Item 1. Business.
Participating Income Properties II, L.P., a Delaware limited partnership (the "Partnership"), was organized on August 12, 1987 under the Delaware Revised Uniform Limited Partnership Act. The Partnership was organized primarily to purchase new and existing "Flying J Travel Plaza" facilities, including land, buildings and equipment, to be leased on a net basis to franchisees of Flying J Franchise Inc. and to Flying J Inc. The managing general partner of the Partnership is Franchise Finance Corporation of America II, a Delaware corporation (the "Managing General Partner"). Morton H. Fleischer and Paul Bagley are the individual general partners of the Partnership. (The Managing General Partner, Morton H. Fleischer and Paul Bagley are sometimes referred to collectively herein as the "General Partners.")
Morton H. Fleischer is the sole stockholder of FFCA Investor Services Corporation 88-C, a Delaware corporation, which was incorporated on August 11, 1987, to serve as the initial limited partner of the Partnership and the owner of record of the limited partnership interests in the Partnership, the rights and benefits of which are assigned by FFCA Investor Services Corporation 88-C to investors in the Partnership. FFCA Investor Services Corporation 88-C conducts no other business activity. The Partnership and FFCA Investor Services Corporation 88-C are referred to collectively as the "Co-Registrants."
On December 12, 1988, the Co-Registrants commenced a public offering of $100,000,000 of limited partnership depository units (the "Units") in the Partnership pursuant to a Registration Statement on Form S-11 under the Securities Act of 1933, as amended. The Co-Registrants sold a total of 82,834 Units to investors at $1,000 per Unit for a total of $82,834,000. Purchasers of the Units (the "Holders") acquired the following number of Units from FFCA Investor Services Corporation 88-C on each of the following dates: 24,735 Units on May 11, 1989; 16,700 Units on July 13, 1989; 24,806 Units on October 19, 1989; and 16,593 Units on December 11, 1989. Subsequent to that date, no Holder has made any additional capital contribution. The Holders share in the benefits of ownership of the Partnership's assets, including its real and personal property investments, according to the number of Units held in substantially the same manner as limited partners in the Partnership.
After deducting organizational and offering expenses, including sales commissions, the net proceeds of the offering of the Units, $71,956,541, were fully invested by the Partnership in thirteen travel plazas located in eleven states. "Flying J Travel Plaza" facilities offer a full-service operation, generally including fuel facilities, a restaurant, convenience store and other amenities for use by the trucking industry and traveling public in general. One of the properties was acquired in 1988, five were acquired during 1989, five were acquired during 1990, and two were acquired during 1991. As of December 31, 1997, all thirteen travel plazas which are owned by the Partnership were leased to CFJ Properties, a general partnership formed pursuant to a joint venture between Flying J Inc., through its subsidiary Big West Oil Company ("Big West"), and Douglas Oil Company of California, a subsidiary of Conoco Inc. ("Douglas Oil"). The Partnership is not affiliated with CFJ Properties, Flying J Inc. or Flying J Franchise Inc. ("FJFI"), a subsidiary of Flying J Inc. and the franchisor of Flying J Travel Plazas.
The Partnership's principal objectives are to (a) preserve, protect and enhance
Partnership capital; (b) provide partially tax-sheltered cash distributions to investors; (c) provide the potential for increased income and protection against inflation through participation in the gross revenues of Flying J Travel Plaza facilities; and (d) to obtain long-term appreciation in the value of its properties through real estate ownership.
Real estate owned by the Partnership is generally leased for a term of 20 years. Equipment is generally leased for a term of eight years. Equipment leases are scheduled to expire at various dates through 1999. Lessees must generally pay the Partnership annual rental payments (in monthly installments) equal to 10% of the Partnership's total investment in properties. As additional rent under the terms of the lease, the Partnership is entitled to receive a portion of the operating revenues of the lessees equal to (a) 3.5% of annual gross receipts derived from the travel plaza facility, excluding fuel sales; (b) 3/10 of $.01 per gallon of fuel sold; and (c) 3.5% of all amounts received by the lessee for any lease year pursuant to any sublease by the lessee of any part of its leased premises. Reference is made to Note (3) of the Notes to Financial Statements filed with this Report for a schedule of the minimum future lease payments to be received by the Company on its properties.
In connection with entering into a lease, the General Partner required each lessee to pay a rent enhancement fee to the Partnership at the inception of the lease in an amount equal to approximately four percent of the Partnership's total cost of the land, building and equipment comprising the property leased to the lessee, including certain capitalized acquisition expenses. This amount was advanced by the Partnership and included in the cost of the property leased to the lessee for the purpose of determining the lease payments. The Partnership, by including this amount in the cost of property, receives an additional amount of lease payments with respect to the property. The funds representing the aggregate rent enhancement fees were used to maintain cash distributions to the Holders in quarters when lease payments received by the Partnership were reduced due to the failure of any of the Partnership's lessees to meet all of their payment obligations. In addition, recognition of the rent enhancement fees provides additional income to the Partnership. The rent enhancement fee is amortized to rental income on a straight-line basis over a ten-year period from the inception of the lease.
The General Partner, the Partnership and Flying J Inc. entered into an operating agreement (the "Operating Agreement"). Pursuant to the terms of the Operating Agreement, in the event a lessee defaults in payment of any minimum rent or other monetary sum when due and payable under the lease and fails to cure such default within five days after receipt of notice of such default from the Partnership, Flying J Inc. has agreed to operate such lessee's leased travel plaza for the maximum potential lease term as a full-service travel plaza and to provide adequate working capital for the operations of such property. A defaulting lessee and any personal guarantor of such defaulting lessee will remain liable under the lease and guaranty, respectively, to the extent permitted by law.
The Partnership is also dependent upon CFJ Properties, its sole lessee, since an adverse change in its financial condition could materially affect its ability to make lease payments. During 1997, CFJ Properties contributed 100% of the Company's total rental and participating rental revenue for the year.
On February 1, 1991, Flying J Inc., through its subsidiary Big West, entered into a joint venture with Douglas Oil to form CFJ Properties. Flying J Inc. (and subsidiaries) is a fully
integrated oil and gas company and is engaged in the production, refining, transportation, wholesaling and retail marketing of petroleum products and other services through its travel plazas and gasoline stations. Flying J Inc. operates all of CFJ Properties' travel plazas and related facilities, which included 72 interstate travel plaza properties as of January 31, 1997. The Partnership owns thirteen of these properties. Under the terms of the joint venture agreement, Big West sold to Douglas Oil certain Flying J Travel Plazas, which Douglas Oil contributed back to CFJ Properties. In addition to this initial contribution, Douglas Oil also made additional contributions to CFJ Properties. As its initial contribution, Big West transferred to CFJ Properties certain leasehold interests and Flying J Travel Plazas, and subsequently contributed to CFJ Properties various assets including working capital, inventories and future development sites. Flying J Inc. assigned its leasehold interests in the travel plazas owned by the Partnership to CFJ Properties and was released by the Partnership with respect to its obligation under those leases.
The Partnership's leases with CFJ Properties are with full recourse to the assets of CFJ Properties, but without recourse to Big West or Douglas Oil. A default on one lease constitutes a default on all other leases to the same lessee by the Partnership and two other partnerships sponsored by affiliates of the Managing General Partner, all of whose travel plazas are leased to CFJ Properties, Flying J Inc. or franchisees of FJFI.
For the fiscal year ended January 31, 1997, CFJ Properties reported net income of $1.8 million on revenues of $1.2 billion. Revenues rose 25% from $937.4 million in the prior year. The higher revenues resulted from the opening of six new units and increases in fuel prices. Net income decreased from $17.2 million in the prior year due to higher interest expense and lower gross profit margins.
During the fiscal year ended January 31, 1997, CFJ Properties reported $22.3 million in net cash provided by operating activities. This cash, along with the cash provided by financing activities, was used to make capital expenditures. As of January 31, 1997, CFJ Properties reported cash balances of approximately $2.1 million, with liquidity supported by net cash provided by operating activities and a $150 million revolving line of credit with a bank. As of January 31, 1997, CFJ Properties reported partners' capital of $139.5 million and total assets of $412.9 million.
CFJ Properties leases travel plazas and equipment under non-cancelable operating leases, which generally expire at various dates over the next 10 to 16 years. Payments under these leases were $17.3 million in 1997 and $17.6 million in 1996, including percentage lease payments. Future minimum annual rent obligations under non-cancelable leases, as projected through 2002, remain comparable to 1997 expense amounts.
The thirteen travel plaza properties leased by CFJ Properties from the Partnership generated a combined fuel and non-fuel gross profit (including other income) of approximately $31.9 million during the fiscal year ended January 31, 1997 as compared to $37.2 million in fiscal year 1996. This decrease was due to lower volumes of fuel sales and lower fuel gross profits during fiscal year 1997 as compared to fiscal year 1996. Total travel plaza unit-level loss for these thirteen properties (before depreciation and allocated corporate overhead) totaled approximately $1.6 million in 1997 with four of the thirteen properties reporting positive unit-level income. The remaining nine properties reported losses primarily due to lower total
gross profits. The combined result of the travel plaza unit-level net loss before depreciation and allocated corporate overhead was down from $3.1 million in the prior year due largely to CFJ's curtailment of its relationship with Comdata on June 1, 1996. Comdata, a large third party billing company for the trucking industry, requested changes to its contract which were unacceptable to CFJ's management due to the significant long-term ramifications of Comdata's proposed change on CFJ's future business. For CFJ Properties' fiscal year ended January 31, 1997, the average unit-level base and participating rents approximated 13.8% of the original cost of these properties. None of the thirteen travel plaza properties operated by CFJ Properties represent over 10% of the Partnership's total assets in fiscal year 1997.
On February 2, 1998, the Partnership entered into a letter of intent with Flying J Inc. to sell substantially all of the Partnership's assets for cash of approximately $80 million. The sale is subject to certain conditions specified in the letter of intent, including the negotiation and execution of definitive sale and financing agreements with respect to the assets of the Partnership and the approval, by vote, of a majority of the limited partner interests. In accordance with the Partnership's limited partnership agreement (the "Partnership Agreement"), sale of substantially all of the assets will result in dissolution of the Partnership and liquidation of remaining Partnership assets, net of liabilities. There can be no assurance as to the final terms of the proposed transaction, that the conditions will be satisfied or that the proposed transaction will be consummated.
The negotiated sales price of approximately $80 million would have resulted in an estimated book gain of $31 million had the proposed sale taken place at December 31, 1997. Subsequent to the proposed asset sale and conversion of other Partnership assets into cash upon liquidation, a liquidating cash distribution will be made to investors in accordance with the Partnership Agreement. Had the sale (as proposed) occurred at December 31, 1997, it is estimated that the liquidating cash distribution would have been in the range of $970 to $990 per limited partnership unit. The actual liquidating distribution to be received by investors will depend upon the actual date and terms of the sale and the actual costs of liquidating the Partnership.
The travel plaza/truck stop industry, although highly fragmented, is also highly competitive. The Partnership's lessees are competing with, among others, National Auto/Truckstops, Petro and Pilot Corporation, as well as other national, regional and local truckstop operators, some of which may have substantially greater financial resources than the lessees. The Partnership's lessees also compete with other entities which provide hospitality goods and services to the trucking industry and traveling public in general. The major competitive factors include, among others, location, ease of access, brand identification, pricing, product and service selections, customer service, store appearance, cleanliness and safety. The Flying J Travel Plaza facilities owned by the Partnership offer a full-service operation, generally including fuel facilities, a restaurant, a convenience store and other amenities for use by the trucking industry and traveling public in general. Flying J Inc. reports that the Flying J Travel Plaza network consists of more than 100 facilities across the U.S. interstate highway system. The travel plaza sites have been selected based on traffic patterns and volumes, and access to interstate highways, among other criteria.
According to the American Trucking Association, the trucking industry generated more than $345 billion in gross freight revenues, representing 82% of the nation's freight bill in
1996. This was up 4% from the prior year. Over 21 million trucks registered in the United States for business purposes consumed approximately 41 billion gallons of fuel and transported over 60% of all primary shipments made in 1996.
Through ownership of the travel plazas, the Partnership is subject to the risks associated with the underground storage of petroleum products such as gasoline. In this regard, the Partnership's lessees are subject to various federal, state and local regulations and environmental laws. These laws and regulations affect the storing, dispensing and discharge of petroleum and other wastes and affect the lessees both in the securing of permits for fueling operations and in the ongoing conduct of such operations.
Federal, state and local regulatory agencies have adopted regulations governing underground storage tanks ("USTs") that require the Partnership's lessees to make certain expenditures for compliance. In particular, at the federal level, the Resource Conservation and Recovery Act requires the Environmental Protection Agency ("EPA") to establish a comprehensive regulatory program for the detection, prevention and cleanup of leaking USTs. Regulations enacted by the EPA in 1988 established requirements for (a) installing UST systems; (b) upgrading UST systems; (c) taking corrective action in response to releases; (d) closing UST systems; (e) keeping appropriate records; and (f) maintaining evidence of financial responsibility for taking corrective action and compensating third parties for bodily injury and property damage resulting from releases. These regulations permit states to develop, administer and enforce their own regulatory programs, incorporating requirements which are at least as stringent as the federal standards. By the end of 1998, all USTs must be corrosion protected, overfill/spill protected and have leak detection. These environmental laws impose strict liability for owners and operators of faulty and leaking storage tanks resulting in damage to the environment or third parties.
The General Partner has taken various steps to (a) ensure that the lessees comply with applicable rules and regulations; (b) mitigate any potential liabilities, including the establishment of storage tank monitoring procedures; and (c) require that lessees indemnify the Partnership for all such liabilities and obtain liability insurance, if reasonably available. The General Partner requires each lessee to obtain an annual environmental audit, performed by an environmental consulting and engineering firm, which includes the following procedures, among others: month-end cumulative inventory variance analysis; tank tightness tests; automatic tank gauging and leak detection system operation and calibration tests; UST excavation zone groundwater and/or soil vapor monitoring well analysis; piping system tightness tests; piping excavation zone ground water and/or soil vapor monitoring well analysis; pipe leak detector inspection and calibration tests; corrosion protection system tests; on-site sanitary sewer treatment plant effluent analysis; and oil/water separator inspections. The consulting and engineering firm hired by the General Partner to conduct such audits also reviews on-site environmental correspondence; visually inspects the UST system, tank and piping excavation zone monitoring wells, areas adjacent to all petroleum above-ground tanks, the stormwater and wastewater control systems, and the travel plaza facility; and discusses employee training procedures, recent significant environmental events (if any), repair and maintenance activities, and regulator compliance with travel plaza personnel.
The most recent annual environmental audits of the travel plazas indicate that some remediation is necessary at one or more of the travel plazas. Under each travel plaza lease, the
lessee is responsible for all costs associated with correcting problems identified by such audits and is obligated to indemnify the Partnership for all liabilities related to the operation of the travel plazas, including those related to remediation. The lessees are in the process of reviewing such environmental audits and have commenced appropriate corrective actions. The General Partner does not believe that the corrective actions recommended in the audits will affect the lessees' ability to make their scheduled lease payments to the Partnership or have a material adverse effect upon the Partnership.
The Partnership believes that its lessees are in compliance with all applicable regulatory requirements, except as discussed above, and that its lessees have all governmental licenses and permits required for their business operations. Management knows of no pending or threatened proceedings or investigations, under federal or state environmental laws; however, management cannot predict the impact on the Partnership's lessees of new governmental regulations and requirements. Although the General Partner has taken necessary steps, as discussed above, to ensure lessee compliance with environmental regulations, there can be no assurance that significant cleanup or compliance costs may not be incurred which may affect the lessees' ability to make their scheduled lease payments to the Partnership.
As of December 31, 1997, the Partnership has invested in real estate located in eleven states in the western, central and southeastern portions of the United States, and no real estate investments are located outside of the United States. A presentation of revenues or assets by geographic region is not applicable and would not be material to an understanding of the Partnership's business taken as a whole.
The Partnership does not believe that any aspect of its business is significantly seasonal in nature.
No portion of the Partnership's business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the United States Government. The Partnership does not manufacture any products and therefore does not require any raw materials in order to conduct its business.
The Partnership is managed by the General Partner and therefore has no employees of its own. FFCA Investor Services Corporation 88-C has no employees because it does not conduct any business operations.
The Partnership pays an affiliate of the General Partner for the maintenance of the books and records of the Partnership and for computer, investor and legal services performed for the Partnership. During 1997, this affiliate of the General Partner completed the design of a new accounting information system that was begun in 1996 and was implemented on January 1, 1998. The new system is "Year 2000" compliant which means that the system will be able to handle any dates that refer to the 21st century. By the end of 1998, all of the affiliate's significant information systems that would impact the Partnership will be "Year 2000" compliant. The affiliate is in the process of assessing the key suppliers that it relies upon in addition to any other systems that are sensitive to dates (such as the telephone and power systems, elevators, security systems, and so on), and has developed a plan for any such systems that are found to be noncompliant.
A five-phase process was adopted by the affiliate to address the issues associated with the year 2000 including: (1) an inventory and assessment of the systems and electronic devices that may be at risk; (2) the identification of potential solutions; (3) the implementation of upgrades or replacements to affected systems or devices; (4) the verification of compliance and testing of the revised systems; and (5) the training of users on the new systems. To date, the inventory and assessment phase of all critical computer hardware has been completed, as have the operating system and database software, and statements of "Year 2000" compliance have been received from the related vendors. The verification of "Year 2000" compliance through testing of these systems and training of users is nearly complete.
As discussed previously, the Partnership entered into a letter of intent with Flying J Inc. to sell substantially all of the Partnership's assets. In accordance with the Partnership Agreement, sale of substantially all of the assets will result in dissolution of the Partnership and liquidation of remaining Partnership assets, net of liabilities. Under these circumstances, the "Year 2000" issue is not anticipated to have any affect on the Partnership.
Factors Affecting Future Operating Results
The provisions of the Private Securities Litigation Reform Act of 1995 (the "Act"), became effective in December 1995. The Act provides a "safe harbor" for companies which make forward-looking statements providing prospective information. The "safe harbor" under the Act relates to protection for companies with respect to litigation filed on the basis of such forward-looking statements.
The Partnership wishes to take advantage of the "safe harbor" provisions of the Act and is therefore including this section. The statements contained herein, if not historical, are forward-looking statements and involve risks and uncertainties which are described below that could cause actual results to differ materially from the results, financial or otherwise, or other expectations described in such forward-looking statements. These statements are identified with the words "anticipated," "expected," "intends," or "plans," or words of similar meaning. Therefore, forward-looking statements should not be relied upon as a prediction of actual future results or occurrences.
The Partnership's future results may be subject to certain risks and uncertainties including the following:
o On February 2, 1998, the Partnership entered into a letter of intent with Flying J Inc. to sell substantially all of the Partnership's assets for cash of approximately $80 million. The sale is subject to certain conditions specified in the letter of intent, including the negotiation and execution of definitive sale and financing agreements with respect to the assets of the Partnership and the approval, by vote, of a majority of the limited partner interests. In accordance with the Partnership Agreement, sale of substantially all of the assets will result in dissolution of the Partnership and liquidation of remaining Partnership assets, net of liabilities. There can be no assurance as to the final terms of the proposed transaction, that the conditions will be satisfied or that the proposed transaction will be consummated.
o Adverse changes in general or local economic or market conditions may decrease demand for products and services sold at the Partnership's travel plazas.
o Competition in the travel plaza industry (see discussion in "Business" above), as well as competition with established entities and private investors in connection with the acquisition, sale and leasing of similar properties may decrease sales at the Partnership's travel plazas and decrease profit margins.
o Material or substantial restrictions on travel plaza facilities imposed by federal, state and local laws and regulations may result in increased operating expenses and capital expenditures for the operators of the Partnership's travel plazas.
o The Partnership is dependent upon the financial condition of CFJ Properties and its ability to properly operate the travel plaza facilities. If CFJ Properties fails to operate the travel plaza facilities properly, the Partnership's revenue stream may be adversely affected.
o The Partnership is dependent upon petroleum products and factors affecting the petroleum industry, including the following: governmental policies and programs regarding oil exploration, production and marketing; federal, state and local environmental laws, rules and regulations regarding the ownership, operation and maintenance of oil production facilities, refineries and petroleum product storage and marketing facilities; unrest in the Middle East; worldwide and domestic economic conditions; oil import quotas; trade embargoes; the imposition of gasoline or other energy taxes; the supply and price of oil; and effects of all of the foregoing on the transportation and travel industries, which could result in smaller profit margins and volumes of sales of petroleum products as well as smaller base rental income revenues from lessees of the properties. This dependency may decrease the availability, and increase the price of, products and services sold at the Partnership's travel plazas which may adversely affect its revenue stream.
o Condemnation or uninsured losses may adversely affect the ability of the travel plazas to profitably operate.
o Changing demographics and changing transport, traffic and travel patterns may result in a decrease in sales at the Partnership's travel plazas.
o Relocation and construction of highways may substantially decrease consumer demand and adversely affect the operations of the Partnership's travel plaza.
o Increased costs of food products would decrease profit margins on food products.
o Failure of lessees to remediate environmental problems identified in recent environmental audits may affect the marketability of the travel plazas to third parties.
Item 2.
Item 2. Properties.
As of December 31, 1997, the Partnership had acquired thirteen travel plaza properties located in 11 states. The properties were acquired by the Partnership during 1988, 1989, 1990 and 1991 with the net proceeds received by the Partnership from the public offering of the Units.
The Partnership's travel plazas, divided into sections which serve both the commercial and non-commercial traveler, generally offer a multi-use, full service operation including fuel facilities for the storage and sale of automotive and diesel fuels, a 24-hour restaurant, a convenience store, restroom facilities with private showers, and other amenities designed to meet the needs of the trucking industry and the traveling public in general. No one property is a principal property of the Partnership because each property represents less than 10% of the Partnership's total assets. The following is a description of each of the properties acquired by the Partnership.
Pecos, Texas
The Pecos travel plaza was acquired as a new full-service travel plaza, built on a parcel consisting of approximately 14.11 acres located at the interchange of Interstate 20 and US 285.
Dillon, South Carolina
The Dillon travel plaza was acquired as a new full-service travel plaza, built on a parcel consisting of approximately 20.64 acres, located at the interchange of Interstate 95 and State Route 38. Within an 85-mile radius of the property are the markets of Columbia and Florence, South Carolina and Lumberton and Fayetteville, North Carolina.
Graham, North Carolina
The Graham travel plaza was acquired as a new full-service travel plaza, built on a parcel consisting of approximately 20 acres, located at the interchange of Interstate 40/85 and State Route 1928.
Knoxville, Tennessee
The Knoxville travel plaza was acquired as a new full-service travel plaza, built on a parcel consisting of approximately 14.05 acres, located parallel to Interstate 40.
Kingman, Arizona
The Kingman travel plaza was built on the site of an existing Husky truck stop which was razed and replaced with a new full-service travel plaza. The site consists of approximately 7.45 acres located 1/8 of a mile north of the Interstate 40/US 90 interchange.
Jackson, Georgia
The Jackson travel plaza was acquired as a new full-service travel plaza, built on a parcel consisting of approximately 42.2 acres of which 27 acres are developed, located at the
interchange of Interstate 75 and Star Route 36.
Texarkana, Arkansas
The Texarkana travel plaza was acquired as a new full-service travel plaza, built on a parcel consisting of approximately 28 acres, located at Exit 7 of Interstate 30. On March 7, 1993, the Texarkana travel plaza sustained substantial damage due to a fire. The property was insured and the lessee of the travel plaza used the insurance proceeds to rebuild the travel plaza. During 1994, the Partnership made an additional investment of $595,000 in the Texarkana travel plaza to enlarge the property to conform to the new Flying J travel plaza prototype. The lessee of the travel plaza continued to make monthly base rental payments during the reconstruction of the travel plaza. The travel plaza reopened in March 1994.
Resaca, Georgia
The Resaca travel plaza was acquired as a new full-service travel plaza, built on a parcel consisting of approximately 39.65 acres, situated at the southeast corner of Resaca Road and Interstate 75.
Walton, Kentucky
The Walton travel plaza was acquired as a new full-service travel plaza, built on a parcel consisting of approximately 19.63 acres, situated at the southwest corner of Stephenson Mill Road and Kentucky Highway 14 and 16 just west of the Interstate 75 exit ramp with 1,200 feet of primary frontage.
San Antonio, Texas
The San Antonio travel plaza was acquired as a new full-service travel plaza, built on a parcel consisting of approximately 19.94 acres, located at the northwest corner of Foster Road and Interstate 10.
Rock Springs, Wyoming
The Rock Springs travel plaza was acquired as a new full-service travel plaza, built on a parcel consisting of approximately 9.57 acres, situated at the northwest corner of Elk Street and Stagecoach Drive at the Elk Street exit off Interstate 80.
Troutdale, Oregon
The Troutdale travel plaza was acquired as a new, full-service (with limited restaurant facilities) travel plaza, built on a parcel consisting of approximately 7.45 acres, located at the southwest corner of Northwest Frontage Road at Interstate 84 and Graham Road.
Winnemucca, Nevada
The Winnemucca travel plaza was acquired as a new, full-service (with limited restaurant facilities) travel plaza, built on a parcel consisting of approximately 8.29 acres, located on the
northwest side of West Winnemucca Boulevard at the interchange of Interstate 80 and West Winnemucca Boulevard.
Reference is made to the Annual Portfolio Valuation prepared by Cushman & Wakefield which is filed with this Report as an exhibit for the properties' appraised value as of December 31, 1997.
Independent of the Partnership, FFCA Investor Services Corporation 88-C has no interest in any real or personal property.
Item 3.
Item 3. Legal Proceedings.
Neither the Co-Registrants nor their properties are parties to, or subject to, any material pending legal proceedings.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of the Holders through the solicitation of proxies or otherwise during the fourth quarter of fiscal year 1997.
PART II
Item 5.
Item 5. Market for Registrant's Units and Related Security Holders Matters.
Market Information. During 1997, there was no established public trading market for the Units, and it is not anticipated that an established public trading market for the Units will develop.
Holders. As of March 2, 1998, there were 6,527 record holders of the Units.
Distributions. For the two most recent fiscal years, the Partnership made the following cash distributions to the Holders:
Per Unit Distribution Total ------------------- ---------------------- Date of Number Cash From Cash From Distribution of Units Operations Capital Operations Capital ------------ -------- ---------- ------- ---------- -------
March 31 82,834 $ 25.27 -- $2,093,215 -- June 30 82,834 26.25 -- 2,174,393 -- September 30 82,834 26.15 -- 2,166,109 -- December 31 82,834 25.74 -- 2,132,147 --
Per Unit Distribution Total ------------------- ---------------------- Date of Number Cash From Cash From Distribution of Units Operations Capital Operations Capital ------------ -------- ---------- ------- ---------- -------
March 31 82,834 $ 25.51 -- $2,113,095 -- June 30 82,834 26.05 -- 2,157,826 -- September 30 82,834 25.53 -- 2,114,752 -- December 31 82,834 25.05 -- 2,074,992 --
Cash from operations, defined as disbursable cash in the agreement of limited partnership which governs the Partnership, is distributed to the Holders. Any variations in the amount of distributions from quarter to quarter are due to fluctuations in net cash provided by operating activities. Reference is made to Item 7 below for a discussion and analysis of such fluctuations. Cash proceeds from the sale of property are distributed to the Holders as a return of capital. The Adjusted Capital Contribution of a Holder is generally the Holder's initial capital contribution reduced by the cash distributions to the Holders of proceeds from the sale of Partnership properties and reduced by any other cash distributions other than from operations. The Adjusted Capital Contribution per Unit of the Holders, as defined in the agreement of limited partnership which governs the Partnership, was $1,000 as of December 31, 1997.
Any differences in the amounts of distributions set forth in the above tables from the information contained in Item 6
Item 6. Selected Financial Data.
The following selected financial data should be read in conjunction with the Financial Statements and the related Notes attached as an exhibit to this Report.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Liquidity and Capital Resources
The Partnership received $82,834,000 in gross proceeds from its public offering of the Units. After deducting organizational and offering expenses, including sales commissions, the Partnership invested the net offering proceeds of $71,956,541 in thirteen travel plazas. The rental payments from lessees of the properties are the Partnership's primary source of income.
As of December 31, 1997, the Partnership had cash and marketable securities aggregating $3,984,265, of which $2,132,147 was paid out to the Holders in January 1998 as their fourth quarter distribution for fiscal year 1997, and the remainder of which will be held by the Partnership for reserves. The Partnership uses the rental revenues from its properties to meet its cash needs, and it is anticipated that such rental payments will be sufficient to meet all of the Partnership's expenses and provide cash for distributions to the Limited Partners.
As of December 31, 1997, the balance sheet of the Partnership reflected as a liability $594,251 in deferred income. This amount represents cash received by the Partnership as rent enhancement fees. Each year approximately 10% of the original amount is recognized as income by the Partnership and the amount of deferred income is decreased by a corresponding amount.
On February 2, 1998, the Partnership entered into a letter of intent with Flying J Inc. to sell substantially all of the Partnership's assets for cash of approximately $80 million. The sale is subject to certain conditions specified in the letter of intent, including the negotiation and execution of definitive sale and financing agreements with respect to the assets of the Partnership and the approval, by vote, of a majority of the limited partner interests. In accordance with the partnership agreement, sale of substantially all of the assets will result in
dissolution of the partnership and liquidation of remaining Partnership assets, net of liabilities. There can be no assurance as to the final terms of the proposed transaction, that the conditions will be satisfied or that the proposed transaction will be consummated.
The negotiated sales price of approximately $80 million would have resulted in an estimated book gain of $31 million had the proposed sale taken place at December 31, 1997. Subsequent to the proposed asset sale and conversion of other Partnership assets into cash upon liquidation, a liquidating cash distribution will be made to investors in accordance with the Partnership agreement. Had the sale (as proposed) occurred at December 31, 1997, it is estimated that the liquidating cash distribution would have been in the range of $970 to $990 per limited partnership unit. The actual liquidating distribution to be received by investors will depend upon the actual date and terms of the sale and the actual costs of liquidating the Partnership.
The Partnership pays an affiliate of the General Partner for the maintenance of the books and records of the Partnership and for computer, investor and legal services performed for the Partnership. During 1997, this affiliate of the General Partner completed the design of a new accounting information system that was begun in 1996 and was implemented on January 1, 1998. The new system is "Year 2000" compliant which means that the system will know how to handle any dates that refer to the 21st century. By the end of 1998, all of the affiliate's significant information systems that would impact the Partnership will be "Year 2000" compliant.
As discussed previously, the Partnership entered into a letter of intent with Flying J Inc. to sell substantially all of the Partnership's assets. In accordance with the partnership agreement, sale of substantially all of the assets will result in dissolution of the partnership and liquidation of remaining Partnership assets, net of liabilities. Under these circumstances, the "Year 2000" issue is not anticipated to have any affect on the Partnership.
FFCA Investor Services Corporation 88-C has no capital resources and conducted no operations in 1997.
Results of Operations
The Partnership purchased its properties beginning in 1988 until becoming fully invested in June 1991. The Partnership received or accrued 100% of the lease payments due it from its lessees in 1997, 1996 and 1995.
Fiscal Year Ended December 31, 1997 Compared to Fiscal Year Ended December 31, 1996
The Partnership's total revenues for the year ended December 31, 1997 increased to $10,034,660 from $9,857,290 for the year ended December 31, 1996. The overall increase in revenues is due to an increase in participating rentals. Participating rental revenues increased to $2,352,826 in 1997 from $2,237,456 in 1996 due to higher travel plaza sales volumes. On June 1, 1996, CFJ Properties (the Partnership's only lessee) curtailed its relationship with a large third party billing company for the trucking industry. The billing company requested changes to its contract that were unacceptable to CFJ Properties' management due to the significant long-
term ramifications of the proposed change on CFJ Properties' future business. This resulted in reduced volume and margins, which contributed to lower participating rental revenues in 1996 as compared to 1997. During 1997, the Partnership sold four equipment packages for an aggregate gain of $29,488, with the remaining equipment leases scheduled to expire at various dates through 1999. Base rental revenue for 1997 includes the recognition of approximately $274,000 of income previously deferred.
Total Partnership expenses in 1997 were $4,060,280, representing an increase from $4,025,683 in 1996. The increase, resulting from an increase in operating expenses of $35,192, primarily related to higher legal fees in 1997. Net income for 1997 amounted to $5,974,380 as compared to $5,831,607 for 1996.
Fiscal Year Ended December 31, 1996 Compared to Fiscal Year Ended December 31, 1995
The Partnership's total revenues for the year ended December 31, 1996 declined slightly to $9,857,290 from $9,985,844 for the year ended December 31, 1995. Revenues decreased between years as a result of a decrease in participating rentals amounting to $116,838, or 5%, which is attributable to decreased overall travel plaza sales related to the curtailment in June 1996 by CFJ Properties of its relationship with a third party billing company. Base rental revenue for 1996 includes the recognition of approximately $274,000 of income previously deferred.
Total Partnership expenses in 1996 were $4,025,683, representing a nominal increase from $3,983,222 in 1995. The increase was the result of an increase in depreciation expense from $2,895,293 in 1995 to $2,988,226 in 1996, partially offset by a decrease of $12,411 in general partner and affiliate fees and a decrease of $38,061 in operating expenses. Net income for 1996 amounted to $5,831,607 as compared to $6,002,622 for 1995.
Inflation
Inflation may cause an increase in each travel plaza's gross revenues due to price increases. This may cause an increase in rental income because a portion of the lessees' lease payments are computed as a percentage of the lessees' gross revenues. Thus, as gross sales increase the lease payments will also increase. Inflation may also tend to increase the rate of capital appreciation of the Partnership's properties over a period of time as gross rental income from the properties continues to increase. Inflation may, however, have an adverse impact on the profitability of the lessees because of increases in operating expenses. Inflation has no impact on FFCA Investor Services Corporation 88-C's activities.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The financial statements of the Co-Registrants required by Regulation S-X are attached to this Report. Reference is made to Item 14 below for an index to the financial statements and financial statement schedules.
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.
The Partnership has no directors or executive officers. Franchise Finance Corporation of America II ("FFCA II"), as the Managing General Partner, has responsibility for all of the Partnership's operations. FFCA II was organized in Delaware in October of 1988 for the purpose of sponsoring limited partnerships such as the Partnership. The directors and executive officers of FFCA II and FFCA Investor Services Corporation 88-C, and the year they were elected or appointed to their respective offices, are as follows:
FFCA II
Directors Name Position Held Since ---- -------------------
Paul Bagley 1988 Morton H. Fleischer, Chairman 1988 John R. Barravecchia 1993 Christopher H. Volk 1993
Officers
FFCA Investor Services Corporation 88-C
Director
Associated with the Corporation Name Since ---- -----
Morton H. Fleischer 1987
Officers
All of the foregoing directors and officers have been elected to serve a one year term and until their successors are elected and qualified. There are no arrangements or understandings between or among any of the officers or directors and any other person pursuant to which any officer or director was selected as such. There are no family relationships among any directors and officers.
Business Experience
The business experience during the past five years of each of the above directors and executive officers is as follows:
Paul Bagley, age 55, has served as a director of FFCA II since 1988. Mr. Bagley is a founding partner of Stone Pine Capital LLC (1994), and is chairman of FCM Fiduciary Management Co. LLC (1989 to date), the advisor to a mezzanine and private equity fund. For more than twenty years prior to 1988, Mr. Bagley was engaged in investment banking activities with Shearson Lehman Hutton Inc. and its predecessor, E.F. Hutton & Company Inc., where he was responsible for the creation and management of over $5 billion of direct investment activities. Mr. Bagley has served on the boards of a number of public and private companies. Currently he is on the boards of Fiduciary Capital, Hollis-Eden Pharmaceuticals, Consolidated Capital, Logan Machinery Corp. and Pacific Consumer Funding.
Morton H. Fleischer, age 61, has served as the Chairman of the Board of FFCA Investor Services Corporation 88-C since 1987 and has served as President, Chief Executive Officer and a Director of FFCA II since its formation in 1988. Mr. Fleischer was appointed Chairman of the Board of FFCA II in February of 1994 and currently serves as President, Chief Executive Officer and Chairman of the Board of Franchise Finance Corporation of America, a Delaware
corporation ("FFCA"). He served as President, Chief Executive Officer and a Director of Franchise Finance Corporation of America I ("FFCA I"), a predecessor of FFCA, from 1980 to 1994. Mr. Fleischer is also an individual general partner of the Partnership and is a general partner (or general partner of a general partner) of the following public limited partnerships: Participating Income Properties 1986, L.P.; Participating Income Properties III Limited Partnership; and Scottsdale Land Trust Limited Partnership.
John R. Barravecchia, age 42, has served as President, Secretary and Treasurer of FFCA Investor Services Corporation 88-C since 1990. He has served as Senior Vice President and Chief Financial Officer of FFCA II since 1989, was named Treasurer in December 1993 and was named Assistant Secretary in 1994. In 1995, Mr. Barravecchia was named Executive Vice President of FFCA II. Mr. Barravecchia currently serves as Executive Vice President, Chief Financial Officer, Treasurer and Assistant Secretary of FFCA and served in various capacities for FFCA I from 1984 to 1994. He was appointed Vice President and Chief Financial Officer of FFCA I in December 1986, and Senior Vice President in October 1989. Mr. Barravecchia was elected as a Director of FFCA I in March 1993 and Treasurer in December 1993. Prior to joining FFCA I, Mr. Barravecchia was associated with the international public accounting firm of Arthur Andersen LLP.
Christopher H. Volk, age 41, has served as Vice President, Assistant Secretary and Assistant Treasurer of FFCA Investor Services Corporation 88-C since 1994 and served as Vice President-Research of FFCA II from 1989 to 1993. Mr. Volk was named Senior Vice President-Underwriting and Research and Secretary of FFCA II in December 1993. In 1995, he was named Chief Operating Officer and Executive Vice President of FFCA II. He currently serves as Executive Vice President, Chief Operating Officer, Secretary and Assistant Treasurer of FFCA. He joined FFCA I in 1986 and has served in various capacities in FFCA I's capital preservation and underwriting areas prior to being named Vice President-Research in October 1989. In December 1993, he was appointed Secretary and Senior Vice President-Underwriting and Research of FFCA I, and he was elected as a Director of FFCA I in March 1993. Prior to joining FFCA I, Mr. Volk was employed for six years with the National Bank of Georgia, where his last position was Assistant Vice President and Senior Correspondent Banking Credit Officer. Mr. Volk is a member of the Association for Investment Management and Research and the Phoenix Society of Financial Analysts.
Dennis L. Ruben, age 44, served as Senior Vice President and General Counsel of FFCA II from December 1994 and was named Executive Vice President, General Counsel and Assistant Secretary of FFCA II in February 1997. He currently serves in the same capacity for FFCA. In 1991, he joined FFCA I as attorney and counsel. In December 1993, he was appointed Senior Vice President and General Counsel of FFCA I. Prior to joining FFCA I, Mr. Ruben was associated with the law firm of Kutak Rock from 1980 until March 1991. Mr. Ruben became a partner of Kutak Rock in 1984. Mr. Ruben has been admitted to the Iowa, Nebraska and Colorado bars.
Stephen G. Schmitz, age 43, served as Senior Vice President-Corporate Finance of FFCA II from January 1996 and was named Executive Vice President, Chief Investment Officer and Assistant Secretary of FFCA II in February 1997. He currently serves in the same capacity for FFCA. Mr. Schmitz served in various positions as an officer of FFCA I from 1986 to June 1, 1994. Prior to joining FFCA I, Mr. Schmitz was a commercial lender with Mellon Bank
in Pittsburgh, where his last position was Vice-President and Section Manager.
Catherine F. Long, age 41, was named Senior Vice President-Finance of FFCA in February 1997, was named Principal Accounting Officer in December 1993 and was named Assistant Secretary and Assistant Treasurer in 1994. She currently serves in the same capacities for FFCA. In June 1990, she joined FFCA I as Vice President-Finance. In December 1993, she was appointed Principal Accounting Officer of FFCA I. From December 1978 to May 1990, Ms. Long was associated with the international public accounting firm of Arthur Andersen LLP, where her last position was senior audit manager. Ms. Long is a certified public accountant and is a member of the Arizona Society of Certified Public Accountants.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to the Co-Registrants during fiscal year 1997 and Forms 5 and amendments thereto furnished to the Co-Registrants with respect to fiscal year ended December 31, 1997 (the "Forms"), and any written representations by the directors and executive officers of FFCA Investor Services Corporation 88-C and the Managing General Partner, the Co-Registrants have not identified herein any such person that failed to file on a timely basis the Forms required by Section 16(a) of the Securities Exchange Act of 1934 for fiscal year 1997.
Item 11.
Item 11. Executive Compensation.
The Partnership is required to pay an acquisition fee and a subordinated real estate disposition fee to the Managing General Partner, and the General Partners are entitled to receive a share of cash distributions, when and as made to the Holders, a share of profits and losses and a subordinated share of any sale proceeds. Reference is made to Note (1) and Note (5) of the Notes to Financial Statements which are filed with this Report for a description of the fees and distributions paid in 1997.
FFCA Investor Services Corporation 88-C serves as assignor and initial limited partner without compensation from the Partnership. It is not entitled to any share of the profits, losses or cash distributions of the Partnership. The director and officers of FFCA Investor Services Corporation 88-C serve without compensation from FFCA Investor Services Corporation 88-C or the Partnership.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
As of March 2, 1998, no person or group was known by the Partnership to own directly or beneficially more than 5% of the outstanding Units of the Partnership.
None of the General Partners of the Partnership owned any Units as of March 2, 1998. The directors and officers of the Managing General Partner, individually and as a group, owned less than 1% of the Units as of March 2, 1998. The Managing General Partner is owned 51% by Morton H. Fleischer and 49% by Paul Bagley.
FFCA Investor Services Corporation 88-C has an interest in the Partnership as a limited partner and it serves as the owner of record of all of the limited partnership interests assigned by
it to the Holders. However, FFCA Investor Services Corporation 88-C has no right to vote its interest on any matter and it must vote the assigned interests as directed by the Holders. FFCA Investor Services Corporation 88-C is a wholly owned subsidiary of the Managing General Partner.
Item 13.
Item 13. Certain Relationships and Related Transactions.
Since the beginning of the last fiscal year of both of the Co-Registrants, there have been no significant transactions or business relationships among the Co-Registrants, the General Partners or their affiliates or their management, other than as described in Items 1, 10 and 11 above.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as part of this Report:
1. Financial Statements. The following financial statements are filed as part of this Report:
The Partnership
Report of independent public accountants Balance Sheets as of December 31, 1997 and 1996 Statements of Income for the years ended December 31, 1997, 1996 and 1995 Statements of Changes In Partners' Capital for the years ended December 31, 1997, 1996 and 1995 Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 Notes to Financial Statements
FFCA Investor Services Corporation 88-C
Report of independent public accountants Balance Sheet as of December 31, 1997 Notes to Balance Sheet
2. Financial Statement Schedules.
Schedule III-Schedule of Real Estate and Accumulated Depreciation as of December 31, 1997
All other schedules are omitted since they are not required, are inapplicable, or the required information is included in the financial statements or notes thereto.
3. Exhibits.
The following is a complete list of exhibits filed as part of this Form 10-K. For electronic filing purposes only, this report contains Exhibit 27, the Financial Data Schedule. Exhibit numbers correspond to the numbers in the Exhibit Table of Item 601 of Regulation S-K.
99. Annual Portfolio Valuation of Cushman & Wakefield as of December 31, 1997
Pursuant to Rule 12b-32 under the Securities Exchange Act of 1934, as amended, the following document, filed with the Securities and Exchange Commission as Exhibit 4 to the Co-Registrants' Form 10-K for the fiscal year ended 1989, Commission File No. 0-18504, is incorporated herein by this reference.
Fifth Amended and Restated Certificate and Agreement of Limited Partnership which governs the Partnership, as filed with the Secretary of State of Delaware on December 11, 1989.
Pursuant to Rule 12b-32 under the Securities Exchange Act of 1934, as amended, the following documents, filed with the Securities and Exchange Commission as exhibits to the Co-Registrants' Registration Statement on Form S-11, Registration No. 33-16849, are incorporated herein by this reference.
(b) Reports on Form 8-K.
The Co-Registrants did not file any reports on Form 8-K during the fourth quarter of fiscal year 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Partnership has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
PARTICIPATING INCOME PROPERTIES II, L.P.
By FRANCHISE FINANCE CORPORATION OF AMERICA II, Managing General Partner
Date: March 27, 1998 By /s/ Morton H. Fleischer -------------------------------- Morton H. Fleischer, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Partnership and in the capacities and on the dates indicated.
SIGNATURES OF REQUIRED OFFICERS AND DIRECTORS OF FRANCHISE FINANCE CORPORATION OF AMERICA II, MANAGING GENERAL PARTNER OF PARTICIPATING INCOME PROPERTIES II, L.P.
Date: March __, 1998 By -------------------------------- Paul Bagley, Director
Date: March 27, 1998 By /s/ Morton H. Fleischer -------------------------------- Morton H. Fleischer, President, Chief Executive Officer and Director
Date: March 27, 1998 By /s/ John Barravecchia -------------------------------- John Barravecchia, Executive Vice President, Chief Financial Officer, Treasurer, Assistant Secretary and Director
Date: March 27, 1998 By /s/ Christopher H. Volk -------------------------------- Christopher H. Volk, Executive Vice President, Chief Operating Officer, Secretary, Assistant Treasurer and Director
Date: March 27, 1998 By /s/ Catherine F. Long -------------------------------- Catherine F. Long, Senior Vice President-Finance, Principal Accounting Officer, Assistant Secretary and Assistant Treasurer
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Co-Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
FFCA INVESTOR SERVICES CORPORATION 88-C
Date: March 27, 1998 By /s/ Morton H. Fleischer -------------------------------- Morton H. Fleischer, Sole Director
Date: March 27, 1998 By /s/ John Barravecchia -------------------------------- John Barravecchia, President, Secretary, Treasurer, Principal Financial Officer and Principal Accounting Officer
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Participating Income Properties II, L.P.:
We have audited the accompanying balance sheets of PARTICIPATING INCOME PROPERTIES II, L.P. (a Delaware limited partnership) as of December 31, 1997 and 1996, and the related statements of income, changes in partners' capital and cash flows for each of the three years in the period ended December 31, 1997. These financial statements and the schedule referred to below are the responsibility of the partnership's managing general partner. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Participating Income Properties II, L.P. as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule of Real Estate and Accumulated Depreciation is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Phoenix, Arizona, January 6, 1998, (except with respect to the matter discussed in Note 6, as to which the date is February 3, 1998).
PARTICIPATING INCOME PROPERTIES II, L.P. ----------------------------------------
BALANCE SHEETS - DECEMBER 31, 1997 AND 1996 -------------------------------------------
The accompanying notes are an integral part of these balance sheets.
PARTICIPATING INCOME PROPERTIES II, L.P. ----------------------------------------
STATEMENTS OF INCOME --------------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 ----------------------------------------------------
The accompanying notes are an integral part of these statements.
PARTICIPATING INCOME PROPERTIES II, L.P. ----------------------------------------
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL ------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 ----------------------------------------------------
General Limited Partners Partners Total ------------ ------------ ------------
BALANCE, December 31, 1994 $ (137,296) $ 58,265,501 $ 58,128,205
Net income 60,026 5,942,596 6,002,622
Distributions to partners (86,237) (8,537,458) (8,623,695) ------------ ------------ ------------
BALANCE, December 31, 1995 (163,507) 55,670,639 55,507,132
Net income 58,316 5,773,291 5,831,607
Distributions to partners (85,456) (8,460,157) (8,545,613) ------------ ------------ ------------
BALANCE, December 31, 1996 (190,647) 52,983,773 52,793,126
Net income 59,744 5,914,636 5,974,380
Distributions to partners (86,524) (8,565,908) (8,652,432) ------------ ------------ ------------
BALANCE, December 31, 1997 $ (217,427) $ 50,332,501 $ 50,115,074 ============ ============ ============
The accompanying notes are an integral part of these statements.
PARTICIPATING INCOME PROPERTIES II, L.P. ----------------------------------------
STATEMENTS OF CASH FLOWS ------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 ----------------------------------------------------
The accompanying notes are an integral part of these statements.
PARTICIPATING INCOME PROPERTIES II, L.P. ----------------------------------------
Notes to Financial Statements -----------------------------
December 31, 1997 and 1996 --------------------------
1) ORGANIZATION: ------------
Participating Income Properties II, L.P. (the Partnership) was formed on August 12, 1987 under the Delaware Revised Uniform Limited Partnership Act to purchase new and existing "Flying J Travel Plaza" facilities, including land, buildings and equipment to be leased on a net basis to certain franchisees of Flying J Franchise Inc. and to Flying J Inc. As of December 31, 1997, all thirteen travel plazas owned by the Partnership were leased to CFJ Properties (CFJ), an affiliate of Flying J Inc. "Flying J Travel Plaza" facilities offer a full-service operation, generally including fuel facilities, a restaurant, convenience store and other amenities for use by the trucking industry and traveling public in general. Franchise Finance Corporation of America II (FFCA II), a Delaware corporation, is the managing general partner of the Partnership. The Partnership will expire December 31, 2047, or sooner, in accordance with the terms of the Partnership agreement.
Investors acquired units of assigned limited partnership interest (the limited partnership units) in the Partnership from FFCA Investor Services Corporation 88-C (the Initial Limited Partner), a Delaware corporation wholly-owned by an affiliate of FFCA II. Holders of the units have all of the economic benefits and substantially the same rights and powers of limited partners; therefore, they are referred to herein as "limited partners."
The Partnership agreement provides for allocation of profits and losses and cash distributions among its partners as follows:
Profits and Losses: Allocated 99% to the limited partners and 1% to the general partners.
Cash Distributions: All cash from operations, as defined, after payment of fees to the managing general partner is allocated 99% to the limited partners and 1% to the general partners. Cash proceeds from the sale of property are not considered cash from operations but, when distributed, represent a partial return of the limited partners' initial $1,000 per unit capital contribution. There have been no such distributions, therefore, the limited partner Adjusted Capital Contribution, as defined in the Partnership agreement, at December 31, 1997 is $1,000 per unit.
The following is a reconciliation of net income to cash distributions from operations as defined in the Partnership agreement:
2) SIGNIFICANT ACCOUNTING POLICIES: -------------------------------
Financial Statements - The financial statements of the Partnership are prepared on the accrual basis of accounting. The preparation of the 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 at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although management believes its estimates are reasonable, actual results could differ from those estimates.
Cash and Cash Equivalents - Investment securities that are highly liquid and have maturities of three months or less at the date of purchase are classified as cash equivalents. Cash equivalents include United States Treasury securities of $3,704,718 and $3,496,028 at December 31, 1997 and 1996, respectively, and bank repurchase agreements (which are collateralized by United States Treasury and Government obligations) of $175,139 at December 31, 1996. Short-term investments are recorded at cost plus accrued interest, which approximates market value.
Leases - The Partnership leases its property under long-term net leases which are classified as operating leases. Rental revenue from operating leases is recognized as it is earned.
Deferred Income - The Partnership required certain lessees to pay to the Partnership, at the inception of the lease, an amount equal to 4% of the property's cost (rental enhancements). This amount is deferred and accreted to revenue on a straight-line basis over ten years. The cash from rental enhancements and interest accrued thereon was used to supplement limited partners' cash distributions during 1992 and prior years.
Depreciation - Depreciation on buildings is provided using the straight-line method based upon an estimated useful life of 24 years. Equipment is depreciated over an estimated useful life of eight years, assuming a 10% salvage value at the end of its useful life. The cost of properties includes miscellaneous acquisition and closing costs.
3) PROPERTY SUBJECT TO OPERATING LEASES: ------------------------------------
The following is an analysis of the Partnership's investment, at cost, in property subject to operating leases by major class at December 31, 1997 and 1996: 1997 1996 ----------- ----------- Land $11,709,570 $11,709,570 Buildings 54,004,577 54,004,577 Equipment 3,832,921 5,268,921 ----------- ----------- 69,547,068 70,983,068 Less - Accumulated depreciation 20,814,945 19,119,173 ----------- -----------
$48,732,123 $51,863,895 =========== ===========
Lease agreements provide for monthly base rentals equal to a percentage of the property's cost. As additional rent, the Partnership receives a portion of the operating revenues of the lessee equal to a percentage of gross receipts (participating rentals) from travel plaza facilities and fuel sales. The term of the leases is eight years for equipment and 20 years for land and buildings. Generally, the lessee has the option to purchase equipment (at fair market value) at the end of the lease term and land and buildings (at the greater of fair market value or cost) at any time after the first ten years of the lease. The equipment leases are scheduled to expire at various dates through 1999. During the year ended December 31, 1997, all thirteen travel plazas owned by the Partnership were leased to CFJ. The Partnership is the beneficiary of a letter of credit from CFJ in the amount of $952,483 to be used as security for CFJ's lease payments.
Minimum future rentals (excluding participating rentals) under noncancellable operating leases as of December 31, 1997, are as follows:
Year Ending December 31, ----------------------- 1998 $ 7,189,000 1999 7,189,000 2000 7,189,000 2001 7,189,000 2002 7,189,000 Thereafter 50,879,000 -----------
Total minimum future rentals $86,824,000 ===========
4) INCOME TAXES: ------------
The Partnership is not directly subject to income taxes; rather, each partner is subject to income taxes on his distributable share of taxable income. The Partnership tax returns and the amount of distributable partnership profits or losses are subject to examination by Federal and state taxing authorities. If examinations by taxing authorities result in changes to distributable partnership profits or losses, the tax liabilities of the partners could be changed accordingly.
The following is a reconciliation of net income for financial reporting purposes to income reported for Federal income tax purposes for the years ended December 31, 1997, 1996 and 1995:
For Federal income tax reporting purposes, taxable income to partners is reported on the accrual basis of accounting and is classified as ordinary income.
At December 31, 1997, the tax bases of the Partnership's assets and liabilities exceed the amounts recorded for financial reporting purposes by $8,018,705. This difference results primarily from differences in depreciation methods and the treatment of deferred rental revenue for tax reporting and financial reporting purposes.
5) TRANSACTIONS WITH RELATED PARTIES: ---------------------------------
Under the terms of the Partnership agreement, FFCA II is entitled to compensation for certain services performed in connection with managing the affairs of the Partnership. Additionally, during 1996 and prior years, an affiliate of FFCA II was entitled to a fee for investment banking and asset management services (investment banking fee). During 1997, 1996 and 1995, fees paid to FFCA II and the affiliate were as follows:
1997 1996 1995 -------- -------- -------- FFCA II - disbursable cash fee $855,735 $845,593 $853,738 Affiliate - investment banking fee -- 4,271 8,537 -------- -------- --------
$855,735 $849,864 $862,275 ======== ======== ========
FFCA II is entitled to a disbursable cash fee equal to 9% of all cash received by the Partnership less Partnership operating expenses, only to the extent the limited partners have received an annual return of 9% (calculated quarterly) on their Adjusted Capital Contribution, as defined. The investment banking fee payable to the affiliate was equal to .09% of disbursable cash as described in the Partnership agreement and was limited in total by the Partnership agreement. This limit was reached during 1996. FFCA II may also be entitled to a subordinated real estate disposition fee and an incentive share of sale proceeds, as defined in the Partnership agreement.
An affiliate of FFCA II incurs expenses on behalf of the Partnership for maintenance of the books and records and for computer, investor and legal services performed for the Partnership. These expenses are reimbursable in accordance with the Partnership agreement and are less than the amount which the Partnership would have paid to independent parties for comparable services. The Partnership reimbursed the affiliate $34,897 in 1997, $28,364 in 1996 and $27,414 in 1995 for such expenses.
6) SUBSEQUENT EVENT - POSSIBLE SALE OF SUBSTANTIALLY ALL ASSETS: ------------------------------------------------------------
On February 2, 1998, the Partnership entered into a letter of intent with Flying J. Inc. to sell substantially all of the Partnership's assets for cash of approximately $80 million. The sale is subject to certain conditions specified in the letter of intent, including the negotiation and execution of definitive sale and financing agreements with respect to the assets of the Partnership and the approval, by vote, of a majority of the limited partner interests. In accordance with the partnership agreement, sale of substantially all of the assets will result in dissolution of the partnership and liquidation of remaining Partnership assets, net of liabilities. There can be no assurance as to the final terms of the proposed transaction, that the conditions will be satisfied or that the proposed transaction will be consummated.
The negotiated sales price of approximately $80 million, net of book value of the assets to be sold, would have resulted in an estimated gain of $31 million had the proposed sale taken place at December 31, 1997. Subsequent to the proposed asset sale and conversion of other Partnership assets into cash upon liquidation, a liquidating cash distribution will be made to investors in accordance with the Partnership agreement. Had the sale (as proposed) occurred at December 31, 1997, it is estimated that the liquidating cash distribution would have been in the range of $970 to $990 per limited partnership unit. The actual liquidating distribution to be received by investors will depend upon the actual date and terms of the sale and the actual costs of liquidating the Partnership.
SCHEDULE III Page 1 of 2
PARTICIPATION INCOME PROPERTIES II, L.P. ----------------------------------------
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION ----------------------------------------------------
AS OF DECEMBER 31, 1997 -----------------------
SCHEDULE III Page 2 of 2
PARTICIPATING INCOME PROPERTIES II, L.P. ----------------------------------------
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION ----------------------------------------------------
AS OF DECEMBER 31, 1997 -----------------------
NOTES:
(1) There are no encumbrances on properties.
(2) Cost for Federal income tax purposes is the same as cost for financial reporting purposes.
(3) All buildings and equipment are depreciated over estimated useful lives of 24 and eight years, respectively. Substantially all of the buildings and equipment were purchased as new properties.
(4) Transactions in real estate, equipment and accumulated depreciation during 1997, 1996 and 1995 are summarized as follows:
Accumulated Cost Depreciation ------------ ------------
Balance, December 31, 1994 $ 71,621,068 $ 13,793,904 Depreciation expense -- 2,895,293 ------------ ------------
Balance, December 31, 1995 71,621,068 16,689,197 Cost of equipment sold (638,000) (558,250) Depreciation expense -- 2,988,226 ------------ ------------
Balance, December 31, 1996 70,983,068 19,119,173 Cost of equipment sold (1,436,000) (1,285,988) Depreciation expense -- 2,981,760 ------------ ------------
Balance, December 31, 1997 $ 69,547,068 $ 20,814,945 ============ ============
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To FFCA Investor Services Corporation 88-C:
We have audited the accompanying balance sheet of FFCA INVESTOR SERVICES CORPORATION 88-C (a Delaware corporation) as of December 31, 1997. This financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet. 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 audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all material respects, the financial position of FFCA Investor Services Corporation 88-C as of December 31, 1997, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Phoenix, Arizona, January 6, 1998.
FFCA INVESTOR SERVICES CORPORATION 88-C ---------------------------------------
BALANCE SHEET - DECEMBER 31, 1997 ---------------------------------
ASSETS
Cash $100 Investment in Participating Income Properties II, L.P., at cost 100 ----
Total Assets $200 ====
LIABILITY
Payable to Parent (Note 2) $100 ----
STOCKHOLDER'S EQUITY
Common Stock; $l par value; 100 shares authorized, issued and outstanding 100 ----
Liability and Stockholder's Equity $200 ====
The accompanying notes are an integral part of this balance sheet.
FFCA INVESTOR SERVICES CORPORATION 88-C ---------------------------------------
NOTES TO BALANCE SHEET ----------------------
DECEMBER 3l, l997 -----------------
(l) Operations:
FFCA Investor Services Corporation 88-C (a Delaware corporation) (88-C) was organized on August 11, l987 to act as the assignor limited partner in Participating Income Properties II, L.P. (PIP-II).
The assignor limited partner is the owner of record of the limited partnership units of PIP-II. All rights and powers of 88-C have been assigned to the holders, who are the registered and beneficial owners of the units. Other than to serve as assignor limited partner, 88-C has no other business purpose and will not engage in any other activity or incur any debt.
(2) Related Parties:
Morton H. Fleischer is the sole stockholder of 88-C. Mr. Fleischer is also a general partner of PIP-II.
PARTICIPATING INCOME PROPERTIES II, L.P. and FFCA INVESTOR SERVICES CORPORATION 88-C ------------------------------
Exhibit Index
The following is a complete list of exhibits filed as part of this Form 10-K. For electronic filing purposes only, this report contains Exhibit 27, the Financial Data Schedule. Exhibit numbers correspond to the numbers in the Exhibit Table of Item 601 of Regulation S-K. ------------------------------ Sequentially Exhibit Numbered Page ------- -------------
99. Annual Portfolio Valuation of Cushman & Wakefield as of December 31, 1997.
Pursuant to Rule 12b-32 under the Securities Exchange Act of 1934, as amended, the following document, filed with the Securities and Exchange Commission as Exhibit 4 to the Co-Registrants' Form 10-K for the fiscal year ended 1989, Commission File No. 0-18504, is incorporated herein by this reference.
Fifth Amended and Restated Certificate of Limited Partnership which governs the Partnership, as filed with the Secretary of State of Delaware on December 11, 1989.
Pursuant to Rule 12b-32 under the Securities Exchange Act of 1934, as amended, the following documents, filed with the Securities and Exchange Commission as exhibits to the Co-Registrants' Registration Statement on Form S-11, Registration No. 33-16849, are incorporated herein by this reference.