-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Fw7aX5NXg4YbSa1VKaruG3XtasIoRAID9JGuw9uqGuUzvVV21AqG4krrAZgwfTVr L0JXd46ttq7rF02Mnixyng== 0000950147-97-000655.txt : 19970923 0000950147-97-000655.hdr.sgml : 19970923 ACCESSION NUMBER: 0000950147-97-000655 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970922 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PARTICIPATING INCOME PROPERTIES 1986 LP CENTRAL INDEX KEY: 0000797977 STANDARD INDUSTRIAL CLASSIFICATION: OPERATORS OF NONRESIDENTIAL BUILDINGS [6512] IRS NUMBER: 860570015 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 000-16720 FILM NUMBER: 97683510 BUSINESS ADDRESS: STREET 1: 17207 N PERIMETER DR STREET 2: THE PERIMETER CENTER CITY: SCOTTSDALE STATE: AZ ZIP: 85255 BUSINESS PHONE: 6025854500 MAIL ADDRESS: STREET 1: 17207 N PERIMETER DR CITY: SCOTTSDALE STATE: AZ ZIP: 85255-5402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FFCA INVESTOR SERVICES CORP 86-B CENTRAL INDEX KEY: 0000797978 STANDARD INDUSTRIAL CLASSIFICATION: OPERATORS OF NONRESIDENTIAL BUILDINGS [6512] IRS NUMBER: 860557949 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 000-16721 FILM NUMBER: 97683511 BUSINESS ADDRESS: STREET 1: 17207 N PERIMETER DR STREET 2: C/O FINANCIAL CTR CITY: SCOTTSDALE STATE: AZ ZIP: 85255 BUSINESS PHONE: 6025854500 MAIL ADDRESS: STREET 1: 17207 N PERIMETER DR CITY: SCOTTSDALE STATE: AZ ZIP: 85255-5402 10-K405/A 1 FORM 10-K405/A SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A-1 ANNUAL REPORT UNDER SECTION 13 or 15(d) of THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 Commission file number 0-16720 Commission file number 0-16721 PARTICIPATING INCOME PROPERTIES 1986, L.P. AND FFCA INVESTOR SERVICES CORPORATION 86-B --------------------------------------- (Exact Name of Co-Registrants as Specified in Their Organizational Documents) Delaware 86-0570015 ----------------------------------- ------------------------- (Partnership State of Organization) (Partnership IRS Employer Identification No.) Delaware 86-0557949 ------------------------------------ ------------------------- (Corporation State of Incorporation) (Corporation IRS Employer Identification No.) The Perimeter Center 85255 17207 North Perimeter Drive ---------- Scottsdale, Arizona (Zip Code) - ---------------------------------------- (Address of Principal Executive Offices) Co-Registrants' telephone number, including area code: (602) 585-4500 PART I Item 1. Business. Participating Income Properties 1986, L.P., a Delaware limited partnership (the "Partnership"), was organized on June 23, 1986 under the Delaware Revised Uniform Limited Partnership Act. The Partnership serves as a co-general partner of FFCA/PIP 1986 Property Company, a Delaware general partnership (the "Company"), which was organized to acquire new and existing travel plazas, including land, buildings and equipment, to be leased to Flying J Inc. and to franchisees of Flying J Franchise Inc. The other co-general partner of the Company is Perimeter Center Management Company ("PCMC"). The Partnership invests in the travel plazas through the Company to avoid burdensome state filing requirements. The Partnership is entitled to 99.9% of all of the profits, losses and disbursable cash of the Company. Under the terms of the First Restated Agreement of Partnership of the Company, PCMC is entitled to the remaining 0.1% of the profits, losses and disbursable cash of the Company. The general partner of the Partnership is FFCA Management Company Limited Partnership, a Delaware limited partnership (the "General Partner"). FFCA Investor Services Corporation 86-B, a Delaware corporation and wholly-owned subsidiary of PCMC, which is the corporate general partner of the General Partner, was incorporated on June 23, 1986, 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 FFCA Investor Services Corporation 86-B to investors in the Partnership. FFCA Investor Services Corporation 86-B conducts no other business activity. The Partnership and FFCA Investor Services Corporation 86-B are referred to collectively as the "Co-Registrants." The statements contained in this report, if not historical, are forward-looking statements and involve risks and uncertainties that could cause actual results to differ materially from the results, financial or otherwise, or other expectations described in such forward-looking statements. These statements are identified with the words "anticipated" or "expected". Therefore, forward-looking statements should not be relied upon as a prediction of actual future results or occurrences. On October 10, 1986, the Co-Registrants commenced a public offering of $75,000,000 in limited partnership depository units (the "Units") in the Partnership pursuant to a Registration Statement on Form S-11 under the Securities Act of 1933, as amended. The Co-Registrants sold a total of 51,687 Units to investors at $1,000 per Unit for a total of $51,687,000. Purchasers of the Units (the "Holders") acquired the following number of Units from FFCA Investor Services Corporation 86-B on each of the following dates: 19,865 Units on January 15, 1987; and 31,822 Units on April 16, 1987. Subsequent to that date, no Holder has made any additional capital contribution. The Holders share in the benefits of ownership of the Partnership's assets, including its interest in the Company's real and personal property investments, according to the number of Units held, in substantially the same manner as limited partners of the Partnership. After deducting organizational and offering expenses, including sales commissions, the net proceeds of the offering of the Units, $45,613,778, were fully invested by the Partnership, through its investment in the Company, as of September 1988, in eleven "Flying J Travel Plazas" located in nine states. "Flying J Travel Plaza" facilities offer a full-service operation, generally including fuel facilities, a restaurant, convenience store and other amenities for use by the trucking industry and traveling public in general. As of August 25, 1997, eight of the travel plazas owned by the Partnership were leased to CFJ Properties, a general partnership formed pursuant to a joint venture between Flying J Inc., through its subsidiary, Big West Oil Company ("Big West"), and Douglas Oil Company of California, a subsidiary of Conoco Inc. ("Douglas Oil"), one of the travel plazas was leased to Flying J Inc. and the remaining two were leased to franchisees of Flying J Franchise Inc. ("FJFI"), a subsidiary of Flying J Inc. and the franchisor of Flying J Travel Plazas. The Partnership and the Company are not affiliated with CFJ Properties, Flying J Inc. or FJFI. The Partnership's principal objectives through its investment in the Company are to (i) preserve, protect and enhance Partnership capital, (ii) provide partially tax-sheltered cash distributions to investors, (iii) provide the potential for increased income and protection against inflation through participation in the gross revenues of Flying J Travel Plaza facilities and (iv) obtain long-term appreciation in the value of its properties through real estate ownership. Real estate owned by the Company is generally leased for a term of 20 years. Equipment is generally leased for a term of eight years. Of the two equipment leases remaining at December 31, 1996, one will expire and the related equipment is anticipated to be sold to the lessee in January 1998 and the other lease is not subject to a purchase option. Lessees must generally pay the Company annual rental payments (in monthly installments) equal to 10% of the Company's total investment in properties. As additional rent under the terms of the lease, the Company is entitled to receive a portion of the operating revenues of the lessees equal to (i) 4% of annual gross receipts derived from the travel plaza facility, excluding fuel sales, (ii) 3/10 of $.01 per gallon of fuel sold and (iii) 4% of all amounts received by the lessee for any lease year pursuant to any sublease by the lessee of any part of its leased premises. Reference is made to Note (3) of the Notes to Financial Statements filed with this Report for a schedule of the minimum future lease payments to be received by the Company on its properties. 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 1996, CFJ Properties and Flying J Inc. together contributed approximately 88% of the Company's total rental and participating rental revenue for the year and are expected to contribute a similar percentage of revenue in 1997. 2 On February 1, 1991, Flying J Inc., through its subsidiary Big West, entered into a joint venture with Douglas Oil to form CFJ Properties. Flying J Inc. (and subsidiaries) is a fully integrated oil and gas company that is engaged in the production, refining, transportation, wholesaling and retail marketing of petroleum products and other services through its travel plazas and gasoline stations. CFJ Properties is the franchisor and operator of the Flying J Inc. network of interstate travel plazas, which included 72 properties as of January 31, 1997. The Company owns eight of these properties. Under the terms of the joint venture, Big West sold to Douglas Oil certain Flying J Travel Plazas, which Douglas Oil contributed back to CFJ Properties. In addition to this initial contribution, Douglas Oil also made additional contributions to CFJ Properties. As its initial contribution, Big West transferred to CFJ Properties certain leasehold interests and Flying J Travel Plazas, and subsequently contributed to CFJ Properties various assets including working capital, inventories and future development sites. With the exception of the Butte, Montana travel plaza, Flying J Inc. assigned its leasehold interests in the travel plazas owned by the Company to CFJ Properties and was released by the Company with respect to its obligations under those leases. The Partnership's leases with CFJ Properties are with full recourse to the assets of CFJ Properties, but without recourse to Big West or Douglas Oil. A default on one lease constitutes a default on all other leases to the same lessee by the Partnership and two other partnerships sponsored by affiliates of the General Partner, all of whose travel plazas are leased to CFJ Properties, Flying J Inc. or franchisees of FJFI. For the fiscal year ended January 31, 1997, CFJ Properties reported net income of $1.8 million on revenues of $1.2 billion. Revenues rose 25% from $937.4 million the prior year. The higher revenues resulted from the opening of six new units and increases in fuel prices. Net income decreased from $17.2 million in the prior year due to higher interest expense and lower gross profit margins. During the fiscal year ended January 31, 1997, CFJ Properties reported $22.3 million in net cash provided by operating activities. This cash, along with the cash provided by financing activities, was used to make capital expenditures. As of January 31, 1997, CFJ Properties reported cash balances of approximately $2.1 million, with liquidity supported by net cash provided by operating activities and a $150 million revolving line of credit with a bank. As of January 31, 1997, CFJ Properties reported partners' capital of $139.5 million and total assets of $412.9 million. CFJ Properties leases travel plazas and equipment under non-cancelable operating leases, which expire at various dates over the next 10 to 16 years. Payments under these leases were $17.3 million in 1997 and $17.6 million in 1996, including percentage lease payments. Future minimum annual rent obligations under non-cancelable leases, as projected through 2002, remain comparable to 1997 expense amounts. 3 The nine properties operated by CFJ Properties and Flying J Inc. generated a combined fuel and non-fuel gross profit (including other income) of approximately $24.4 million during the fiscal year ended January 31, 1997 as compared to $26.8 million in 1996. Total travel plaza unit-level income for these nine properties (before depreciation and allocated corporate overhead) totaled approximately $700,000 in 1997 with three of the nine properties reporting positive unit-level income. The remaining six properties reported net losses primarily due to lower total gross profits. The combined result of the travel plaza unit-level income before depreciation and allocated corporate overhead was down from $2.8 million in the prior year due largely to CFJ's curtailment of its relationship with Comdata on June 1, 1996. Comdata, a large third party billing company for the trucking industry, requested changes to its contract which were unacceptable to CFJ's management due to the significant long-term ramifications of Comdata's proposed change on CFJ's future business. CFJ's management believes that CFJ's profitability will stabilize within the next few months. For CFJ Properties' fiscal year ended January 31, 1997, the average unit-level base and participating rents approximated 14.1% of the original cost of these properties. Those properties that each represent over 10% of the Partnership's total assets are located in Amarillo, Texas; Clive, Iowa and Cheyenne, Wyoming. The travel plaza/truckstop industry, although highly fragmented, is highly competitive. The Partnership's lessees are competing with, among others, National Auto/Truckstops, Petro and Pilot Corporation, as well as other national, regional and local truckstop operators, some of which may have substantially greater financial resources than the lessees. The Partnership's lessees also compete with other entities which provide hospitality goods and services to the trucking industry and traveling public in general. The major competitive factors include, among others, location, ease of access, brand identification, pricing, product and service selections, customer service, store appearance, cleanliness and safety. The Flying J Travel Plaza facilities owned by the Company offer a full-service operation, generally including fuel facilities, a restaurant, a convenience store and other amenities for use by the trucking industry and traveling public in general. Flying J Inc. reports that the Flying J Travel Plaza network consists of more than 100 facilities across the U.S. interstate highway system. The travel plaza sites have been selected based on traffic patterns and volumes, and access to interstate highways, among other criteria. According to the American Trucking Association, the trucking industry grosses more than $340 billion annually, representing 78% of the nation's freight bill. The 20 million commercial trucks registered in the United States consume approximately 39 billion gallons of fuel annually. The Partnership believes that the trucking industry is sensitive to certain aspects of the general economic environment, such as retail sales; the level, direction and rate of change in inventories; international trade; vendor performance; the cost and availability of fuel; labor issues; and technology. The trucking industry is also affected by various government policies, including economic regulations; vehicle size and weight regulations; and health, safety and 4 environmental protection regulations. These factors also may influence the competitive posture of one mode of transportation compared to others; however, the trucking industry has presented itself as an affordable and timely alternative to other methods of transportation such as air freight and rail, particularly for short hauls. Through ownership of the travel plazas, the Partnership and the Company are 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 ("UST's") that require the Partnership's lessees to make certain expenditures for compliance. In particular, at the federal level, the Resource Conservation and Recovery Act requires the Environmental Protection Agency ("EPA") to establish a comprehensive regulatory program for the detection, prevention and cleanup of leaking UST's. Regulations enacted by the EPA in 1988 established requirements for (i) installing UST systems; (ii) upgrading UST systems; (iii) taking corrective action in response to releases; (iv) closing UST systems; (v) keeping appropriate records; and (vi) maintaining evidence of financial responsibility for taking corrective action and compensating third parties for bodily injury and property damage resulting from releases. These regulations permit states to develop, administer and enforce their own regulatory programs, incorporating requirements which are at least as stringent as the federal standards. By 1998, all UST's must be corrosion protected, overfill/spill protected and have leak detection. These environmental laws impose strict liability for owners and operators of faulty and leaking storage tanks resulting in damage to the environment or third parties. The General Partner has taken steps to (i) ensure that the lessees comply with applicable rules and regulations; (ii) mitigate any potential liabilities, including the establishment of storage tank monitoring procedures; and (iii) require that lessees indemnify the Partnership for all such liabilities and obtain liability insurance, if reasonably available. The General Partner requires 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 ground water and/or soil vapor monitoring well analysis; pipe leak detector inspection and calibration tests; corrosion protection system tests; on-site sanitary sewer treatment plant effluent analysis; and oil/water separator inspections. The consulting and engineering firm hired by the General Partner to conduct such audits also reviews on-site environmental correspondence; visually inspects the UST system, tank and piping excavation zone monitoring wells, areas adjacent to all 5 petroleum above-ground tanks, the stormwater and wastewater control systems, and the travel plaza facility; and discusses employee training procedures, recent significant environmental events (if any), repair and maintenance activities, and regulatory compliance with travel plaza personnel. The Partnership believes that its lessees are in compliance with all applicable regulatory requirements and that its lessees have all governmental licenses and permits required for their business operations. Management knows of no pending or threatened proceedings or investigations under federal or state environmental laws; however, management cannot predict the impact on the Partnership's lessees of new governmental regulations and requirements. Although the General Partner has taken necessary steps, 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. The Partnership, through its investment in the Company, has invested in real estate located in nine states in the western and central portions of the United States, and no real estate investments are located outside of the United States. A presentation of revenues or assets by geographic region is not applicable and would not be material to an understanding of the Partnership's business taken as a whole. The Partnership does not believe that any aspect of its business is significantly seasonal in nature. No portion of the Partnership's business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the United States Government. The Partnership does not manufacture any products and therefore does not require any raw materials in order to conduct its business. The Partnership is managed by the General Partner and therefore has no employees of its own. FFCA Investor Services Corporation 86-B has no employees because it does not conduct any business operations. 6 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) The following documents are filed as part of this Report: 1. Financial Statements. The Partnership and the Company Report of independent public accountants Consolidated Balance Sheets as of December 31, 1996 and 1995 Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Changes in Partners' Capital for the years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements FFCA Investor Services Corporation 86-B Report of independent public accountants Balance Sheet as of December 31, 1996 Notes to Balance Sheet CFJ Properties (A General Partnership) Independent Auditors' Report Balance Sheets as of January 31, 1997 and 1996 Statements of Income and Partners' Capital for the years ended January 31, 1997, 1996 and 1995 Statements of Cash Flows for the years ended January 31, 1997, 1996 and 1995 Notes to Financial Statements Clive Travel Plaza Independent Auditors' Report Statements of Revenues and Direct Operating Costs and Expenses for the years ended January 31, 1997, 1996 and 1995 7 Statements of Cash Flows for the years ended January 31, 1997, 1996 and 1995 Note to Financial Statements Amarillo Travel Plaza Independent Auditors' Report Statements of Revenues and Direct Operating Costs and Expenses for the years ended January 31, 1997, 1996 and 1995 Statements of Cash Flows for the years ended January 31, 1997, 1996 and 1995 Note to Financial Statements Cheyenne Travel Plaza Independent Auditors' Report Statements of Revenues and Direct Operating Costs and Expenses for the years ended January 31, 1997, 1996 and 1995 Statements of Cash Flows for the years ended January 31, 1997, 1996 and 1995 Note to Financial Statements 2. Financial Statement Schedules. Schedule III-Schedule of Real Estate and Accumulated Depreciation as of December 31, 1996 All other schedules are omitted since they are not required, are inapplicable, or the required information is included in the financial statements or notes thereto. 3. Exhibits. 99. Annual Portfolio Valuation of Cushman & Wakefield as of December 31, 1996. Pursuant to Rule 12b-32 under the Securities Exchange Act of 1934, as amended, the following document, filed with the Securities and Exchange Commission as Exhibit 4 to the Co-Registrants' Form 10-K for the fiscal year ended December 31, 1989, is incorporated herein by this reference. 8 Second Amended and Restated Certificate and Agreement of Limited Partnership which governs the Partnership, as filed with the Secretary of State of Delaware on April 16, 1987. Pursuant to Rule 12b-32 under the Securities Exchange Act of 1934, as amended, the following documents, filed with the Securities and Exchange Commission as exhibits to the Co-Registrants' Form 10-K for the fiscal year ended December 31, 1986, are incorporated herein by this reference.
1986 Form 10-K Exhibit No. ----------- Depository Agreement of the Partnership. 3-C The Certificate of Incorporation which governs FFCA Investor Services Corporation 86-B, as filed with the 3-D Secretary of State of Delaware on June 23, 1986. Bylaws of FFCA Investor Services Corporation 86-B. 3-E
Pursuant to Rule 12b-32 under the Securities Exchange Act of 1934, as amended, the following document, filed with the Securities and Exchange Commission on October 8, 1986 as Exhibit 10(e) to the Co-Registrants' Pre-Effective Amendment No. 1 to the Registration Statement, is incorporated herein by this reference. Operating Agreement, dated October 7, 1986, by and among FFCA Management Company, L.P., FFCA/PIP 1986 Property Company, Flying J Inc. and Flying J Franchise Inc. (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Co-Registrants during the last quarter of the fiscal year ended December 31, 1996. 9 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the co-registrants have duly caused this amendment to be signed on their behalf by the undersigned, thereunto duly authorized. PARTICIPATING INCOME PROPERTIES 1986, L.P. By: FFCA MANAGEMENT COMPANY LIMITED PARTNERSHIP, General Partner Date: September 17, 1997 By: /s/ Morton H. Fleischer -------------------------------------- Morton H. Fleischer, General Partner By: PERIMETER CENTER MANAGEMENT COMPANY, Corporate General Partner Date: September 17, 1997 By: /s/ Morton H. Fleischer -------------------------------------- Morton H. Fleischer, President and Chief Executive Officer FFCA INVESTOR SERVICES CORPORATION 86-B Date: September 17, 1997 By: /s/ John Barravecchia -------------------------------------- John Barravecchia, President, Secretary, Treasurer, Principal Financial Officer and Principal Accounting Officer Independent Auditors' Report ================================================================================ The Board of Directors CFJ Properties: We have audited the accompanying balance sheets of CFJ Properties (a general partnership) as of January 31, 1997 and 1996, and the related statements of income and partners' capital and cash flows for each of the years in the three-year period ended January 31, 1997. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CFJ Properties as of January 31, 1997 and 1996, and the results of its operations and its cash flows for each of the years in the three-year period ended January 31, 1997, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP Salt Lake City, Utah March 31, 1997 1 Balance Sheets CFJ PROPERTIES (A General Partnership) January 31, 1997 and 1996 (In thousands)
Assets 1997 1996 Current assets: Cash and cash equivalents $ 2,138 $ 2,314 Trade receivables, net of allowance for doubtful accounts of of $129 in 1997 and $165 in 1996 (note 8) 11,400 11,836 Inventories (note 2) 20,308 15,832 Prepaid expenses 2,141 2,229 -------- -------- Total current assets 35,987 32,211 -------- -------- Land, buildings, and equipment: Land and improvements 129,270 111,053 Buildings 145,875 119,632 Equipment 105,561 86,939 Leasehold improvements 24,317 24,494 Construction-in-progress 29,454 33,687 -------- -------- 434,477 375,805 Less accumulated depreciation and amortization 58,932 40,095 -------- -------- Net land, buildings, and equipment 375,545 335,710 Long-term notes receivable 395 535 Other assets (note 3) 957 930 -------- -------- $412,884 $369,386 ======== ======== Liabilities and Partners' Capital Current liabilities: Accounts payable (note 8) $ 58,395 $ 48,313 Accrued liabilities (notes 4 and 8) 20,995 23,466 -------- -------- Total current liabilities 79,390 71,779 Long-term debt (note 5) 190,000 156,500 Other liabilities 4,016 3,409 -------- -------- Total liabilities 273,406 231,688 -------- -------- Partners' capital 139,478 137,698 Commitments and contingencies (notes 5, 6 and 10) -------- -------- $412,884 $369,386 ======== ========
See accompanying notes to financial statements. 2 Statements of Income and Partners' Capital CFJ PROPERTIES (A General Partnership) Years ended January 31, 1997, 1996 and 1995 (In thousands)
1997 1996 1995 Sales (note 1(f)) $ 1,171,813 $ 937,370 $ 703,430 Cost of sales 985,377 755,852 563,519 ----------- ----------- ----------- Gross profit 186,436 181,518 139,911 ----------- ----------- ----------- Operating, general, and administrative expense: Operating 162,236 145,959 112,882 General and administrative 11,732 11,753 9,533 ----------- ----------- ----------- 173,968 157,712 122,415 ----------- ----------- ----------- Income from operations 12,468 23,806 17,496 ----------- ----------- ----------- Other income (expense): Interest income 134 93 147 Interest expense, net (10,659) (6,642) (1,483) Loss on sale of fixed assets, net (163) (52) (19) ----------- ----------- ----------- (10,688) (6,601) (1,355) ----------- ----------- ----------- Net income 1,780 17,205 16,141 Partners' capital, beginning of year 137,698 120,493 104,352 ----------- ----------- ----------- Partners' capital, end of year $ 139,478 $ 137,698 $ 120,493 =========== =========== ===========
See accompanying notes to financial statements. 3 Statements of Cash Flows CFJ PROPERTIES (A General Partnership) Years ended January 31, 1997, 1996 and 1995 (In thousands)
1997 1996 1995 Cash flows from operating activities: Net income $ 1,780 $ 17,205 $ 16,141 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 19,080 14,933 9,827 Provision for losses on accounts receivable 0 0 51 Loss on sale of fixed assets 163 52 19 Change in assets and liabilities: Receivables 436 (3,803) (1,302) Inventories (4,476) (3,034) (4,065) Prepaid expenses 88 (1,025) (164) Other assets (106) (128) 1,636 Accounts payable and accrued liabilities 4,723 8,817 16,713 Other liabilities 607 2,739 268 --------- --------- --------- Net cash provided by operating activities 22,295 35,756 39,124 --------- --------- --------- Cash flows from investing activities: Capital expenditures (note 8) (56,111) (104,107) (90,258) Note receivable funded 140 (535) 0 --------- --------- --------- Net cash used in investing activities (55,971) (104,642) (90,258) --------- --------- --------- Cash flows from financing activities: Proceeds from issuance of notes payable 0 25,000 75,000 Net proceeds (payments) under line of credit agreements 33,500 44,500 (29,000) --------- --------- --------- Net cash provided by financing activities 33,500 69,500 46,000 --------- --------- --------- Increase (decrease) in cash and cash equivalents (176) 614 (5,134) Cash and cash equivalents, beginning of year 2,314 1,700 6,834 --------- --------- --------- Cash and cash equivalents, end of year $ 2,138 $ 2,314 $ 1,700 ========= ========= ========= Supplemental Disclosure of Cash Flow Information Cash paid for interest, net of capitalized amounts $ 10,854 $ 6,387 $ 916 Supplemental Disclosure of Noncash Investing Activities The capital expenditures noted above are net of accounts payable increases (decreases) related to the acquisiton of building and equipment of $2,888, ($4,403), and $2,477 in 1997, 1996, and 1995, respectively.
See accompanying notes to financial statements. 4 Notes to Financial Statements ================================================================================ CFJ PROPERTIES (A General Partnership) January 31, 1997, 1996 and 1995 (1) Summary of Significant Accounting Policies The following significant accounting policies are followed by CFJ Properties (the Partnership) in preparing and presenting its financial statements: (a) Organization and Line of Business - The Partnership is a Utah general partnership with its principal business being the development and operation of a national network of interstate travel plazas in North America. A typical travel plaza offers a 24-hour service operation which includes fuel facilities, a restaurant or deli, convenience store, and other amenities designed to meet the needs of the trucking industry and traveling public. Some travel plazas include lodging and truck service centers. The Partnership operated 72, 66 and 54 travel plazas, as of January 31, 1997, 1996 and 1995, respectively. (b) Cash Equivalents - For purposes of the statements of cash flows, the Partnership considers all investments with original maturities of three months or less to be cash equivalents. (c) Inventories - Inventories include gasoline, diesel, ready-to-use additives, related petroleum products, food and miscellaneous merchandise. Inventories are stated at the lower of cost or market value as determined by the first-in, first-out (FIFO) method. (d) Land, Buildings, and Equipment - Land, buildings and equipment are stated at cost for constructed and purchased assets and fair market value at the date contributed for contributions from the general partners. Depreciation is provided using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the lesser of the lease term or the estimated useful life of the related assets. Interest is capitalized in connection with the construction of travel plazas. The interest capitalized is recorded as part of the asset to which it relates and is amortized over the lesser of its useful life or lease term. Interest of $1,634,000, $2,925,000, and $2,993,000 was capitalized for 1997, 1996, and 1995 respectively. (e) Income Taxes - The Partnership is not directly subject to income taxes. Each partner is responsible for any income tax related to their portion of taxable income. (f) Retail Fuel Sales - The Partnership does not include related federal or state excise taxes in petroleum product retail sales or cost of sales. Such taxes amounted to approximately $516,381,000, $475,900,000 and $361,243,000 for 1997, 1996 and 1995, respectively. (g) New Plaza Opening Costs - Opening costs are expensed when incurred. The costs associated with new travel plaza openings were approximately $2,100,000, $4,000,000 and $4,100,000 in 1997, 1996 and 1995, respectively. (h) Concentration of Credit Risk - Financial instruments which potentially subject the Partnership to concentrations of credit risk consist principally of cash and cash equivalents, and trade receivables. The Partnership places its cash and cash equivalent investments with high quality credit financial institutions and limits the amount of credit exposure to any one financial institution. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Partnership's customer base, and their dispersion across many different geographical regions. The Partnership routinely performs credit evaluations of its customers and maintains allowances for potential credit losses. (i) Use of Estimates - The Partnership has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (2) Inventories Inventories are summarized as follows (in thousands): 1997 1996 ---- ---- Store merchandise and restaurant food $16,368 $13,002 Petroleum products 3,940 2,830 ------- ------- $20,308 $15,832 ======= ======= 5 (3) Other Assets Other assets consist of the following (in thousands): 1997 1996 ---- ---- Land deposits $630 $590 Lease deposits 232 232 Loan origination fees, net 95 108 ---- ---- $957 $930 ==== ==== (4) Accrued Liabilities Accrued liabilities are summarized as follows (in thousands): 1997 1996 ---- ---- Fuel taxes $14,285 $15,078 Expense incurred by Operator (note 8) 4,222 5,677 Other 2,488 2,711 ------- ------- $20,995 $23,466 ======= ======= (5) Long-term Debt Subsequent to year-end, the Partnership replaced its line-of-credit agreement. Under the new revolving line of credit the Partnership may borrow up to $150,000,000. Interest is computed at the Partnership's option, at the Libor rate plus plus .5 to 1 percent, or the higher of the federal funds rate plus .5 percent and the administrative agent bank's prime rate. The agreement requires a commitment fee. The Partnership had $90,000,000 and $56,500,000 in outstanding borrowings under a revolving line of credit as of January 31, 1997 and 1996, respectively. Interest rates on outstanding borrowings range from 6.04 to 8.25 percent. In addition to the borrowings under the line of credit, the Partnership had letters of credit totaling $5,177,000 outstanding as of January 31, 1997. Under a fiscal 1995 Master Shelf Agreement, the Partnership issued $100,000,000 in long-term notes payable to an insurance company. The notes bear interest from 7.37 to 9.45 percent and require quarterly interest payments. Annual principal payments are required beginning March 1998 with the final payment in January 2005. In addition to the $100,000,000, the Partnership has an option to issue an additional $25,000,000 in long-term notes payable to the same insurance company contingent upon meeting certain conditions. Aggregate maturities of long-term debt are summarized as follows (in thousands): 1998 $ 0 1999 10,000 2000 15,000 2001 17,000 2002 16,000 Thereafter 132,000 -------- Total $190,000 ======== (6) Lease Commitments The Partnership leases travel plazas and equipment under noncancelable operating leases, which expire at various dates over the next 10 to 16 years. The leases are obligations of the Partnership without recourse to the general partners. The operating leases include minimum and percentage (contingent) lease payments. Contingent rents are based upon gallons sold, restaurant and merchandise sales, and other revenues. Minimum lease payments under noncancelable operating leases were $13,173,000, $13,266,000 and $13,277,000 for the years ended January 31, 1997, 1996 and 1995, respectively. Percentage lease payments under noncancelable operating leases were $4,105,000, $4,348,000 and $4,213,000 for the years ended January 31, 1997, 1996 and 1995, respectively. Future minimum payments under noncancelable operating leases as of January 31, 1997 are as follows (in thousands): 1998 $ 12,696 1999 12,432 2000 12,250 2001 12,156 2002 12,142 Thereafter 92,608 ------- Total $ 154,284 ======= (7) Pension and Profit Sharing Plans Currently, the Partnership has chosen to have all eligible employees participate in the noncontributory defined contribution pension and profit sharing plans of Flying J Inc. (Flying J), the parent company of one of the general partners. Contributions to these plans, which are made at the discretion of Flying J's Board of Directors, may be in cash or qualifying common stock of Flying J. The Partnership's expenses related to these plans amounted to $1,591,000, $1,212,000 and $998,000 for the years ended January 31, 1997, 1996 and 1995, respectively. 6 (8) Related Party Transactions Flying J operates all travel plazas and related facilities for the Partnership. Under the terms of the operations agreement, the Partnership reimburses Flying J for the cost of operations plus a monthly amount for overhead costs. The overhead cost reimbursements amounted to $960,000, $916,000 and $801,000 for 1997, 1996 and 1995, respectively. Flying J paid the Partnership $686,000, $668,000 and $651,000 during 1997, 1996 and 1995, respectively, for services performed by the Partnership for certain franchisees of Flying J. During its normal course of business, the Partnership purchases petroleum products from the general partners under supply agreements. It is the general partners' opinion that such agreements are under terms similar to those which could be received under arms-length contracts. Purchases from the partners' amounted to approximately $882,884,000, $662,900,000 and $494,800,000 for 1997, 1996 and 1995, respectively. Included in accounts receivable at January 31, 1997 and 1996 is $1,827,000 and $1,317,000, respectively, due from affiliates. Included in accounts payable and accrued liabilities is $38,256,000 and $31,250,000 as of January 31, 1997 and 1996, respectively, due the general partners and their affiliates resulting from petroleum product purchases and management services. The Partnership periodically contracts with Flying J for the development and construction of travel plazas. Capitalized expenditures under these agreements were $45,326,000 and $70,326,000 in 1997 and 1996, respectively. It is the general partners' opinion that such purchases are under terms similar to those which could be received under arms-length contracts. (9) Disclosure About the Fair Value of Financial Instruments The carrying value for certain short-term financial instruments that mature or reprice frequently at market rate, approximates their fair value. Such financial instruments include: cash and cash equivalents, trade receivables, revolving line of credit, accounts payable, and accrued liabilities. The carrying value of the long-term notes payable also approximates fair market value. (10) Commitments and Contingencies (a) Environmental Laws and Regulations - In connection with the operation of its network of fuel facilities, the Partnership has become subject to increasingly demanding environmental standards imposed by federal, state, and local environmental laws and regulations. It is the policy of the Partnership to comply with applicable environmental laws and regulations. An estimated amount related to the remediation of environmental issues has been accrued as management's best estimate of the cost. However, governmental regulations covering environmental issues are highly complex and are subject to change. Accordingly, changes in the regulations or interpretations thereof could result in future costs to the Partnership in excess of the amounts accrued. Management believes that preventative measures in addition to proper attention to these regulations will minimize costs related to compliance to such regulations. Furthermore, the Partnership routinely succeeds in recovering a significant portion of the cost of remediation from the states which administer environmental clean up funds for in-state fuel retailers. (b) Litigation - The Partnership is involved in legal actions resulting from the ordinary course of business. Such actions relate to routine travel plaza operations and other general matters. Management believes that the Partnership has adequate legal defenses or insurance coverage and reserves and, accordingly, the ultimate outcome of such actions will not have a material adverse effect on the Partnership's financial position. 7 Independent Auditors' Report ================================================================================ To the General Partners CFJ Properties: We have audited the accompanying statements of revenues and direct operating costs and expenses and the statements of cash flows from direct travel plaza operations for each of the years in the three-year period ended January 31, 1997, of the Clive Travel Plaza operated by CFJ Properties (see note 1). The land and related plaza facilities are owned by Participating Income Properties 1986, L.P. These statements are the responsibility of management. Our responsibility is to express an opinion on these statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall statement presentation. We believe that our audits provide a reasonable basis for our opinion. The statements referred to above were prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission and are not intended to be a complete representation of the Clive Travel Plaza's statements of operations and cash flows. In our opinion, the statements referred to above present fairly, in all material respects, the revenues and direct operating costs and expenses and the cash flows from direct travel plaza operations of the Clive Travel Plaza for each of the years in the three-year period ended January 31, 1997, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP Salt Lake City, Utah March 20, 1997 1 Statements of Revenues and Direct Operating Costs and Expenses ================================================================================ CLIVE TRAVEL PLAZA Years ended January 31, 1997, 1996 and 1995 (In thousands)
1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------- Revenues $ 18,076 $ 17,336 $ 17,471 - ---------------------------------------------------------------------------------------------------------------------- Direct operating costs and expenses: Cost of sales 15,234 14,167 13,730 Labor costs 1,288 1,217 1,290 Controllable operating expenses 675 716 762 Occupancy expenses 1,241 1,260 1,228 - ---------------------------------------------------------------------------------------------------------------------- Travel Plaza revenues in excess (deficient) of direct operating costs and expenses $ (362) $ (24) $ 461 ======================================================================================================================
See accompanying note to financial statements. 2 Statements of Cash Flows ================================================================================ CLIVE TRAVEL PLAZA Years ended January 31, 1997, 1996 and 1995 (In thousands)
1997 1996 1995 - ------------------------------------------------------------------------------------------------- Cash flows from operating activities: Travel Plaza revenues in excess (deficient) of direct operating costs and expenses $(362) $ (24) $ 461 Add amortization of leasehold improvements 145 139 124 - ------------------------------------------------------------------------------------------------- Cash provided by (used in) direct Travel Plaza operations $(217) $ 115 $ 585 =================================================================================================
See accompanying note to financial statements. 3 Note to Financial Statements ================================================================================ CLIVE TRAVEL PLAZA Years ended January 31, 1997, 1996 and 1995 (1) Summary of Significant Accounting Policies (a) Organization and Business - The Clive Travel Plaza (Travel Plaza) is a 24-hour service operation and includes fuel facilities, restaurant, convenience store and other amenities designed to meet the needs of the trucking industry and traveling public in general. The Travel Plaza, located in Clive, Iowa, commenced operations in March 1989 and is operated by CFJ Properties (CFJ). The land and related plaza facilities are leased by CFJ from Participating Income Properties 1986, L.P. (PIP 86). The accompanying statements have been prepared to facilitate PIP 86's compliance with the rules and regulations of the Securities and Exchange Commission. The statements include only revenues and direct operating costs and expenses. Certain overhead costs such as corporate administrative allocations are excluded. (b) Controllable Operating Expenses - Controllable operating expenses consist of supplies, repairs and maintenance, cleaning, advertising and promotion, telephone and utilities, insurance, credit card charges and travel incurred at the Travel Plaza level. (c) Occupancy Expenses - Occupancy expenses consist of taxes, insurance and rent paid to PIP 86. (d) Leasehold Improvements Amortization - Leasehold improvements are amortized using the straight-line method over the lesser of the lease term or the estimated useful lives of the related assets. (e) Federal and State Income Taxes - Federal and state income taxes have not been allocated to the Travel Plaza. 4 Independent Auditors' Report ================================================================================ To the General Partners CFJ Properties: We have audited the accompanying statements of revenues and direct operating costs and expenses and the statements of cash flows from direct travel plaza operations for each of the years in the three-year period ended January 31, 1997, of the Amarillo Travel Plaza operated by CFJ Properties (see note 1). The land and related plaza facilities are owned by Participating Income Properties 1986, L.P. These statements are the responsibility of management. Our responsibility is to express an opinion on these statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall statement presentation. We believe that our audits provide a reasonable basis for our opinion. The statements referred to above were prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission and are not intended to be a complete representation of the Amarillo Travel Plaza's statements of income and cash flows. In our opinion, the statements referred to above present fairly, in all material respects, the revenues and direct operating costs and expenses and the cash flows from direct travel plaza operations of the Amarillo Travel Plaza for each of the years in the three-year period ended January 31, 1997, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP Salt Lake City, Utah March 20, 1997 1 Statements of Revenues and Direct Operating Costs and Expenses ================================================================================ AMARILLO TRAVEL PLAZA Years ended January 31, 1997, 1996 and 1995 (In thousands)
1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------ Revenues $ 21,706 $ 22,525 $ 23,449 - ------------------------------------------------------------------------------------------------------------------------ Direct operating costs and expenses: Cost of sales 19,188 19,152 19,973 Labor costs 1,069 1,095 1,062 Controllable operating expenses 638 583 567 Occupancy expenses 962 974 971 - ------------------------------------------------------------------------------------------------------------------------ Travel Plaza revenues in excess (deficient) of direct operating costs and expenses $ (151) $ 721 $ 876 ========================================================================================================================
See accompanying note to financial statements. 2 Statements of Cash Flows ================================================================================ AMARILLO TRAVEL PLAZA Years ended January 31, 1997, 1996 and 1995 (In thousands)
1997 1996 1995 - ------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Travel Plaza revenues in excess (deficient) of direct operating costs and expenses $(151) $ 721 $ 876 Add amortization of leasehold improvements 159 133 123 - ------------------------------------------------------------------------------------------------------------- Cash provided by direct Travel Plaza operations $ 8 $ 854 $ 999 =============================================================================================================
See accompanying note to financial statements. 3 Note to Financial Statements ================================================================================ AMARILLO TRAVEL PLAZA Years ended January 31, 1997, 1996 and 1995 (1) Summary of Significant Accounting Policies (a) Organization and Business - The Amarillo Travel Plaza (Travel Plaza) is a 24-hour service operation and includes fuel facilities, restaurant, convenience store and other amenities designed to meet the needs of the trucking industry and traveling public in general. The Travel Plaza, located in Amarillo, Texas, commenced operations in May 1989 and is operated by CFJ Properties (CFJ). The land and related plaza facilities are leased by CFJ from Participating Income Properties 1986, L.P. (PIP 86). The accompanying statements have been prepared to facilitate PIP 86's compliance with the rules and regulations of the Securities and Exchange Commission. The statements include only revenues and direct operating costs and expenses. Certain overhead costs such as corporate administrative allocations are excluded. (b) Controllable Operating Expenses - Controllable operating expenses consist of supplies, repairs and maintenance, cleaning, advertising and promotion, telephone and utilities, insurance, credit card charges and travel incurred at the Travel Plaza level. (c) Occupancy Expenses - Occupancy expenses consist of taxes, insurance and rent paid to PIP 86. (d) Leasehold Improvements Amortization - Leasehold improvements are amortized using the straight-line method over the lesser of the lease term or the estimated useful lives of the related assets. (e) Federal and State Income Taxes - Federal and state income taxes have not been allocated to the Travel Plaza. 4 Independent Auditors' Report ================================================================================ To the General Partners CFJ Properties: We have audited the accompanying statements of revenues and direct operating costs and expenses and the statements of cash flows from direct travel plaza operations for each of the years in the three-year period ended January 31, 1997, of the Cheyenne Travel Plaza operated by CFJ Properties (see note 1). The land and related plaza facilities are owned by Participating Income Properties 1986, L.P. These statements are the responsibility of management. Our responsibility is to express an opinion on these statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall statement presentation. We believe that our audits provide a reasonable basis for our opinion. The statements referred to above were prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission and are not intended to be a complete representation of the Cheyenne Travel Plaza's statements of income and cash flows. In our opinion, the statements referred to above present fairly, in all material respects, the revenues and direct operating costs and expenses and the cash flows from direct travel plaza operations of the Cheyenne Travel Plaza for each of the years in the three-year period ended January 31, 1997, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP Salt Lake City, Utah March 20, 1997 1 Statements of Revenues and Direct Operating Costs and Expenses ================================================================================ CHEYENNE TRAVEL PLAZA Years ended January 31, 1997, 1996 and 1995 (In thousands)
1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------ Revenues $28,793 $24,733 $23,676 - ------------------------------------------------------------------------------------------------------------------ Direct operating costs and expenses: Cost of sales 23,216 19,214 18,583 Labor costs 1,478 1,326 1,334 Controllable operating expenses 950 872 871 Occupancy expenses 1,206 1,176 1,154 - ------------------------------------------------------------------------------------------------------------------ Travel Plaza revenues in excess of direct operating costs and expenses $ 1,943 $ 2,145 $ 1,734 ==================================================================================================================
See accompanying note to financial statements. 2 Statements of Cash Flows ================================================================================ CHEYENNE TRAVEL PLAZA Years ended January 31, 1997, 1996 and 1995 (In thousands)
1997 1996 1995 - --------------------------------------------------------------------------------------------------- Cash flows from operating activities: Travel Plaza revenues in excess of direct operating costs and expenses $1,943 $2,145 $1,734 Add amortization of leasehold improvements 321 290 276 - --------------------------------------------------------------------------------------------------- Cash provided by direct Travel Plaza operations $2,264 $2,435 $2,010 ===================================================================================================
See accompanying note to financial statements. 3 Note to Financial Statements ================================================================================ CHEYENNE TRAVEL PLAZA Years ended January 31, 1997, 1996 and 1995 (1) Summary of Significant Accounting Policies (a) Organization and Business - The Cheyenne Travel Plaza (Travel Plaza) is a 24-hour service operation and includes fuel facilities, restaurant, convenience store, motel and other amenities designed to meet the needs of the trucking industry and traveling public in general. The Travel Plaza, located in Cheyenne, Wyoming, commenced operations in July 1988 and is operated by CFJ Properties (CFJ). The land and related plaza facilities are leased by CFJ from Participating Income Properties 1986, L.P. (PIP 86). The accompanying statements have been prepared to facilitate PIP 86's compliance with the rules and regulations of the Securities and Exchange Commission. The statements include only revenues and direct operating costs and expenses. Certain overhead costs such as corporate administrative allocations are excluded. (b) Controllable Operating Expenses - Controllable operating expenses consist of supplies, repairs and maintenance, cleaning, advertising and promotion, telephone and utilities, insurance, credit card charges and travel incurred at the Travel Plaza level. (c) Occupancy Expenses - Occupancy expenses consist of taxes, insurance and rent paid to PIP 86. (d) Leasehold Improvements Amortization - Leasehold improvements are amortized using the straight-line method over the lesser of the lease term or the estimated useful lives of the related assets. (e) Federal and State Income Taxes - Federal and state income taxes have not been allocated to the Travel Plaza. 4 -----END PRIVACY-ENHANCED MESSAGE-----