Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[x] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
PARTICIPATING INCOME PROPERTIES II, L.P.
----------------------------------------
(Name of Registrant as Specified in Its Charter)
------------------------------
(Name of Person(s) Filing Proxy Statement,
if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[x] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
1) Title of each class of securities to which transaction
applies: units of assigned limited partnership interests
2) Aggregate number of securities to which transaction applies:
82,834 units of assigned limited partnership interests
3) Aggregate cash, securities and other property to be received
in connection with the proposed transaction, computed pursuant
to Exchange Act Rule 0-11(c)(2): $80,460,000
4) Total fee paid: $16,092
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
<PAGE>
PARTICIPATING INCOME PROPERTIES II, L.P.
Dear Investor:
On behalf of Franchise Finance Corporation of America II, the managing
general partner of Participating Income Properties II, L.P. (the "Partnership"),
we are requesting your consent to sell the Partnership's interests in thirteen
travel plaza properties pursuant to the proposal set forth in the accompanying
Consent Solicitation Statement. Thereafter, the Partnership will be liquidated,
all assets distributed and a final Schedule K-1 issued.
Whether you own a few or many units in the Partnership, it is important
that your units be represented. We encourage you to make certain your units are
represented by signing and dating the accompanying consent card and promptly
returning it in the enclosed envelope. Please note that a consent card that is
not signed will be invalid.
Should you have any questions regarding this Consent Solicitation
Statement, please call D.F. King & Co., Inc. at 800-848-3410.
Sincerely,
Franchise Finance Corporation of America II
By: /s/ Morton H. Fleischer
------------------------------------------
Morton H. Fleischer, President
Scottsdale, Arizona
Dated: September ___, 1998
<PAGE>
NOTICE OF CONSENT SOLICITATION
NOTICE IS HEREBY GIVEN that investors in Participating Income
Properties II, L.P. (the "Partnership") will be asked to consent to the
following proposal (the "Proposal") by ________, 1998, unless extended from time
to time (the "Consent Date") by Franchise Finance Corporation of America II (the
"Managing General Partner"):
A proposal to authorize the Managing General Partner to accept
the terms of an offer to purchase all of the Partnership's interests in
thirteen travel plazas, including real property, improvements,
equipment and other personal property, by Flying J Inc. and certain
special purpose companies affiliated with Flying J Inc., for a cash
payment of $80,460,000, which purchase will be followed by a
liquidation of the Partnership and final distribution of assets as
described in this Consent Solicitation Statement.
Each person (an "Investor") who holds one or more units of limited
partnership depository units ("Units") in the Partnership and is reflected as an
Investor on the books and records of the Partnership on the date of mailing of
this Notice of the Consent Solicitation is entitled to receive such notice and
consent to the Proposal. Valid transferees of Units after the date of the
Consent Solicitation Statement and prior to the Consent Date will be entitled to
revoke or revise a consent previously given by the transferor with respect to
such Units before the Consent Date. An affirmative vote of Investors holding a
majority of Units is required to approve the Proposal. FFCA Investor Services
Corporation 88-C, the initial limited partner of the Partnership (the "Initial
Limited Partner") and holder of record of the limited partnership interests in
the Partnership, will deliver the consents of the Investors to the Partnership
as directed by Investors. No meeting of Investors will be held.
All Investors are requested to complete, date and sign the enclosed
Consent Card and return it promptly in the postage paid, return-addressed
envelope provided for that purpose. By returning your Consent Card promptly you
can help the Partnership avoid the expense of follow-up mailings.
THE ENCLOSED CONSENT IS BEING SOLICITED BY THE MANAGING GENERAL
PARTNER. THE MANAGING GENERAL PARTNER RECOMMENDS THAT YOU VOTE IN FAVOR OF THE
PROPOSAL.
Franchise Finance Corporation of America II
By: /s/ Morton H. Fleischer
---------------------------------------
Morton H. Fleischer, President
Scottsdale, Arizona
Dated: September __, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
GENERAL INFORMATION..............................................................................................1
SUMMARY..........................................................................................................3
The Partnership.........................................................................................3
CFJ Properties..........................................................................................3
The Transaction.........................................................................................3
Background to the Transaction...........................................................................4
Source and Amount of Funds..............................................................................5
Conditions to the Transaction...........................................................................6
Appraisals..............................................................................................6
Fairness................................................................................................7
Recommendation of the Managing General Partner..........................................................7
Estimated Liquidating Distributions.....................................................................7
Liquidation Procedures..................................................................................8
Federal Income Tax Consequences.........................................................................8
Special Considerations..................................................................................9
SPECIAL CONSIDERATIONS..........................................................................................10
Participation by Lender................................................................................10
Federal Income Tax Consequences........................................................................10
THE PARTNERSHIP.................................................................................................11
THE TRANSACTION.................................................................................................16
Purchase Agreements....................................................................................16
Source of Funds........................................................................................17
Conditions to the Transaction..........................................................................18
Closing Date...........................................................................................19
Benefits of Sale of Travel Plazas and Liquidation of Partnership; Reasons for the
Transaction...................................................................................19
Detriments of Sale of the Travel Plazas and Liquidation of Partnership.................................20
Partnership Agreement Provisions Regarding Dissolution of Partnership..................................21
Insurance..............................................................................................21
Consent Required.......................................................................................22
Related Sale of PIP 86 and PIP III Travel Plazas to the Buyer..........................................22
Accounting Treatment...................................................................................22
Regulatory Requirements................................................................................23
Recommendation of the Managing General Partner.........................................................23
FAIRNESS........................................................................................................23
APPRAISALS......................................................................................................24
THE TRAVEL PLAZAS...............................................................................................25
INDUSTRY........................................................................................................27
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
<S> <C>
UNAUDITED PRO FORMA FINANCIAL INFORMATION.......................................................................28
SELECTED FINANCIAL DATA.........................................................................................32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..............................................................................33
Liquidity and Capital Resources........................................................................33
Results of Operations..................................................................................33
Three Months Ended March 31, 1998 Compared to the Three Months Ended
March 31, 1997................................................................................34
Fiscal Year Ended December 31, 1997 Compared to Fiscal Year Ended
December 31, 1996.............................................................................34
Fiscal Year Ended December 31, 1996 Compared to Fiscal Year Ended
December 31, 1995.............................................................................34
Inflation..............................................................................................35
GENERAL PARTNER COMPENSATION....................................................................................35
MARKET FOR UNITS AND RELATED SECURITY HOLDER MATTERS............................................................35
Secondary Market Information...........................................................................35
Third Party Tender Offers..............................................................................36
Unitholders............................................................................................37
Distributions..........................................................................................37
CONSENT PROCEDURES..............................................................................................39
FEDERAL INCOME TAX CONSIDERATIONS...............................................................................40
Opinions of Counsel....................................................................................40
Federal Income Tax Characterization of the Partnership.................................................41
Tax Consequences of the Transaction....................................................................41
Taxation of Tax-Exempt Investors.......................................................................43
State Tax Consequences and Withholding.................................................................44
ANNUAL REPORT AND OTHER DOCUMENTS...............................................................................44
OTHER MATTERS...................................................................................................44
NOTICE TO BANKS, BROKER-DEALERS AND VOTING TRUSTEES AND THEIR
NOMINEES...............................................................................................44
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES....................................................................F-1
</TABLE>
ii
<PAGE>
PARTICIPATING INCOME PROPERTIES II, L.P.
17207 North Perimeter Drive
Scottsdale, Arizona 85255
--------------------------------------
CONSENT SOLICITATION STATEMENT
--------------------------------------
GENERAL INFORMATION
Participating Income Properties II, L.P. (the "Partnership") was formed
in August 1987 to purchase new and existing "Flying J Travel Plaza" facilities,
including real estate, improvements, equipment and other personal property (the
"Travel Plazas"), which are leased to, and operated by, CFJ Properties, a
general partnership formed pursuant to a joint venture between a subsidiary of
Flying J Inc. and two subsidiaries of Conoco Inc. The managing general partner
of the Partnership is Franchise Finance Corporation of America II, a Delaware
corporation (the "Managing General Partner"). Morton Fleischer and Paul Bagley
are the individual general partners of the Partnership. The initial limited
partner of the Partnership is FFCA Investor Services Corporation 88-C, a
Delaware corporation (the "Initial Limited Partner"), which holds legal title to
the limited partnership interests of the Partnership. The limited partnership
interests of the Partnership (the "Units") are assigned by the Initial Limited
Partner to investors (the "Investors") in the Partnership.
This Consent Solicitation Statement is furnished in connection with the
solicitation by the Managing General Partner of consents directing the Initial
Limited Partner to deliver the consents of Investors to the Partnership
regarding the proposed transaction with respect to the Partnership described
herein (the "Transaction") on __________, 1998, a period of 45 days from the
date of this Consent Solicitation Statement, unless extended from time to time
by the Managing General Partner (the "Consent Date"). The consents are being
solicited by the Managing General Partner pursuant to Section 11.4 of the Fifth
Amended and Restated Certificate and Agreement of Limited Partnership of the
Partnership (the "Partnership Agreement"). This Consent Solicitation Statement,
the accompanying Consent Card (the "Consent Card"), and the Notice of Consent
Solicitation will be first mailed or given to each Investor who holds one or
more Units on or about June 30, 1998.
The Managing General Partner solicits consents by mail to give each
Investor an opportunity to direct the Initial Limited Partner to vote the number
of limited partnership interests corresponding to the number of Units held by
the Investor on all matters described in this Consent Solicitation Statement.
Investors are urged to: (i) read this Consent Solicitation Statement carefully;
(ii) specify their choice in each matter by marking the appropriate box on the
enclosed Consent Card; and (iii) sign, date and return the Consent Card by mail
in the postage-paid, return addressed envelope provided for that purpose.
All Units represented by a properly executed and valid Consent Card
received prior to the Consent Date will be voted by the Initial Limited Partner
in accordance with the instructions marked thereon or otherwise as provided
therein, unless such Consent Card has previously been
<PAGE>
revoked or revised. Unless instructions to the contrary are marked, or if no
instructions are specified, the Initial Limited Partner will treat each signed
Consent Card as a direction to vote the Units represented thereby in favor of
the proposal set forth on the Consent Card. Any Consent Card may be revoked or
revised at any time prior to the Consent Date by submitting another Consent Card
bearing a later date or by giving written notice of revocation to the Initial
Limited Partner at the Partnership's address indicated above. Any notice of
revocation or revision sent to the Partnership must include the Investor's name,
the number of Units with respect to which the prior Consent Card was given, and
a statement that the Investor revokes all previously executed Consent Cards, and
must be received prior to the Consent Date to be effective.
The information contained herein concerning the Partnership and the
Managing General Partner has been furnished by the Managing General Partner.
Information contained herein concerning the buyer has been furnished to the
Managing General Partner by the buyer.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION (THE "COMMISSION"), NOR HAS THE COMMISSION PASSED UPON
THE FAIRNESS OR MERITS OF THIS TRANSACTION OR UPON THE ACCURACY OR ADEQUACY OF
THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY
IS UNLAWFUL.
2
<PAGE>
SUMMARY
The following is a summary of certain information contained in this
Consent Solicitation Statement. This summary is not intended to be complete and
is qualified in its entirety by the more detailed information and financial
statements contained elsewhere in this Consent Solicitation Statement.
References to the Fifth Amended and Restated Certificate and Agreement of
Limited Partnership (the "Partnership Agreement") of Participating Income
Properties II, L.P. contained in this Consent Solicitation Statement are
qualified in their entirety by the terms of the Partnership Agreement previously
filed with the Securities and Exchange Commission, which is incorporated in this
Consent Solicitation Statement by reference. Copies of the Partnership Agreement
will be furnished, without charge, to any Investor who makes a written or oral
request therefor to Investor Services, Franchise Finance Corporation of America
II, 17207 North Perimeter Drive, Scottsdale, Arizona 85255, telephone number
(602) 585-4500.
Statements contained in this Consent Solicitation Statement that are
not based on historical fact are "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements may be identified by the use of forward-looking terminology such as
"may," "will," "expect," "anticipate," "believe," "continue" or similar terms,
variations of those terms or the negative of those terms. Cautionary statements
set forth in "Special Considerations" and elsewhere in this Consent Solicitation
Statement identify important factors that could cause actual results to differ
materially from those in the forward-looking statements.
The Partnership
Participating Income Properties II, L.P., a Delaware limited
partnership (the "Partnership"), was organized in August 1987 to purchase new
and existing "Flying J Travel Plaza" facilities. The Partnership currently owns
thirteen travel plazas, including real property, improvements, equipment and
other personal property, located in Arizona, Arkansas, Georgia, Kentucky,
Nevada, North Carolina, South Carolina, Oregon, Tennessee, Texas, and Wyoming
(collectively, the "Travel Plazas"). See "THE TRAVEL PLAZAS." All thirteen of
the Travel Plazas are leased to, and operated by, CFJ Properties ("CFJ
Properties"), a general partnership. The managing general partner of the
Partnership is Franchise Finance Corporation of America II, a Delaware
corporation (the "Managing General Partner"). The individual general partners of
the Partnership are Mr. Morton Fleischer and Mr. Paul Bagley.
CFJ Properties
CFJ Properties is a joint venture between Flying J Inc. ("Flying J"),
through its subsidiary Big West Oil Company ("Big West"), and Conoco Inc.,
through its subsidiaries Douglas Oil Company of California ("Douglas Oil"), and
Kayo Oil Company ("Kayo Oil").
3
<PAGE>
The Transaction
The Partnership has entered into Purchase Agreements with Flying J
dated July ___, 1998 (the "Purchase Agreements") to acquire from the Company all
of the Company's right, title and interest to the Travel Plazas for a cash
payment of $80,460,000 (the "Transaction"). These proceeds represent an increase
of approximately 16% over the cost of the Travel Plazas paid by the Partnership.
See "THE TRANSACTION" and "APPRAISALS."
The obligation of the parties to consummate the Transaction is
conditioned upon the approval by an affirmative vote of Investors holding a
majority of assigned limited partnership interests of the Partnership (the
"Units"), and certain other conditions more particularly described under "THE
TRANSACTION--Conditions to the Transaction" below. Certain of the Purchase
Agreements will be assigned by Flying J to certain special purpose companies
affiliated with Flying J or CFJ Properties (collectively with Flying J, the
"Buyer").
The investors of Participating Income Properties 1986, L.P., a Delaware
limited partnership ("PIP 86"), and Participating Income Properties III Limited
Partnership, a Delaware limited partnership ("PIP III"), are being asked to
approve the sale of the assets of their respective partnerships to the Buyer
(the "Related PIP Transactions") in conjunction with the sale of the Travel
Plazas by the Partnership pursuant to the Purchase Agreements. Consent
solicitation statements relating to the sale of the PIP 86 and PIP III assets to
the Buyer have been filed with the Securities and Exchange Commission ("SEC")
and mailed to the PIP 86 and PIP III investors simultaneously with the mailing
of this Consent Solicitation Statement and are available to Investors upon
request. Requests should be directed to Investor Services, Franchise Finance
Corporation of America II, 17207 North Perimeter Drive, Scottsdale, Arizona
85255, telephone number (602) 585-4500.
If the Transaction is approved by Investors in the Partnership but not
by investors in either of the Related PIP Transactions, the Buyer has the right
not to consummate the Transaction. However, the Buyer, at its discretion, may
obligate the Company to consummate the Transaction if the Investors approve the
Transaction and other conditions to closing are met. See "THE
TRANSACTION--Conditions to the Transaction" below. Investors voting against the
Transaction do not have dissenters' rights or any rights of appraisal.
The Purchase Agreements provide that the Buyer is purchasing the Travel
Plazas from the Partnership with limited representations and warranties from the
Partnership and otherwise on an "as is," "where is" basis and with all faults.
The Purchase Agreements also provide that the Partnership will indemnify the
Buyer for all liabilities incurred by it in connection with the consent
solicitation of the Investors. In order to facilitate a prompt and final
liquidating distribution to Investors, the Partnership has purchased insurance
to protect itself against potential claims and liabilities arising after the
liquidation and dissolution of the Partnership relating to this Consent
Solicitation and the Transaction. See "THE TRANSACTION--Insurance."
4
<PAGE>
Background to the Transaction
The negotiations between Flying J and the Managing General Partner
leading up to the Transaction commenced in mid-1997. At that time,
representatives of Flying J advised the Managing General Partner that the
lessees intended to exercise their options to purchase the land, building and
equipment comprising the Travel Plazas as soon as practicable. Flying J
representatives requested the Managing General Partner to consider a transaction
which would involve all of the travel plazas owned by the Partnership, PIP 86
and PIP III (collectively, the "PIP Travel Plazas"). During December 1997, an
agreement in principle regarding the Transaction was reached, which agreement
was based upon the December 31, 1996 appraised value of the PIP Travel Plazas.
See "APPRAISALS." The terms and conditions of the Purchase Agreement were
determined pursuant to arm's-length negotiations between the Managing General
Partner and Flying J.
Source and Amount of Funds
The funds required to purchase the Travel Plazas pursuant to the
Purchase Agreements will be $80,460,000 (the "Purchase Price"). The Buyer is
obligated to pay for all costs and expenses of the Transaction, including,
without limitation, the attorneys' fees of the Partnership, title insurance
expenses and premiums, escrow fees, survey expenses, environmental audit
expenses and/or environmental insurance premiums, transfer, recording and filing
fees and expenses, and mortgage taxes, if any, except that the Buyer shall not
be responsible for any expenses incurred in connection with the consent
solicitation of the Investors or liquidation of the Partnership. The Managing
General Partner estimates that the costs and expenses associated with the
consent solicitation of the Investors and with the liquidation of the
Partnership will total $490,500.
The Buyer will pay cash for the purchase of the Travel Plazas.
Financing will be provided to the Buyer with loans (the "Loans") from FFCA
Acquisition Corporation (the "Lender"), a wholly owned subsidiary of Franchise
Finance Corporation of America ("FFCA") (NYSE:FFA). FFCA is a New York Stock
Exchange listed company whose primary business purpose is to provide real estate
financing to the chain restaurant industry, as well as to the convenience store
and automotive service and parts industries. The Loans will be made pursuant to
definitive loan agreements, promissory notes, deeds of trust or mortgages, and
security agreements (collectively, the "Loan Documents"). The Lender has issued
a commitment letter to Flying J (the "Commitment Letter") with respect to the
Loans. Flying J's rights and obligations under the Commitment Letter will be
assigned to the Buyer. The Lender's rights and obligations under the Commitment
Letter may be assigned to a third-party lender not affiliated with FFCA or the
Buyer.
The Lender's obligation under the Commitment Letter to make the Loans and
similar loans to be made by the Lender to the Buyer in the Related PIP
Transactions (the "Related Loans") is conditioned upon the satisfaction or
waiver of certain conditions on or before December 31, 1998. If the Buyer
purchases a Travel Plaza with funds from sources other than the Loans, the Buyer
must pay the Lender a breakup fee equal to 1% of the proposed Loan
5
<PAGE>
amount applicable to such Travel Plaza plus the Lender's expenses incurred in
connection therewith. See "THE TRANSACTION--Source of Funds."
The terms of the Commitment Letter were determined pursuant to
arm's-length negotiations between the Lender and Flying J. Because of the size
of the Transaction and to address the issues under "SPECIAL CONSIDERATIONS," a
special meeting of the Board of Directors of FFCA was held on June 29, 1998, at
which the terms and conditions of the Commitment Letter and Loans were reviewed
and approved by the disinterested directors of FFCA. See "SPECIAL
CONSIDERATIONS--Participation by Lender."
Conditions to the Transaction
Consummation of the Transaction is conditioned upon each of the
following occurring on or before December 31, 1998: (i) approval of the
Transaction and the subsequent dissolution of the Partnership by an affirmative
vote of Investors holding a majority of Units; (ii) unless waived by the Buyer,
approval of the Related PIP Transactions and the subsequent dissolutions of PIP
86 and PIP III by an affirmative vote of the PIP 86 and PIP III investors; and
(iii) there having been no statute, rule, order or regulation enacted or issued
by any governmental authority or by a court, which prohibits the consummation of
the Transaction. See "THE TRANSACTION--Conditions to the Transaction."
The obligation of the Buyer (but not the Partnership) to close the
Transaction is conditioned upon the Lender making the Loans as provided in the
Commitment Letter. This condition was added to the Purchase Agreements at the
Buyer's request. Assuming that all other conditions to the closing have been
met, the Partnership will be obligated to consummate the Transaction even if the
Buyer elects to fund the purchase of a Travel Plaza from a source other than the
Loans. However, in such event, the Buyer would be obligated to pay the Lender a
breakup fee equal to 1% of the proposed Loan amount applicable to such Travel
Plaza plus the Lender's expenses incurred in connection therewith..
Appraisals
The Partnership has received appraisals as of December 31, 1996 (the
"1996 Appraisal"), and as of December 31, 1997 (the "1997 Appraisal" and
collectively with the 1996 Appraisal, the "Appraisals") from Cushman &
Wakefield, Inc. ("Cushman & Wakefield") relating to the Appraised Travel Plazas.
Cushman & Wakefield is a nationally recognized, independent and fully
diversified real estate firm with extensive valuation experience and has
provided appraisals to the Partnership since its formation.
The Transaction is based upon the agreement in principle between the
Managing General Partner and Flying J in December 1997 that the purchase price
for the Travel Plazas, after taking into account any sale of assets, would be
the appraised value of the Travel Plazas as set forth in the 1996 Appraisal.
This agreement was subject to the condition that the 1997 Appraisal for the
Partnership would not vary by more than five percent from the 1996 Appraisal.
The difference between the 1996 Appraisal and the 1997 Appraisal was 1.5%. The
agreement was further
6
<PAGE>
subject to the condition that the appraised value as of December 31, 1997 of the
PIP Travel Plazas (which include the Travel Plazas of PIP 86 and PIP III) also
did not vary by more than five percent from their December 31, 1996 appraisal
value. The difference between the December 31, 1996 and December 31, 1997
appraisals for the Travel Plazas did not vary by more than five percent with
respect to the Partnership, PIP 86 and PIP III on a combined basis. Therefore,
the value set forth in the 1996 Appraisal was used to determine the purchase
price of the Travel Plazas. See "APPRAISALS."
Fairness
The Managing General Partner reasonably believes that the terms of the
Transaction are fair to the Partnership and the Investors. The Managing General
Partner has based its determination as to the fairness of the Transaction on
several factors, including but not limited to (i) the amount of the cash
consideration to be received for the Travel Plazas, (ii) prices received
recently for units in the secondary market, including third party tender offers,
(iii) the opportunity for each Investor to vote in favor of or against the
Transaction and the subsequent dissolution of the Partnership, (iv) the
Appraisals and (v) the fact that the Options will be fully exercisable by June
2001. See "FAIRNESS" and "THE PARTNERSHIP" (for a discussion of the Options).
Recommendation of the Managing General Partner
The Managing General Partner has approved the Transaction and
recommends that Investors vote in favor of the Transaction and the subsequent
liquidation of the Partnership as described herein.
Estimated Liquidating Distributions
The Managing General Partner estimates that the sale of the thirteen
Travel Plazas to the Buyer for $80,460,000, followed by a distribution and
liquidation of the Partnership, will result in estimated liquidating
distributions ranging from approximately $981 to $1,010 in cash per Unit,
depending on the date the Unit originally was issued. At March 31, 1998, each
Investor's adjusted capital contribution was $1,000 per Unit. An Investor's
adjusted capital contribution is generally the Investor's initial capital
contribution reduced by the cash distributions to the Investor of proceeds from
the sale of Partnership properties and reduced by any other cash distributions
other than cash from operations.
The following chart sets forth the cash distributions for the life of
the Partnership that Investors would have received upon the liquidation of the
Partnership had the Partnership liquidated on March 31, 1998:
7
<PAGE>
<TABLE>
<CAPTION>
- - ----------------------------- ----------------------------- ---------------------------- ----------------------------
Date of Admission Cash Distributions to Liquidating Total Distributions
Date - From Distribution (estimated)
Operations (estimated)
- - ----------------------------- ----------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C>
May 11, 1989 $804 $1,010 $1,814
- - ----------------------------- ----------------------------- ---------------------------- ----------------------------
July 13, 1989 $800 $984 $1,784
- - ----------------------------- ----------------------------- ---------------------------- ----------------------------
October 19, 1989 $793 $984 $1,777
- - ----------------------------- ----------------------------- ---------------------------- ----------------------------
December 11, 1989 $790 $981 $1,771
- - ----------------------------- ----------------------------- ---------------------------- ----------------------------
</TABLE>
See "UNAUDITED PRO FORMA FINANCIAL INFORMATION" for assumptions used in
calculating the estimated liquidating distributions.
Liquidation Procedures
As soon as practicable after the sale of the Travel Plazas to the
Buyer, the Managing General Partner will take all steps necessary to complete
the liquidation of the Partnership. Upon liquidation of the Partnership, the
Managing General Partner will apply and distribute the assets of the Partnership
to Investors and the general partners in accordance with the provisions of the
Partnership Agreement. Each Investor will receive a final Schedule K-1 from the
Partnership as soon as practicable after the liquidation of the Partnership. It
is estimated that the transaction costs and expenses associated with the consent
solicitation of the Investors and with the liquidation of the Partnership
(including the cost of the Insurance) will be approximately $490,500.
Federal Income Tax Consequences
Separate federal income tax consequences result from the sale of the
Travel Plazas and the subsequent liquidation of the Partnership, as described
below.
o Taxable gain -- The sale of the Travel Plazas will constitute
a taxable transaction for federal income tax purposes. A
taxable gain of approximately $294 per Unit is expected to
result from the sale of the Travel Plazas, a majority of which
will be a capital gain for federal income tax purposes. This
gain is principally the result of depreciation deductions, the
benefit of which was received by the Investors during the life
of the Partnership. Each Investor will receive a final
Schedule K-1 from the Partnership reflecting this taxable
gain.
o Capital loss -- Separately, as a result of the subsequent
liquidation of the Partnership, each Investor who acquired his
Units in the initial offerings thereof is expected to
recognize a capital loss of approximately $123 per Unit.
Investors who purchased their Units after the initial
offerings may have a tax basis in their Units different from
that of Investors who acquired their Units in the initial
8
<PAGE>
offerings. As a result, such Investors may recognize a
different amount of loss from liquidation of the Partnership
than Investors who purchased Units in the initial offerings.
If the sale of the Travel Plazas and the subsequent
liquidation of the Partnership happen in the same taxable
year, the loss from liquidation would partially offset the
gain from the sale of the Travel Plazas described above.
See "SPECIAL CONSIDERATIONS--Federal Income Tax Consequences" and "FEDERAL
INCOME TAX CONSIDERATIONS."
Special Considerations
In evaluating the Transaction, Investors should carefully consider the
information contained under "SPECIAL CONSIDERATIONS."
9
<PAGE>
SPECIAL CONSIDERATIONS
In their evaluation of the Transaction, Investors should carefully
consider the following:
Participation by Lender
The Buyer expects to obtain the cash required to purchase the Travel
Plazas from FFCA Acquisition Corporation, a wholly owned subsidiary of FFCA, or
from an unaffiliated third party lender to whom the Lender has assigned its
rights under the Commitment Letter. See "THE TRANSACTION--Source of Funds." Mr.
Fleischer is both the principal owner of the Managing General Partner and the
Chairman, President and Chief Executive Officer of FFCA. In addition, several
officers and directors of the Managing General Partner are also directors and
officers of FFCA. Because of these relationships, the terms and conditions of
the Purchase Agreement, Commitment Letter and Loans were reviewed and approved
by the disinterested directors of FFCA at a special meeting of the Board of
Directors of FFCA held on June 29, 1998.
Federal Income Tax Consequences
Separate federal income tax consequences result from the sale of the
Travel Plazas and the subsequent liquidation of the Partnership, as described
below.
o Taxable gain -- The sale of the Travel Plazas will constitute
a taxable transaction for federal income tax purposes. A
taxable gain of approximately $294 per Unit is expected to
result from the sale of the Travel Plazas, a majority of which
will be a capital gain for federal income tax purposes. This
gain is principally the result of depreciation deductions, the
benefit of which was received by the Investors during the life
of the Partnership. Each Investor will receive a final
Schedule K-1 from the Partnership reflecting this taxable
gain.
o Capital loss -- Separately, as a result of the subsequent
liquidation of the Partnership, each Investor who acquired his
Units in the initial offerings thereof is expected to
recognize a capital loss of approximately $123 per Unit.
Investors who purchased their Units after the initial
offerings may have a tax basis in their Units different from
that of Investors who acquired their Units in the initial
offerings. As a result, such Investors may recognize a
different amount of loss from liquidation of the Partnership
than Investors who purchased Units in the initial offerings.
If the sale of the Travel Plazas and the subsequent
liquidation of the Partnership happen in the same taxable
year, this loss from liquidation would partially offset the
gain from the sale of the Travel Plazas described above.
As a general matter, each Investor will aggregate his share of certain
gain derived from the Transaction with certain gain or loss from other sources.
Any net gain will be taxed at the rates applicable to capital gains, which
currently is 20%. However, a portion of the gain to be recognized as a result of
the sale of the real property equal to the Partnership's depreciation deductions
with respect thereto will be subject to tax at a rate of 25%. The General
Partner
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expects that gain to be recognized as a result of the sale of the personal
property will be characterized as ordinary income. Each Investor should consult
his or her own tax advisor as to the specific consequences of this transaction.
See "FEDERAL INCOME TAX CONSIDERATIONS."
THE PARTNERSHIP
The Partnership was organized on August 12, 1987, under the Delaware
Revised Uniform Limited Partnership Act to acquire new and existing "Flying J
Travel Plazas," including real property, improvements, equipment and other
personal property. The Travel Plazas are located in Arizona, Arkansas, Georgia,
Kentucky, Nevada, North Carolina, South Carolina, Oregon, Tennessee, Texas, and
Wyoming. The Managing General Partner of the Partnership is Franchise Finance
Corporation of America II, a Delaware corporation, and the individual general
partners of the Partnership are Mr. Morton Fleischer and Mr. Paul Bagley.
The Initial Limited Partner, which is a wholly owned subsidiary of
Perimeter Center Management Company, a Delaware corporation ("PCMC"), was
incorporated on August 11, 1987, to serve as the assignor and initial limited
partner of the Partnership and the owner of record of the limited partnership
interests in the Partnership. The limited partnership interests are assigned by
the Initial Limited Partner to Investors in the Partnership. The Initial Limited
Partner conducts no other business activity.
On December 12, 1988, the Partnership commenced a public offering of
$100,000,000 in Units in the Partnership pursuant to a Registration Statement on
Form S-11 under the Securities Act of 1933, as amended (the "Offering"). The
Partnership and the Initial Limited Partner sold a total of 82,834 Units to
investors at $1,000 per Unit for a total of $82,834,000. The Investors acquired
the following number of Units from the Initial Limited Partner 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 Investor has made any additional capital
contribution. Investors 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 of a
partnership.
The net proceeds of the Offering totaled $71,956,541 and were fully
invested by the Partnership in the Travel Plazas, which are located in eleven
states. The 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
Travel Plazas was acquired in 1988, five were acquired during 1989, five were
acquired during 1990, and two were acquired during 1991. As of March 31, 1998,
all thirteen of the Travel Plazas were leased to CFJ Properties. The Partnership
is not affiliated with CFJ Properties, Flying J or Flying J Franchise Inc.
("FJFI"), a subsidiary of Flying J and the franchisor of the Travel Plazas.
The Partnership's principal objectives are to (i) preserve, protect and
enhance Partnership capital; (ii) provide partially tax-deferred cash
distributions to Investors; (iii) provide the
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potential for increased income and protection against inflation through
participation in the gross revenues of the Travel Plazas; 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. Lessees
generally must pay the Partnership annual rental payments (in monthly
installments) equal to 10% of the Partnership's total investment in the
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, 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.
On February 1, 1991, Flying J, through its subsidiary Big West, entered
into a joint venture with two subsidiaries of Conoco Inc., Douglas Oil and Kayo
Oil, to form CFJ Properties. Flying J (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. Flying J operates all of CFJ
Properties' travel plazas and related facilities, which included 78 interstate
travel plaza properties as of January 31, 1998. The Partnership owns thirteen of
these properties.
The Partnership's leases with CFJ Properties are with full recourse to
the assets of CFJ Properties, but without recourse to its joint venture
partners. A default on one lease constitutes a default on all other leases to
the same lessee by the Partnership, PIP 86 and PIP III, all of whose travel
plazas are leased to Flying J, CFJ Properties or franchisees of FJFI.
Letters of credit issued for the Partnership's benefit were substituted
for rent deposits previously held by the Partnership. As part of the
Transaction, the Partnership will relinquish its rights to those letters of
credit.
The lessees of the Travel Plazas have options (the "Options") to
purchase the land, building and equipment comprising the Travel Plazas. Pursuant
to the Options, the real estate may be purchased commencing in the tenth year of
the lease, for a five or ten year period. The real estate may be purchased at a
price equal to the greater of (i) the appraised fair market value of the land,
building and equipment, as determined by an independent appraiser, or (ii) the
approximate cost of the land, building and equipment, plus a pro rata portion of
organizational and offering expenses of the Partnership and less any amounts
paid previously for equipment. The equipment may be purchased at the end of the
eight-year lease term at a price equal to its appraised fair market value.
Equipment leases are scheduled to expire at various dates through 1999.
The following chart shows when the lessees of the Travel Plazas will be
eligible to exercise their Options regarding the land and improvements:
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Travel Plaza Location Purchase Option Exercise Commencement Date
--------------------- ------------------------------------------
Kingman, AZ September 1999
Texarkana, AR January 2000
Resaca, GA January 2000
Jackson, GA November 1999
Walton, KY April 2000
Winnemucca, NV June 2001
Graham, NC June 1999
Troutdale, OR March 2001
Dillon, SC February 1999
Knoxville, TN August 1999
Pecos, TX November 1998
San Antonio, TX June 2000
Rock Springs, WY July 2000
The Partnership is dependent upon CFJ Properties, its principal 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 Partnership's total rental and percentage lease payments for the year.
For the fiscal year ended January 31, 1998, CFJ Properties reported net
income of $16 million on revenues of $1.3 billion. Revenues rose 7% from $1.2
billion in the prior year. The higher revenues resulted from the opening of six
new units and increases in fuel prices. Net income increased from $1.8 million
in the prior year due to higher gross profit margins.
During the fiscal year ended January 31, 1998, CFJ Properties reported
$41.7 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, 1998, CFJ Properties reported cash balances of
approximately $3.8 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, 1998, CFJ Properties reported partners' capital of $155.5 million
and total assets of $463.7 million.
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CFJ Properties leases the PIP Travel Plazas and equipment under
non-cancelable operating leases, which generally expire at various dates over
the next 9 to 15 years. Payments under all CFJ Properties leases, including the
PIP Travel Plaza leases, were $17.5 million in fiscal 1998 and $17.3 million in
fiscal 1997, including percentage lease payments. Future minimum annual rent
obligations under non-cancelable leases, as projected through 2003, remain
comparable to 1997 expense amounts.
The thirteen Travel Plazas leased by CFJ Properties from the
Partnership generated a combined fuel and non-fuel gross profit (including other
income) of approximately $35.9 million during the fiscal year ended January 31,
1998 as compared to $31.9 million in fiscal year 1997. This increase was due to
higher volumes of fuel sales and higher fuel prices during fiscal year 1998 as
compared to fiscal year 1997. Total unit-level income for these thirteen Travel
Plazas (before depreciation and allocated corporate overhead) totaled
approximately $758,000 in 1998 with four of the thirteen Travel Plazas reporting
positive unit-level income. The remaining nine Travel Plazas reported losses
primarily due to higher expenses. The combined result of the Travel Plaza
unit-level net income before depreciation and allocated corporate overhead was
up from the unit-level net loss of $1.6 million in the prior year due largely to
an increase in fuel and non-fuel sales volumes and an increase in fuel prices.
Volumes and margins were reduced in 1997 due to CFJ Properties' curtailment of
its relationship with a third party billing company in June 1996. For CFJ
Properties' fiscal year ended January 31, 1998, the average unit-level base and
percentage lease payments approximated 13.5% of the original cost of these
properties.
At March 31, 1998, no individual Travel Plaza represented over 10% of
the Partnership's total assets.
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 that are at
least as stringent as the federal standards. By the end of 1998, all USTs must
be corrosion protected, overfill/spill protected and
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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 Partnership has taken 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 environmental liability insurance, if reasonably available. The
Partnership 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 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 Partnership 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 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 have reviewed
such environmental audits and have commenced appropriate corrective actions. The
Managing 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 Partnership 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 March 31, 1998, 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
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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 and 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 Managing General Partner and
therefore has no employees of its own. The Initial Limited Partner has no
employees because it does not conduct any business operations.
THE TRANSACTION
Investors will be asked on the Consent Date to approve the terms of the
offer by the Buyer, which includes Flying J and certain special purpose
companies affiliated with Flying J, to purchase the Travel Plazas pursuant to
the terms of the Purchase Agreements, for consideration consisting of cash in
the amount of $80,460,000. The purchase will be followed by a liquidation of the
Partnership and final distribution of assets. The Buyer is not affiliated with
the Managing General Partner or any of its officers or directors, the individual
general partners or the Partnership. The Managing General Partner currently has
no reason to believe that the Buyer will fail to purchase the Travel Plazas.
Purchase Agreements
The following is a summary of certain provisions of the Purchase
Agreements and is qualified in its entirety by the specific provisions set forth
in the Purchase Agreements. The terms and conditions of the Purchase Agreements
were determined pursuant to arm's-length negotiations between the Managing
General Partner and Flying J. The Managing General Partner may change the terms
of the Purchase Agreement in its discretion, except for the cash sales price
described below.
The Purchase Agreements provide that the Partnership will sell the
Travel Plazas to the Buyer, subject to certain conditions specified therein, in
exchange for cash in an aggregate amount of $80,460,000. See "APPRAISALS." The
sale of all of the Travel Plazas is intended to be an integrated and
simultaneous transaction. As of the date of this Consent Solicitation Statement,
the Buyer has completed its due diligence review of the Travel Plazas and
approved the conditions of the Purchase Agreements, including the condition of
the properties, environmental matters and title.
The Buyer is obligated to pay for all costs and expenses of the
Transaction, including, without limitation, the attorneys' fees of the Lender
and the Partnership, title insurance expenses and premiums, escrow fees, survey
expenses, environmental audit expenses and/or environmental insurance premiums,
transfer, recording and filing fees and expenses, and
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mortgage taxes, if any. Notwithstanding the above, the Buyer shall not be
responsible for any expenses incurred in connection with the consent
solicitation of the Investors or the liquidation of the Partnership. The
Purchase Agreements provide that the Partnership will indemnify the Buyer for
all liabilities incurred by it in connection with the consent solicitation of
the Investors.
The Purchase Agreements provide that the Buyer is purchasing the Travel
Plazas from the Partnership with limited representations and warranties from the
Partnership and otherwise on an "as is," "where is" basis and with all faults.
The representations and warranties of the Partnership under the Purchase
Agreements will not survive the closing of the Transaction. The Purchase
Agreements also provide that the Buyer is releasing the Partnership from all
claims or damages relating to the condition of the Travel Plazas, including
those relating to USTs. The Purchase Agreements do not release the lessees of
the Travel Plazas from any of their obligations under the leases arising prior
to the closing of the Transaction, including indemnification obligations
relating to environmental matters.
Source of Funds
The Purchase Price for the Travel Plazas is $80,460,000. The Buyer is
obligated to pay for all costs and expenses of the Transaction, including,
without limitation, the attorneys' fees of the Partnership, title insurance
expenses and premiums, escrow fees, survey expenses, environmental audit
expenses and/or environmental insurance premiums, transfer, recording and filing
fees and expenses, and mortgage taxes, if any, except that the Buyer shall not
be responsible for any expenses incurred in connection with the consent
solicitation of the Investors or liquidation of the Partnership. The Managing
General Partner estimates that the costs and expenses associated with the
consent solicitation of the Investors and with the liquidation of the
Partnership will total $490,500.
The Buyer will pay cash for the purchase of the Travel Plazas.
Financing will be provided to the Buyer with loans (the "Loans") from FFCA
Acquisition Corporation (the "Lender"), a wholly owned subsidiary of FFCA. The
Buyer has obtained the Commitment Letter from the Lender with respect to the
Loans. The Lender's rights and obligations under the Commitment Letter may be
assigned to a third-party lender not affiliated with FFCA, the Buyer or CFJ
Properties.
The obligation of the Buyer (but not the Partnership) to close the
Transaction is conditioned upon the Lender making the Loans as provided in the
Commitment Letter. This condition was added to the Purchase Agreements at the
Buyer's request. Assuming that all other conditions to the closing have been
met, the Partnership will be obligated to consummate the Transaction even if the
Buyer elects to fund the purchase of a Travel Plaza from sources other than the
Loans. However, in such event, the Buyer would be obligated to pay the Lender a
breakup fee equal to 1% of the proposed Loan amount applicable to such Travel
Plaza plus the Lender's expenses incurred in connection therewith. See
"--Conditions to the Transaction."
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The Lender's obligation under the Commitment Letter to make the Loans
and the Related Loans is conditioned upon the satisfaction or waiver of certain
conditions on or before December 31, 1998.
The terms of the Commitment Letter were determined pursuant to
arm's-length negotiations between the Lender and Flying J. FFCA (the parent of
the Lender) is a New York Stock Exchange listed company whose primary business
purpose is to provide real estate financing to the chain restaurant industry, as
well as to the convenience store and automotive service and parts industries.
Conditions to the Transaction
Consummation of the Transaction is conditioned upon each of the
following occurring on or before December 31, 1998:
(i) approval of the Transaction and the subsequent dissolution
of the Partnership by an affirmative vote of Investors holding a majority of
Units;
(ii) unless waived by the Buyer, approval of the Related PIP
Transactions and the subsequent dissolutions of PIP 86 and PIP III by an
affirmative vote of the PIP 86 and PIP III investors;
(iii) there having been no statute, rule, order or regulation
enacted or issued by any governmental authority or by a court, which prohibits
the consummation of the Transaction; and
(iv) unless waived, all of the parties' respective
representations and warranties are true as of the closing date of the sale of
the Travel Plazas (the "Closing Date") and all covenants have been performed on
or before the Closing Date.
If the Transaction is approved by Investors in the Partnership but not
by investors in either of the Related PIP Transactions, the Buyer has the right
not to consummate the Transaction. However, the Buyer, at its discretion, may
obligate the Company to consummate the Transaction if the Investors approve the
Transaction and other conditions to closing are met.
The obligation of the Buyer (but not the Partnership) to close the
Transaction also is conditioned upon the Lender making the Loans as provided in
the Commitment Letter. This condition was added to the Purchase Agreements at
the Buyer's request. Assuming that all other conditions to the closing have been
met, the Partnership will be obligated to consummate the Transaction even if the
Buyer elects to fund the purchase of a Travel Plaza from sources other than the
Loans. However, in such event, the Buyer would be obligated to pay the Lender a
breakup fee equal to 1% of the proposed Loan amount applicable to such Travel
Plaza plus the Lender's expenses incurred in connection therewith.
The Buyer may terminate a Purchase Agreement if: (i) the Partnership
breaches a representation, warranty or covenant set forth in the Purchase
Agreement; (ii) the Investors do
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not approve the sale of the Travel Plazas to the Buyer under the terms set forth
in this Consent Solicitation Statement and the Purchase Agreement; (iii) the PIP
86 and PIP III investors fail to approve the Related PIP Transactions; (iv) the
Lender fails to provide the Loans on the terms and conditions contained in the
Commitment Letter or (v) all of the conditions to the Partnership's obligation
to sell the Travel Plazas have been satisfied and the Partnership fails to close
the Transaction.
The Partnership may terminate a Purchase Agreement if: (i) the
Investors do not approve the sale of the Travel Plazas to the Buyer under the
terms set forth in this Consent Solicitation Statement and the Purchase
Agreement; (ii) the Buyer breaches a representation, warranty or covenant under
the Purchase Agreement; or (iii) all of the conditions to the Buyer's obligation
to close have been satisfied and the Buyer fails to close the purchase of the
Travel Plazas. In the event that the Partnership terminates a Purchase Agreement
pursuant to (i) above, neither party shall have any further obligation to the
other under the Purchase Agreement, with the exception of certain indemnity
obligations of the Buyer.
Closing Date
Consummation of the Transaction shall occur on a date when all of the
conditions to closing have been satisfied or waived. The Closing Date is
anticipated to be on or before December 31, 1998.
Benefits of Sale of Travel Plazas
and Liquidation of Partnership;
Reasons for the Transaction
At the time the Partnership commenced the Offering in 1988, the
Partnership intended to hold its interests in the Travel Plazas for a period of
at least 10 years, at which point the lessees could exercise their Options to
purchase the Travel Plazas and the Partnership would be liquidated. See "THE
PARTNERSHIP." These Options become exercisable at various dates beginning in
November 1998. The Options will have become exercisable as to all of the Travel
Plazas by June 2001. Therefore, the Managing General Partner believes that the
sale of the Travel Plazas under the terms and conditions set forth in the
Purchase Agreements is advisable at this time.
If the Options are exercised individually, there can be no assurance
that the aggregate price paid for all of the Travel Plazas would equal or exceed
the Purchase Price. Furthermore, if the Partnership does not sell the Travel
Plazas collectively and the lessees exercise their Options individually, this
may result in declining assets and revenue for the Partnership. Returns to
Investors would likely decrease over time as declining revenues from fewer
Travel Plazas are applied against a relatively fixed Partnership expense
structure, including fees payable to the Managing General Partner. In 1997, the
Managing General Partner received aggregate fees from the Partnership totaling
$855,735. The fees payable to the Managing General Partner in the future may be
more or less than those paid in 1997, depending on the performance of the Travel
Plazas. By selling the Travel Plazas in the Transaction, payment of the ongoing
disbursable cash
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fees to the Managing General Partner is avoided. If the Partnership had been
liquidated as of March 31, 1998, the Managing General Partner would not have
received any liquidating distributions. See "GENERAL PARTNER COMPENSATION."
In liquidation, the Partnership will pay off existing liabilities and
debts and distribute the net liquidation proceeds to the Investors and the
general partners in accordance with the Partnership Agreement. Existing
liabilities and debts of the Partnership are not anticipated to be substantial.
It is estimated that the transaction costs and expenses associated with the
consent solicitation of the Investors will approximate $285,000. The costs and
expenses associated with the liquidation of the Partnership, including Insurance
expenses, will be approximately $205,500. Together, it is estimated that the
costs of the Investor consent solicitation and the liquidation of the
Partnership will total $490,500.
An additional benefit of the sale of the Travel Plazas is that the
anticipated estimated liquidating distribution will be substantially higher than
recent secondary sale transactions for the Units. See "MARKET FOR UNITS AND
RELATED SECURITY HOLDER MATTERS--Secondary Market Information."
The sale of the Travel Plazas to the Buyer for $80,460,000, followed by
a distribution and liquidation of the Partnership, would result in estimated
liquidating distributions ranging from approximately $981 to $1,010 in cash per
Unit, depending on the date the Unit originally was issued.
Detriments of Sale of the Travel Plazas
and Liquidation of Partnership
The sale of the Travel Plazas would deprive the Investors of any
benefits from possible future appreciation and operation of the Travel Plazas.
However, representatives of Flying J have advised the Managing General Partner
that the lessees intend to exercise the Options as soon as practicable.
The sale of all of the Travel Plazas will result in the liquidation of
the Partnership. Upon liquidation, the Investors will cease to receive periodic
tax-deferred cash distributions from the Partnership. There can be no assurance
that Investors will be able to reinvest their liquidation proceeds in an
investment that provides a rate of return similar to the periodic distributions
that Investors received from the Partnership. Furthermore, as a result of the
sale of the Travel Plazas, Investors will recognize a taxable gain. See "FEDERAL
INCOME TAX CONSIDERATIONS."
Partnership Agreement Provisions
Regarding Dissolution of Partnership
The following discussion of the provisions of the Partnership Agreement
concerning the dissolution and liquidation of the Partnership is qualified in
its entirety by the specific provisions of the Partnership Agreement.
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Pursuant to Section 8.1 of the Partnership Agreement, the Partnership
will dissolve upon the occurrence of certain events, including the sale or other
disposition at one time of all or substantially all of the Partnership assets.
After the sale of the Travel Plazas as proposed in this Consent Solicitation
Statement, the Managing General Partner will dissolve the Partnership. However,
the Partnership will not terminate until the Partnership Agreement has been
cancelled and the assets of the Partnership have been distributed.
Section 8.2 of the Partnership Agreement provides that, upon
dissolution, the Managing General Partner may cause the Partnership's then
remaining assets to be sold in such manner as it, in its sole discretion,
determines in an effort to obtain the best prices for the assets. Following the
sale of the Travel Plazas, the Managing General Partner does not expect that the
Partnership will have any substantial assets other than cash. Pending completion
of the sale of assets and the cancellation of the Partnership Agreement, the
Managing General Partner will have the right to continue to operate the business
of the Partnership and otherwise deal with Partnership assets. The Managing
General Partner intends to liquidate the Partnership and distribute the
Partnership's assets as soon as practicable following the sale of the Travel
Plazas.
Section 8.2 of the Partnership Agreement also provides that, upon the
dissolution of the Partnership, its liabilities will be paid first to third
party creditors and then to the general partners for any loans or advances made
by them to the Partnership. Any amounts remaining will be distributed to the
partners (and with respect to the Initial Limited Partner, for the benefit of
the Investors to the extent of their Units) in the amount of their respective
Capital Accounts, as adjusted by the provisions of the Partnership Agreement
relating to the allocation of profits and losses. As of March 31, 1998, the
general partners' Capital Accounts had a combined deficit balance of
approximately $148,000, and the general partners will be obligated to contribute
cash to the Partnership in the amount of the negative balance to the extent that
such deficit still exists after allocation of the gain on the sale of the Travel
Plazas. Any such cash will be distributed in the foregoing order of priority.
Insurance
In order to facilitate a prompt and final liquidating distribution to
Investors, the Partnership purchased the Insurance to cover certain liabilities
relating to potential securities claims and claims based on the wrongful acts
(as determined under the policy) of the partnerships and their general partners.
No claims are pending against the Partnership and the Managing General Partner
is not aware of any threatened claims against the Partnership. The policy
provides a maximum aggregate coverage of $15,000,000 with a maximum coverage of
$5,000,000 for each of the Partnership, PIP 86 and PIP III. There is a $100,000
deductible per claim, per partnership. The $201,340 cost of the premium has been
equally allocated among the Partnership, PIP 86 and PIP III. Of the
Partnership's allocated premium, 99% has been allocated to the limited partners
and paid by the Partnership and 1% has been allocated to and paid by the general
partners of the Partnership. The Insurance policy will be issued at or prior to
the date of this Consent Solicitation Statement and coverage thereunder for the
Partnership will terminate six years after the Partnership has been terminated
under Delaware law.
21
<PAGE>
The purpose of the Insurance is to protect the Partnership against
claims made after its liquidation and dissolution. The Managing General Partner
selected the Insurance rather than electing to continue the existence of the
Partnership and delaying the final liquidating distribution. Depending on
potential claims, this delay and the amounts retained could have been
significant. Furthermore, because the Purchase Agreements require the
Partnership to indemnify the Buyer for all liabilities incurred by the Buyer in
connection with the consent solicitation of the Investors, the Partnership and
the Buyer are additional insureds under the Insurance.
Consent Required
Section 5.4(b)(i) of the Partnership Agreement requires the consent of
the Investors holding more than 50% of Units to dispose of all or substantially
all of the assets of the Partnership. The Transaction and the subsequent
liquidation of the Partnership therefore requires the affirmative vote of
Investors holding a majority of Units pursuant to the consent procedures
described herein. See "CONSENT PROCEDURES." Investors voting against the
Transaction do not have dissenters' rights or any rights of appraisal.
Related Sale of PIP 86 and PIP III Travel Plazas to the Buyer
The investors of PIP 86 and PIP III are being asked to approve the sale
of the assets of their respective partnerships to the Buyer in the Related PIP
Transactions at the time of the sale of the Travel Plazas to the Buyer pursuant
to the Purchase Agreements. Consent solicitation statements relating to the sale
of the PIP 86 and PIP III assets to the Buyer have been filed with the SEC and
mailed to the PIP 86 and PIP III investors simultaneously with the mailing of
this Consent Solicitation Statement and are available to Investors upon request.
Requests should be directed to Investor Services, Franchise Finance Corporation
of America II, 17207 North Perimeter Drive, Scottsdale, Arizona 85255, telephone
number (602) 585-4500.
Accounting Treatment
The proposed sale of the Travel Plazas will be treated as a sale of the
real estate and related assets under the full accrual method. Under this method
of accounting, profit is recognized in full when the sale is consummated. See
"UNAUDITED PRO FORMA FINANCIAL INFORMATION."
Regulatory Requirements
Except as described below, no federal or state regulatory requirements,
other than applicable requirements related to federal and state securities laws,
if any, must be complied with in order to complete the sale of the Travel
Plazas, and no regulatory approvals must be obtained in order to complete the
sale. In addition, Investors will not have dissenter's right in the event the
Transaction is approved. Under the provisions of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 and the rules and regulations thereunder, certain
acquisitions, such as the Transaction and the Related PIP Transactions, may not
be consummated unless required information has been furnished to the Antitrust
Division of the Department of Justice (the
22
<PAGE>
"Antitrust Division") and the Federal Trade Commission (the "FTC") and the
specified waiting requirements have been satisfied. On _________, 1998, the
Partnership filed a Notification and Report Form with the Antitrust Division and
the FTC and on ___________, 1998, the Partnership's request for early
termination of the waiting period was granted. Notwithstanding the termination
of the waiting period, at any time before or after the consummation of the
Transaction and the Related PIP Transactions, the Antitrust Division or the FTC
could take actions under federal antitrust laws as they deem necessary in the
public interest, including seeking to enjoin consummation of the Transaction, or
seeking divestiture of a portion of the Travel Plazas. In appropriate
circumstances, private parties also may bring legal actions under federal
antitrust laws.
Recommendation of the Managing General Partner
THE MANAGING GENERAL PARTNER HAS APPROVED THE TRANSACTION AND
RECOMMENDS THAT INVESTORS CONSENT TO THE PROPOSAL TO SELL THE TRAVEL PLAZAS AND
DISSOLVE THE PARTNERSHIP BY MARKING THE "FOR" BOX ON THE ENCLOSED CONSENT CARD.
FAIRNESS
Based upon its analysis of the Transaction, the Managing General
Partner reasonably believes that the terms of the Transaction, when considered
as a whole, are fair to the Partnership and the Investors. The Managing General
Partner has based its determination as to the fairness of the Transaction on
several factors, including but not limited to (i) the amount of the cash
consideration to be received for the Travel Plazas, (ii) prices received
recently for Units in the secondary market, including third party tender offers,
(iii) the opportunity for each Investor to vote in favor of or against the
Transaction and the subsequent dissolution of the Partnership, (iv) the
Appraisals, and (v) the fact that all of the Options will be fully exercisable
by June 2001. See "THE TRANSACTION--Benefits of Sale of Travel Plazas and
Liquidation of Partnership; Reasons for the Transaction" and "APPRAISALS."
In particular, the Managing General Partner considered the fact that
the sale of the Travel Plazas to the Buyer for $80,460,000, followed by a
distribution and liquidation of the Partnership, would result in estimated
liquidating distributions ranging from approximately $981 to $1,010 in cash per
Unit, depending on the date the Unit originally was issued. At March 31, 1998,
each Investor's adjusted capital contribution was $1,000 per Unit. See
"UNAUDITED PRO FORMA FINANCIAL INFORMATION." The anticipated estimated
liquidating distribution also would be substantially higher than recent
secondary sale transactions for the Units. See "MARKET FOR UNITS AND RELATED
SECURITY HOLDER MATTERS--Secondary Market Information."
The terms and conditions of the Purchase Agreements were determined
pursuant to arm's-length negotiations between the Managing General Partner and
Flying J.
23
<PAGE>
APPRAISALS
The Partnership has received the 1996 Appraisal and the 1997 Appraisal
from Cushman & Wakefield, copies of which are available upon request. The
following summary of the Appraisals is qualified in its entirety by the specific
provisions set forth therein. The Managing General Partner has not made any
contacts, other than as described in this Consent Solicitation Statement, with
any outside party regarding the preparation by the outside party of an opinion
as to the fairness of the Transaction, an appraisal of the Partnership or its
assets, or any other report with respect to the Transaction.
Cushman & Wakefield is a nationally recognized, independent and fully
diversified real estate firm with extensive valuation experience. The Managing
General Partner elected to retain Cushman & Wakefield to render the Appraisals
because of its valuation experience and because it has rendered appraisals using
similar methodologies to affiliates of the Managing General Partner since 1981
and to the Partnership regarding the Travel Plazas since the inception of the
Partnership. The Managing General Partner and its affiliates have no contract,
agreement or understanding with Cushman & Wakefield regarding any future
engagement.
The valuation in the Appraisals addressed the market value of the
leased fee interest in the Travel Plazas as a going concern. Cushman & Wakefield
determined that the highest and best use of the Travel Plazas is their continued
use as travel plazas. The 1996 Appraisal concluded that the market value of the
leased fee interest in the Travel Plazas as of December 31, 1996, was
$80,460,000. The 1997 Appraisal concluded that the market value of the leased
fee interest in the Travel Plazas as of December 31, 1997, was $81,689,000. The
Appraisals did not render an opinion as to the value of other assets or
liabilities of the Partnership.
The Transaction is based upon the agreement in principle between the
Managing General Partner and Flying J reached in December 1997 that the purchase
price for the Travel Plazas, after taking into account any sale of assets, would
be the appraised value of the Travel Plazas as set forth in the 1996 Appraisal.
This agreement was subject to the condition that the 1997 Appraisal for the
Partnership would not vary by more than five percent from the 1996 Appraisal.
The difference between the 1996 Appraisal and 1997 Appraisal was approximately
1.5%. The agreement was further subject to the condition that the appraised
value as of December 31, 1997 of the PIP Travel Plazas (which include the Travel
Plazas of PIP 86 and PIP III) also did not vary by more than five percent from
their December 31, 1996 appraisal value. The difference between December 31,
1996 and December 31, 1997 appraisals for the Travel Plazas did not vary by more
than five percent with respect to the Partnership, PIP 86 and PIP III on a
combined basis.
THE TRAVEL PLAZAS
The Partnership acquired the Travel Plazas during the years 1988
through 1991 without borrowings by the Partnership. The Travel Plazas were
acquired with the net proceeds received by the Partnership from the Offering.
The Partnership proposes to sell the Travel Plazas in the Transaction.
24
<PAGE>
The 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.
The following is a description of the Travel Plazas, including the
percentage of the Partnership's total assets as of March 31, 1998, represented
by such plaza. No individual Travel Plaza represents 10% or more of the total
assets of the Partnership. All of the Travel Plazas are leased to CFJ
Properties.
Pecos, Texas. (2.7% of total assets). 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. (8.8% of total assets). 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. (8.9% of total assets). 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. (7.2% of total assets). 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. (6.2% of total assets). 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. (7.5% of total assets). 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. (7.3% of total assets). 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 plaza used the insurance proceeds to
rebuild the Travel Plaza. During 1994, the Partnership made an additional
investment of $595,000 in the Texarkana plaza to enlarge the property to conform
to the new Flying J travel plaza prototype. The Travel Plaza reopened in March
1994.
25
<PAGE>
Resaca, Georgia. (8.0% of total assets). 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. (8.2% of total assets). 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. (7.8% of total assets). 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. (5.8% of total assets). 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. (6.4% of total assets). 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. (7.2% of total assets). 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.
Independent of the Partnership, the Initial Limited Partner has no
interest in any real or personal property.
INDUSTRY
The travel plaza/truckstop industry is both highly competitive and
highly fragmented. 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 that 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 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
26
<PAGE>
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 commercial trucks registered in the United States consume approximately
41 billion gallons of fuel annually. The Managing General Partner believes 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.
In particular, the profitability of the businesses operated at the Travel Plazas
are substantially dependent upon the margins available from the sale of fuel and
availability of fuel supplies. 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.
27
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
Participating Income Properties II, L.P. (the "Partnership") was formed
to purchase new and existing "Flying J Travel Plaza" facilities, including land,
buildings and equipment (the "Travel Plazas") to be leased on a net basis to
Flying J Inc. and certain franchises of Flying J Franchise Inc. Franchise
Finance Corporation of America II, a Delaware corporation (the "Managing General
Partner"), is the managing general partner of the Partnership. Mr. Morton
Fleischer and Mr. Paul Bagley are individual general partners of the
Partnership. The Partnership proposes to sell the Travel Plazas in a transaction
with an unaffiliated buyer. The sale of the Travel Plazas will give rise to the
liquidation of the Partnership in accordance with the Partnership Agreement.
Dissolution of the Partnership is effective upon the closing of the Transaction,
but the Partnership does not terminate until the remaining assets of the
Partnership have been distributed as provided in the Partnership Agreement.
Set forth below is unaudited historical and pro forma financial
information for the Partnership as of March 31, 1998. The pro forma balance
sheet information has been prepared assuming that the sale of the Travel Plazas
and the liquidation of the Partnership occurred on March 31, 1998, and includes
estimates of transaction costs and other costs to be incurred in connection with
the liquidation of the Partnership. The pro forma financial information has been
prepared assuming a sale price of $80,460,000 based on the Purchase Agreements.
The pro forma information is based on the historical financial
information of the Partnership and should be read in conjunction with the
historical financial statements and notes of the Partnership included in this
Consent Solicitation Statement. In the opinion of management, all material
adjustments necessary to reflect the effects of the transaction have been made.
The pro forma information is unaudited and is not necessarily
indicative of the results which actually would have occurred if the transaction
had been consummated in the period presented, or on any particular date in the
future, nor does it purport to represent the financial position for future
periods.
28
<PAGE>
PARTICIPATING INCOME PROPERTIES II, L.P.
----------------------------------------
UNAUDITED PRO FORMA BALANCE SHEET
---------------------------------
AS OF MARCH 31, 1998
--------------------
<TABLE>
<CAPTION>
Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
- - ------
Cash and cash equivalents $ 3,974,080 $ 78,123,796(2) $ 82,097,876
Receivables from lessees 187,300 (187,300)(3) --
Property subject to operating leases 48,118,890 (48,118,890)(1) --
------------ ------------ ------------
Total assets $ 52,280,270 $ 29,817,606 $ 82,097,876
============ ============ ============
LIABILITIES AND PARTNERS' CAPITAL
- - ---------------------------------
Distribution payable to limited partners $ 2,112,679 $ (2,112,679)(4) $ --
Accounts payable and accrued liabilities 71,500 (71,500)(4) --
Deferred income 525,696 (525,696)(5) --
------------ ------------ ------------
Total liabilities 2,709,875 (2,709,875) --
------------ ------------ ------------
Partners' capital (deficit):
General partners (222,874) 222,874(1) --
Limited partners 49,793,269 32,304,607(1) 82,097,876
------------ ------------ ------------
Total partners' capital 49,570,395 32,527,481 82,097,876
------------ ------------ ------------
Total liabilities and partners' capital $ 52,280,270 $ 29,817,606 $ 82,097,876
============ ============ ============
</TABLE>
The accompanying notes are an integral part of this unaudited pro forma balance
sheet.
29
<PAGE>
PARTICIPATING INCOME PROPERTIES II, L.P.
----------------------------------------
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET
------------------------------------------
MARCH 31, 1998
--------------
1) Pro forma Adjustments to Partners' Capital:
------------------------------------------
The pro forma adjustments to Partners' Capital reflect the sale of the
Travel Plazas, receipt of cash proceeds and recognition of related gain in
accordance with the Partnership Agreement. The pro forma effect of the proposed
sale of the Travel Plazas is calculated as follows:
<TABLE>
<S> <C>
Sale proceeds $ 80,460,000
Book value of Travel Plazas sold 48,118,890
------------
Gross gain on sale of Travel Plazas 32,341,110
Less: Consent solicitation costs of the proposed sale of Travel Plazas (283,799)
------------
Net pro forma effect of sale on Partners' Capital $ 32,057,311
============
</TABLE>
The following is an analysis of the pro forma effect of the resulting
partnership liquidation on Partners' Capital:
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
-------- -------- -----
<S> <C> <C> <C>
Net pro forma effect of sale on Partners' Capital $ -- $ 32,057,311 $ 32,057,311
Net pro forma effect of liquidation costs and
recognition of deferred income (see Note 5) 3,202 316,994 320,196
Reallocation of Partners' Capital in accordance with
liquidation provision of the Partnership Agreement 69,698 (69,698) --
Contribution from general partners 149,974 -- 149,974
------------ ------------ ------------
Pro forma effect on Partners' capital $ 222,874 $ 32,304,607 $ 32,527,481
============ ============ ============
</TABLE>
The pro forma adjustment for liquidation costs reflects the estimated
costs to be incurred to liquidate the Partnership, such as legal, accounting,
insurance and other liquidation costs.
2) Pro forma Adjustments to Cash:
-----------------------------
The pro forma adjustments to cash reflect the following:
Proceeds from sale of Travel Plazas $ 80,460,000
Consent solicitation costs of the proposed sale of Travel Plazas (283,799)
Contribution from general partners 149,974
Collection of receivables 187,300
Payment of first quarter 1998 distribution to limited partners (2,112,679)
Payment of accounts payable and accrued liabilities (71,500)
Payment of costs incurred to liquidate (205,500)
------------
Net pro forma effect on cash $ 78,123,796
============
30
<PAGE>
3) Pro forma adjustments to receivables:
------------------------------------
Receivables from lessees are due from the Buyer. As a result, these
amounts will be collected from the Buyer prior to liquidation of the
Partnership.
4) Pro forma adjustments to certain liabilities:
--------------------------------------------
The pro forma adjustments reflect the payment of the regular quarterly
cash distributions payable to the limited partners and the payment of sales tax
and other payables to third party creditors.
5) Pro forma adjustment to deferred income:
---------------------------------------
This pro forma adjustment reflects the recognition of deferred revenue
from the Travel Plaza leases upon sale of the related Travel Plazas.
31
<PAGE>
SELECTED FINANCIAL DATA
The selected financial information set forth below has been derived
from the Partnership's financial statements included herein and published
financial statements of the Partnership previously filed with the Securities and
Exchange Commission and not appearing herein. The Partnership's financial
statements for each of the years ended December 31, 1997, 1996 and 1995 have
been audited by Arthur Andersen LLP, independent public accountants. The
unaudited financial data for the three months ended March 31, 1998 and 1997,
include all adjustments that the Managing General Partner considers necessary
for a fair presentation of the financial position and the results of operations
for those periods. The selected financial data set forth below do not purport to
be complete and should be read in conjunction with "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and the Partnership's
financial statements and the notes thereto included elsewhere in this Consent
Solicitation Statement.
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 31, Year Ended December 31,
--------- -----------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 2,476,341 $ 2,455,257 $10,034,660 $ 9,857,290 $ 9,985,844 $ 9,895,376 $ 9,364,420
Net Income 1,589,127 1,418,546 5,974,380 5,831,607 6,002,622 5,926,437 5,558,318
Net Income Per Unit 18.99 16.95 71.40 69.70 71.74 70.83 66.43
Total Assets 52,280,270 52,913,688 52,913,688 55,827,780 58,932,231 61,749,194 65,255,222
Distributions of Cash
From Operations to
Investors 2,112,468 2,093,108 8,565,908 8,460,157 8,537,458 8,258,384 7,940,289
Distributions of Cash
From Operations Per
Unit 25.50 25.27 103.41 102.14 103.07 99.70 95.86
Return of Capital to
Investors -- -- -- -- -- -- --
Return of Capital Per
Unit -- -- -- -- -- -- --
</TABLE>
32
<PAGE>
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 March 31, 1998, the Partnership had cash and marketable
securities with a maturity of three months or less generally collateralized by
United States government obligations aggregating $3,974,080 of which $2,112,267
was paid out to the Investors in April 1998 as their distribution from
operations for the first quarter of 1998. The remaining cash 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 revenues will
be sufficient to meet all of the Partnership's expenses and provide cash for
distributions to the Investors.
The Partnership pays an affiliate of the Managing 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, the
affiliate of the Managing General Partner completed the design of a new
accounting information system that was begun in 1996 and was successfully
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. If the
Transaction occurs, all of the Partnership's assets will be sold, which will
result in the dissolution of the Partnership and the liquidation of the
remaining Partnership assets, net of liabilities. Under these circumstances, the
"Year 2000" issue is not anticipated to have any effect on the Partnership.
The Managing General Partner knows of no other trends, demands,
commitments, events or uncertainties that will result in or that are reasonably
likely to result in the Partnership's liquidity increasing or decreasing in any
material way.
The Initial Limited Partner serves as the owner of record of the
limited partner interests in the Partnership, the rights and benefits of which
are assigned by the Initial Limited Partner to the Investors. The Initial
Limited Partner has no other business activity and has no capital resources.
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 during the quarters ended March
31, 1998 and 1997 and during the years ended December 31, 1997, 1996 and 1995.
33
<PAGE>
Three Months Ended March 31, 1998 Compared to the
Three Months Ended March 31, 1997
During the three months ended March 31, 1998 (the period), the
Partnership received base rental revenue pursuant to its lease arrangements in
the amount of $1,865,905, unchanged from the comparable period of the prior
year. Base rental revenue for the period includes the recognition of
approximately $69,000 of income previously deferred. In addition, the
Partnership received or accrued percentage rentals of $565,225 for the period
representing an increase over percentage rentals of $531,517 for the comparable
period in 1997. On June 1, 1996, CFJ Properties (the Partnership's only lessee)
terminated 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 low percentage
rental revenues in the quarter ended March 31, 1997 as compared to the quarter
ended March 31, 1998. Total expenses decreased by $149,497 during the period as
compared to the prior period due to a decrease in depreciation expense related
to the sale of Travel Plaza equipment in the last twelve months.
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 percentage rentals.
Percentage rental revenues increased to $2,352,826 in 1997 from $2,237,456 in
1996 due to higher Travel Plaza sales volumes. In June, 1996, a credit card
issuer to Flying J Travel Plaza customers terminated its relationship with the
Travel Plazas. This resulted in reduced volume and margins, which contributed to
lower percentage 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 percentage
rentals amounting to $116,838, or 5%, which is attributable to decreased overall
Travel Plaza sales related to the termination in June
34
<PAGE>
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 the Initial Limited Partner's
activities.
GENERAL PARTNER COMPENSATION
Pursuant to provisions of the Partnership Agreement, the officers and
directors of the Managing General Partner serve in such capacities without
remuneration from the Partnership. The Managing General Partner is entitled to
be reimbursed for certain expenses as permitted under the Partnership Agreement.
The general partners are entitled to a total of one percent of all
profits, gains, losses, deductions and credits for federal income tax purposes
and a total of one percent of all cash flow of the Partnership. The Managing
General Partner is also entitled to a subordinated real estate disposition fee
under certain circumstances. If the Partnership had been liquidated as of March
31, 1998, the Managing General Partner would not have received any liquidating
distributions. See "UNAUDITED PRO FORMA FINANCIAL INFORMATION."
The Initial Limited Partner 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 the Initial Limited Partner serve without compensation
from the Initial Limited Partner or the Partnership.
MARKET FOR UNITS AND RELATED SECURITY HOLDER MATTERS
Secondary Market Information
The Units are not listed on any national or regional securities
exchange or quoted in the over the counter market. There is no established
public trading market for the Units, and it is unlikely that an established
public market for the Units will develop. Secondary sales activity for
35
<PAGE>
the Units has been limited and sporadic. The Managing General Partner monitors
transfers of the Units (i) because the admission of the transferee as a
substitute investor requires the consent of the Managing General Partner under
the Partnership Agreement, and (ii) in order to track compliance with safe
harbor provisions to avoid treatment of the Partnership as a "publicly traded
partnership" for federal income tax purposes.
Set forth in the table that follows is certain information regarding
sale transactions in the Units. Such information was obtained from Gemisys
Transfer Agents. The transactions reflected in the tables below represent only
some of the sale transactions in the Units. There have been other secondary sale
transactions in the Units, although specific information regarding such
transactions is not readily available to the Managing General Partner. Because
the information regarding sale transactions in the Units included in the tables
below is provided without verification by the Managing General Partner and
because the information provided does not reflect sufficient activity to cause
the prices shown to be representative of the value of the Units, such
information should not be relied upon as indicative of the ability of Investors
to sell their Units in secondary sale transactions or as to the prices at which
such Units may be sold.
While the Managing General Partner receives some information regarding
the prices of secondary sales transactions of the Units, the Managing General
Partner does not receive or maintain comprehensive information regarding all
activities of all broker/dealers and others known to facilitate secondary sales
of the Units. The Managing General Partner estimates, based solely on the
transfer records of the Partnership, that the number of Units transferred in
sale transactions was as follows:
<TABLE>
<CAPTION>
======================== ====================== ====================== ====================== ======================
Effective # Sales Highs Lows Averages
Transfer Date
as of
======================== ====================== ====================== ====================== ======================
<S> <C> <C> <C> <C>
April 1, 1997 184 $750 $725 $745
- - ------------------------ ---------------------- ---------------------- ---------------------- ----------------------
July 1, 1997 115 $965 $725 $835
- - ------------------------ ---------------------- ---------------------- ---------------------- ----------------------
October 1, 1997 113 $913 $750 $815
- - ------------------------ ---------------------- ---------------------- ---------------------- ----------------------
January 1, 1998 112 $946 $750 $847
- - ------------------------ ---------------------- ---------------------- ---------------------- ----------------------
April 1, 1998 22 $910 $830 $845
======================== ====================== ====================== ====================== ======================
</TABLE>
Third Party Tender Offers
During June 1998, Investors in the Partnership received an unsolicited
offer to purchase their Units from third parties not affiliated with the General
Partner for $800 per Unit. This was for a price which the Managing General
Partner believes does not reflect the fair value of the Units.
36
<PAGE>
Unitholders
As of June 1, 1998, there were 6,502 record holders of the Units. As of
June 1, 1998, no person or group was known by the Partnership to own directly or
beneficially 5% or more of the outstanding Units of the Partnership. As of June
1, 1998, Mr. Morton Fleischer beneficially owned 20 Units. Neither the Managing
General Partner nor Mr. Paul Bagley owned any Units as of June 1, 1998. Mr.
Fleischer is the only director or officer of the Managing General Partner who
owned any Units as of June 1, 1998.
The Initial Limited Partner 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 Investors. However, the Initial
Limited Partner has no right to vote its interest on any matter and it must vote
the assigned interests as directed by the Investors. The Initial Limited Partner
is a wholly owned subsidiary of PCMC.
Distributions
For the two most recent fiscal years and the interim period ended March
31, 1998, the Partnership made the following cash distributions to the
Investors:
1998
<TABLE>
<CAPTION>
Per Unit
Distribution Total
------------------------ ----------------------------
Date of Number Cash from Cash from
Distribution of Units Operations Capital Operations Capital
- - ------------ -------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C>
March 31 82,834 $25.50 -- $2,112,267 --
</TABLE>
1997
<TABLE>
<CAPTION>
Per Unit
Distribution Total
------------------------ ----------------------------
Date of Number Cash from Cash from
Distribution of Units Operations Capital Operations Capital
- - ------------ -------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C>
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 --
</TABLE>
37
<PAGE>
1996
<TABLE>
<CAPTION>
Per Unit
Distribution Total
------------------------ ----------------------------
Date of Number Cash from Cash from
Distribution of Units Operations Capital Operations Capital
- - ------------ -------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C>
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 --
</TABLE>
Cash from operations, defined as disbursable cash in the Partnership
Agreement, is distributed to the Investors. Any variations in the amount of
distributions from quarter to quarter are due to fluctuations in net cash
provided by operating activities. Cash proceeds from the sale of property, when
distributed, represent a partial return of the limited partners' initial $1,000
per Unit capital contribution. The Adjusted Capital Contribution of an Investor
is generally the Investor's initial capital contribution reduced by the cash
distributions to the Investor 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 Investors, as
defined in the Partnership Agreement, was $1,000 as of March 31, 1998.
Any differences in the amounts of distributions set forth in the above
tables from the information contained above in "SELECTED FINANCIAL DATA" are due
to rounding the amount of distributions payable per Unit down to the nearest
whole cent and carrying any fractional cents forward from one period to the
next.
38
<PAGE>
CONSENT PROCEDURES
Pursuant to the Partnership Agreement, only Investors are entitled to
consent to matters under the Partnership Agreement. The Managing General Partner
is not entitled to vote. The Initial Limited Partner is the holder of all of the
limited partnership interests in the Partnership; however, the Initial Limited
Partner has no right to vote its interest in the Partnership and must vote the
assigned limited partnership interests in the Partnership as directed by the
Investors. On the Consent Date, 82,834 Units representing interests in the
Partnership will be held by Investors.
Each Unit on the Consent Date is entitled to one vote. Pursuant to
Sections 7.3 and 11.1 of the Partnership Agreement, each Investor will be
entitled to direct the Initial Limited Partner to vote on the Consent Date (and
the Initial Limited Partner is required to vote in accordance with the
Investor's direction) the number of Units held by the Investor on the Consent
Date. A reference in this Consent Solicitation Statement to a consent with
respect to Units shall refer to such directions given to the Initial Limited
Partner by the Investors of the Units by a properly executed Consent Card or
subsequent revision thereof.
The Partnership Agreement does not provide for the setting of a record
date for determining the Investors entitled to vote Units with respect to
matters upon which votes will be cast on the Consent Date. Accordingly, each
Investor reflected on the books and records of the Partnership and the Initial
Limited Partner on the date of mailing of the Notice of Consent Solicitation
will be entitled to vote its Units on the Consent Date regarding the proposal
submitted for approval. If an Investor validly transfers one or more Units after
returning its Consent Card, the new Investor may revoke or revise, before the
Consent Date, the transferor Investor's Consent Card with respect to the
transferred Units under the procedures described under "General Information" for
revoking or revising a Consent Card.
Mr. Morton Fleischer, who beneficially owns 20 Units, is the only
director or officer of the Managing General Partner who owned any Units as of
June 1, 1998. The 20 Units beneficially owned by Mr. Fleischer will be voted in
favor of the Transaction. Neither the Managing General Partner nor any of its
other affiliates or individual general partners hold, or will hold as of the
Consent Date, any Units.
An affirmative vote of a majority of Units on the Consent Date is
required for approval of the proposal being submitted for a vote. Abstentions
are counted in tabulations of the proposal but are not deemed to be affirmative
votes. Directions provided to the Initial Limited Partner by the consent
procedures described herein will be tabulated by an automated system
administered by Gemisys Transfer Agents.
This consent solicitation is being made by mail on behalf of the
Managing General Partner, but may also be made without additional remuneration
by officers or employees of the Managing General Partner by telephone,
telegraph, facsimile transmission or personal interview. The expense of the
preparation, printing and mailing of this Consent Solicitation Statement and the
enclosed Consent Card and Notice of Consent Solicitation, and any additional
material relating to the proposal to be consented to on the Consent Date which
may be furnished to
39
<PAGE>
Investors by the Managing General Partner subsequent to the furnishing of this
Consent Solicitation Statement, has been or will be borne by the Partnership as
permitted by the Partnership Agreement. The Partnership will reimburse banks and
brokers who hold Units in their name or custody, or in the name of nominees for
others, for their out-of-pocket expenses incurred in forwarding copies of the
consent materials to those persons for whom they hold such Units. Supplementary
solicitations may be made by mail, telephone or interview by officers of the
Partnership or selected securities dealers. It is anticipated that the cost of
such supplementary solicitations, if any, will not be material. In addition, the
Partnership has retained D.F. King & Co. to solicit consents from Investors by
mail, in person and by telephone. The Partnership will pay D.F. King & Co. a fee
for its services, plus reimbursement of reasonable out-of-pocket expenses
incurred in connection with the consent solicitation, which are estimated to be
approximately $100,000.
FEDERAL INCOME TAX CONSIDERATIONS
Kutak Rock, counsel for the Managing General Partner ("Counsel"), has
rendered an opinion regarding the material federal income tax consequences
associated with the sale of the Travel Plazas, which are summarized in this
section and which may affect Investors who are individuals and citizens or
residents of the United States. The following discussion further briefly
summarizes such issues, which may affect certain Investors which are tax-exempt
persons. This summary was prepared by Counsel and is based upon the Internal
Revenue Code of 1986, as amended (the "Code"), Treasury regulations promulgated
or proposed thereunder (the "Regulations") and published rulings and court
decisions, all of which are subject to changes which could adversely affect the
Investors. Each Investor should consult his own tax advisor as to the specific
consequences of the proposed Transaction, and the transactions related thereto,
that may apply to such Investor. No ruling from the Internal Revenue Service
("IRS") or from any other taxing authority will be sought or obtained as to any
of the following tax issues, and neither the IRS nor the courts are bound by the
discussion set forth below.
Opinions of Counsel
Counsel has rendered its opinion to the Partnership concerning the
material federal income tax consequences relating to the Transaction and the
related transactions. Subject to the limitations and qualifications described
below, Counsel has opined that as of the date hereof, the Partnership will be
characterized as a partnership rather than as an association taxable as a
corporation for federal income tax purposes and that the Transaction, if
consummated, will be a taxable transaction in which gain or loss is recognized
in full. Such opinions are based in part upon certain representations of the
Managing General Partner. In addition, Counsel has rendered its opinion to the
effect that this discussion, which represents the material federal income tax
consequences associated with the Transaction, and which may affect Investors who
are individuals and citizens or residents of the United States, is correct to
the extent such discussion describes provisions of the Code or interpretations
thereof.
40
<PAGE>
Federal Income Tax Characterization of the Partnership
Under Section 7701 of the Code and the Regulations promulgated
thereunder, certain eligible entities are entitled to elect to be treated as a
partnership or as a corporation for federal income tax purposes. Among the types
of entities which are not eligible to elect to be treated as a partnership are
publicly traded partnerships, as described in Section 7704 of the Code.
For this purpose, a partnership will be considered publicly traded if
its interests are traded on an established securities market or are readily
tradable on a secondary market or the substantial equivalent thereof.
Counsel has delivered its opinion to the Partnership to the effect that
as of the date hereof the Partnership is characterized as a partnership for
federal income tax purposes. Such opinion is based in part upon a number of
representations by the Managing General Partner, including a representation
concerning the number of Units in the Partnership which were traded in each
year. If the IRS were to successfully challenge the federal income tax
characterization of the Partnership, gain or loss recognized as a result of the
Transaction would be taken into account by the Partnership rather than the
Investors and, in addition, distributions of the proceeds thereof likely would
be taxable to the Investors as dividends.
Tax Consequences of the Transaction
In connection with the Transaction, the assets of the Partnership will
be transferred to the Buyer in return for cash. The Partnership then will
immediately liquidate and distribute its share of such cash to the Investors.
Each Investor will be required to recognize a share of the income or loss of the
Partnership for its final taxable year, subject to the limits described below,
including gain or loss recognized as a result of the Transaction. Each Investor
will receive a final Schedule K-1 from the Partnership as soon as practical
after the liquidation of the Partnership. As described above, the Transaction
will constitute a taxable transaction in which gain or loss will be recognized
in full.
The amount of gain or loss recognized by the Partnership will equal its
share of the difference between (i) the sum of the amount of cash received as a
result of the Transaction and the amount of any liabilities assumed by the
Buyer, and (ii) the adjusted tax basis of its assets including the Travel
Plazas. The amount of gain or loss recognized by the Partnership as a result of
the Transaction will be allocated among its partners in accordance with the
terms of the Partnership Agreement. Each Investor will take into account his
share of such gain or loss regardless of whether he voted in favor of the
Transaction.
Under the provisions of Section 1060 of the Code, in the event of a
sale of assets that constitute a trade or business, for purposes of calculating
gain or loss, the seller will be required to segregate its assets into certain
classes. The consideration to be received for such assets will be allocated
among the classes and among assets of a particular class in accordance with
their respective fair market values. The Managing General Partner believes that
the allocation to be used by the Partnership in connection with the Transaction
represents the fair market values of its
41
<PAGE>
assets. If the IRS were to successfully challenge such allocation, the amount of
ordinary income to be recognized by the Partnership could be increased.
The Partnership has not made an election under Section 754 of the Code.
This election, if made, would permit the Partnership to adjust the basis of its
assets to reflect the price paid by a purchaser of Units. Because this election
has not been made, the amount of gain or loss recognized by the Partnership as a
result of the Transaction will be determined solely by reference to the tax
basis of the assets and not by the purchase price paid by any Investor for his
Units. The allocation by the Partnership of each Investor's gain or loss in
connection with the Transaction will be determined by reference to the basis of
the Partnership in its underlying assets rather than by reference to the basis
of an Investor's Units. However, as described in greater detail below, the
amount of gain actually recognized by an Investor as a result of the liquidation
of the Partnership will be determined in part by reference to the tax basis of
his Units.
Except as with respect to recapture income described below, gains or
losses recognized as a result of the Transaction will be treated as realized
from the sale of assets used in a trade or business within the meaning of
Section 1231 of the Code. Each Investor will be required to net his gain or loss
from the Transaction with gains or losses of Section 1231 assets from other
sources. If the result of such netting is a loss, such loss will be treated as
an ordinary loss. Conversely, if the result of such netting is a gain, such gain
will be treated as a capital gain. In certain cases, Section 1231 gain, which
otherwise would be treated as capital gain, will be recharacterized as ordinary
income to the extent of losses from Section 1231 assets recognized during any of
the five preceding years. Each Investor should consult his own tax advisor
concerning the application of the provisions of Section 1231 of the Code. All or
a portion of any gain attributable to personal property recognized by the
Partnership as a result of the Transaction will be characterized as ordinary
income. Gain recognized as a result of the Transaction will be treated as
passive income under the provisions of Section 469 of the Code.
As a general matter, each Investor will aggregate his share of Section
1231 gain derived from the Transaction with Section 1231 gain or loss from other
sources. Any net gain will be taxed at the rates applicable to capital gains,
which currently is 20%. However, a portion of the gain to be recognized as a
result of the sale of the real property equal to the Partnership's depreciation
deductions with respect thereto will be subject to tax at a rate of 25%. The
Managing General Partner expects that gain to be recognized as a result of the
sale of the personal property will be characterized as ordinary income.
The Transaction will not result in the recognition of material
unrelated business taxable income ("UBTI") by any tax-exempt Investor which does
not hold Units in the Partnership either as a "dealer" or as debt-financed
property within the meaning of Section 514, and is not an organization described
in Code Section 501(c)(7) (social clubs), 501(c)(9) (voluntary employees'
beneficiary associations), 501(c)(17) (supplemental unemployment benefit trusts)
or 501(c)(20) (qualified group legal services plans). The four classes of exempt
organizations noted in the previous sentence may recognize gain or loss on the
Transaction.
42
<PAGE>
Upon consummation of the Transaction, the Managing General Partner
intends to liquidate the Partnership and distribute the net proceeds to its
Investors. The taxable year of the Partnership will end at such time and each
Investor in the Partnership must report, in his taxable year that includes the
Transaction, his share of all income, gain, loss, deduction and credit for such
Partnership through the date of the Transaction (including gain or loss
resulting from the Transaction as described above). Each Investor whose taxable
year is not a calendar year could be required to take into income in a single
taxable year his share of income of the Partnership attributable to more than
one of its taxable years.
The Partnership's share of the net proceeds of the Transaction will be
distributed among the Investors and the general partners in a manner which will
be on a pro rata basis based on their respective capital account balances
adjusted to reflect the gain or loss recognized as a result of the Transaction.
The Investors will be required to recognize gain as a result of the distribution
of cash in liquidation of the Partnership only to the extent such distribution
exceeds the basis of their Units. If the amount of cash distributed in
liquidation of the Partnership is less than the basis of an Investor in his
Units, such Investor will be permitted to recognize a loss to the extent of such
excess.
The sale of the Travel Plazas will constitute a taxable transaction for
federal income tax purposes. The Managing General Partner expects that a taxable
gain of approximately $294 per Unit will result from the sale of the Travel
Plazas, a majority of which will be Section 1231 or capital gain. This gain is
principally the result of depreciation deductions, the benefit of which was
received by the Investors during the life of the Partnership. In the case of
Units assigned during the year in which the Transaction occurs, gain will be
allocated among the transferor and transferee thereof based on the number of
days of the year each held such interest. Each Investor will be required to take
into account a share of the gain recognized as a result of the sale of the
Travel Plazas whether or not such Investor voted in favor of the Transaction.
Each Investor will receive a final Schedule K-1 from the Partnership reflecting
this taxable gain.
In addition, as a result of the subsequent liquidation of the
Partnership, the Managing General Partner expects that each Investor who
acquired his Units in the initial offerings thereof will recognize a capital
loss of approximately $123 per Unit. Investors who purchased their Units after
the initial offerings may have a tax basis in their Units different from that of
Investors who acquired their Units in the initial offerings. As a result, such
Investors may recognize a different amount of loss from liquidation of the
Partnership than Investors who purchased Units in the initial offerings. If the
sale of the Travel Plazas and the subsequent liquidation of the Partnership
happen in the same taxable year, the loss from liquidation would partially
offset the gain from the sale of the Travel Plazas described above.
Taxation of Tax-Exempt Investors
As a general matter, persons who are exempt from tax under the
provisions of Section 501 of the Code will be entitled to exclude from the
calculation of UBTI any capital gains, unless the properties to which the gains
are attributable are subject to acquisition indebtedness. Acquisition
indebtedness includes debt incurred to purchase or improve property
43
<PAGE>
and certain debt incurred either before or after the acquisition or improvement
of such property. The Travel Plazas are not subject to acquisition indebtedness.
Any gain recharacterized as ordinary income under the provisions of Section 1245
of the Code will be required to be included in the calculation of UBTI by
Investors who are tax-exempt persons. The Managing General Partner anticipates
that the Transaction will not generate a material amount of UBTI for tax-exempt
Investors. Each Investor who is a tax-exempt person should consult his own tax
advisor concerning the recognition of UBTI as a result of the Transaction.
State Tax Consequences and Withholding
The Partnership may be subject to state or local taxation in various
state or local jurisdictions, including those in which it transacts business.
The state and local tax treatment of the Partnership and its partners may not
conform to the federal income tax consequences discussed above. Consequently,
Investors should consult their own tax advisors regarding the effect of state
and local tax laws on the Transaction.
ANNUAL REPORT AND OTHER DOCUMENTS
The Partnership will, upon written request and without charge
(excluding exhibits thereto), provide by first-class mail within three business
days of receipt of such request to any person solicited hereunder a copy of the
Partnership Agreement, the Appraisals, the tax opinion of Counsel and the
Partnership's Annual Report on Form 10-K for the year ended December 31, 1997,
and Quarterly Report on Form 10-Q for the period ended March 31, 1998, as filed
with the Securities and Exchange Commission. Requests should be addressed to
Franchise Finance Corporation of America II, Investors Services, at 17207 North
Perimeter Drive, Scottsdale, Arizona 85255.
OTHER MATTERS
No other business is to be presented for consideration on the Consent
Date, other than that specified in the Notice of Consent Solicitation.
NOTICE TO BANKS, BROKER-DEALERS AND
VOTING TRUSTEES AND THEIR NOMINEES
Please advise the Partnership whether other persons are the beneficial
owners of the Units for which Consents are being solicited from you, and, if so,
the number of copies of this Consent Solicitation Statement and other soliciting
materials you wish to receive in order to supply copies to the beneficial owners
of the Units.
IT IS IMPORTANT THAT CONSENTS BE RETURNED PROMPTLY. INVESTORS ARE
REQUESTED TO COMPLETE, DATE AND SIGN THE ENCLOSED FORM OF CONSENT AND RETURN IT
PROMPTLY IN THE ENVELOPE PROVIDED FOR THAT PURPOSE. BY RETURNING YOUR CONSENT
PROMPTLY YOU CAN HELP THE PARTNERSHIP AVOID THE EXPENSE OF FOLLOW-UP MAILINGS.
AN INVESTOR MAY REVOKE OR REVISE A PRIOR CONSENT AND DIRECT THE
44
<PAGE>
INITIAL LIMITED PARTNER TO VOTE LIMITED PARTNERSHIP INTERESTS CORRESPONDING TO
THE NUMBER OF THE INVESTOR'S UNITS AS SET FORTH IN THIS CONSENT SOLICITATION
STATEMENT.
FRANCHISE FINANCE CORPORATION OF
AMERICA II
By: /s/ Morton H. Fleischer
----------------------------------
Morton H. Fleischer, President
Scottsdale, Arizona
Dated: September ___, 1998
45
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants....................................................F-2
Financial Statements
Balance Sheets - December 31, 1997 and 1996........................................F-3
Statements of Income for the Years ended December 31,
1997, 1996 and 1995................................................................F-4
Statements of Changes in Partners' Capital for the Years ended
December 31, 1997, 1996 and 1995...................................................F-5
Statements of Cash Flows for the Years ended
December 31, 1997, 1996 and 1995...................................................F-6
Notes to Financial Statements......................................................F-7
Schedule III - Schedule of Real Estate and Accumulated Depreciation as
of December 31, 1997..............................................................F-11
Report of Independent Public Accountants to
FFCA Investor Services Corporation 88-C...........................................F-13
Balance Sheet - December 31, 1997 for FFCA Investor Services Corporation 88-C.....F-14
Notes to Balance Sheet for FFCA Investor Services Corporation 88-C................F-15
Unaudited Financial Statements
Balance Sheets - March 31, 1998 and December 31, 1997.............................F-16
Statements of Income for the Three Months ended March 31, 1998
and 1997..........................................................................F-17
Statement of Changes in Partners' Capital for the Three Months
ended March 31, 1998..............................................................F-18
Statements of Cash Flows for the Three Months ended
March 31, 1998 and 1997...........................................................F-19
</TABLE>
F-1
<PAGE>
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.
/s/ 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).
F-2
<PAGE>
PARTICIPATING INCOME PROPERTIES II, L.P.
----------------------------------------
BALANCE SHEETS - DECEMBER 31, 1997 AND 1996
-------------------------------------------
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
------
CASH AND CASH EQUIVALENTS $ 3,984,265 $ 3,790,885
RECEIVABLES FROM LESSEES 197,300 173,000
PROPERTY SUBJECT TO OPERATING LEASES (Note 3) 48,732,123 51,863,895
------------ ------------
Total assets $ 52,913,688 $ 55,827,780
============ ============
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
DISTRIBUTION PAYABLE TO LIMITED PARTNERS $ 2,132,357 $ 2,075,158
PAYABLE TO GENERAL PARTNERS -- 18,239
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 72,006 72,787
DEFERRED INCOME (Note 2) 594,251 868,470
------------ ------------
Total liabilities 2,798,614 3,034,654
------------ ------------
PARTNERS' CAPITAL (DEFICIT):
General partners (217,427) (190,647)
Limited partners 50,332,501 52,983,773
------------ ------------
Total partners' capital 50,115,074 52,793,126
------------ ------------
Total liabilities and partners' capital $ 52,913,688 $ 55,827,780
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
PARTICIPATING INCOME PROPERTIES II, L.P.
----------------------------------------
STATEMENTS OF INCOME
--------------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
----------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Rental $ 7,463,620 $ 7,463,620 $ 7,463,620
Percentage rentals 2,352,826 2,237,456 2,354,294
Interest and other 188,726 156,214 167,930
Gain on sale of equipment 29,488 -- --
----------- ----------- -----------
10,034,660 9,857,290 9,985,844
----------- ----------- -----------
EXPENSES:
General partner and affiliate fees (Note 5) 855,735 849,864 862,275
Depreciation 2,981,760 2,988,226 2,895,293
Operating 222,785 187,593 225,654
----------- ----------- -----------
4,060,280 4,025,683 3,983,222
----------- ----------- -----------
NET INCOME $ 5,974,380 $ 5,831,607 $ 6,002,622
=========== =========== ===========
NET INCOME ALLOCATED TO (Note 1):
General partners $ 59,744 $ 58,316 $ 60,026
Limited partners 5,914,636 5,773,291 5,942,596
----------- ----------- -----------
$ 5,974,380 $ 5,831,607 $ 6,002,622
=========== =========== ===========
NET INCOME PER LIMITED PARTNERSHIP
UNIT (based on 82,834 units held by
limited partners) $ 71.40 $ 69.70 $ 71.74
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
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.
F-5
<PAGE>
PARTICIPATING INCOME PROPERTIES II, L.P.
----------------------------------------
STATEMENTS OF CASH FLOWS
------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
----------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,974,380 $ 5,831,607 $ 6,002,622
Adjustments to net income:
Depreciation 2,981,760 2,988,226 2,895,293
Gain on sale of equipment (29,488) -- --
Change in assets and liabilities:
Decrease (increase) in receivables from lessees (24,300) 8,433 (1,433)
Increase (decrease) in payable to general partners (18,239) 18,239 --
Increase (decrease) in accounts payable
and accrued liabilities (781) 10,091 (70,444)
Decrease in deferred income (274,219) (392,589) (155,852)
----------- ----------- -----------
Net cash provided by operating activities 8,609,113 8,464,007 8,670,186
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment 179,500 79,750 --
----------- ----------- -----------
CASH FLOWS FOR FINANCING ACTIVITIES:
Partner distributions declared (Note 1) (8,652,432) (8,545,613) (8,623,695)
Increase (decrease) in distribution payable
to limited partners 57,199 (26,186) 30,406
----------- ----------- -----------
Net cash used in financing activities (8,595,233) (8,571,799) (8,593,289)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 193,380 (28,042) 76,897
CASH AND CASH EQUIVALENTS, beginning of year 3,790,885 3,818,927 3,742,030
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 3,984,265 $ 3,790,885 $ 3,818,927
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net income $ 5,974,380 $ 5,831,607 $ 6,002,622
Adjustments to reconcile net income to
cash distributions declared:
Depreciation 2,981,760 2,988,226 2,895,293
Gain on sale of equipment (29,488) -- --
Rental enhancement accretion (274,220) (274,220) (274,220)
----------- ----------- -----------
Cash distributions declared from operations $ 8,652,432 $ 8,545,613 $ 8,623,695
=========== =========== ===========
</TABLE>
F-7
<PAGE>
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
(percentage 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.
F-8
<PAGE>
Minimum future rentals (excluding percentage 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:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net income for financial reporting purposes $ 5,974,380 $ 5,831,607 $ 6,002,622
Differences for tax purposes in:
Depreciation 1,466,095 1,382,631 1,092,026
Adjustment to deferred rental revenue (274,220) (274,220) (274,220)
Deferred income -- (118,368) 118,368
Gain on sale 53,509 (35,758) --
----------- ----------- -----------
Taxable income to partners $ 7,219,764 $ 6,785,892 $ 6,938,796
=========== =========== ===========
</TABLE>
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.
F-9
<PAGE>
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 that 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.
F-10
<PAGE>
SCHEDULE III
Page 1 of 2
PARTICIPATING INCOME PROPERTIES II, L.P.
----------------------------------------
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
----------------------------------------------------
AS OF DECEMBER 31, 1997
-----------------------
<TABLE>
<CAPTION>
Initial Cost to Partnership and
Gross Amount at December 31, 1997 Accumulated Depreciation
--------------------------------- ------------------------
Travel Plaza Location Land Buildings Equipment Total Buildings Equipment Total Date
- - --------------------- ---- --------- --------- ----- --------- --------- ----- Acquired
--------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Kingman, AZ $ 843,681 $ 3,731,319 $ -- $ 4,575,000 $ 1,295,597 $ -- $ 1,295,597 9/89
Texarkana, AR 63,243 4,866,904 765,921 5,696,068 1,169,434 670,181 1,839,615 1/90
Resaca, GA 1,145,422 4,555,578 600,000 6,301,000 1,518,526 540,040 2,058,566 1/90
Jackson, GA 284,661 5,523,339 492,000 6,300,000 1,879,470 442,800 2,322,270 11/89
Walton, KY 1,216,623 4,529,377 454,000 6,200,000 1,462,611 395,831 1,858,442 4/90
Winnemucca, NV 1,489,004 3,098,996 287,000 4,875,000 850,072 212,559 1,062,631 6/91
Graham, NC 1,153,847 5,566,153 -- 6,720,000 1,990,673 -- 1,990,673 6/89
Troutdale, OR 738,474 3,647,526 267,000 4,653,000 1,038,532 205,256 1,243,788 3/91
Dillon, SC 1,052,840 5,625,160 -- 6,678,000 2,031,308 -- 2,031,308 2/89
Knoxville, TN 1,058,958 4,241,042 -- 5,300,000 1,487,310 -- 1,487,310 8/89
Pecos, TX 170,990 1,999,010 -- 2,170,000 721,865 -- 721,865 11/88
San Antonio, TX 1,566,238 3,612,762 600,000 5,779,000 1,141,532 511,875 1,653,407 6/90
Rock Springs, WY 925,589 3,007,411 367,000 4,300,000 939,815 309,658 1,249,473 7/90
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total $11,709,570 $54,004,577 $ 3,832,921 $69,547,068 $17,526,745 $ 3,288,200 $20,814,945
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
F-11
<PAGE>
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
============ ============
F-12
<PAGE>
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 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 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.
/s/ ARTHUR ANDERSEN LLP
Phoenix, Arizona,
January 6, 1998.
F-13
<PAGE>
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.
F-14
<PAGE>
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 Investors, 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.
F-15
<PAGE>
PARTICIPATING INCOME PROPERTIES II, L.P.
BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
------
CASH AND CASH EQUIVALENTS $ 3,974,080 $ 3,984,265
RECEIVABLES FROM LESSEES 187,300 197,300
PROPERTY SUBJECT TO OPERATING LEASES, at cost
Land 11,709,570 11,709,570
Buildings 54,004,577 54,004,577
Equipment 3,832,921 3,832,921
------------ ------------
69,547,068 69,547,068
Less - Accumulated depreciation 21,428,178 20,814,945
------------ ------------
48,118,890 48,732,123
------------ ------------
Total assets $ 52,280,270 $ 52,913,688
============ ============
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
DISTRIBUTION PAYABLE TO LIMITED PARTNERS $ 2,112,679 $ 2,132,357
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 71,500 72,006
DEFERRED INCOME 525,696 594,251
------------ ------------
Total liabilities 2,709,875 2,798,614
------------ ------------
PARTNERS' CAPITAL (DEFICIT):
General partners (222,874) (217,427)
Limited partners 49,793,269 50,332,501
------------ ------------
Total partners' capital 49,570,395 50,115,074
------------ ------------
Total liabilities and partners' capital $ 52,280,270 $ 52,913,688
============ ============
</TABLE>
F-16
<PAGE>
PARTICIPATING INCOME PROPERTIES II, L.P.
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
1998 1997
---------- ----------
REVENUES:
Rental $1,865,905 $1,865,905
Percentage rentals 565,225 531,517
Interest and other 45,211 55,697
Gain on sale of equipment -- 2,138
---------- ----------
2,476,341 2,455,257
---------- ----------
EXPENSES:
General partner fees 211,036 209,102
Depreciation 613,233 766,397
Operating 62,945 61,212
---------- ----------
887,214 1,036,711
---------- ----------
NET INCOME $1,589,127 $1,418,546
========== ==========
NET INCOME ALLOCATED TO:
General partners $ 15,891 $ 14,185
Limited partners 1,573,236 1,404,361
---------- ----------
$1,589,127 $1,418,546
========== ==========
NET INCOME PER LIMITED PARTNERSHIP UNIT
(based on 82,834 units held by limited partners) $ 18.99 $ 16.95
========== ==========
F-17
<PAGE>
PARTICIPATING INCOME PROPERTIES II, L.P.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Limited Partners
General ---------------------------
Partners Number Total
Amount of Units Amount Amount
------ -------- ------ ------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1997 $ (217,427) 82,834 $ 50,332,501 $ 50,115,074
Net income 15,891 -- 1,573,236 1,589,127
Distribution to partners (21,338) -- (2,112,468) (2,133,806)
------------ ------------ ------------ ------------
BALANCE, March 31, 1998 $ (222,874) 82,834 $ 49,793,269 $ 49,570,395
============ ============ ============ ============
</TABLE>
F-18
<PAGE>
PARTICIPATING INCOME PROPERTIES II, L.P.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,589,127 $ 1,418,546
Adjustments to net income:
Depreciation 613,233 766,397
Gain on sale of equipment -- (2,138)
Change in assets and liabilities:
Decrease (increase) in receivables from lessees 10,000 (1,218)
Increase in payable to general partner -- 7,005
Increase (decrease) in accounts payable
and accrued liabilities (506) 8,314
Decrease in deferred income (68,555) (68,554)
----------- -----------
Net cash provided by operating activities 2,143,299 2,128,352
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property -- 42,751
----------- -----------
CASH FLOWS FOR FINANCING ACTIVITIES:
Partner distributions declared (2,133,806) (2,114,251)
Increase (decrease) in distribution payable
to limited partners (19,678) 18,116
----------- -----------
Net cash used in financing activities (2,153,484) (2,096,135)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (10,185) 74,968
CASH AND CASH EQUIVALENTS, beginning of period 3,984,265 3,790,885
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 3,974,080 $ 3,865,853
=========== ===========
</TABLE>
F-19
<PAGE>
CONSENT CARD
THIS CONSENT IS SOLICITED ON BEHALF OF
FFCA MANAGEMENT COMPANY LIMITED PARTNERSHIP
FOR PARTICIPATING INCOME PROPERTIES II, L.P.
The undersigned Investor of Units representing interests in
Participating Income Properties II, L.P., a Delaware limited partnership (the
"Partnership"), hereby directs FFCA Investor Services Corporation 88-C to
consent to the Proposal, as designated below, the Limited Partnership Interests
held by FFCA Investor Services Corporation 88-C, according to the number of
Units held of record by the undersigned.
This Consent Card when properly executed will direct the consent of
FFCA Investor Services Corporation 88-C in the manner herein indicated by the
undersigned. If properly executed and no direction is made, the holder of this
Consent Card will direct FFCA Investor Services Corporation 88-C to vote FOR the
proposal set forth on the Consent Card.
Please mark boxes |X| in ink. Sign, date and return this Consent Card promptly,
using the enclosed envelope.
Proposal to sell the Partnership's interests in the Travel Plazas pursuant to
the terms and conditions set forth in the Purchase Agreements and to dissolve
the Partnership as described in the Consent Solicitation Statement.
|_| FOR |_| AGAINST |_| ABSTAIN
The undersigned hereby acknowledges receipt of the Notice of Consent
Solicitation, dated September ___, 1998 and the Consent Solicitation Statement
furnished therewith.
Please sign and date this consent card on the reverse side and mail in
the enclosed envelope.
Please sign exactly as name appears hereon. When Units are held by
joint tenants, both should sign. Executors, administrators, trustees and other
fiduciaries, and persons signing on behalf of corporations or partnerships,
should so indicate when signing.
Dated_____________________________, 1998
________________________________________
Authorized Signature
________________________________________
Title, if any
________________________________________
Authorized Signature
________________________________________
Title, if any
To save the Partnership additional vote solicitation expenses, please
sign, date and return this Consent Card promptly, using the enclosed envelope.
