash Receipts, note 1(c)).
The remainder of the profits will be allocated to the Limited Partners.
Balcor/Colonial Storage Income Fund - 86 (An Illinois Limited Partnership)
Notes to Financial Statements
(c) Cash Distributions
Net Cash Receipts available for distribution from operations shall be distributed 90% to the Limited Partners and 10% to the General Partners, 9% as a partnership incentive management fee and 1% as their distributable share from operations. Distributions from operations to the General Partners are subordinated to receipt by the Limited Partners of a Cumulative Distribution of 6% of Adjusted Original Capital ($63,868,903 at December 31, 1994) during the first twelve month period following the termination of the offering of Interests, 8% during the second twelve month period following the termination of the offering of Interests, and 10% during each twelve month period thereafter.
Net Cash Proceeds from sales or refinancings shall be distributed first to the Limited Partners until they have received an amount equal to their Original Capital plus any deferred portion of the Cumulative Distribution. If the receipt of any portion of the General Partners' 10% share of Net Cash Receipts from operations has been deferred (approximately $3,135,000 has been deferred as of December 31, 1994), then available Net Cash Proceeds shall thereafter be distributed to the General Partners to the extent of such deferred amounts. Thereafter, remaining Net Cash Proceeds shall be distributed 85% to the Limited Partners and 15% to the General Partners.
(d) Cash and Cash Equivalents
The Partnership considers all highly liquid investments with maturities at date of purchase of three months or less to be cash equivalents.
(e) Mini-Warehouse Facilities
Costs associated with the appraisal and acquisition of mini- warehouse facilities are capitalized.
The buildings, furniture, fixtures and equipment are depreciated using the straight-line method over their estimated useful lives ranging from 5 to 25 years.
Maintenance and repairs are charged to expense when incurred. Expenditures for improvements are charged to the related asset account.
Balcor/Colonial Storage Income Fund - 86 (An Illinois Limited Partnership)
Notes to Financial Statements
The Partnership records its investments in real estate at cost, and periodically assesses possible impairment to the value of its properties. In the event that the General Partners determine that a permanent impairment in value has occurred, the carrying basis of the property is reduced to its estimated fair value.
When properties are disposed of, the related costs and accumulated depreciation will be removed from the respective accounts, and any gain or loss on disposition will be recognized in accordance with generally accepted accounting principles.
(f) Income Taxes
Taxable income or loss of the Partnership is includable in the income tax returns of the individual partners; therefore, no provision for income taxes has been made in the accompanying financial statements.
The tax bases of the Partnership's assets and liabilities exceeded the amounts recorded in the Financial Statements at December 31, 1994 and 1993, by $10,856,612 and $10,522,730, respectively.
Balcor/Colonial Storage Income Fund - 86 (An Illinois Limited Partnership)
Notes to Financial Statements
(2) Transactions With Affiliates
The Partnership has an agreement with Colonial Storage Management 86, Inc., an affiliate of Colonial Storage 86, Inc., a General Partner, to supervise and direct the business and affairs associated with the mini- warehouse and office/warehouse facilities for a fee of 6% and 5%, respectively, of the gross revenues of the facilities.
Fees and expenses paid and payable by the Partnership to affiliates for the years ended December 31, 1994, 1993 and 1992, are:
1994 1993 1992 Paid Payable Paid Payable Paid Payable
Property management fees $ 396,555 118,743 444,086 38,145 421,204 34,604
General and administrative expenses $ 226,199 36,051 218,301 13,768 171,804 6,907