SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A-1
ANNUAL REPORT UNDER SECTION 13 or 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
Commission file number 0-18504
PARTICIPATING INCOME PROPERTIES II, L.P.
AND
FFCA INVESTOR SERVICES CORPORATION 88-C
-------------------------------------------
(Exact Name of Co-Registrants as Specified in Their
Organizational Documents)
Delaware 86-0588505
----------------------- ---------------------
(Partnership State of Organization) (Partnership IRS Employer
Identification No.)
Delaware 86-0588507
----------------------- ---------------------
(Corporation State of Incorporation) (Corporation IRS Employer
Identification No.)
The Perimeter Center 85255
17207 North Perimeter Drive --------
Scottsdale, Arizona (Zip Code)
----------------------------
(Address of Principal Executive Offices)
Co-Registrants' telephone number, including area code: (602) 585-4500
<PAGE>
PART I
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"). M. H. Fleischer and Paul
Bagley are the individual general partners of the Partnership. (The Managing
General Partner, M. H. Fleischer and Paul Bagley are sometimes referred to
collectively herein as the "General Partners.")
M.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, $72,562,584, were
fully invested by the Partnership in thirteen "Flying J 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
June 30, 1996, eleven 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
<PAGE>
West"), and Douglas Oil Company of California, a subsidiary of Conoco Inc.
("Douglas Oil") and the remaining two travel plazas were leased to Flying J Inc.
One of the travel plazas leased to CFJ Properties was originally leased to a
franchisee of Flying J Franchise Inc. ("FJFI") and such franchisee was released
upon the assignment to CFJ Properties. The Partnership is not affiliated with
CFJ Properties, Flying J Inc. or FJFI, a subsidiary of Flying J Inc. and the
franchisor of Flying J Travel Plazas.
The Partnership's principal objectives are to (i) preserve, protect and
enhance Partnership capital, (ii) provide partially tax-sheltered cash
distributions to investors, (iii) provide the potential for increased income and
protection against inflation through participation in the gross revenues of
Flying J Travel Plaza facilities, and (iv) 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 from November 1996 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 (i) 3.5% of
annual gross receipts derived from the travel plaza facility, excluding fuel
sales, (ii) 3/10 of $.01 per gallon of fuel sold, and (iii) 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 (6) 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 has
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 is 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 are used to maintain
cash distributions to the Holders in quarters when lease payments received by
the Partnership are reduced due to the failure of all 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
2
<PAGE>
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 dependent upon CFJ Properties, its principal lessee,
since an adverse change in the financial condition of CFJ Properties could
materially affect its ability to make lease payments. During 1995, CFJ
Properties contributed approximately 82% of the Company's total rental and
participating rental revenue for the year and is expected to contribute a
similar percentage of revenue in 1996.
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 that is
engaged in the production, refining, transportation, wholesaling and retail
marketing of petroleum products and other services through its travel plazas and
gasoline stations. CFJ Properties is the franchisor and operator of the Flying J
Inc. network of interstate travel plazas, which included 66 properties as of
January 31, 1996. The Partnership owns eleven 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. With the exception of
the Graham, North Carolina and Dillon, South Carolina travel plazas, 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 obligations 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 or franchisees of FJFI.
For the fiscal year ended January 31, 1996, CFJ Properties reported
earnings of $17.2 million on revenues of $937.4 million. Revenues rose 33.3%
from $703.4 million the prior year. The higher revenues resulted from the
opening of twelve new units and increases in average unit volumes. As a result
of higher revenues, net income increased to $17.2 million from $16.1 million in
the fiscal year ended January 31, 1995.
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<PAGE>
During the fiscal year ended January 31, 1996, CFJ Properties reported
$35.8 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, 1996, CFJ Properties reported cash balances of
approximately $2.3 million, with liquidity supported by net cash provided by
operating activities and a $70 million revolving line of credit with a bank. As
of January 31, 1996, CFJ Properties reported partners' capital of $137.7 million
and total assets of $369.4 million.
CFJ Properties leases travel plazas and equipment under non-cancelable
operating leases, which expire at various dates over the next 15 to 20 years.
Payments under these leases were $13.3 million in both 1996 and 1995. Future
minimum annual rent obligations under non-cancelable leases, as projected
through 2001, remain comparable to 1996 expense amounts.
The eleven travel plaza properties operated by CFJ Properties and
Flying J Inc. generated a combined fuel and non-fuel gross profit (including
other income) of approximately $31.7 million during the fiscal year ended
January 31, 1996 as compared to $31.2 million in 1995. This increase was due to
higher non-fuel gross profits during fiscal year 1996 as compared to fiscal year
1995, which offset an overall decrease in fuel gross profits during the same
period. Total travel plaza unit-level income for these eleven properties (before
depreciation and allocated corporate overhead) totaled approximately $3.1
million in 1996 with seven of the eleven properties reporting positive
unit-level income. The remaining four properties reported losses primarily due
to intense fuel price competition in their geographic area. The combined result
of the travel plaza unit-level net income before depreciation and allocated
corporate overhead was down from $3.6 million in the prior year due to decreased
fuel gross profit margins at some units. For CFJ Properties' fiscal year ended
January 31, 1996, the mean unit-level base and participating rents approximated
13.9% of the original cost of these properties. None of the eleven travel plaza
properties operated by CFJ Properties represented over 10% of the Partnership's
total assets in 1995.
The travel plaza/truck stop industry, although highly fragmented, is
highly competitive. The Partnership's lessees are competing with, among others,
National Auto/Truckstops, Union, 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
4
<PAGE>
sites have been selected based on traffic patterns and volumes, and access to
interstate highways, among other criteria.
According the American Trucking Association, the trucking industry
grosses more than $290 billion annually, representing 78% of the nation's
freight bill. The 15 million commercial trucks registered in the United States
consume approximately 35 billion gallons of fuel annually. The Partnership
believes that the trucking industry is sensitive to certain aspects of the
general economic environment, such as retail sales; the level, direction and
rate of change in inventories; international trade; vendor performance; the cost
and availability of fuel; labor issues; and technology. The trucking industry is
also affected by various government policies, including economic regulations;
vehicle size and weight regulations; and health, safety and environmental
protection regulations. These factors also may influence the competitive posture
of one mode of transportation compared to others; however, the trucking industry
has presented itself as an affordable and timely alternative to other methods of
transportation such as air freight and rail, particularly for short hauls.
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 ongoing conduct of such operations.
Federal, state and local regulatory agencies have adopted regulations
governing underground storage tanks ("UST's") 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 UST's. Regulations
enacted by the EPA in 1988 established requirements for (i) installing UST
systems; (ii) upgrading UST systems; (iii) taking corrective action in response
to releases; (iv) closing UST systems; (v) keeping appropriate records; and (vi)
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 1998, all UST's 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 steps to (i) ensure that the lessees
comply with applicable rules and regulations; (ii) mitigate any potential
liabilities, including the establishment of storage tank monitoring procedures;
and (iii) require that lessees indemnify the Partnership for all such
liabilities and obtain liability insurance, if reasonably available. The General
Partner requires
5
<PAGE>
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 fuel 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
groundwater 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 regulatory compliance with travel plaza personnel.
The Partnership believes that its lessees are in compliance with all
applicable regulatory requirements 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 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.
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 and FFCA Investor Services Corporation 88-C have no
employees.
6
<PAGE>
PART IV
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, 1995 and 1994
Statements of Income for the years ended
December 31, 1995, 1994 and 1993
Statements of Changes in Partners' Capital for
the years ended December 31, 1995, 1994 and 1993
Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993
Notes to Financial Statements
FFCA Investor Services Corporation 88-C
Report of independent public accountants
Balance Sheet as of December 31, 1995
Notes to Balance Sheet
CFJ Properties
(A General Partnership)
Independent Auditors' Report
Balance Sheets as of January 31, 1996 and 1995
Statements of Income and Partners' Capital for the years
ended January 31, 1996, 1995 and 1994
Statements of Cash Flows for the years ended January 31, 1996,
1995 and 1994
2. Financial Statement Schedules.
Schedule III--Schedule of Real Estate and Accumulated
Depreciation as of December 31, 1995
7
<PAGE>
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.
28. Annual Portfolio Valuation of Cushman & Wakefield as
of December 31, 1995
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, 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 on December 12, 1988 as
exhibits to the Co-Registrants' Pre-Effective Amendment No. 3
to the Registration Statement, are incorporated herein by this
reference.
Registration
Statement
Exhibit No.
-----------
Form of Depository Agreement. 4(d)
The Certificate of Incorporation which 4(b)
governs FFCA Investor Services Corporation
88-C, as filed with theSecretary of State
of Delaware on August 11, 1987.
Bylaws of FFCA Investor Services Corporation 4(c)
88-C.
Operating Agreement, dated November 14, 10(c)
1988, by and among Participating Income
Properties II, L.P.
8
<PAGE>
Franchise Finance Corporation of America II,
Flying J Inc. and Flying J Franchise Inc.
(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 1995.
9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the co-registrants have duly caused this amendment to be signed on their behalf
by the undersigned, thereunto duly authorized.
PARTICIPATING INCOME PROPERTIES II, L.P.
By: FRANCHISE FINANCE CORPORATION OF
AMERICA II, Managing General Partner
Date: September 12 , 1996 By: /s/ M.H. Fleischer
--------------------------------------
M.H. Fleischer, President and
Chief Executive Officer
FFCA INVESTOR SERVICES CORPORATION 88-C
Date: September 12, 1996 By: /s/ John R. Barravecchia
-----------------------------------------------
John R. Barravecchia, President, Secretary,
Treasurer, Principal Financial Officer and
Principal Accounting Officer
<PAGE>
Independent Auditors' Report
================================================================================
The Board of Directors
CFJ Properties:
We have audited the accompanying balance sheets of CFJ Properties (a general
partnership) as of January 31, 1996 and 1995, and the related statements of
income and partners' capital and cash flows for each of the years in the
three-year period ended January 31, 1996. 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 also 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 CFJ Properties as of January
31, 1996 and 1995, and the results of its operations and its cash flows for each
of the years in the three-year period ended January 31, 1996, in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Salt Lake City, Utah
March 22, 1996
1
<PAGE>
Balance Sheets
================================================================================
CFJ PROPERTIES
(A General Partnership)
January 31, 1996 and 1995
(In thousands)
<TABLE>
<CAPTION>
Assets 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,314 $ 1,700
Trade receivables, net of allowance for doubtful accounts of
of $165 in 1996 and $219 in 1995 (note 8) 11,836 8,012
Inventories (note 2) 15,832 12,798
Prepaid expenses 2,229 1,204
- --------------------------------------------------------------------------------
Total current assets 32,211 23,714
- --------------------------------------------------------------------------------
Land, buildings, and equipment:
Land and improvements 111,053 72,270
Buildings 119,632 78,349
Equipment 86,939 58,860
Leasehold improvements 24,494 24,078
Construction-in-progress 33,687 42,853
- --------------------------------------------------------------------------------
375,805 276,410
Less accumulated depreciation and amortization 40,095 25,384
- --------------------------------------------------------------------------------
Net land, buildings, and equipment 335,710 251,026
- --------------------------------------------------------------------------------
Long-term notes receivable 535 0
Other assets (note 3) 930 848
- --------------------------------------------------------------------------------
$369,386 $275,588
================================================================================
Liabilities and Partners' Capital
- --------------------------------------------------------------------------------
Current liabilities:
Accounts payable (note 8) $ 48,313 $ 45,036
Accrued liabilities (notes 4 and 8) 23,466 22,329
- --------------------------------------------------------------------------------
Total current liabilities 71,779 67,365
Long-term debt (note 5) 156,500 87,000
Other liabilities 3,409 730
- --------------------------------------------------------------------------------
Total liabilities 231,688 155,095
- --------------------------------------------------------------------------------
Partners' capital 137,698 120,493
Commitments and contingencies (notes 5, 6 and 10)
- --------------------------------------------------------------------------------
$369,386 $275,588
================================================================================
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
Statements of Income and Partners' Capital
================================================================================
CFJ PROPERTIES
(A General Partnership)
Years ended January 31, 1996, 1995 and 1994
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales (note 1(f)) $ 937,370 $ 703,430 $ 564,627
Cost of sales 755,852 563,519 458,840
- ----------------------------------------------------------------------------------------------
Gross profit 181,518 139,911 105,787
- ----------------------------------------------------------------------------------------------
Operating, general, and administrative expense (note 7):
Operating 145,959 112,882 88,970
General and administrative 11,753 9,533 7,323
- ----------------------------------------------------------------------------------------------
157,712 122,415 96,293
- ----------------------------------------------------------------------------------------------
Income from operations 23,806 17,496 9,494
- ----------------------------------------------------------------------------------------------
Other income (expense):
Interest income 93 147 91
Interest expense (6,642) (1,483) 0
Loss on sale of fixed assets, net (52) (19) (28)
- ----------------------------------------------------------------------------------------------
(6,601) (1,355) 63
- ----------------------------------------------------------------------------------------------
Net income 17,205 16,141 9,557
Partners' capital, beginning of year 120,493 104,352 94,795
- ----------------------------------------------------------------------------------------------
Partners' capital, end of year $ 137,698 $ 120,493 $ 104,352
==============================================================================================
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
Statements of Cash Flows
================================================================================
CFJ PROPERTIES
(A General Partnership)
Years ended January 31, 1996, 1995 and 1994
In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 17,205 $ 16,141 $ 9,557
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 14,933 9,827 6,793
Provision for losses on accounts receivable 0 51 21
Loss on sale of fixed assets 52 19 28
Change in assets and liabilities:
Receivables (3,803) (1,302) (179)
Inventories (3,034) (4,065) (1,318)
Prepaid expenses (1,025) (164) (248)
Other assets (128) 1,636 (124)
Accounts payable and accrued liabilities 8,817 16,713 6,799
Other liabilities 2,739 268 (563)
- ---------------------------------------------------------------------------------------------------
Net cash provided by operating activities 35,756 39,124 20,766
- ---------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from insurance coverage 0 0 423
Capital expenditures (note 8) (104,107) (90,258) (57,943)
Note receivable funded (535) 0 0
- ---------------------------------------------------------------------------------------------------
Net cash used in investing activities (104,642) (90,258) (57,520)
- ---------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of notes payable 25,000 75,000 0
Net proceeds (payments) under line of credit agreements 44,500 (29,000) 36,000
- ---------------------------------------------------------------------------------------------------
Net cash provided by financing activities 69,500 46,000 36,000
- ---------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 614 (5,134) (754)
Cash and cash equivalents, beginning of year 1,700 6,834 7,588
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 2,314 $ 1,700 $ 6,834
===================================================================================================
Supplemental Disclosure of Cash Flow Information
Cash paid for interest, net of capitalized amounts $ 6,387 $ 916 $ 0
</TABLE>
Supplemental Disclosure of Noncash Investing Activities
TheCapital expenditures noted above are net of accounts payable increases
(decreases) related to the acquisiton of building and equipment of
($4,403), $2,477, and $4,735 in 1996, 1995, and 1994, respectively.
See accompanying notes to financial statements.
4
<PAGE>
Notes to Financial Statements
================================================================================
CFJ PROPERTIES
(A General Partnership)
January 31, 1996, 1995 and 1994
(1) Summary of Significant Accounting Policies
The following significant accounting policies are followed by CFJ Properties
(the Partnership) in preparing and presenting its financial statements:
(a) Organization and Line of Business - The Partnership is a Utah general
partnership with its principal business being the development and operation of a
national network of interstate travel plazas in North America. A typical travel
plaza offers a 24-hour service operation which includes fuel facilities, a
restaurant or deli, convenience store, and other amenities designed to meet the
needs of the trucking industry and traveling public. Some travel plazas include
lodging and truck service centers. The Partnership operated 66, 54 and 41 travel
plazas, as of January 31, 1996, 1995 and 1994, respectively.
(b) Cash Equivalents - For purposes of the statements of cash flows, the
Partnership considers all investments with original maturities of three months
or less to be cash equivalents.
(c) Inventories - Inventories include gasoline, diesel, ready-to-use additives,
related petroleum products, food and miscellaneous merchandise. Inventories are
stated at the lower of cost or market value as determined by the first-in,
first-out (FIFO) method.
(d) Land, Buildings, and Equipment - Land, buildings and equipment are stated at
cost for constructed and purchased assets and fair market value at the date
contributed for contributions from the general partners. Depreciation is
provided using the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized using the straight-line method over
the lesser of the lease term or the estimated useful life of the related assets.
Interest is capitalized in connection with the construction of travel plazas.
The interest capitalized is recorded as part of the asset to which it relates
and is amortized over the lesser of its useful life or the lease term. Interest
of $2,925,000, $2,993,000, and $791,000 was capitalized for 1996, 1995, and 1994
respectively.
(e) Income Taxes - The Partnership is not directly subject to income taxes. Each
partner is responsible for any income tax related to their portion of taxable
income.
(f) Retail Fuel Sales - The Partnership does not include related federal or
state excise taxes in petroleum product retail sales or cost of sales. Such
taxes amounted to approximately $475,900,000, $361,243,000 and $253,062,000 for
1996, 1995 and 1994, respectively.
(g) New Plaza Opening Costs - Opening costs are expensed when incurred. The
costs associated with new travel plaza openings were approximately $4,000,000,
$4,100,000 and $1,100,000 in 1996, 1995 and 1994, respectively.
(h) Concentration of Credit Risk - Financial instruments which potentially
subject the Partnership to concentrations of credit risk consist principally of
cash and cash equivalents, and trade receivables. The Partnership places its
cash and cash equivalent investments with high quality credit financial
institutions and limits the amount of credit exposure to any one financial
institution. Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers comprising the Partnership's
customer base, and their dispersion across many different geographical regions.
The Partnership routinely performs credit evaluations of its customers and
maintains allowances for potential credit losses.
(I) Use of Estimates - The Partnership has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
(2) Inventories
Inventories are summarized as follows (in thousands):
1996 1995
------- -------
Store merchandise and restaurant food $13,002 10,590
Petroleum products 2,830 2,208
------- -------
$15,832 12,798
======= =======
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<PAGE>
(3) Other Assets
Other assets consist of the following (in thousands):
1996 1995
---- ----
Land deposits $590 562
Lease deposits 232 232
Loan origination fees 108 54
---- ----
$930 848
==== ====
(4) Accrued Liabilities
Accrued liabilities are summarized as follows (in thousands):
1996 1995
------- -------
Fuel taxes $15,078 13,285
Expense incurred by
Operator (note 8) 5,677 6,550
Other 2,711 2,494
------- -------
$23,466 22,329
======= =======
(5) Long-term Debt
Under a revolving line of credit agreement with a bank, the Partnership may
borrow up to $70,000,000 at the bank's prime, adjusted certificate of deposit,
or adjusted Libor rate at the Partnership's option. Under the agreement,
outstanding borrowings on July 13, 1999, convert to a term loan and are payable
in quarterly installments through April 2003. The agreement requires a
commitment fee. The Partnership had $56,500,000 and $12,000,000 in outstanding
borrowings as of January 31, 1996 and 1995, respectively. Interest rates on
outstanding borrowings range from 6.23 to 8.50 percent. In addition to the
$70,000,000 line of credit, the Partnership had letters of credit totaling
$5,177,000 outstanding as of January 31, 1996.
Under a fiscal 1995 Master Shelf Agreement, the Partnership issued $100,000,000
in long-term notes payable to an insurance company. The notes bear interest at
7.88, 9.35, and 7.27 percent and require quarterly interest payments. Annual
principal payments are required beginning March 1998 with the final payment in
January 2005. In addition to the $100,000,000, the Partnership has an option to
issue an additional $25,000,000 in long-term notes payable to the same insurance
company contingent upon meeting certain conditions.
The following aggregate maturities of long-term debt (in thousands) reflect the
Partnership's intent and ability (subject to bank approval) to defer the first
quarterly installment on its $70,000,000 line of credit one year to July 13,
1999:
1997 $ 0
1998 0
1999 10,000
2000 25,594
2001 31,125
Thereafter 89,781
--------
Total $156,500
========
(6) Lease Commitments
The Partnership leases travel plazas and equipment under noncancelable operating
leases, which expire at various dates over the next 15 to 20 years. The leases
are obligations of the Partnership without recourse to the general partners. The
operating leases include minimum and percentage (contingent) lease payments.
Contingent rents are based upon gallons sold, restaurant and merchandise sales,
and other revenues.
Minimum lease payments under noncancelable operating leases were $13,266,000,
$13,277,000 and $13,426,000 for the years ended January 31, 1996, 1995 and 1994,
respectively. Percentage lease payments under noncancelable operating leases
were $4,348,000, $4,213,000 and $3,710,000 for the years ended January
31, 1996, 1995 and 1994, respectively.
Future minimum payments under noncancelable operating leases as of January 31,
1996 are as follows (in thousands):
1997 $ 13,182
1998 12,630
1999 12,288
2000 12,221
2001 12,166
Thereafter 106,573
-----------
Total $ 169,060
===========
6
<PAGE>
(7) Pension and Profit Sharing Plans
Currently, the Partnership has chosen to have all eligible employees participate
in the noncontributory defined contribution pension and profit sharing plans of
Flying J Inc. (Flying J), the parent company of one of the general partners.
Contributions to these plans, which are made at the discretion of Flying J's
Board of Directors, may be in cash or qualifying common stock of Flying J. The
Partnership's expenses related to these plans amounted to $1,212,000, $998,000,
and $753,000 for the years ended January 31, 1996, 1995, and 1994, respectively.
(8) Related Party Transactions
The parent company (the Operator) of one of the general partners, operates all
travel plazas and related facilities for the Partnership. Under the terms of the
operations agreement, the Partnership reimburses the Operator for the cost of
operations plus a monthly amount for overhead costs. The overhead cost
reimbursements amounted to $916,000, $801,000 and $697,000 for 1996, 1995 and
1994, respectively. The Operator paid the Partnership $668,000, $651,000 and
$634,000 during 1996, 1995 and 1994, respectively, for services performed by the
Partnership for certain franchises of the Operator.
During its normal course of business, the Partnership purchases petroleum
products from the general partners under supply agreements. It is the general
partners' opinion that such agreements are under terms similar to those which
could be received under arms-length contracts. Purchases from the partners'
amounted to approximately $662,900,000, $494,800,000 and $409,481,000 for 1996,
1995 and 1994, respectively.
Included in accounts receivable is $729,000 and $616,000 as of January 31, 1996
and 1995, respectively, from affiliates.
Included in accounts payable and accrued liabilities is $31,250,000 and
$24,020,000 as of January 31, 1996 and 1995, respectively, due the general
partners and their affiliates resulting from petroleum product purchases and
management services.
The Partnership periodically contracts with the Operator for the development and
construction of travel plazas. Capitalized expenditures under these agreements
were $70,326,000 and $73,576,000 in 1996 and 1995, respectively. It is the
general partners' opinion that such purchases are under terms similar to those
which could be received under arms-length contracts.
(9) Disclosure About the Fair Value of Financial Instruments
The carrying value for certain short-term financial instruments that mature or
reprice frequently at market rate, approximates their fair value. Such financial
instruments include: cash and cash equivalents, trade receivables, revolving
lines of credit, accounts payable, and accrued liabilities. The carrying value
of the long-term debt approximates its fair market value.
(10) Commitments and Contingencies
(a) Environmental Laws and Regulations - In connection with the operation of its
network of fuel facilities, the Partnership has become subject to increasingly
demanding environmental standards imposed by federal, state, and local
environmental laws and regulations. It is the policy of the Partnership to
comply with applicable environmental laws and regulations.
An estimated amount related to the remediation of environmental issues has been
accrued as managements's best estimate of the cost. However, governmental
regulations covering environmental issues are highly complex and are subject to
change. Accordingly, changes in the regulations or interpretations thereof could
result in future costs to the Partnership in excess of the amounts accrued.
Management believes that preventative measures in addition to proper attention
to these regulations will minimize costs related to compliance to such
regulations. Furthermore, the Partnership routinely succeeds in recovering a
significant portion of the cost of remediation from the states which administer
environmental clean up funds for in-state fuel retailers.
(b) Litigation - The Partnership is involved in legal actions resulting from the
ordinary course of business. Such actions relate to travel plaza operations and
other general matters. Management believes that the Partnership has adequate
legal defenses or insurance coverage and reserves and that the ultimate outcome
of such actions will not have a material adverse effect on the Partnership's
financial position.
7
