<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN DECLARED EFFECTIVE
BY THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 415 UNDER THE
SECURITIES ACT OF 1933. A FINAL PROSPECTUS SUPPLEMENT AND PROSPECTUS WILL BE
DELIVERED TO PURCHASERS OF THESE SECURITIES. THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION; DATED OCTOBER 30, 1997
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED OCTOBER 16, 1997)
3,200,000 SHARES
U.S. RESTAURANT PROPERTIES, INC.
[LOGO]
$ SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK
(LIQUIDATION PREFERENCE $25.00 PER SHARE)
------------------------
U.S. Restaurant Properties, Inc. (the "Company"), a fully integrated,
self-administered and self-managed real estate investment trust (a "REIT"),
acquires, owns, manages and selectively develops restaurant properties that it
leases on a triple net basis primarily to operators of fast food and casual
dining chain restaurants affiliated with national brands such as Burger
King-Registered Trademark-, Arby's-Registered Trademark-, Dairy Queen-Registered
Trademark-, Chili's-Registered Trademark-, Pizza Hut-Registered Trademark- and
Schlotzsky's-Registered Trademark- and regional franchises such as
Grandy's-Registered Trademark- and Taco Cabana-Registered Trademark-. The
Company is one of the largest publicly-traded entities in the United States
dedicated to acquiring, owning, managing and selectively developing restaurant
properties. At September 30, 1997, the Company's portfolio consisted of 520
restaurant properties (the "Properties") diversified geographically in 45 states
and operated by approximately 200 restaurant operators. As of September 30,
1997, over 99% of the Properties were leased pursuant to leases with an average
remaining term (excluding extension options) in excess of ten years.
Dividends on the shares of $ Series A Cumulative Convertible Preferred
Stock, par value $.001 per share (the "Series A Preferred Stock"), will be
cumulative from the date of original issuance and will be payable quarterly in
arrears on the 15th day (or the next succeeding business day) of March, June,
September and December of each year, commencing on , 1997, in an
amount per share equal to the greater of $ per annum or the cash
distribution paid or payable (determined on each of the quarterly dividend
payment dates referred to above) on the number of shares of the Company's common
stock, par value $.001 per share (the "Common Stock"), or portion thereof, into
which a share of Series A Preferred Stock is then convertible. See "Description
of Series A Preferred Stock--Dividends." Shares of Series A Preferred Stock will
be convertible, in whole or in part, at the option of the holder at any time,
unless previously redeemed, into shares of Common Stock at a conversion price of
$ per share of Common Stock (equivalent to a conversion rate of
shares of Common Stock for each share of Series A Preferred Stock), subject to
adjustment in certain circumstances (the "Conversion Price"). See "Description
of Series A Preferred Stock--Conversion Rights." On October 29, 1997, the last
reported sale price of the Common Stock on the New York Stock Exchange (the
"NYSE") was $24.6875 per share, giving effect to the three-for-two stock split.
The Series A Preferred Stock will not be redeemable prior to .
On and after , the Series A Preferred Stock will be redeemable, in
whole or in part, at the option of the Company, (i) for such number of shares of
Common Stock as are issuable at a conversion rate of shares of Common
Stock for each share of Series A Preferred Stock, provided that for 20 trading
days within any period of 30 consecutive trading days, including the last
trading day of such period, the closing price of the Common Stock on the NYSE
equals or exceeds the Conversion Price, subject to adjustment in certain
circumstances, plus cash in the amount of any accrued and unpaid dividends, or
(ii) for cash at a redemption price equal to $25.00 per share of Series A
Preferred Stock, plus any accrued and unpaid dividends. The Series A Preferred
Stock has no stated maturity and will not be subject to any sinking fund.
Application has been made to list the Series A Preferred Stock on the NYSE.
However, there can be no assurance that the Series A Preferred Stock will be
approved for listing.
In order to maintain the Company's qualification as a REIT, ownership by any
person of the Common Stock or Series A Preferred Stock is limited, with certain
exceptions, to 9.8% of the outstanding capital stock of the Company.
SEE "RISK FACTORS," COMMENCING ON PAGE S-15, FOR CERTAIN RISK FACTORS
RELEVANT TO AN INVESTMENT IN THE SERIES A PREFERRED STOCK.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COMPANY(3)
<S> <C> <C> <C>
Per Share................................................ $ $ $
Total.................................................... $ $ $
Total Assuming Full Exercise of Over-
Allotment Option(4).................................... $ $ $
</TABLE>
(1) Plus accrued dividends, if any, from the date of original issuance.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting expenses estimated at $400,000, which are payable by the
Company.
(4) Assuming exercise in full of the 30-day option granted by the Company to the
Underwriters to purchase up to 480,000 additional shares of Series A
Preferred Stock, on the same terms, solely to cover over-allotments. See
"Underwriting."
------------------------
The shares of Series A Preferred Stock are offered by the Underwriters,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters, and subject to their right to reject orders in whole or in part.
It is expected that delivery of the Series A Preferred Stock will be made in New
York City on or about November , 1997.
------------------------
PAINEWEBBER INCORPORATED
MORGAN KEEGAN & COMPANY, INC.
EVEREN SECURITIES, INC.
CROWELL, WEEDON & CO.
------------
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS NOVEMBER , 1997.
<PAGE>
[PICTURES]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SERIES A PREFERRED
STOCK. SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF THE SERIES A PREFERRED
STOCK TO STABILIZE ITS MARKET PRICE, THE PURCHASE OF THE SERIES A PREFERRED
STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR
A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
S-2
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO INCLUDED
ELSEWHERE IN THIS PROSPECTUS SUPPLEMENT AND IN THE ACCOMPANYING PROSPECTUS AND
IN THE DOCUMENTS INCORPORATED THEREIN BY REFERENCE. ON OCTOBER 15, 1997, U.S.
RESTAURANT PROPERTIES, INC., A MARYLAND CORPORATION (THE "COMPANY"), SUCCEEDED
TO THE OPERATIONS OF U.S. RESTAURANT PROPERTIES MASTER L.P., A DELAWARE LIMITED
PARTNERSHIP ("USRP"), THROUGH THE MERGER OF A PARTNERSHIP SUBSIDIARY OF THE
COMPANY WITH AND INTO USRP WITH USRP BEING THE SURVIVING ENTITY (THE
"CONVERSION"). THE TERM "COMPANY" INCLUDES, UNLESS THE CONTEXT OTHERWISE
REQUIRES, THE COMPANY'S PREDECESSORS (INCLUDING USRP) AND SUBSIDIARIES. UNLESS
OTHERWISE INDICATED, ALL INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT (I)
GIVES RETROACTIVE EFFECT TO THE CONVERSION, (II) GIVES RETROACTIVE EFFECT TO A
THREE-FOR-TWO SPLIT OF THE COMPANY'S COMMON STOCK, PAR VALUE $.001 PER SHARE
(THE "COMMON STOCK"), AND (III) ASSUMES NO EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTION. THIS PROSPECTUS SUPPLEMENT CONTAINS, AND THE ACCOMPANYING
PROSPECTUS CONTAINS OR INCORPORATES BY REFERENCE, FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED (THE "EXCHANGE ACT"). THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE SET FORTH IN THE FORWARD-LOOKING STATEMENTS. CERTAIN
FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE ARE DISCUSSED IN THE SECTION ENTITLED
"RISK FACTORS" STARTING ON PAGE S-15 OF THIS PROSPECTUS SUPPLEMENT.
THE COMPANY
U.S. Restaurant Properties, Inc., a fully integrated, self-administered and
self-managed real estate investment trust (a "REIT"), is one of the largest
publicly-traded entities in the United States dedicated to acquiring, owning,
managing and selectively developing restaurant properties. At September 30,
1997, the Company's portfolio consisted of 520 restaurant properties (the
"Properties") diversified geographically in 45 states and operated by
approximately 200 restaurant operators. The Properties are leased by the Company
on a triple net basis primarily to operators of fast food and casual dining
chain restaurants affiliated with national brands such as Burger King-Registered
Trademark-, Arby's-Registered Trademark-, Dairy Queen-Registered Trademark-,
Hardee's-Registered Trademark-, Chili's-Registered Trademark-, Pizza
Hut-Registered Trademark- and Schlotzsky's-Registered Trademark- and regional
franchises such as Grandy's-Registered Trademark- and Taco Cabana-Registered
Trademark-. Triple net leases typically require the tenants to be responsible
for property operating costs, including property taxes, insurance and
maintenance. As of September 30, 1997, over 99% of the Properties were leased
pursuant to leases with an average remaining term (excluding extension options)
in excess of ten years.
The Company has been engaged in the business of owning, managing and leasing
restaurant properties since 1986. Prior to 1994, the Company held a static
portfolio consisting of 123 Burger King-Registered Trademark-restaurant
properties. In May 1994, existing management assumed control of the Company and
began implementing a number of new strategies intended to pursue Company growth.
These strategies have involved the Company in, among other things, acquiring new
properties, enhancing investment returns through merchant banking activities and
developing new co-branded service centers on a selective basis. In addition, the
Company has begun to provide acquisition financing to owners/operators of
restaurant properties and at September 30, 1997 had a security interest in 14
restaurant properties.
From May 1994, when existing management assumed control of the Company,
through September 30, 1997, the Company acquired 402 Properties for an aggregate
purchase price of approximately $248 million. During this period, the number of
Properties in the Company's portfolio increased from 123 Properties to 520
Properties, representing a 905% increase in the portfolio on a cost basis and a
323% increase in the number of Properties. From May 1994 through October 15,
1997, the total return (distributions plus stock price appreciation) on the
Common Stock has been 159%.
The Company's management team, led by Robert J. Stetson and Fred H.
Margolin, consists of seven senior executives with an average of 15 years of
experience in the acquisition, operation, management and financing of chain
restaurants and retail properties. Mr. Stetson, the Chief Executive Officer and
President of the Company, is the former President of the Restaurant Division and
Chief Financial Officer of Burger King Corporation, as well as the former Chief
Financial Officer of Pizza Hut, Inc. While at Burger King Corporation, Mr.
Stetson oversaw the management of approximately 950 restaurant properties,
supervised
S-3
<PAGE>
over 35,000 employees and was responsible for evaluating and structuring
property acquisitions and implementing tenant lease programs. Prior to joining
the Company in May 1994, Mr. Margolin, the Chairman of the Board, Treasurer and
Secretary of the Company, developed, leased and sold shopping centers. Mr.
Margolin also has an extensive financial background, including the founding and
managing of a successful insurance agency servicing financial institutions and
one of the largest independent premium finance companies in Texas. The Company's
senior management and directors beneficially own 13.7% of the Common Stock
(including the OP Units (as defined below) owned by QSV Properties, Inc.). See
"Management" and "Principal Stockholders."
The Company is a Maryland corporation which has elected to be taxed as a
REIT for federal income tax purposes for the year ending December 31, 1997. The
Common Stock is traded on the NYSE under the symbol "USV." The principal
executive offices of the Company are located at 5310 Harvest Hill Road, Suite
270, Dallas, Texas 75230. The telephone number is (972) 387-1487.
RISK FACTORS
An investment in shares of Series A Cumulative Convertible Preferred Stock,
par value $.001 per share (the "Series A Preferred Stock"), involves various
risks and prospective investors should carefully consider the matters discussed
under "Risk Factors" prior to an investment in the Company. Such risks include,
among others:
- The Company will be subject to increased risks of managing new properties,
such as administrative burdens, tenant retention and mortgage default, due
to the rapid growth of the Company's portfolio.
- Risks associated with property acquisitions, including that acquired
properties may fail to perform in accordance with expectations and
judgments with respect to the costs of improvements to bring an acquired
property up to standards established for the market position intended for
that property may prove inaccurate, as well as general investment risks
associated with any new real estate investment. Additionally, if the
Company were unable to obtain funds from the capital markets to refinance
acquisitions or development undertaken without permanent financing, the
Company's ability to grow through additional acquisition and development
activities could be curtailed.
- Lack of industry diversification as a result of concentration on fast food
and casual dining restaurant properties.
- Dependence on the success of franchises affiliated with specific national
and regional franchise brands and the possible adverse effect from
franchise-wide reductions in business.
- Failure to renew leases and failure of tenants to renew franchise
agreements and the corresponding reduction in lease income should
properties not be re-leased on terms as favorable to the Company.
- Risks associated with real estate financing, including uncertainty that
the Company will be able to refinance its indebtedness when due and the
risk of higher interest rates or other unfavorable terms on debt incurred
to refinance such indebtedness, and the risk of potential increases in
leverage due to the absence of any limitation in the organizational
documents of the Company on the amount of debt which may be incurred by
the Company.
- Real estate investment risks, such as the effect of economic and other
conditions on restaurant property values (including the dependence of the
Properties on the economies of the metropolitan areas where they are
located), the ability of the Properties to generate revenues sufficient to
meet operating expenses (including future debt service), the illiquidity
of real estate investments, potential liability of the Company for unknown
or future environmental liabilities and costs of compliance with the
Americans with Disabilities Act of 1990 (the "ADA") and similar laws, and
potential losses in the event of a casualty or other liability that is
uninsurable or not economically insurable.
- Taxation of the Company as a corporation if it fails to qualify as a REIT
and the Company's liability for certain federal, state and local income
taxes in such event.
S-4
<PAGE>
- The potential anti-takeover effect of limiting individual share ownership
to 9.8% of the outstanding Common Stock (with certain exceptions) and
certain other provisions contained in the organizational documents of the
Company, such as the ability of the Board of Directors of the Company (the
"Board") to issue shares of preferred stock, par value $.001 per share
(the "Preferred Stock"), and the business combination provision, any of
which may discourage a change in control and may limit any opportunity for
the Company's stockholders to receive a premium for their Common Stock.
- The dependence of the Company on the efforts of its executive officers,
particularly Robert J. Stetson and Fred H. Margolin.
- Absence of prior market for shares of Series A Preferred Stock.
THE OFFERING
<TABLE>
<S> <C>
SECURITIES OFFERED............ 3,200,000 shares of $ Series A Cumulative Convertible
Preferred Stock.
DIVIDENDS..................... Cumulative commencing on the date of issue in an amount per
share equal to the greater of $ per annum or the
cash distributions paid or payable (determined on each of
the quarterly dividend payment dates referred to below) on
that number of shares of Common Stock, or portion thereof,
into which a share of Series A Preferred Stock is then
convertible. Dividends on the Series A Preferred Stock are
payable quarterly in arrears on the 15th day of March, June,
September and December of each year, commencing on
, 1997 with respect to the period commencing on
the date of issue and ending on , 1997.
CONVERSION RIGHTS............. The Series A Preferred Stock will be convertible, in whole
or in part, at the option of the holder at any time, unless
previously redeemed, into shares of Common Stock at a
conversion price of $ per share of Common Stock
(equivalent to a conversion rate of shares of Common
Stock per share of Series A Preferred Stock), subject to
adjustment in certain circumstances (the "Conversion
Price").
LIQUIDATION PREFERENCE........ $25.00 per share, plus an amount equal to all accrued and
unpaid dividends.
REDEMPTION AT OPTION OF THE
COMPANY..................... The Series A Preferred Stock will not be redeemable by the
Company prior to . On and after , the
Series A Preferred Stock will be redeemable, in whole or in
part, at the option of the Company (i) for such number of
shares of Common Stock as is equal to the per share
liquidation preference of the Series A Preferred Stock to be
redeemed (without regard to accrued and unpaid dividends,
which are to be paid in cash) divided by the Conversion
Price, provided that for 20 trading days within any period
of 30 consecutive trading days, including the last trading
day of such period, the closing price of the Common Stock on
the NYSE equals or exceeds the Conversion Price, or (ii) for
cash at a redemption price of $25.00 per share, plus any
accrued and unpaid dividends. In order to exercise its
redemption option for shares of Common Stock, the Company
must issue a press release announcing the redemption
</TABLE>
S-5
<PAGE>
<TABLE>
<S> <C>
price prior to the opening of business on the second trading
day after the conditions described in clause (i) above have
been fulfilled. In order to exercise its redemption option
for cash, the Company must give not less than 30 nor more
than 60 days notice of its intention to do so.
VOTING RIGHTS................. If dividends on the Series A Preferred Stock or any series
of Preferred Stock ranking on a parity with the Series A
Preferred Stock with respect, in each case, to the payment
of dividends and amounts upon liquidation, dissolution and
winding up of the Company ("Parity Stock") are in arrears
for six quarterly dividend periods, holders of the Series A
Preferred Stock (voting as a single class with holders of
shares of any Parity Stock) will have the right to elect two
additional directors to serve on the Board until such
dividend arrearage is eliminated. In addition, certain
changes that would be materially adverse to the rights of
holders of the Series A Preferred Stock or Parity Stock
cannot be made without the affirmative vote of the holders
of two-thirds of the shares of Series A Preferred Stock and
any Parity Stock similarly affected, voting as a single
class.
OWNERSHIP LIMIT............... With certain exceptions, no person may own, or be deemed to
own by virtue of the attribution provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), more than
9.8% of the Company's capital stock, which includes the
Series A Preferred Stock.
RANKING....................... The Series A Preferred Stock will rank senior to the Common
Stock (the only capital stock of the Company outstanding as
of the date of this Prospectus Supplement) with respect to
the payment of dividends and amounts upon liquidation,
dissolution or winding up.
NYSE LISTING.................. Application has been made to list the Series A Preferred
Stock on the New York Stock Exchange (the "NYSE").
USE OF PROCEEDS............... The net proceeds to the Company from the sale of the Series
A Preferred Stock will be used to reduce borrowings under
the Company's $110 million secured credit facility (the
"Existing Credit Facility"). See "Use of Proceeds."
</TABLE>
RECENT DEVELOPMENTS
THIRD QUARTER EARNINGS 1997
The Company reported on October 21, 1997 that Funds from Operations ("FFO")
for the third quarter ended September 30, 1997 was $5,588,000 compared to
$3,843,000 for the quarter ended September 30, 1996, an increase of 45%. FFO for
the nine months ended September 30, 1997 was $14,561,000 compared to $9,131,000
for the nine months ended September 30, 1996, an increase of 59%. The Company's
revenue for the third quarter ended September 30, 1997 was $9,775,000 compared
to $5,822,000 for the quarter ended September 30, 1996, an increase of 68%. FFO
is computed by the Company as net income (computed in accordance with generally
accepted acounting principles ("GAAP")), excluding the effects of direct
financing leases and gains on sales of property, plus real estate related
depreciation and amortization.
INVESTMENT GRADE RATING
In October 1997, the Company received an investment grade rating from Duff &
Phelps Credit Rating Company ("Duff & Phelps"). Duff & Phelps assigned initial
prospective ratings of "BBB-" (Triple-B-
S-6
<PAGE>
Minus) to the Company's senior unsecured debt and "BB+" (Double-B-Plus) to the
Company's cumulative preferred stock.
UNSECURED CREDIT FACILITY
The Company has entered into an agreement in principle with a major
international commercial bank to provide a $175 million unsecured credit
facility (the "Unsecured Credit Facility"). The Unsecured Credit Facility will
be used to finance property acquisitions, development, capital improvements and
for general working capital purposes. The Company anticipates that following
this offering the Unsecured Credit Facility will bear interest at a rate of
LIBOR plus 1.05% per annum. The Unsecured Credit Facility will replace the
Existing Credit Facility under which, at September 30, 1997, the Company had
outstanding borrowings of $109.4 million bearing interest at a rate of LIBOR
plus 1.80% per annum.
RECENT ACQUISITIONS
Subsequent to September 30, 1997, the Company has acquired an additional
seven restaurant properties for a total investment of $6 million. These
properties consist of three Schlotzsky's-Registered Trademark- located in
Dallas, Texas, Forest Hill, Texas and Grand Prairie, Texas, three
Harrigan's-Registered Trademark-, two of which are located in Oklahoma City,
Oklahoma and one of which is located in Albuquerque, New Mexico, and one
Superpumper-Registered Trademark- located in Belfield, North Dakota.
REIT CONVERSION
On October 15, 1997, the Company effected the Conversion of USRP into a
self-administered and self-managed REIT. The Conversion was effected through the
merger (the "Merger") of USRP Acquisition, L.P., an indirectly wholly-owned
Delaware limited partnership subsidiary of the Company, with and into USRP. As a
result of the Merger, USRP became a subsidiary of the Company and, at the
effective time of the Merger, all holders of units of beneficial interest (the
"Units") of USRP became stockholders of the Company. On October 16, 1997, the
Common Stock, in replacement of the Units, commenced trading on the NYSE under
the symbol "USV." In connection with the Conversion, QSV Properties, Inc.
("QSV") withdrew as general partner of each of USRP and U.S. Restaurant
Properties Operating L.P. (the "Operating Partnership"), effective as of October
15, 1997, and USRP Managing, Inc., a wholly-owned subsidiary of the Company
("USRP Managing"), was substituted as the general partner for USRP and the
Operating Partnership. As part of the Conversion, QSV received 126,581 shares of
Common Stock and 1,148,420 units of beneficial interest (the "OP Units") in the
Operating Partnership, which are exchangeable at any time for shares of Common
Stock on a one-for-one basis, in exchange for its interests in USRP and the
Operating Partnership. See "Certain Relationships and Related Transactions."
INDUSTRY
The restaurant industry has grown significantly over the past 20 years as a
result of population growth, the influence of the baby boom generation, the
growth of two-income families and the growth in consumers' disposable income.
During that period, the growth of the fast food segment has exceeded that of the
entire restaurant industry. According to the National Restaurant Association,
the food service industry generated an estimated $308 billion of revenue
representing approximately 4.1% of the Gross Domestic Product during 1996. Total
food service industry sales during 1997 are estimated to be approximately $320
billion. The fast food segment, which offers value pricing and convenience and
represents approximately 90% of the Properties, is the largest segment in the
restaurant industry with 1997 sales estimated to exceed $103 billion or 32% of
the industry's revenues. The growth of the fast food segment has exceeded that
of the entire restaurant industry for over 20 years. According to the National
Restaurant Association, sales at fast food restaurants are expected to outpace
the overall industry in 1997. See "Market and Industry Information."
S-7
<PAGE>
PROPERTIES
As of September 30, 1997, the Company owned 520 Properties, including 181
Burger King-Registered Trademark-Properties (out of approximately 6,409 U.S.
locations), 77 Arby's-Registered Trademark- Properties (out of approximately
2,890 U.S. locations), 41 Dairy Queen-Registered Trademark- Properties (out of
approximately 6,000 U.S. locations), 28 Hardee's-Registered Trademark-Properties
(out of approximately 2,308 U.S. locations), 23 Pizza Hut-Registered Trademark-
Properties (out of approximately 9,566 U.S. locations), 18
Schlotzsky's-Registered Trademark- Properties (out of approximately 560 U.S.
locations) and eight Chili's-Registered Trademark- Properties (out of
approximately 108 U.S. locations). The Properties are diversified geographically
in 45 states, with no state, except Texas (28%), accounting for a concentration
of greater than 10% of the Properties. Of the 520 Properties, over 99% were
leased on a triple net basis as of September 30, 1997.
S-8
<PAGE>
The following table sets forth certain state-by-state information regarding
the Properties owned by the Company as of September 30, 1997.
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF ANNUALIZED TOTAL ANNUALIZED
STATE PROPERTIES PERCENT LEASED BASE RENT(1) BASE RENT
- -------------------------------------------- ------------- ----------------- ------------ -----------------
<S> <C> <C> <C> <C>
Alabama..................................... 3 100% $ 148,011 0.4%
Arizona..................................... 15 100 953,671 2.7
Arkansas.................................... 8 100 901,014 2.5
California.................................. 17 100 1,212,251 3.4
Colorado.................................... 8 100 382,131 1.1
Connecticut................................. 3 100 249,144 0.7
Florida..................................... 30 100 2,486,615 7.0
Georgia..................................... 32 100 2,742,258 7.7
Idaho....................................... 1 100 129,105 0.4
Illinois.................................... 10 100 759,842 2.1
Indiana..................................... 11 82 653,879 1.8
Iowa........................................ 8 100 686,820 1.9
Kansas...................................... 2 50(2) 63,139 0.2
Kentucky.................................... 3 100 185,440 0.5
Louisiana................................... 3 100 66,625 0.2
Maine....................................... 4 100 244,078 0.7
Maryland.................................... 3 100 156,376 0.4
Massachusetts............................... 4 100 346,577 1.0
Michigan.................................... 30 100 1,855,389 5.2
Minnesota................................... 16 100 1,034,961 2.9
Mississippi................................. 2 100 128,525 0.4
Missouri.................................... 8 88 613,436 1.7
Montana..................................... 1 100 43,164 0.1
Nebraska.................................... 2 100 199,628 0.6
Nevada...................................... 1 100 65,835 0.2
New Jersey.................................. 4 100 291,303 0.8
New Mexico.................................. 4 100 420,654 1.2
New York.................................... 35 97 2,715,708 7.6
North Carolina.............................. 18 100 1,493,695 4.2
North Dakota................................ 1 100 50,268 0.1
Ohio........................................ 8 100 561,833 1.6
Oklahoma.................................... 15 100 1,101,349 3.1
Oregon...................................... 5 100 339,191 0.9
Pennsylvania................................ 19 100 1,261,807 3.5
South Carolina.............................. 10 100 644,211 1.8
South Dakota................................ 1 100 35,196 0.1
Tennessee................................... 8 100 455,269 1.3
Texas....................................... 145 100 8,613,140 24.1
Utah........................................ 1 100 189,355 0.5
Vermont..................................... 1 100 65,974 0.2
Virginia.................................... 1 100 12,275 0.0
Washington.................................. 7 100 504,798 1.4
West Virginia............................... 3 100 135,804 0.4
Wisconsin................................... 8 100 396,171 1.1
Wyoming..................................... 1 100 121,064 0.3
--- --- ------------ -----
Total/Average............................. 520 99% $ 35,716,979 100.0%
--- --- ------------ -----
--- --- ------------ -----
</TABLE>
- --------------------------
(1) Annualized base rent was calculated by multiplying the monthly contractual
base rent as of October 1, 1997 for each of the Properties by 12. Annualized
base rent does not include percentage rents (I.E., additional rent
calculated as a percentage of the tenant's gross sales above a specified
level), if any, that may be payable under leases covering certain of the
Properties, or other adjustments to base rent required by GAAP.
(2) One Property, located in Manhattan, Kansas, is currently being redeveloped
as a Schlotzsky's-Registered Trademark- and is expected to re-open in early
1998.
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<PAGE>
ORGANIZATIONAL STRUCTURE
The business and operations of the Company are conducted through the
Operating Partnership. The Company controls the Operating Partnership through
its 99% limited partnership interest in USRP (the 90.86% limited partner of the
Operating Partnership), and its 100% stock ownership of USRP Managing, the
general partner of the Operating Partnership. The other limited partner of the
Operating Partnership is QSV, of which Messrs. Stetson and Margolin are
stockholders and directors. QSV has an 8.24% limited partner interest in the
Operating Partnership. Each OP Unit issued by the Operating Partnership, other
than those held by USRP, may be exchanged by the holder thereof for one share of
Common Stock. With each exchange of outstanding OP Units for Common Stock, the
Company's percentage ownership interest in the Operating Partnership, directly
or indirectly, will increase. In addition, whenever the Company issues shares of
capital stock, the Company will contribute the net proceeds therefrom to the
Operating Partnership and the Operating Partnership will issue to the Company an
equivalent number of units of limited partner interest with rights corresponding
to those of the shares of capital stock issued by the Company. The Company
expects to merge USRP into the Operating Partnership, and thereby become a
90.86% limited partner of the Operating Partnership, prior to the conclusion of
this offering.
As sole general partner, USRP Managing has the exclusive power under the
agreement of limited partnership of the Operating Partnership (the "Partnership
Agreement") to manage and conduct the business of the Operating Partnership,
subject to the consent of the holders of the OP Units in connection with the
sale of all or substantially all of the assets of the Operating Partnership or
the dissolution of the Operating Partnership. The board of directors of USRP
Managing is made up of the same directors as the Board of the Company and such
directors manage the affairs of the Company by directing the affairs of the
Operating Partnership. The Operating Partnership cannot be terminated except in
connection with a sale of all or substantially all of the assets of the Company
prior to December 31, 2035 without a vote of a majority of the limited partners
of the Operating Partnership. The limited and general partner interests in the
Operating Partnership entitle the Company to share in cash distributions from,
and in the profits and losses of, the Operating Partnership in proportion to the
percentage interest therein held by USRP Managing and USRP and entitle USRP to
vote on all matters requiring a vote of the limited partners.
GROWTH STRATEGIES
The Company seeks to maximize sustainable growth in FFO and cash available
for distribution to stockholders through effective management, operation,
acquisition and selective development of restaurant properties. The Company
believes FFO is helpful to investors as a measure of the performance of an
equity REIT because, along with cash flows from operating, financing and
investing activities, it provides investors with an understanding of the ability
of the Company to incur and service debt and make capital expenditures. FFO does
not represent amounts available for management's discretionary use because of
needed capital replacement or expansion, debt service obligations, or other
commitments and uncertainties. FFO should not be considered as an alternative to
net income (determined in accordance with GAAP) as an indication of the
Company's financial performance or to cash flows from operating activities
(determined in accordance with GAAP) as a measure of the Company's liquidity,
nor is it indicative of funds available to fund the Company's cash needs,
including its ability to make distributions.
The Company believes it can achieve its goal of increasing FFO and cash
available for distribution per share by (i) acquiring high quality restaurant
properties at attractive returns, (ii) realizing contractual rental rate
escalations or percentage rent on existing leases, (iii) re-leasing space at
increased rental rates, when market conditions warrant, as leases expire, (iv)
selectively developing properties where the Company can secure leases prior to
construction and where such development is expected to result in returns on
investment that the Company believes will exceed returns on comparable
acquisitions, and (v) actively managing the Company's portfolio, including
periodically re-evaluating all assets for strategic disposition or
repositioning. In pursuing its growth strategy, the Company intends to maintain
a conservative capital
S-10
<PAGE>
structure providing it flexibility to access capital markets when financial and
market conditions warrant, thereby enabling it to take advantage of growth
opportunities as they arise.
ACQUISITIONS. The Company seeks to identify and acquire high quality
restaurant properties. The Company believes that it has been able to maximize
returns on acquisitions as a result of its expertise in evaluating and
capitalizing on the real estate needs of chain restaurant tenants, its ability
to identify and acquire financially attractive restaurant properties operated by
major national and regional restaurant brands and its expertise in identifying
and evaluating restaurant operators. The Company also seeks to utilize the
extensive personal and business relationships that management has developed over
time within the real estate and chain restaurant industries to identify
prospective acquisition opportunities and to consummate favorable acquisitions
prior to the active marketing of the subject properties.
The Company believes that the ownership of chain restaurant properties is
highly fragmented and that such fragmentation often creates pricing
inefficiencies in the sale of such properties. Chain restaurants are generally
owned by numerous local operators, many of whom own or operate a single
facility. Additionally, the Company believes that numerous chain restaurants are
occupied by owners who desire to focus their investments on and attention to the
operation of their respective restaurants, and not on the ownership of real
estate.
Critical evaluation of prospective property acquisitions is an essential
component of the Company's acquisition strategy. When evaluating acquisition
opportunities, the Company assesses a full range of matters relating to the
properties, including the quality of the tenant, the condition and capacity of
building infrastructure, the remaining lease term and the strength of the brand
affiliation. Additionally, the Company believes its access to capital will
provide it with a competitive advantage over other potential property acquirors
whose offers may be contingent upon obtaining the requisite financing.
INTERNAL GROWTH. The Company's goal of maximizing sustainable growth in FFO
is expected to be enhanced by its strategy to achieve internal growth from
several sources. A substantial number of the Company's leases contain annual
rent escalations that are either fixed (ranging from 2% to 3%) or indexed based
on a consumer price or other index. The Company will seek to include similar
escalation provisions in its future leases. The Company also seeks to include
percentage rent provisions in its leases. At September 30, 1997, 62% of the
Company's leases provided for percentage rent ranging from 2% to 11% of the
gross revenue generated by the tenant. Percentage rent represented 18% of the
Company's rental revenues for the nine months ended September 30, 1997. The
Company believes that the location of a restaurant is a central factor in a
restaurant's success and that, as a result, its tenants, in most cases, would
experience a loss in the profitability of a store and incur difficulty and cost
in moving the store in the event of non-renewal of the lease, and as a result,
believes renewal of the lease at a higher rental rate is more likely to occur
than the tenant vacating the space. Since May 1994, the Company has renewed 15
of the 16 leases (representing 94% of such leases) that have expired pursuant to
their terms since that time. In addition, the Company has implemented an early
lease renewal program pursuant to which the Company offers remodeling financing
to tenants in consideration for renewing and restructuring existing leases. The
Company's ability to negotiate contractual rent escalations in future leases or
renewals and to achieve increases in base and percentage rental rates will
depend upon market conditions and demand for restaurant properties at the time
such leases or renewals are negotiated and such increases are proposed.
SELECTIVE DEVELOPMENT. Given the current favorable acquisition environment
for chain restaurant properties, the Company intends to emphasize acquisitions
over development in pursuing its growth objectives. However, the Company expects
to pursue selective development of co-branded service centers (combining a fast
food restaurant, branded convenience store and filling station on one prime
retail site) where it anticipates achieving investment returns that will equal
or exceed its returns on acquisitions. On September 28, 1997, the Company opened
its first co-branded service center in Fort Worth, Texas. In addition, the
Company currently has two co-branded service center developments under
construction which are expected to be completed during 1998. The Company intends
to undertake development
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<PAGE>
projects only it if can secure long-term leases (generally 10 years or more)
with high quality tenants prior to construction.
TAX STATUS OF THE COMPANY
The Company intends to make an election to be taxed as a REIT under Sections
856 through 860 of the Code, commencing with its taxable year ending December
31, 1997. If the Company qualifies for taxation as a REIT, the Company generally
will not be subject to federal income tax if it distributes at least 95% of its
REIT taxable income (which does not include capital gains) to its stockholders.
REITs are subject to a number of organizational and operational requirements. If
the Company fails to qualify as a REIT in any taxable year, the Company will be
subject to federal income tax (including any applicable alternative minimum tax)
on its taxable income at regular corporate rates. In addition, unless entitled
to relief under certain statutory provisions, the Company would be disqualified
from treatment as a REIT for the four taxable years following the year during
which qualification is lost. See "Federal Income Tax Considerations--Failure to
Qualify as a REIT" in the accompanying Prospectus for a more detailed discussion
of the consequences of the failure of the Company to qualify as a REIT. Even if
the Company qualifies for taxation as a REIT, the Company may be subject to
certain state and local taxes on its income and property and to federal income
and excise taxes on its undistributed income. See "Federal Income Tax
Considerations" in the accompanying Prospectus.
S-12
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following table sets forth summary historical information for USRP and
summary pro forma information for the Company. This information should be read
in conjunction with the historical financial statements and notes thereto
included elsewhere in this Prospectus Supplement and incorporated by reference
in the Prospectus and the pro forma financial statements and notes thereto
included elsewhere in this Prospectus Supplement. The historical information of
USRP may not be indicative of future operating results of the Company. The pro
forma financial data of the Company is not necessarily indicative of what the
Company's results of operations or financial condition would have been for the
periods or at the date indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------------ ------------------------------------
COMPANY COMPANY
USRP (1) -------------- USRP (1) --------------
-------------------------------- PRO FORMA -------------------- PRO FORMA
1994 1995 1996 1996(2) 1996 1997 1997(2)
--------- --------- ---------- -------------- --------- --------- --------------
(IN THOUSANDS, EXCEPT PER SHARE/UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Total revenues................. $ 8,793 $ 9,780 $ 18,324 $ 42,651 $ 7,264 $ 14,544 $ 20,995
Total expenses................. 3,860 4,557 10,883 22,507 4,080 9,967 11,355
Net income before unusual
items........................ $ 4,933 $ 5,223 $ 7,441 $ 20,144 $ 3,184 $ 4,577 $ 9,640
Net income..................... $ 4,933 $ 5,223 $ 7,473 $ 20,176 $ 3,184 $ 4,099 $ 9,906
Net income allocable to
Unitholders.................. $ 4,834 $ 5,119 $ 7,325 $ 14,576 $ 3,121 $ 4,018 $ 7,106
Weighted average number of
Shares/Units outstanding
(3).......................... 6,953 6,957 9,161 13,956 7,814 11,114 14,046
Net income per Share/Unit (3).. $ 0.70 $ 0.74 $ 0.80 $ 1.04 $ 0.40 $ 0.36 $ 0.51
BALANCE SHEET DATA:
Net investment in direct
financing leases............. $ 21,237 $ 19,371 $ 17,105 N/A $ 18,144 $ 15,679 $ 15,488
Land........................... 23,414 27,493 61,340 N/A 39,806 78,679 94,480
Buildings and leasehold
improvements, net............ 1,548 7,900 75,339 N/A 61,070 139,298 173,987
Equipment...................... -- 224 2,980 N/A 2,911 3,743 4,052
Intangibles, net............... 14,317 13,161 12,263 N/A 14,489 12,116 12,208
Total assets................... 62,889 71,483 177,418 N/A 141,968 261,515 318,626
Line of credit and long term
debt......................... -- 10,931 69,486 N/A 35,065 132,313 97,038
Capitalized lease
obligations.................. 775 563 362 N/A 458 263 263
General partners' capital...... 1,308 1,241 1,163 N/A 1,212 1,093 N/A
Limited partners' capital...... 60,361 58,071 103,120 N/A 103,453 123,995 N/A
Stockholders' equity........... N/A N/A N/A N/A N/A N/A 216,561
OTHER DATA:
Funds From Operations (4)...... $ 7,638 $ 8,260 $ 13,033 $ 27,267 $ 5,322 $ 8,823 $ 13,129
Cash distributions declared per
Unit applicable to respective
period....................... $ 1.07 $ 1.14 $ 1.29 N/A $ 0.63 $ 0.69 N/A
Cash flow from operating
activities................... $ 6,990 $ 9,288 $ 13,852 $ 33,006 $ 5,555 $ 7,693 $ 16,179
Cash flow from (used in)
investing activities......... $ -- $ (12,039) $ (100,978) $ (210,338) $ (64,973) $ (81,683) $ (128,176)
Cash flow from (used in)
financing activities......... $ (7,569) $ 2,077 $ 87,500 $ 193,737 $ 59,425 $ 75,386 $ 121,090
Number of Properties........... 123 139 322 527 264 452 527
</TABLE>
S-13
<PAGE>
- ------------------------------
(1) The historical information for the years ended December 31, 1994, 1995 and
1996 was derived from USRP's audited consolidated financial statements.
USRP's audited consolidated financial statements as of December 31, 1995 and
1996 and for each of the three years in the period ended December 31, 1996,
and unaudited consolidated financial statements as of June 30, 1997 and for
the six months ended June 30, 1996 and 1997 are included elsewhere in this
Prospectus Supplement or are incorporated by reference in the Prospectus and
the Company's pro forma financial statements for the year ended December 31,
1996 and the six months ended June 30, 1997 are included elsewhere in this
Prospectus Supplement.
(2) The pro forma condensed balance sheet as of June 30, 1997 is based on the
Company's unaudited balance sheet as of June 30, 1997, as adjusted to
reflect certain property acquisitions and dispositions and property mortgage
receivables, increase in debt, issuances of shares and other transactions
associated with the recent conversion of the Company into a REIT and this
offering. The pro forma condensed consolidated statement of income for the
six months ended June 30, 1997 is based on the Company's unaudited statement
of income for that period, as adjusted to reflect as of January 1, 1997
certain property acquisitions and dispositions and property mortgage
receivables, increase in debt, issuances of shares and other transactions
associated with the recent conversion of the Company into a REIT and this
offering. The pro forma condensed consolidated statement of income for the
year ended December 31, 1996 is based on the Company's audited statement of
income for that period, as adjusted to reflect certain property acquisitions
and dispositions and property mortgage receivables, increase in debt,
issuances of shares and other transactions associated with the recent
conversion of the Company into a REIT and this offering.
(3) Historical and pro forma weighted average number of Shares/Units outstanding
and net income per Share/Unit have been adjusted to reflect the
three-for-two split of the Common Stock.
(4) The White Paper on FFO approved by the Board of Governors of the National
Association of Real Estate Investment Trusts ("NAREIT") in March 1995 (the
"White Paper") defines FFO as net income (loss) (computed in accordance with
GAAP), excluding gains (or losses) from debt restructuring and sales of
property, plus real estate related depreciation and amortization and unusual
and non-recurring items and after adjustments for unconsolidated
partnerships and joint ventures. The Company believes FFO is helpful to
investors as a measure of the performance of an equity REIT because, along
with cash flows from operating, financing and investing activities, it
provides investors with an understanding of the ability of the Company to
incur and service debt and make capital expenditures. The Company computes
FFO in accordance with the standards established by the White Paper, which
may differ from the methodology for calculating FFO utilized by other equity
REITs, and, accordingly, may not be comparable to such other REITs. The
White Paper, however, does not address the treatment of direct financing
leases, and the Company has interpreted the definition of FFO to permit
excluding the effects of such leases from the calculation of FFO.
Additionally, for the years ended December 31, 1994, 1995 and 1996 and for
the six month periods ended June 30, 1996 and 1997, the Company's
calculation of FFO excluded the effects of distributions made to the general
partner of USRP and the Operating Partnership. Further, FFO does not
represent amounts available for management's discretionary use because of
needed capital replacement or expansion, debt service obligations, or other
commitments and uncertainties. FFO should not be considered as an
alternative to net income (determined in accordance with GAAP) as an
indication of the Company's financial performance or to cash flows from
operating activities (determined in accordance with GAAP) as a measure of
the Company's liquidity, nor is it indicative of funds available to fund the
Company's cash needs, including its ability to make distribution.
S-14
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SERIES A PREFERRED STOCK INVOLVES VARIOUS RISKS.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING INFORMATION IN
CONJUNCTION WITH THE OTHER INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN
THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS BEFORE MAKING A
DECISION TO PURCHASE SERIES A PREFERRED STOCK.
FAILURE TO MANAGE RAPID GROWTH AND INTEGRATE OPERATIONS; ACQUISITION OF
ADDITIONAL PROPERTIES
The Company is currently experiencing a period of rapid growth. Since May
1994, the Company has acquired a total of 402 Properties located in various
states for a total purchase price of approximately $248 million. As a result of
the rapid growth of the Company's portfolio, there can be no assurance that the
Company will be able to adapt its management, administrative, accounting and
operational systems to respond to any future acquisitions of additional
properties without certain operating disruptions or unanticipated costs. The
failure to successfully integrate any future acquisitions into the Company's
portfolio could have a material adverse effect on the results of operations and
financial condition of the Company and its ability to pay expected distributions
to stockholders. As it acquires additional properties, the Company will be
subject to risks associated with managing new properties, including tenant
retention and mortgage default. In addition, there can be no assurance that the
Company will be able to maintain its current rate of growth or negotiate and
acquire any acceptable properties in the future. A larger portfolio of
properties may entail additional operating expenses that would be payable by the
Company. Such acquisitions may also require loans to prospective tenants. Making
loans to existing or prospective tenants involves credit risks and could subject
the Company to regulation under various federal and state laws. Any operation of
restaurants, even on an interim basis, would also subject the Company to
operating risks (such as uncertainties associated with labor and food costs)
which may be significant and would cause the Company to recognize "bad income"
which may adversely impact the Company's qualification as a REIT. See "Federal
Income Tax Considerations" in the accompanying Prospectus.
DEVELOPMENT AND ACQUISITION RISKS; INCREASED PROJECT COSTS; FAILURE TO OBTAIN
FINANCING; INABILITY TO MEET OPERATING EXPENSES
GENERAL DEVELOPMENT AND ACQUISITION RISKS. The Company intends to continue
selective build-to-suit and retrofit restaurant property development and
acquisition of restaurant properties where it expects to achieve investment
returns that are anticipated to equal or exceed returns on acquisitions. New
project development is subject to a number of risks, including risks of
construction delays and cost overruns that may increase project costs,
availability of acceptable financing, volatility in interest rates, the timing
of the commencement of rental payments and new project commencement risks such
as the receipt of zoning, occupancy and other required governmental
authorizations and permits and the incurrence of development costs in connection
with projects that are not pursued to completion. In addition, such activities,
regardless of whether they are ultimately successful, typically require a
substantial portion of management's time and attention. Further, development
involves the risk that developed properties will not produce desired revenue
levels once leased and the risk of competition for suitable development sites
from competitors which may have greater financial resources than the Company.
Acquisitions entail risks that investments will fail to perform in accordance
with expectations and that judgments with respect to the costs of improvements
to bring an acquired property up to standards established for the market
position intended for that property will prove inaccurate, as well as general
investment risks associated with any new real estate investment. There can be no
assurance that development and acquisition activities, if consummated, will
perform in accordance with the Company's expectations and distributions to
stockholders might be adversely affected.
RISKS RELATING TO FINANCING; DISTRIBUTIONS. The Company anticipates that
its development and acquisition activities will be largely financed through
externally generated funds from borrowings under credit facilities and other
secured and unsecured debt financing and from equity financing. In addition, new
S-15
<PAGE>
development activities may be financed under lines of credit or other forms of
secured or unsecured construction financing that would result in a risk that
permanent financing for newly developed projects might not be available or would
be available only on disadvantageous terms. Because the Company must distribute
95% of its taxable income to maintain its qualification as a REIT, the Company's
ability to rely upon income from operations or cash flow from operations to
finance new development or acquisitions will be limited. Accordingly, were the
Company unable to obtain funds from borrowings or the capital markets to
refinance new development or acquisitions undertaken without permanent
financing, the Company's ability to grow through additional development and
acquisition activities could be curtailed, cash available for distribution could
be adversely affected and the Company could be required to reduce distributions.
LACK OF INDUSTRY DIVERSIFICATION
The Company's strategy is to continue to acquire interests in chain
restaurant properties, specifically fast food and casual dining restaurant
properties. Consequently, the Company is subject to the risks associated with an
investment in real estate in the chain restaurant industry, and is subject to
the risks generally associated with investment in a single industry. As a
result, a downturn in the fast food or casual dining segment could have a
material adverse effect on the Company's total rental revenues and amounts
available for distribution to its stockholders. See "Market and Industry
Information."
DEPENDENCE ON SUCCESS OF BRANDS
Substantially all of the Properties are occupied by operators of chain
restaurants with national and regional brand affiliations. Additionally, 181 of
the Properties are occupied by operators of Burger King-Registered Trademark-
restaurant properties. In the future, the Company also may acquire additional
restaurant properties which will be affiliated with the same national and
regional brands. As a result, the Company is subject to the risks inherent in
investments concentrated in specific national and regional brands, such as a
reduction in business following adverse publicity related to such brands or if
the particular restaurant chain (and its franchisees) were to suffer a
system-wide decrease in sales. In such circumstances, the ability of franchisees
to pay rents (including percentage rents) to the Company may be adversely
affected.
FAILURE TO RENEW LEASES AND FRANCHISE AGREEMENTS
The Properties are leased to restaurant franchise operators pursuant to
leases with remaining terms varying from one to 27 years at December 31, 1996
and an average remaining term in excess of ten years. No assurance can be given
that such leases will be renewed at the end of the lease terms or that the
Company will be able to renegotiate terms which are acceptable to the Company.
In certain instances, the Company has attempted to extend the terms of certain
of its existing leases pursuant to a recently implemented program intended to
encourage early renewal of leases, but in connection therewith has had to commit
to paying for certain improvements on such Properties. See "Business and
Properties--Leases with Restaurant Operators."
REAL ESTATE FINANCING RISKS
EXISTING DEBT AND REFINANCING RISKS. The Company is subject to the risks
normally associated with debt financing, including the risk that the Company's
cash flow will be insufficient to meet required payments of principal and
interest, the risk of violating loan covenants, the risk of rising interests
rates on the Company's variable rate debt and the risk that the Company will not
be able to repay or refinance existing indebtedness on its Properties (which
generally will not have been fully amortized at maturity) or that the terms of
such refinancing will not be as favorable as the terms of its existing
indebtedness. Currently, the Company's borrowings do not have long-term
maturities and as a result, the Company will be required to refinance such
borrowings prior to the maturities of the lease terms of its Properties. There
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<PAGE>
can be no assurance that the Company will be able to refinance any indebtedness
it may incur or otherwise obtain funds by selling assets or raising equity to
make required payments on indebtedness.
SUBSTANTIAL DEBT OBLIGATIONS. As of September 30, 1997, the Company had
$169.6 million of mortgage indebtedness secured by certain of its Properties.
Those Properties not otherwise directly securing the Company's indebtedness are
restricted from being used as collateral for new borrowings pursuant to the
terms of the Company's debt instruments. In addition, properties which the
Company may acquire in the future could be mortgaged to secure payment of
indebtedness. If the Company is unable to generate funds to cover required
payments of principal and interest on borrowings secured by these properties,
the mortgage securing such properties could be foreclosed upon by, or such
properties could be transferred to, the mortgagee with a consequent loss of
income and asset value to the Company.
NO LIMITATION ON INCURRENCE OF DEBT. As of September 30, 1997, the
Company's ratio of debt to total market capitalization was approximately 37%.
Upon completion of the offering of shares of Series A Preferred Stock and the
application of the net proceeds therefrom, the Company's debt to total market
capitalization will be approximately 23%. The Company's Amended and Restated
Articles of Incorporation (the "Charter") do not contain any limitation on the
amount or percentage of indebtedness the Company may incur. The Board has
implemented a policy of limiting its indebtedness to maintain a ratio of total
debt of 50% or less to the lesser of total market capitalization or the original
cost of the Properties as of the date of such calculation. However, the Board
could alter or eliminate its current policy on borrowing and would do so, for
example, if it were necessary in order for the Company to continue to qualify as
a REIT. If the policy were changed, the Company could become more highly
leveraged, resulting in an increase in debt service that could adversely affect
the Company's financial condition and cash available for distribution to
stockholders and could increase the risk of default on the Company's
indebtedness. See "Business and Properties--Debt Structure."
POTENTIAL DILUTION. A wholly-owned subsidiary of the Company has entered
into a short term borrowing facility (the "Pacific Mutual Facility") with
Pacific Mutual Life Insurance Co. ("Pacific Mutual") which is secured by, among
other things, the pledge of 1,351,618 shares of Common Stock (the "Pledged
Shares") currently owned by such subsidiary. If an event of default were to
occur under the Pacific Mutual Facility, then under the terms of the pledge
agreement Pacific Mutual could acquire ownership of the Pledged Shares. If that
were to occur, the Company's net income per share would be reduced
substantially. See "Business and Properties--Debt Structure."
IMPACT OF COMPETITION ON OPERATIONS
ACQUISITIONS. Numerous entities and individuals compete with the Company to
acquire restaurant properties, including entities which have substantially
greater financial resources than the Company. These entities and individuals may
be able to accept more risk than the Company is willing to undertake.
Competition generally may reduce the number of suitable investment opportunities
available to the Company and may increase the bargaining power of property
owners seeking to sell. There can be no assurance that the Company will find
suitable properties for inclusion in its portfolio of triple net leased
Properties or sale/leaseback transactions in the future.
OPERATIONS. The restaurants operated on the Properties are subject to
significant competition in the market areas in which they compete, including
competition from other national and regional fast food restaurant chains and
national and regional restaurant chains that do not specialize in fast food but
appeal to many of the same customers and other competitors such as convenience
stores and supermarkets that sell prepared and ready-to-eat foods. The success
of the Company depends, in part, on the ability of the restaurants operated on
the Properties to compete successfully with such businesses. The Company does
not intend to engage directly in the operation of restaurants. However, the
Company would operate restaurants located on its Properties if required to do so
in order to protect the Company's investment. As a result, the Company generally
will be dependent upon the experience and ability of the lessees operating the
restaurants located on the Properties.
S-17
<PAGE>
REAL ESTATE INVESTMENT RISKS
GENERAL RISKS. The Company's investments in real estate are subject to
varying degrees of risk inherent in the ownership of real property. The
underlying value of the Company's real estate and the income therefrom and,
consequently, the ability of the Company to make distributions to stockholders,
are dependent upon the operators of the Properties generating income in excess
of operating expenses in order to make rent payments. Income from the Properties
may be adversely affected by changes in national economic conditions, changes in
local market conditions due to changes in general or local economic conditions
and neighborhood characteristics, changes in interest rates and the
availability, cost and terms of borrowings, the impact of compliance with
present or future environmental laws, the ongoing need for capital improvements,
particularly for older restaurants, increases in operating expenses, adverse
changes in governmental rules and fiscal policies, civil unrest, acts of God
(which may result in uninsured losses), acts of war, adverse changes in zoning
laws and other factors beyond the Company's control.
ILLIQUIDITY OF REAL ESTATE MAY LIMIT ITS VALUE. Real estate investments are
relatively illiquid. The ability of the Company to vary its portfolio in
response to changes in economic and other conditions is, therefore, limited. No
assurance can be given that the market value of any of the Company's properties
will not decrease in the future. If the Company must sell an investment, there
can be no assurance that the Company will be able to dispose of it in a
desirable time period or that the sales price will recoup or exceed the amount
paid for such investment.
POSSIBLE ENVIRONMENTAL LIABILITIES. The Company's operating costs may be
affected by the obligation to pay for the cost of complying with existing
environmental laws, ordinances and regulations, as well as the cost of
compliance with future legislation. Under current federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real property may be liable for the costs of removal or remediation
of hazardous or toxic substances on, under or in such property. Such laws often
impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of such hazardous or toxic substances. In
addition, the presence of contamination from hazardous or toxic substances, or
the failure to remediate such contaminated property properly, may adversely
affect the ability of the owner of the property to borrow using such property as
collateral for a loan or to sell such property. Environmental laws also may
impose restrictions on the manner in which a property may be used or transferred
or in which businesses may be operated, and may impose remedial or compliance
costs. The costs of defending against claims of liability or remediating
contaminated property and the cost of complying with environmental laws could
materially adversely affect the Company's results of operations and financial
condition.
In connection with the Company's acquisition of a property, a Phase I
environmental assessment is conducted by a qualified independent environmental
engineer. Phase I environmental assessments have been performed on all of the
Company's acquisitions since May 1994 and it is expected that all future
acquisitions will be subject to a Phase I environmental assessment. No Phase I
environmental assessments were conducted with respect to the original 123 Burger
King-Registered Trademark- Properties at the time existing management assumed
control of the Company. A Phase I environmental assessment involves researching
historical usages of a property, databases containing registered underground
storage tanks and other matters, including an on-site inspection, to determine
whether an environmental issue exists with respect to the property which needs
to be addressed. If the results of a Phase I environmental assessment reveal
potential issues, a Phase II environmental assessment, which may include soil
testing, ground water monitoring or borings to locate underground storage tanks,
may, depending upon the circumstances, be ordered for further evaluation.
Certain of the Phase I and Phase II environmental assessments have revealed
potential environmental concerns with respect to several of the Properties.
Specifically, the soils and groundwater beneath certain of the Properties may
have been impacted by the presence of leaking underground storage tanks on, and
the migration of contaminants from, the subject Property and third-party offsite
locations adjacent to such Properties. While certain of the Phase I and Phase II
environmental assessments have recommended
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certain remedial action or further analysis be undertaken, the Company has
determined that such action or analysis is unwarranted at this time based on the
nature of the suggested action or analysis. Based on the information provided by
the Phase I and Phase II environmental assessments, as well as the Company's
knowledge of such Burger King-Registered Trademark- Properties, the Company is
not aware of any environmental liability or compliance concern at the Properties
that the Company believes would have a material adverse effect on the Company's
business, assets, results of operations or liquidity.
It is possible that Phase I environmental assessments will not reveal all
environmental liabilities or compliance concerns or that there will be material
environmental liabilities or compliance concerns of which the Company will not
be aware. The Company has not been notified by any governmental authority, and
has no other knowledge of, any material noncompliance, liability or claim
relating to hazardous or toxic substances or other environmental substances in
connection with any of its Properties. Moreover, no assurances can be given that
(i) future laws, ordinances or regulations will not impose any material
environmental liability or (ii) the current environmental condition of the
Company's existing and future properties will not be affected by the condition
of neighboring properties (such as the presence of leaking underground storage
tanks) or by third parties (whether neighbors such as dry cleaners or others)
unrelated to the Company.
UNINSURED AND UNDERINSURED LOSSES COULD RESULT IN LOSS OF VALUE OF
FACILITIES. The Company requires its lessees to maintain comprehensive
insurance on each of the Properties, including liability, fire and extended
coverage, and the Company is an additional named insured under such policies.
Management believes such specific coverage is of the type and amount customarily
obtained for or by an owner on real property assets. The Company intends to
require lessees of subsequently acquired properties to obtain similar insurance
coverage. However, there are certain types of losses, generally of a
catastrophic nature, such as earthquakes and floods, that may be uninsurable or
not economically insurable, as to which the Properties are at risk depending on
whether such events occur with any frequency in such areas. In addition, because
of coverage limits and deductibles, insurance coverage in the event of a
substantial loss may not be sufficient to pay the full current market value or
current replacement cost of the Company's investment. Inflation, changes in
building codes and ordinances, environmental considerations and other factors
also might make it impractical to use insurance proceeds to replace a facility
after it has been damaged or destroyed. Under such circumstances, the insurance
proceeds received by the Company might not be adequate to restore its economic
position with respect to such property.
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT; OTHER TAX LIABILITIES
The Company intends to operate so as to qualify as a REIT for federal income
tax purposes. Although the Company believes it has been and will continue to be
organized and operated in such a manner, no assurance can be given that the
Company will qualify or remain qualified as a REIT. Qualification as a REIT
involves the application of highly technical and complex Code provisions for
which there are only limited judicial or administrative interpretations. The
determination of various factual matters and circumstances not entirely within
the Company's control may affect the Company's ability to qualify as a REIT. For
example, in order to qualify as a REIT, at least 95% of the Company's gross
income in any year must be derived from qualifying sources and the Company must
pay dividends to stockholders aggregating annually at least 95% of its REIT
taxable income (excluding net capital gains). Further, no assurance can be given
that new legislation, regulations, administrative interpretations or court
decisions will not significantly change the tax laws with respect to
qualification as a REIT or the federal income tax consequences of such
qualification. The Company, however, is not aware of any pending tax legislation
that would adversely affect the Company's ability to operate as a REIT.
If in any taxable year the Company were to fail to qualify as a REIT, the
Company would not be allowed a deduction for dividends to stockholders in
computing its taxable income and would be subject to federal income tax
(including any applicable alternative minimum tax) on its taxable income at
corporate rates. Unless entitled to relief under certain statutory provisions,
the Company also would be disqualified from treatment as a REIT for the four
taxable years following the year during which qualification was lost.
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As a result, the funds available for distribution to the Company's stockholders
would be reduced for each of the years involved. In addition, dividends would no
longer be required to be paid. To the extent that dividends to stockholders
would have been paid in anticipation of the Company's qualification as a REIT,
the Company might be required to borrow funds or to liquidate certain of its
investments to pay the applicable tax. Although the Company currently intends to
operate in a manner designed to qualify as a REIT, it is possible that future
economic, market, legal, tax or other considerations may cause the Board to
revoke the REIT election. See "Federal Income Tax Considerations" in the
accompanying Prospectus.
LIMITS ON CHANGES IN CONTROL
OWNERSHIP LIMIT. In order to maintain its qualification as a REIT under the
Code, not more than 50% in the value of the outstanding shares of capital stock
of the Company may be owned, directly or indirectly, by five or fewer
individuals (as defined in the Code to include certain exempt organizations).
Therefore, the Charter limits ownership of more than 9.8% of the value of the
outstanding shares of Equity Stock (as defined in the Charter to mean Common
Stock and Preferred Stock) of the Company by any single stockholder, with
certain exceptions, has been restricted (the "Ownership Limit"). The Board, upon
receipt of a ruling from the Internal Revenue Service (the "IRS"), an opinion of
counsel or other evidence satisfactory to the Board and upon such other
conditions as the Board may direct, may exempt a proposed transferee from this
restriction. The Ownership Limit may discourage a change of control of the
Company and may also (i) deter tender offers for Common Stock, which offers may
be advantageous to stockholders, and (ii) limit the opportunity for stockholders
to receive a premium for their Common Stock that might otherwise exist if an
investor were attempting to assemble a block of Common Stock in excess of 9.8%
of the value of the Company's outstanding shares of Equity Stock.
ADDITIONAL CLASSES OF STOCK. The Charter authorizes the Board to reclassify
any authorized but unissued shares of capital stock into one or more new classes
or series of capital stock, including classes or series of preferred stock, and
to determine the preferences, rights and other terms of such classes or series.
The additional classes or series of securities, as well as the Common Stock,
will be available for issuance without further action by the Company's
stockholders, unless such action is required by applicable law or the rules of
any stock exchange or automated quotation system on which the Company's
securities may be listed or traded. Although the Board has no intention at the
present time of doing so, it could issue a class or series of securities that
could, depending on the terms of such class or series of securities, impede a
merger, tender offer, or other transaction that some, or a majority, of the
Company's stockholders might believe to be in their best interest or in which
the stockholders might receive a premium for their shares over the then current
market price of such shares.
POSSIBLE ADVERSE EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON
STOCK
No prediction can be made as to the effect, if any, of future sales of
shares of Common Stock, or the availability of shares of Common Stock for future
sale, on the market price of the Common Stock prevailing from time to time.
Sales of substantial amounts of capital stock (including Common Stock issued
upon the exercise of stock options), or the perception that such sales could
occur, could adversely affect prevailing market prices for the Common Stock.
QSV, the former general partner of USRP and of which Messrs. Stetson and
Margolin are directors and stockholders, owns 1,148,420 OP Units in the
Operating Partnership which are exchangeable on a one-for-one basis for shares
of Common Stock, and has the right to receive up to an additional 825,000 OP
Units depending on the Company's performance in the fiscal year ending December
31, 2000.
EFFECT OF CERTAIN ANTITAKEOVER PROVISIONS AND OWNERSHIP LIMITS ON CHANGE IN
CONTROL
CHARTER PROVISIONS. Certain provisions of the Charter may have the effect
of discouraging a third party from making an acquisition proposal for the
Company and may thereby inhibit a change in control of the Company under
circumstances that could give the holders of shares of Common Stock the
opportunity to realize a premium over the then-prevailing market prices.
Furthermore, the ability of the stockholders to effect a change in management
control of the Company could be substantially impeded by such
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antitakeover provisions. Moreover, in order for the Company to maintain its
qualification as a REIT, not more than 50% in value of its outstanding shares of
capital stock may be owned, directly or indirectly, by five or fewer individuals
(as defined in the Code to include certain entities). For the purpose of
preserving the Company's REIT qualification, the Charter prohibit ownership
either directly or under the applicable attribution rules of the Code of more
than 9.8% of the shares of Common Stock by any stockholder, subject to certain
exceptions. Such ownership limit may have the effect of preventing an
acquisition of control of the Company without the approval of the Board. See
"Certain Provisions of Maryland Law and of the Company's Charter and Bylaws"
herein and "Federal Income Tax Considerations" in the accompanying Prospectus.
PREFERRED STOCK. The Charter authorizes the Board to issue up to 50 million
shares of Preferred Stock and to establish the preferences and rights, including
the right to elect additional directors under terms specified in the preferred
stock preferences, of any such shares issued. See "Description of the Series A
Preferred Stock." The issuance of Preferred Stock could have the effect of
delaying or preventing a change in control of the Company even if a change in
control were in the stockholders' best interests. The rights, if any, of the
holders of any series of Preferred Stock to elect additional directors under
specified circumstances could have the effect of delaying or preventing a change
in control of the Company even if a change in control were in the stockholders'
best interests.
NO RESTRICTIONS ON CHANGES IN INVESTMENT, FINANCING AND OTHER POLICIES
The Company's policies with respect to all activities, including its
investment, growth, debt, capitalization, distribution and operating policies,
will be determined by the Board. Although the Board has no present intention to
do so, these policies may be amended or revised at any time and from time to
time at the discretion of the Board without a vote of the stockholders of the
Company. A change in these policies could adversely affect the Company's
financial condition or results of operations or the market price of the Common
Stock. See "Policies With Respect to Certain Activities."
DEPENDENCE ON KEY PERSONNEL
The Company's continued success is dependent upon the efforts and abilities
of its key executive officers. In particular, the loss of the services of either
Robert J. Stetson, Chief Executive Officer and President, or Fred H. Margolin,
Chairman of the Board, Treasurer and Secretary, could have a material adverse
effect on the Company's operations and its ability to effectuate its growth
strategy. There can be no assurance that the Company would be able to recruit or
hire any additional personnel with equivalent experience and contacts. The
Company has entered into employment contracts with each of Messrs. Stetson and
Margolin. See "Management--Employment Agreements."
ABSENCE OF PRIOR MARKET FOR SHARES OF SERIES A PREFERRED STOCK
Prior to this offering of the Series A Preferred Stock, there has been no
public market for Series A Preferred Stock. Application has been made to list
the Series A Preferred Stock on the NYSE. There can be no assurance that such
listing will be approved, or that upon listing, the Company will continue to
meet the criteria for continued listing of the Series A Preferred Stock on the
NYSE. See "Underwriting." The market value of the Series A Preferred Stock could
be substantially affected by general market conditions, including changes in
interest rates. Moreover, numerous other factors, such as governmental
regulatory action and changes in tax laws, could have significant effects on the
future market price of the Series A Preferred Stock.
REGULATION
The Company, through its ownership of interests in and management of real
estate, is subject to various environmental, health, land-use and other
regulation by federal, state and local governments that affects the development
and regulation of restaurant properties. The Company's leases impose the primary
obligation for regulatory compliance on the operators of the restaurant
properties.
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AMERICANS WITH DISABILITIES ACT. Under the ADA, all public accommodations,
including restaurants, are required to meet certain federal requirements
relating to physical access and use by disabled persons. A determination that
the Company or a property of the Company is not in compliance with the ADA could
result in the imposition of fines, injunctive relief, damages or attorney's
fees. The Company's leases contemplate that compliance with the ADA is the
responsibility of the operator. The Company is not currently a party to any
litigation or administrative proceeding with respect to a claim of violation of
the ADA and does not anticipate any such action or proceeding that would have a
material adverse effect upon the Company.
LAND-USE AND SAFETY REGULATIONS. The Company and its restaurant operators
are required to operate the properties in compliance with various laws, land-use
regulations, fire and safety regulations, and building codes as may be
applicable or later adopted by the governmental body or agency having
jurisdiction over the property or the matter being regulated. The Company does
not believe that the cost of compliance with such regulations and laws will have
a material adverse effect upon the Company.
HEALTH REGULATIONS. The restaurant industry is regulated by a variety of
state and local departments and agencies concerned with the health and safety of
restaurant customers. These regulations vary by restaurant location and type
(I.E., fast food or casual dining). The Company's leases provide for compliance
by the restaurant operator with all health regulations and inspections and
require the restaurant operator to obtain insurance to cover liability for
violation of such regulations or the interruption of business due to closure
caused by failure to comply. The Company is not currently a party to any
litigation or administrative proceeding concerning compliance with health
regulations and does not anticipate any such action or proceeding that would
have a material adverse effect upon the Company.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This Prospectus Supplement, the
accompanying Prospectus and other materials filed or to be filed by the Company
with the Securities and Exchange Commission under the Exchange Act and
incorporated by reference in the accompanying Prospectus contain or will contain
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. Such statements include information
relating to acquisitions and other business development activities, future
capital expenditures, financing sources and availability and the effects of
regulations (including environmental regulation) and competition. Such
forward-looking information involves important risks and uncertainties that
could significantly affect anticipated results in the future and, accordingly,
such results may differ from those expressed in any forward-looking statements
contained in this Prospectus Supplement or the accompanying Prospectus or
incorporated by reference in such Prospectus. These risks and uncertainties
include, but are not limited to, uncertainties affecting real estate businesses
generally (such as entry into new leases, renewals of leases and dependence on
tenants' business operations), risks relating to acquisition and development
activities, mergers and acquisitions, possible environmental liabilities, risks
relating to leverage, debt service and obligations with respect to the payment
of dividends (including the availability of financing on terms acceptable to the
Company and sensitivity of the Company's operations to fluctuations in interest
rates), the potential for the need to use borrowings to make distributions
necessary for the Company to qualify as a REIT or to fund the payment of
dividends, dependence on the markets in which the Company's properties are
located, the existence of complex regulations relating to the Company's status
as a REIT and the adverse consequences of the failure of the Company to qualify
as a REIT and the potential adverse impact of market interest rates on the
market price for the Company's securities.
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THE COMPANY
GENERAL
The Company, a fully integrated, self-administered and self-managed REIT, is
one of the largest, publicly-traded entities in the United States dedicated to
acquiring, owning, managing and selectively developing restaurant properties. At
September 30, 1997, the Company's portfolio consisted of 520 Properties
diversified geographically in 45 states and operated by approximately 200
restaurant operators. The Properties are leased by the Company on a triple net
basis primarily to operators of fast food and casual dining chain restaurants
affiliated with national brands such as Burger King-Registered Trademark-,
Arby's-Registered Trademark-, Dairy Queen-Registered Trademark-,
Hardee's-Registered Trademark-, Chili's-Registered Trademark-, Pizza
Hut-Registered Trademark- and Schlotzsky's-Registered Trademark- and regional
franchises such as Grandy's-Registered Trademark-and Taco Cabana-Registered
Trademark-. As of September 30, 1997, over 99% of the Properties were leased
pursuant to leases with average remaining lease terms (excluding extension
options) in excess of ten years.
The Company is a Maryland corporation which has elected to be taxed as a
REIT for federal income tax purposes for the year ending December 31, 1997. The
Common Stock is traded on the NYSE under the symbol "USV." The principal
executive offices of the Company are located at 5310 Harvest Hill Road, Suite
270, Dallas, Texas 75230. The telephone number is (972) 387-1487.
HISTORY OF THE COMPANY
The Company's predecessor, USRP, formerly Burger King Investors Master L.P.,
was formed in 1985 by Burger King Corporation and QSV, both of which were at
that time wholly-owned subsidiaries of The Pillsbury Company. QSV acted as the
general partner of USRP. Burger King Corporation was a special general partner
of USRP until its withdrawal on November 30, 1994. USRP effected an initial
public offering in 1986 and the proceeds therefrom were used to buy the
Company's initial portfolio of 128 properties from Burger King Corporation. From
1986 through March 1995, the partnership agreement governing USRP limited the
activities of the Company to managing the original portfolio of properties.
In May 1994, existing management assumed control of the Company and began
implementing a number of new strategies intended to pursue Company growth. These
strategies have involved the Company in, among other things, acquiring new
properties, enhancing investment returns through merchant banking activities and
developing new co-branded service centers on a selective basis. From May 1994,
when existing management assumed control of the Company, through September 30,
1997, the Company acquired 402 Properties for an aggregate purchase price of
approximately $248 million. During this period, the number of Properties in the
Company's portfolio increased from 123 Properties to 520 Properties,
representing a 905% increase in the portfolio on a cost basis and a 323%
increase in the number of Properties. Since September 30, 1997, the Company has
acquired an additional seven restaurant properties for a total investment of $6
million. From May 1994 through October 15, 1997, the total return (distributions
plus stock price appreciation) on the Common Stock has been 159%.
GROWTH STRATEGIES
The Company seeks to maximize sustainable growth in FFO and cash available
for distribution to stockholders through effective management, operation,
acquisition and selective development of restaurant properties. The Company
believes it can achieve its goal of increasing FFO and cash available for
distribution per share by (i) acquiring high quality restaurant properties at
attractive returns, (ii) realizing contractual rental rate escalations or
percentage rent on existing leases, (iii) releasing space at increased rental
rates, when market conditions warrant, as leases expire, (iv) selectively
developing properties where the Company can secure leases prior to construction
and where such development is expected to result in returns on investment that
the Company believes will exceed returns on comparable acquisitions, and (v)
actively managing the Company's portfolio, including periodically re-evaluating
all assets for strategic
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disposition or repositioning. In pursuing its growth strategy, the Company
intends to maintain a conservative capital structure providing it flexibility to
access capital markets when financial and market conditions warrant, thereby
enabling it to take advantage of growth opportunities as they arise.
ACQUISITION STRATEGY. The Company seeks to identify and acquire high
quality restaurant properties. The Company believes that it has been able to
maximize returns on acquisitions as a result of its expertise in evaluating and
capitalizing on the real estate needs of chain restaurant tenants, its ability
to identify and acquire financially attractive restaurant properties operated by
major national and regional restaurant brands and its expertise in identifying
and evaluating restaurant operators. The Company also seeks to utilize the
extensive personal and business relationships that management has developed over
time within the real estate and chain restaurant industries to identify
prospective acquisition opportunities and to consummate favorable acquisitions
prior to the active marketing of the subject properties.
The Company believes that the ownership of chain restaurant properties is
highly fragmented and that such fragmentation often creates pricing
inefficiencies in the sale of such properties. Chain restaurants are generally
owned by numerous local operators, many of whom own or operate a single
facility. Additionally, the Company believes that numerous chain restaurants are
occupied by owners who desire to focus their investments on and attention to the
operation of their respective restaurants, and not on ownership of real estate.
Critical evaluation of prospective property acquisitions is an essential
component of the Company's acquisition strategy. When evaluating acquisition
opportunities, the Company assesses a full range of matters relating to the
properties, including the quality of the tenant, the condition and capacity of
building infrastructure, the remaining lease term and the strength of the brand
affiliation. Additionally, the Company believes its access to capital will
provide it with a competitive advantage over other potential property acquirors
whose offers may be contingent upon obtaining the requisite financing. To
achieve a predictable return while maintaining a low risk profile, the Company
has developed the following acquisition criteria:
- INVEST IN MAJOR RESTAURANT BRANDS. The Company intends to continue to
acquire properties operated by competent, financially-stable multi-unit
restaurant operators, which properties are affiliated with major national
brands such as Burger King-Registered Trademark-, Arby's-Registered
Trademark-, Dairy Queen-Registered Trademark-, Pizza Hut-Registered
Trademark-, Chili's-Registered Trademark-and Schlotzsky's-Registered
Trademark- and regional brands such as Grandy's-Registered Trademark- and
Taco Cabana-Registered Trademark-. The Company believes that successful
restaurants operated under these types of brands will continue to offer
stable, consistent income to the Company with reduced risk of default or
non-renewal of the lease and franchise agreement. The Company's strategy
will continue to focus primarily on the acquisition of existing chain
restaurant properties that have a history of profitable operations with a
remaining term on the current lease of at least five years. The Company
believes that acquiring existing restaurant properties provides a higher
risk-adjusted rate of return to the Company than acquiring
newly-constructed restaurants.
- ACQUIRE PROPERTIES SUBJECT TO LONG-TERM LEASES. The Company has
historically acquired, and intends to continue to acquire, properties
subject to existing long-term leases. The average remaining lease term for
the Properties is over ten years. The Company believes that by having
long-term leases in place it avoids the risks associated with trying to
lease the property, including uncertainty as to lease rate and tenant
continuity.
- CONSOLIDATE SMALLER PORTFOLIOS. While the Company generally focuses its
acquisition efforts on the acquisition of single properties and smaller
portfolios in the $1 million to $10 million range, the Company also
pursues transactions involving portfolios of restaurant properties
(generally having a portfolio acquisition price in excess of $10 million).
These smaller portfolio transactions have historically resulted in a more
attractive valuation for the Company because the size of such transactions
generally does not attract competition from other large institutional
property owners. Buyers for these smaller portfolios typically are not
well capitalized and may be unable to compete
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for such transactions. Larger transactions involving multiple properties
generally attract several institutional bidders, often resulting in a
higher purchase price and lower investment returns to the purchaser. Since
January 1, 1996, the Company has closed 74 transactions involving the
acquisition of single properties with average acquisition prices of less
than $1 million and with an average acquisition capitalization rate of
between 11% and 14%. No assurance can be given, however, that future
acquisitions will achieve such capitalization rates. In certain
circumstances, however, the Company has identified, evaluated and pursued
portfolios valued at up to $50 million that present attractive risk/return
ratios.
- SELECTIVELY DEVELOP AS WELL AS ACQUIRE PROPERTIES. The Company has begun
to develop co-branded service centers, which combine a fast food
restaurant with a branded convenience store and filling station on one
prime retail site. The Company's general approach is to place under
contract or option a prime commercial parcel, obtain lease commitments
from restaurant and gas station/ convenience store operators, and then
supervise the construction of the facility. On September 28, 1997, the
Company opened its first co-branded service center in Fort Worth, Texas.
In addition, the Company currently has two co-branded service center
developments under construction which are expected to be completed during
1998. The Company believes that its development program may provide
investment yields in the range of 11% to 15%. The Company expects to
invest approximately $15 million to $20 million, which is approximately
10% to 12% of its total annual investment activity, in co-branded service
center development over the next 12 months. As an adjunct to this
business, the Company is exploring the acquisition of existing filling
stations with convenience stores. These properties do not currently have a
fast food restaurant but in some cases have the potential to add a fast
food restaurant.
INTERNAL GROWTH. The Company's goal of maximizing sustainable growth in FFO
is expected to be enhanced by its strategy to achieve internal growth from
several sources. A substantial number of the Company's leases contain annual
rent escalations that are either fixed (ranging from 2% to 3%) or indexed based
on a consumer price or other index. The Company will seek to include similar
escalation provisions in its future leases. The Company also seeks to include
percentage rent provisions in its leases. At September 30, 1997, 62% of the
Company's leases provided for percentage rent ranging from 2% to 11% of the
gross revenue generated by the tenant.
OPERATING STRATEGY. Management has endeavored to achieve a consistent
return by employing the strategies described above while at the same time
minimizing loss risk. The significant risk in the chain restaurant property
business falls into two categories: (i) default losses and/or (ii) non-renewal
of leases with accompanying declines in rent. The Company has collected in the
last three years, more than 99% of all rent due and, in the last 12 months, the
average remaining lease term on the Properties has increased from seven years to
more than ten years. These achievements are the result of the following
operating strategies which are designed to enhance the predictability and
sustainability of the Company's cash flow:
- RENT PAYMENT PROTECTION. The Company protects against loss of rent payment
by employing strict underwriting standards, such as rent coverage ratio
analysis, and including terms and conditions in its leases which
discourage non-payment, such as master leases covering multi-unit
operations, cross default provisions on other properties, non-access to
restaurant equipment and letter of credit and/ or personal guaranty
requirements.
- LEASE RENEWAL. The Company believes that the location of a restaurant is a
critical factor in a restaurant's success and that, as a result, its
tenants, in most cases, would experience a loss in the profitability of a
store and incur difficulty and cost in moving the store in the event of
non-renewal of the lease and, as a result, believes renewal of the lease,
on terms equal to or better than the existing terms, is more likely to
occur than the tenant vacating the space. Since May 1994, the Company has
renewed 15 of the 16 leases (representing 94% of such leases) that have
expired pursuant to their terms since that time. In addition, the Company
has implemented an early lease
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renewal program pursuant to which the Company offers remodeling financing
to tenants in consideration for renewing and restructuring existing
leases. The Company believes this program will help mitigate the risk of
non-renewals of leases and will enable the Company, where needed, to
restructure the leases to require the tenant to be responsible for all
costs associated with operating the property. The Company aggressively
pursues lease renewals to take advantage of this need by tenants for
stability and continuity. A total of 45 leases expiring over the next 11
years have been renewed.
- DIVERSIFICATION. The Company believes its income stream is further
protected through the diversification of the Properties by location, brand
affiliation and the large number of operators leasing the Properties. The
520 Properties are diversified geographically in 45 states, with no state,
except Texas (28%), accounting for a concentration of greater than 10% of
the Properties. The Company believes the geographic diversity provides the
Company with protection from downturns in local and regional economies.
Since May 1994, the Company has significantly expanded the number of its
brand affiliations. Of the 402 Properties acquired since May 1994, only 60
are Burger King-Registered Trademark-restaurants and the balance are
affiliated with other national and regional chain restaurants, such as
Arby's-Registered Trademark-, Hardee's-Registered Trademark-, Pizza
Hut-Registered Trademark-, Dairy Queen-Registered Trademark-,
Grandy's-Registered Trademark- and Chili's-Registered Trademark-.
Additionally, the Company has no tenant that accounts for greater than 15%
of the Company's gross revenues. As a result, the Company is not
materially dependent on any one operator or any small group of operators.
- ASSET MANAGEMENT. The Company analyzes each restaurant property within its
portfolio to identify opportunities to improve its return. Such
opportunities may include purchasing property adjacent to the current
property, working with existing tenants to improve the sales and
performance of their stores and in some cases providing remodeling
financing toward that end.
FINANCING STRATEGY. The Company utilizes the Existing Credit Facility
provided by Comerica Bank-Texas for short term financing of the acquisition of
additional restaurant properties. Borrowings under the Existing Credit Facility
currently bear interest at a rate of LIBOR plus 1.80% per annum. At September
30, 1997, $109.4 million was outstanding under the Existing Credit Facility. The
Company has entered into an agreement in principle with a major international
commercial bank to provide the Unsecured Credit Facility to replace the Existing
Credit Facility. The Company anticipates that the Unsecured Credit Facility will
bear interest at a rate of LIBOR plus 1.05% per annum. The Company may also
issue Common Stock or OP Units as consideration for future acquisitions. The
Company believes that its access to capital should provide it with a competitive
advantage in acquisitions over other bidders that qualify their bids with
financing or other contingencies.
The Company believes that it is best served by a conservative capital
structure with flexibility to access the capital markets when financial and
market conditions warrant. The Company's policy is to maintain a debt to total
market capitalization ratio (I.E., total consolidated debt of the Company as a
percentage of market value of its capital stock plus total consolidated debt;
for purposes of this calculation, the Series A Preferred Stock will be valued at
the greater of its liquidation preference or the market value of the Common
Stock into which it is convertible) of less than 50%. Upon completion of this
offering of Series A Preferred Stock and the application of the net proceeds
therefrom to repay outstanding borrowings under the Existing Credit Facility,
the Company's ratio of debt to total market capitalization is expected to be
approximately 23%.
MARKET AND INDUSTRY INFORMATION
The Company invests in properties on which fast food and casual dining
restaurants operate. These are primarily existing, seasoned operations using the
brand names of well known chain restaurants. The restaurant industry has grown
significantly over the past 20 years as a result of population growth, the
influence of the baby boom generation, the growth of two-income families and the
growth in consumers'
S-26
<PAGE>
disposable income. According to the National Restaurant Association, the food
service industry generated an estimated $308 billion of revenue representing
approximately 4.1% of the Gross Domestic Product during 1996. Total food service
industry sales during 1997 are estimated to be approximately $320 billion. The
fast food segment, which offers value pricing and convenience and represents
approximately 90% of the Properties, is the largest segment in the restaurant
industry with 1997 sales estimated to exceed $103 billion or 32% of the
industry's revenues. The growth of the fast food segment has exceeded that of
the entire restaurant industry for over 20 years. According to the National
Restaurant Association, sales at fast food restaurants are expected to outpace
the overall industry in 1997.
Demographic trends point toward an optimistic outlook for the food service
industry. According to the National Restaurant Association, the aging of the
baby boomers presents an opportunity for the industry, as people aged 45 to 54
generally have the highest incomes and spend the most money on food away from
home. Over the next several years, the 35 to 54 age group will experience an
income increase through wage increases and inheritances. Furthermore, the 15 to
24 age group will begin to expand again, reversing a ten-year decline. The
industry's product serves the dual income family particularly well. This group
craves the convenience due to their job demands and has the financial capacity
to buy meals outside the home. Families with two or more incomes represent over
70% of all family units; their real incomes have improved over the last 20 years
while single income families experienced an erosion in their earnings.
The Company believes that, in the fast food industry, operators are moving
toward leasing rather than owning their restaurants. Currently, approximately
two-thirds of fast food restaurant operators lease their restaurant properties.
Leasing enables a restaurant operator to reallocate funds to the improvement of
the restaurant, the acquisition of additional restaurants or other uses.
The Company believes that it competes with numerous other publicly-owned
entities, some of which dedicate substantially all of their assets and efforts
to acquiring, owning and managing chain restaurant properties. The Company also
competes with numerous private firms and individuals for the acquisition of
restaurant properties. In addition, there are a number of other publicly owned
entities that are dedicated to acquiring, owning and managing triple net lease
properties. The majority of chain restaurant properties is owned by restaurant
operators and real estate investors. Management believes, based on its industry
knowledge and experience, that this fragmented market provides the Company with
substantial acquisition opportunities. The Company also believes that the
inability of most small restaurant owners to obtain funds with which to compete
for acquisitions as timely and inexpensively as the Company provides the Company
with a competitive advantage when seeking to acquire a restaurant property.
The primary national and regional brands with which the Company is
affiliated are among the strongest in the country. The Company owns properties
operating under the Burger King-Registered Trademark-, Pizza Hut-Registered
Trademark-, Taco Bell-Registered Trademark-, Wendy's-Registered Trademark-,
Hardee's-Registered Trademark- and KFC-Registered Trademark- restaurant brands
which are six of the top ten domestic restaurant chains (based on estimated 1996
system wide sales) in the United States. In addition, the Company leases to
operators of restaurant chains falling in the top 20 domestic restaurant chains
such as
S-27
<PAGE>
Arby's-Registered Trademark-, Dairy Queen-Registered Trademark-,
Chili's-Registered Trademark- and Boston Market-Registered Trademark-. The
following table lists the top 20 domestic restaurant chains based on estimated
1996 system wide sales:
<TABLE>
<CAPTION>
# FRANCHISE UNITS
EST. 1996 -----------------
SYSTEM WIDE SALES
-----------------
(MILLIONS)
<S> <C> <C>
McDonald's........................................................ $ 16,370 10,232
Burger King....................................................... 7,548 6,409
Pizza Hut......................................................... 5,400 4,100
Taco Bell......................................................... 4,750 3,190
Wendy's........................................................... 4,237 3,125
Hardee's.......................................................... 4,127 2,502
KFC............................................................... 4,000 3,120
Subway............................................................ 2,700 10,848
Domino's Pizza.................................................... 2,115 3,700
Little Caesars Pizza.............................................. 2,075 3,175
Arby's............................................................ 1,913 2,461
Denny's........................................................... 1,884 677
Red Lobster....................................................... 1,760 --
Applebee's........................................................ 1,540 671
Olive Garden...................................................... 1,263 --
Dairy Queen....................................................... 1,240 5,053
Jack in the Box................................................... 1,229 365
Shoney's.......................................................... 1,196 300
TGI Friday's...................................................... 1,179 180
Boston Market..................................................... 1,167 982
</TABLE>
USE OF PROCEEDS
The net proceeds of the Company from this offering, after all anticipated
issuance costs, are expected to be approximately $76.3 million (approximately
$87.8 million if the Underwriter's over-allotment option is exercised in full).
The Company will use the net proceeds from this offering to reduce borrowings
under the Existing Credit Facility, which were used to fund the acquisition and
development of additional chain restaurant properties. The Existing Credit
Facility bears interest at LIBOR plus 1.80% per annum and matures in 1999.
S-28
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1997 (i) on a pro forma basis to reflect: (a) the acquisition of 65
Properties, eight newly constructed properties and five undeveloped parcels of
land and the financing transactions related thereto; (b) the disposition of
three Properties; and (c) the completion of the Conversion, and (ii) on a pro
forma basis, as adjusted to reflect the application of the net proceeds received
by the Company from this offering of shares Series A Preferred Stock. The
information presented below should be read in conjunction with the Pro Forma
Balance Sheet of the Company (and the accompanying note disclosures thereto)
included elsewhere in this Prospectus Supplement.
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA AS ADJUSTED
---------- -----------
UNAUDITED
(IN THOUSANDS, EXCEPT
FOR UNIT/SHARE DATA)
<S> <C> <C>
Debt:
Notes payable............................................................................ $ 40,000 $ 40,000
Credit facilities........................................................................ 133,358 57,038
Obligations under capitalized leases..................................................... 263 263
Stockholders' equity:
Common stock, $.001 par value, 100,000,000 authorized, 13,808,031 issued and
outstanding(1)......................................................................... -- 3
Preferred stock, $.001 par value, 50,000,000 authorized, none outstanding; 3,200,000
shares of Series A Cumulative Convertible Preferred Stock, $25.00
per share liquidation preference, issued and outstanding as adjusted................... 14 14
Additional paid-in capital............................................................... 140,227 216,544
Accumuated earnings (deficit)(2)......................................................... (23,132) (23,132)
---------- -----------
Total stockholders' equity............................................................. 117,109 193,429
---------- -----------
Total capitalization....................................................................... $ 290,730 $ 290,730
---------- -----------
---------- -----------
</TABLE>
- --------------------------
(1) Includes shares of Common Stock reserved for issuance upon exchange of
1,148,420 outstanding OP Units, representing the aggregate minority interest
in the Operating Partnership. Excludes 420,000 shares of Common Stock
issuable upon exercise of options held by the General Partner.
(2) Reflects the cost of QSV's interests in USRP and the Operating Partnership
of $23,132.
S-29
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL
INFORMATION AND OTHER DATA
The following pro forma and historical information should be read in
conjunction with the consolidated financial statements and notes thereto of USRP
included elsewhere in this Prospectus Supplement and incorporated by reference
in the Prospectus and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained elsewhere in this Prospectus
Supplement. The pro forma consolidated financial statements are not necessarily
indicative of what the Company's financial position or results of operations
would have been had the transactions described below occurred on the assumed
dates. Such financial statements also do not purport to represent the future
financial position or results of operations of the Company.
The attached pro forma consolidated financial statements have been prepared
based upon the consolidated operations of the Company, including USRP, the
Operating Partnership and other majority owned entities (USRP and other majority
owned entities, collectively, the "Partnerships"), and adjusted to reflect the
effects of this offering, as if the Conversion and this offering had both
occurred on the first day of the period indicated. The basis for the
consolidation is because USRP Managing, a wholly-owned subsidiary of the
Company, became the general partner of the Partnerships on October 15, 1997 and
has complete control over the Partnerships through its right to make major
decisions such as the acquisition, sale, financing or refinancing of principal
partnership assets, issuance of debt or equity securities, declaration and
payment of dividends or distributions and all other business matters. Historical
and pro forma weighted average number of Shares/Units outstanding and net income
per Share/Unit have been further adjusted to reflect the impact of a
three-for-two split of the Common Stock.
S-30
<PAGE>
U.S. RESTAURANT PROPERTIES, INC.
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
AND OTHER DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
COMPANY
USRP(1) ---------------
---------------------------------------------- PRO FORMA
1992 1993 1994 1995 1996 1996 (2)
------- ------- ------- -------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE/UNIT AMOUNTS)
STATEMENT OF INCOME:
Total revenues.................................... $ 8,489 $ 8,332 $ 8,793 $ 9,780 $ 18,324 $ 42,651
Expenses:
Rent............................................ 1,187 1,295 1,348 1,405 2,080 2,523
Depreciation and amortization................... 1,473 1,383 1,361 1,541 3,978 10,879
Taxes, general and administrative............... 1,097 1,008 1,144 1,419 2,461 2,070
Interest expense (income), net.................. 60 44 (4) 192 2,364 7,035
Provision for write down or disposition of
properties.................................... 2,186 74 11 -- -- --
------- ------- ------- -------- --------- ---------------
Total expenses.................................... 6,003 3,804 3,860 4,557 10,883 22,507
------- ------- ------- -------- --------- ---------------
Net income before unusual items................... 2,486 4,528 4,933 5,223 7,441 20,144
REIT Conversion Costs.............................
Gain on Sale of equipment and properties.......... -- -- -- -- 32 32
------- ------- ------- -------- --------- ---------------
Net income........................................ $ 2,486 $ 4,528 $ 4,933 $ 5,223 $ 7,473 $ 20,176
------- ------- ------- -------- --------- ---------------
Net income allocable to Unitholders............... $ 2,436 $ 4,437 $ 4,834 $ 5,119 $ 7,325 $ 14,576
Net income per Share/Unit (3)..................... $ 0.35 $ 0.64 $ 0.70 $ 0.74 $ 0.80 $ 1.04
Weighted average number of Shares/ Units
outstanding (3)................................. 6,953 6,953 6,953 6,957 9,161 13,956
BALANCE SHEET DATA:
Net investment in direct financing leases......... $24,760 $22,910 $21,237 $ 19,371 $ 17,105 N/A
Land.............................................. 23,816 23,414 23,414 27,493 61,340 N/A
Buildings and leasehold improvements, net......... 1,919 1,734 1,548 7,900 75,339 N/A
Equipment......................................... -- -- -- 224 2,980 N/A
Intangibles, net.................................. 17,123 15,503 14,317 13,161 12,263 N/A
Total assets...................................... 69,087 65,322 62,889 71,483 177,418 N/A
Line of credit and long term debt................. -- -- -- 10,931 69,486 N/A
Capitalized lease obligations..................... 1,138 966 775 563 362 N/A
General partners' capital......................... 1,429 1,357 1,308 1,241 1,163 N/A
Limited partners' capital......................... 66,287 62,757 60,361 58,071 103,120 N/A
Stockholders' equity.............................. N/A N/A N/A N/A N/A N/A
OTHER DATA:
Funds From Operations (4)......................... $ 7,045 $ 7,119 $ 7,638 $ 8,260 $ 13,033 $ 27,267
Cash distributions declared per Unit applicable to
respective period............................... $ 1.03 $ 0.99 $ 1.07 $ 1.14 $ 1.29 N/A
Cash flow from operating activities............... $ 7,366 $ 7,475 $ 6,990 $ 9,288 $ 13,852 $ 33,006
Cash flow from (used in) investing activities..... $ -- $ 1,130 $ -- $(12,039) $(100,978) $(210,338)
Cash flow from (used in) financing activities..... $(7,542) $(8,302) $(7,569) $ 2,077 $ 87,500 $193,737
Number of Properties.............................. 125 123 123 139 322 527
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------
COMPANY
USRP(1) ---------------
------------------ PRO FORMA
1996 1997 1997 (2)
-------- -------- ---------------
<S> <C> <C> <C>
STATEMENT OF INCOME:
Total revenues.................................... $ 7,264 $ 14,544 $ 20,995
Expenses:
Rent............................................ 897 1,189 1,294
Depreciation and amortization................... 1,375 3,366 5,255
Taxes, general and administrative............... 851 1,987 1,289
Interest expense (income), net.................. 957 3,425 3,517
Provision for write down or disposition of
properties.................................... -- -- --
-------- -------- ---------------
Total expenses.................................... 4,080 9,967 11,355
-------- -------- ---------------
Net income before unusual items................... 3,184 4,577 9,640
REIT Conversion Costs............................. (744)
Gain on Sale of equipment and properties.......... -- 266 266
-------- -------- ---------------
Net income........................................ $ 3,184 $ 4,099 $ 9,906
-------- -------- ---------------
Net income allocable to Unitholders............... $ 3,121 $ 4,018 $ 7,106
Net income per Share/Unit (3)..................... $ 0.40 $ 0.36 $ 0.51
Weighted average number of Shares/ Units
outstanding (3)................................. 7,814 11,114 14,046
BALANCE SHEET DATA:
Net investment in direct financing leases......... $ 18,144 $ 15,679 $ 15,488
Land.............................................. 39,806 78,679 94,480
Buildings and leasehold improvements, net......... 61,070 139,298 173,987
Equipment......................................... 2,911 3,743 4,052
Intangibles, net.................................. 14,489 12,116 12,208
Total assets...................................... 141,968 261,515 318,626
Line of credit and long term debt................. 35,065 132,313 97,038
Capitalized lease obligations..................... 458 263 263
General partners' capital......................... 1,212 1,093 N/A
Limited partners' capital......................... 103,453 123,995 N/A
Stockholders' equity.............................. N/A N/A 216,561
OTHER DATA:
Funds From Operations (4)......................... $ 5,322 $ 8,823 $ 13,129
Cash distributions declared per Unit applicable to
respective period............................... $ 0.63 $ 0.69 N/A
Cash flow from operating activities............... $ 5,555 $ 7,693 $ 16,179
Cash flow from (used in) investing activities..... $(64,973) $(81,683) $(128,176)
Cash flow from (used in) financing activities..... $ 59,425 $ 75,386 $ 121,090
Number of Properties.............................. 264 452 527
</TABLE>
- ------------------------------
(1) The historical information for the years ended December 31, 1992, 1993,
1994, 1995 and 1996 was derived from USRP's audited consolidated financial
statements. USRP's audited consolidated financial statements as of December
31, 1995 and 1996 and for each of the three years in the period ended
December 31, 1996, and unaudited consolidated financial statements as of
June 30, 1997 and for the six months ended June 30, 1996 and 1997 are
included elsewhere in this Prospectus Supplement or are incorporated by
reference in the Prospectus and the Company's pro forma financial statements
for the year ended December 31, 1996 and the six months ended June 30, 1997
are included elsewhere in this Prospectus Supplement.
S-31
<PAGE>
(2) The pro forma condensed balance sheet as of June 30, 1997 is based on the
Company's unaudited balance sheet as of June 30, 1997, as adjusted to
reflect certain property acquisitions and dispositions and property mortgage
receivables, increase in debt, issuances of shares and other transactions
associated with the recent conversion of the Company into a REIT and this
offering. The pro forma condensed consolidated statement of income for the
six months ended June 30, 1997 is based on the Company's unaudited statement
of income for that period, as adjusted to reflect as of January 1, 1997
certain property acquisitions and dispositions and property mortgage
receivables, increase in debt, issuances of shares and the transactions
associated with the recent conversion of the Company into a REIT and this
offering. The pro forma condensed consolidated statements of income for the
year ended December 31, 1996 is based on the Company's audited statement of
income, for that period, as adjusted to reflect certain property
acquisitions and dispositions and property mortgage receivables, increase in
debt, issuances of shares and other transactions associated with the recent
conversion of the Company into a REIT and this offering.
(3) Historical and pro forma weighted average number of Shares/Units outstanding
and net income per Share/Unit have been adjusted to reflect the
three-for-two split of the Common Stock.
(4) The White Paper defines FFO as net income (loss) (computed in accordance
with GAAP), excluding gains (or losses) from debt restructuring and sales of
property, plus real estate related depreciation and amortization and unusual
and non-recurring items and after adjustments for unconsolidated
partnerships and joint ventures. The Company believes FFO is helpful to
investors as a measure of the performance of an equity REIT because, along
with cash flows from operating, financing and investing activities, it
provides investors with an understanding of the ability of the Company to
incur and service debt and make capital expenditures. The Company computes
FFO in accordance with the standards established by the White Paper, which
may differ from the methodology for calculating FFO utilized by other equity
REITs, and, accordingly, may not be comparable to such other REITs. The
White Paper, however, does not address the treatment of direct financing
leases, and the Company has interpreted the definition of FFO to permit
excluding the effects of such leases from the calculation of FFO.
Additionally, for the years ended December 31, 1992, 1993, 1994, 1995 and
1996 and for the six month periods ended June 30, 1996 and 1997, the
Company's calculation of FFO excluded the effects of distributions made to
the general partner of USRP and the Operating Partnership. Further, FFO does
not represent amounts available for management's discretionary use because
of needed capital replacement or expansion, debt service obligations, or
other commitments and uncertainties. FFO should not be considered as an
alternative to net income (determined in accordance with GAAP) as an
indication of the Company's financial performance or to cash flows from
operating activities (determined in accordance with GAAP) as a measure of
the Company's liquidity, nor is it indicative of funds available to fund the
Company's cash needs, including its ability to make distribution.
S-32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
The following discussion should be read in conjunction with "Selected
Historical and Pro Forma Financial Information and Other Data" and the condensed
consolidated financial statements and notes thereto included herein and
incorporated by reference in the Prospectus.
The Company derives its revenue from the leasing of its Properties to
restaurant operators on a "triple net" basis. Triple net leases typically
require the tenants to be responsible for property operating costs, including
property taxes, insurance and maintenance. A majority of the Company's leases
provides for a base rent plus a percentage of the restaurant's sales in excess
of a threshold amount. As a result, a portion of the Company's revenues is a
function of the number of restaurants in operation and their level of sales.
Sales at individual restaurants are influenced by local market conditions, by
the efforts of specific restaurant operators, by marketing, by new product
programs, support by the franchisor and by the general state of the economy.
On October 15, 1997, the Company effected the Conversion of USRP into a
self-administered and self-managed REIT. As a result of the Conversion, the
Company expects to realize reductions in general and administrative expenses
arising from the termination of the management fee previously payable to QSV as
general partner of each of USRP and the Operating Partnership. The Company also
believes the Conversion will provide the Company greater access to the equity
and debt capital markets, thereby permitting the Company to more easily raise
capital at lower costs in order to facilitate future growth. See
"Summary--Recent Developments."
RESULTS OF OPERATIONS
The results of operations of the Company, together with its predecessors,
for the periods discussed below have been affected by the growth in the total
number of Properties owned by the Company, as well as by increases in rental
income across the portfolio, over such time periods. The following discussion
considers the specific impact of such factors on the results of operations of
the Company for the following periods.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1997 TO THE SIX MONTHS ENDED JUNE
30, 1996
The Company owned 322 Properties prior to January 1, 1997. The Company
acquired 131 Properties from January 1, 1997 to June 30, 1997, the operations of
which are included in the periods presented from their respective dates of
acquisition.
Revenues in the six months ended June 30, 1997 totaled $14,544,000, an
increase of 100% when compared to the six months ended June 30, 1996. The
increase was due primarily to increases in the number of Properties owned during
this period as compared to the same period in 1996. Through June 30, 1997,
approximately 20% of the Company's rental revenues resulted from percentage
rents, down from 33% for the year ended December 31, 1996. Thus, during the six
months ended June 30, 1997, the impact of fluctuations in restaurant sales had a
diminishing impact on total rental revenues.
General and administrative expenses for the six months ended June 30, 1997
totaled $1,987,000, an increase of 133% when compared to the six months ended
June 30, 1996. The increase was a result of the costs of the increased
infrastructure, including additional employees, required by the Company to
manage and maintain the Company's rate of growth, as well the increased
management fee payable to the general partner of USRP and the Operating
Partnership as a result of increased acquisitions. Rent expense for the six
months ended June 30, 1997 totaled $1,189,000, an increase of 33% when compared
to the six months ended June 30, 1996. The increase in rent expense directly
correlates to the property acquisitions.
Interest expense, net of interest income, totaled $3,425,000, an increase of
258%, when compared to the six months ended June 30, 1996. The increase in
interest expense directly correlates to the additional property debt associated
with the acquisitions.
S-33
<PAGE>
Depreciation and amortization expenses in the six months ended June 30, 1997
totaled $3,366,000, an increase of 145% when compared to the six months ended
June 30, 1996.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1996 TO THE YEAR ENDED DECEMBER 31,
1995
The Company owned 139 Properties prior to January 1, 1996. The Company
acquired 184 Properties from January 1, 1996 to December 31, 1996, the
operations of which are included in the periods presented from their respective
dates of acquisition.
Revenues in 1996 totaled $18,324,000, an increase of 87% when compared to
1995. The increase in revenues was primarily due to the acquisition of 184
restaurant properties in 1996. The comparable store sales relate primarily to
the original portfolio of Burger King-Registered Trademark- restaurants owned by
the Company at the time current management assumed control of the Company.
Revenues from these and other properties are in the form of minimum base rents
as well as percentage rents that are paid based on the actual sales of each
restaurant property.
Taxes, general and administrative expenses for 1996 totaled $2,461,000, an
increase of 73% when compared to 1995. An increase in the management fee of
$585,000 and expenses that directly correspond to the active growth of the
Company were the primary reasons for increased general and administrative
expenses for the year ended December 31, 1996 as compared to December 31, 1995.
Rent expenses for 1996 totaled $2,080,000, an increase of 48% when compared to
1995. The increase in rent expense directly correlates to the property
acquisitions. Further, 27 of the 200 Properties purchased in 1995 and 1996 were
leasehold properties.
Interest expense, net of interest income, increased from $192,000 in 1995 to
$2,364,000 in 1996. The increase in interest expense directly correlates to the
additional property debt associated with the acquisitions.
Depreciation and amortization expenses totaled $3,978,000 in 1996, an
increase of 158% when compared to 1995. This increase directly correlates to the
property acquisitions in 1996.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1995 TO THE YEAR ENDED DECEMBER 31,
1994
The Company owned 123 Properties prior to January 1, 1995. The Company
acquired 16 Properties from January 1, 1995 to December 31, 1995, the operations
of which are included in the periods presented from their respective dates of
acquisition.
Revenues in 1995 totaled $9,780,000, an increase of 11% when compared to
1994. The increase in revenues was primarily due to the acquisition of 16
restaurant properties through 1996. In 1995, unlike in 1996, the straight-lining
of rents did not apply. Total comparable sales in the restaurants located on the
Company's real estate were $129,100,000, an increase of 7% when compared to
1994. The comparable store sales relate solely to the original Burger King
portfolio.
Taxes, general and administrative expenses for 1995 totaled $1,419,000, an
increase of 24% when compared to 1994. An increase in the management fee of
$42,000 and expenses that directly correspond to the active growth of the
Company were the primary reason for the increase in general and administrative
expenses for the year ended December 31, 1995 as compared to December 31, 1994.
Rent expenses for 1995 totaled $1,405,000, an increase of 4% when compared to
1994. The increase in rent expense directly correlates to the property
acquisitions.
Interest expense, net of interest income, totaled $192,000 in 1995. No
amounts were borrowed in 1994.
Depreciation and amortization expenses totaled $1,541,000, an increase of
13% when compared to 1994. This increase directly correlates to the property
acquisitions in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are net cash provided by (i)
operations, primarily rental revenues generated from its real property
investments and (ii) financing activities. Cash generated by
S-34
<PAGE>
operations in excess of operating needs is used to reduce amounts outstanding
under the Company's credit facilities instruments and to cover payments of
quarterly distributions to stockholders. Currently, the Company's primary source
of funding for acquisitions is the Existing Credit Facility.
The Company requires cash in the short-term to make distributions to
stockholders, to fund limited capital expenditures relating to the improvement
of Properties and tenant improvements. The Company expects to meet its
short-term cash needs through undistributed net cash provided by operations and
its initial working capital reserves. Capital expenditures aggregating
approximately $500,000 are budgeted for the year ended December 31, 1998.
The Company's long-term cash needs include funds for property acquisitions,
scheduled debt maturities and renovations of Properties and other non-recurring
capital improvements. The Company anticipates meeting its future long-term
capital needs through the incurrence of additional debt financing secured by
individual properties or groups of properties, by unsecured private or public
debt offerings or by additional equity offerings, along with cash generated from
internal operations. The Company intends to incur additional borrowings for such
purposes in a manner consistent with its policy of maintaining a conservative
ratio of debt to total market capitalization of less than 50%.
As of September 30, 1997, the Company had approximately $109.4 million
outstanding under its Existing Credit Facility. The Company may request advances
under the Existing Credit Facility to finance the acquisition and/or development
of restaurant properties, to redevelop restaurant properties and for working
capital. The Existing Credit Facility expires on December 28, 1998 and provides
that borrowings thereunder bear interest at LIBOR plus 1.80% per annum. Interest
expense, net of interest income, for 1996 and 1995 equaled $2,364,000 and
$192,000, respectively. At present, the Company has $40 million of senior
secured guaranteed notes outstanding, consisting of a $12.5 million tranche
maturing on January 31, 2000 and a second $27.5 million tranche maturing on
January 31, 2002. As a result of the receipt of its investment grade debt
rating, the Company has initiated the procedures necessary to change these notes
from secured to unsecured status. On August 15, 1997, a wholly-owned subsidiary
of the Company entered into the Pacific Mutual Facility which is secured by the
Pledged Shares. At September 30, 1997, the amount due under the Pacific Mutual
Facility was $20 million. On October 15, 1997, a wholly-owned subsidiary of the
Company entered into a short term $20 million acquisition facility (the
"Acquisition Facility") with PW Real Estate Investments Inc., an affiliate of
PaineWebber Incorporated, which is secured by a first mortgage on each of the
properties acquired with the Acquisition Facility and by 1,725,997 shares of
Common Stock currently owned by such borrower subsidiary of the Company. The
Acquisition Facility provides that borrowings thereunder bear interest at LIBOR
plus 2.30% per annum. At October 30, 1997, no amounts were outstanding under the
Acquisition Facility. It is expected that the Acquisition Facility will be
terminated upon the closing of this offering of the Series A Preferred Stock.
The Company has entered into an agreement in principle with a major
international commercial bank to provide a $175 million Unsecured Credit
Facility. The Company anticipates that following this offering the Unsecured
Credit Facility will bear interest at a rate of LIBOR plus 1.05% per annum. The
Unsecured Credit Facility will replace the Existing Credit Facility.
The Company believes that it will have sufficient capital resources to
satisfy its obligations during the 12-month period following completion of this
offering. Thereafter, the Company expects that future capital needs, including
property acquisitions, will be met through a combination of net cash provided by
operations, borrowings and additional equity issuances.
The Company paid distributions of $1.29 per share, and of $0.69 per share
for the year ended December 31, 1996 and the six months ended June 30, 1997,
respectively. In order to qualify as a REIT, the Company must make annual
distributions to stockholders of at least 95% of its REIT taxable income. Future
distributions by the Company will be at the discretion of the Board and will
depend on actual results of operations, the financial condition of the Company,
capital requirements or other factors management deems relevant. During 1996,
the Company made distributions in an aggregate amount of $11,166,000.
S-35
<PAGE>
FUNDS FROM OPERATIONS
FFO is computed as net income (loss) (computed in accordance with GAAP),
excluding the effects of direct financing leases and gains and losses from debt
restructuring and sales of property, plus real estate related depreciation and
amortization and the deduction of preferred stock dividends. The Company
believes FFO is helpful to investors as a measure of the performance of an
equity REIT because, along with cash flow from operating, financing and
investing activities, it provides investors with an understanding of the ability
of the Company to incur and service debt, and make capital expenditures. The
Company computes FFO in accordance with standards (see table and footnote below)
which may differ from the methodology for calculating FFO utilized by other
equity REITs, and accordingly, may not be comparable to such other REITs.
Further, FFO does not represent amounts available for management's discretionary
use because of needed capital replacement or expansion, debt service
obligations, or other commitments and uncertainties. FFO should not be
considered as an alternative to net income (determined in accordance with GAAP)
as an indication of the Company's financial performance or to cash flow from
operating activities (determined in accordance with GAAP) as a measure of the
Company's liquidity, nor is it indicative of funds available to fund the
Company's cash needs, including its ability to make cash distributions.
On a pro forma basis after giving effect to this offering and other
adjustments included in the pro forma financial statements, FFO for the year
ended December 31, 1996, and for the six months ended June 30, 1997,
respectively, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997(1)
----------------- -----------------
<S> <C> <C>
Net Income.............................................. $ 20,176 $ 9,906
Add:
Direct financing lease principal payments............. 2,041 1,130
Capital leases........................................ (201) (99)
Depreciation and amortization......................... 10,883 5,258
Gain on sale of properties............................ (32) (266)
Preferred Dividends................................... (5,600) (2,800)
------- -------
Funds from Operations................................... $ 27,267 $ 13,129
------- -------
------- -------
Weighted Average Shares/Units Outstanding............... 13,956 14,046
</TABLE>
- ------------------------
(1) FFO for the six months ended June 30, 1997 has been adjusted to exclude
unusual one-time costs associated with the Company's conversion to a REIT.
INFLATION
Some of the Company's leases are subject to adjustments for increases in the
Consumer Price Index, which reduces the risk to the Company of the adverse
effects of inflation. Additionally, to the extent inflation increases sales
volume, percentage rents may tend to offset the effects of inflation on the
Company. Because triple net leases typically require the restaurant operators to
be responsible for property operating costs, including property taxes, insurance
and maintenance, some or all of the inflationary impact of these expenses will
be borne by the restaurant operators and not by the Company.
Operators of restaurants, in general, possess the ability to adjust menu
prices quickly. However, competitive pressures may limit a restaurant operator's
ability to raise prices in the face of inflation.
SEASONALITY
Fast food restaurant operations historically have been seasonal in nature,
reflecting higher unit sales during the second and third quarters due to warmer
weather and increased leisure travel. This seasonality can be expected to cause
fluctuations in the Company's quarterly unit revenue to the extent it receives
percentage rent.
S-36
<PAGE>
BUSINESS AND PROPERTIES
GENERAL
The Company acquires, owns, manages and selectively develops restaurant
properties that it leases on a triple net basis primarily to operators of fast
food and casual dining chain restaurants affiliated with national brands such as
Burger King-Registered Trademark-, Arby's-Registered Trademark-, Dairy
Queen-Registered Trademark-, Chili's-Registered Trademark-, Pizza Hut-Registered
Trademark- and Schlotzsky's-Registered Trademark-and regional brands such as
Grandy's-Registered Trademark- and Taco Cabana-Registered Trademark-. During the
first year following acquisition by the Company, the Properties have
historically provided the Company with an aggregate first year return on total
investment in excess of 11%. Management believes that the long-term, triple net
structure of its leases results in a more predictable and sustainable income
stream than other forms of real estate investments.
THE PROPERTIES
As of September 30, 1997, the Company owned 520 Properties, including 181
Burger King-Registered Trademark-Properties (out of approximately 6,409 U.S.
locations), 77 Arby's-Registered Trademark- Properties (out of approximately
2,890 U.S. locations), 41 Dairy Queen-Registered Trademark- Properties (out of
approximately 6,000 U.S. locations), 28 Hardee's-Registered Trademark-Properties
(out of approximately 2,308 U.S. locations), 23 Pizza Hut-Registered Trademark-
Properties (out of approximately 9,566 U.S. locations), 18
Schlotzsky's-Registered Trademark- Properties (out of approximately 560 U.S.
locations) and eight Chili's-Registered Trademark- Properties (out of
approximately 108 U.S. locations). The Properties are diversified geographically
in 45 states, with no state, except Texas (28%), accounting for greater than 10%
of the Properties. Of the 520 Properties, over 99% were leased on a triple net
basis as of September 30, 1997.
The following table sets forth certain state-by-state information regarding
the Properties owned by the Company as of September 30, 1997.
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF ANNUALIZED TOTAL ANNUALIZED
STATE PROPERTIES PERCENT LEASED BASE RENT(1) BASE RENT
- ----------------------------------------------------- ------------- ----------------- ------------- -----------------
<S> <C> <C> <C> <C>
Alabama.............................................. 3 100% $ 148,011 0.4%
Arizona.............................................. 15 100 953,671 2.7
Arkansas............................................. 8 100 901,014 2.5
California........................................... 17 100 1,212,251 3.4
Colorado............................................. 8 100 382,131 1.1
Connecticut.......................................... 3 100 249,144 0.7
Florida.............................................. 30 100 2,486,615 7.0
Georgia.............................................. 32 100 2,742,258 7.7
Idaho................................................ 1 100 129,105 0.4
Illinois............................................. 10 100 759,842 2.1
Indiana.............................................. 11 82 653,879 1.8
Iowa................................................. 8 100 686,820 1.9
Kansas............................................... 2 50(2) 63,139 0.2
Kentucky............................................. 3 100 185,440 0.5
Louisiana............................................ 3 100 66,625 0.2
Maine................................................ 4 100 244,078 0.7
Maryland............................................. 3 100 156,376 0.4
Massachusetts........................................ 4 100 346,577 1.0
Michigan............................................. 30 100 1,855,389 5.2
Minnesota............................................ 16 100 1,034,961 2.9
Mississippi.......................................... 2 100 128,525 0.4
Missouri............................................. 8 88 613,436 1.7
Montana.............................................. 1 100 43,164 0.1
Nebraska............................................. 2 100% $ 199,628 0.6%
</TABLE>
S-37
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF ANNUALIZED TOTAL ANNUALIZED
STATE PROPERTIES PERCENT LEASED BASE RENT(1) BASE RENT
- ----------------------------------------------------- ------------- ----------------- ------------- -----------------
<S> <C> <C> <C> <C>
Nevada............................................... 1 100 65,835 0.2
New Jersey........................................... 4 100 291,303 0.8
New Mexico........................................... 4 100 420,654 1.2
New York............................................. 35 97 2,715,708 7.6
North Carolina....................................... 18 100 1,493,695 4.2
North Dakota......................................... 1 100 50,268 0.1
Ohio................................................. 8 100 561,833 1.6
Oklahoma............................................. 15 100 1,101,349 3.1
Oregon............................................... 5 100 339,191 0.9
Pennsylvania......................................... 19 100 1,261,807 3.5
South Carolina....................................... 10 100 644,211 1.8
South Dakota......................................... 1 100 35,196 0.1
Tennessee............................................ 8 100 455,269 1.3
Texas................................................ 145 100 8,613,140 24.1
Utah................................................. 1 100 189,355 0.5
Vermont.............................................. 1 100 65,974 0.2
Virginia............................................. 1 100 12,275 0.0
Washington........................................... 7 100 504,798 1.4
West Virginia........................................ 3 100 135,804 0.4
Wisconsin............................................ 8 100 396,171 1.1
Wyoming.............................................. 1 100 121,064 0.3
--- --- ------------- -----
Total/Average...................................... 520 99% $ 35,716,979 100.0%
--- --- ------------- -----
--- --- ------------- -----
</TABLE>
- ------------------------------
(1) Annualized base rent was calculated by multiplying the monthly contractual
base rent as of October 1, 1997 for each of the Properties by 12. Annualized
base rent does not include percentage rents, if any, that may be payable
under leases covering certain of the Properties, or other adjustments to
base rent required by GAAP.
(2) One Property, located in Manhattan, Kansas, is currently being redeveloped
as a Schlotzsky's-Registered Trademark- and is expected to re-open in early
1998.
Set forth below is a list by state of all 520 Properties owned by the Company as
of September 30, 1997:
<TABLE>
<CAPTION>
YEAR OF
BRAND ADDRESS CITY STATE ACQUISITION
- ------------------------- ---------------------------------------- ------------------------ --------- ----------
<S> <C> <C> <C> <C>
ALABAMA--3 PROPERTIES
Burger King.............. Highway 31 Pelham AL 1996
Hardee's................. 701 Gilmer Avenue Lanett AL 1996
Pizza Hut................ 3450 Demetropolis Road Mobile AL 1997
ARKANSAS--8 PROPERTIES
Burger King.............. 1715 Northwest Avenue El Dorado AR 1986
Burger King.............. 403 East Broadway Street Little Rock AR 1986
Burger King.............. 2306 Highway 7 North Russelville AR 1986
Burger King.............. 3712 Central Hot Springs AR 1996
Burger King.............. 790 Cash Road Camden AR 1995
Burger King.............. 1114 East Main Street Magnolia AR 1995
Chili's.................. 772 East Millsap Street Fayetteville AR 1996
El Chico................. 300 Realtor Road Texarkana AR 1997
</TABLE>
S-38
<PAGE>
<TABLE>
<CAPTION>
YEAR OF
BRAND ADDRESS CITY STATE ACQUISITION
- ------------------------- ---------------------------------------- ------------------------ --------- ----------
<S> <C> <C> <C> <C>
ARIZONA--15 PROPERTIES
Burger King.............. 3520 East Santa Fe Avenue Flagstaff AZ 1986
Burger King.............. 1005 North Campbell Avenue Tucson AZ 1986
Burger King.............. 871 West St. Mary's Road Tucson AZ 1986
Burger King.............. Highway 66, West & Hipkoe Winslow AZ 1986
Burger King.............. 2710 Grand Avenue Phoenix AZ 1986
Burger King.............. 2530 North Central Avenue Phoenix AZ 1986
Burger King.............. 1751 Highway 95, Suite 15 Riviera AZ 1986
Burger King.............. U.S. Highway 60 Globe AZ 1986
Burger King.............. 301 South Beeline Highway Payson AZ 1986
Burger King.............. 7025 North 7th Street Phoenix AZ 1996
Burger King.............. 1763 East Prince Road Tucson AZ 1996
Burger King.............. 5850 West Camelback Road Glendale AZ 1996
Burger King.............. 10 North Wilmot Road Tucson AZ 1986
Pizza Hut................ 2945 North 24th Street Phoenix AZ 1996
Schlotzsky's............. 3426 West Greenway Road Phoenix AZ 1997
CALIFORNIA--17 PROPERTIES
Burger King.............. 9313 Mira Mesa Boulevard San Diego CA 1986
Burger King.............. 20673 Tracy Avenue Buttonwillow CA 1986
Burger King.............. 785 North Main Street Bishop CA 1986
Burger King.............. 962 East Avenue Chico CA 1986
Burger King.............. 1104 West 2nd Street Chico CA 1986
Burger King.............. 5400 Ygnacio Valley Road Concord CA 1986
Burger King.............. 72327 Baker Highway Baker CA 1986
Burger King.............. 2817 South El Camino Real San Mateo CA 1986
Burger King.............. 170 West El Monte Way Dinuba CA 1986
Burger King.............. 15165 Lake Shore Drive Clearlake Highland CA 1986
Burger King.............. 24966 Sunnymead Boulevard Moreno Valley CA 1986
Burger King.............. 760 South Main Street Fort Bragg CA 1986
Burger King.............. 1320 Industrial Park Avenue Redlands CA 1996
Burger King.............. 1427 Herndon Avenue Ceres CA 1996
Burger King.............. 2734 North Tustin Avenue Orange CA 1996
Jose's Mexican........... 950 South East Street San Bernardino CA 1986
Puerta Vallarta.......... 745 East Foothill Boulevard Rialto CA 1986
COLORADO--8 PROPERTIES
Burger King.............. 1727 East Platte Avenue Colorado Springs CO 1986
Burger King.............. 1505 East Bridge Street Brighton CO 1986
Burger King.............. 880 Kinner Street Castle Rock CO 1986
Le Peep.................. 990 West Hampton Avenue Englewood CO 1997
Schlotzsky's............. 1250 South Hover Longmont CO 1997
Schlotzsky's............. 1510 West Eisenhower Boulevard Loveland CO 1997
Schlotzsky's............. Highway 83 & Razorback Drive Colorado Springs CO 1997
Wendy's.................. 9200 East Arapaho Road Greenwood CO 1997
</TABLE>
S-39
<PAGE>
<TABLE>
<CAPTION>
YEAR OF
BRAND ADDRESS CITY STATE ACQUISITION
- ------------------------- ---------------------------------------- ------------------------ --------- ----------
<S> <C> <C> <C> <C>
CONNECTICUT--3 PROPERTIES
Burger King.............. 575 Connecticut Avenue Norwalk CT 1986
Burger King.............. 130 Main Street Middletown CT 1986
Burger King.............. 340 Hartford Turnpike Vernon CT 1996
FLORIDA--30 PROPERTIES
Ale House................ 7379 West Colonial Drive Orlando FL 1997
Ale House................ 1667 Florida Mall Avenue Orlando FL 1997
Arby's................... 843 U.S. Highway 41 South Brooksville FL 1997
Arby's................... 7446 Gall Boulevard, Highway 301 Zephyrhills FL 1997
Arby's................... 3815 South Florida Avenue Lakeland FL 1997
Arby's................... 2230 Fletcher Avenue Tampa FL 1997
Arby's................... 201 West Alexander Street Plant City FL 1997
Arby's................... 7125 County Road 54 New Port Richey FL 1997
Arby's................... 8968 State Road 52 Hudson FL 1997
Arby's................... 12915 Cortez Boulevard Brooksville FL 1997
Arby's................... 602 Havendale Boulevard Aurburndale FL 1997
Arby's................... 1070 East Van Fleet Drive Bartow FL 1997
Burger King.............. 23924 U.S. Highway 19 North Clearwater FL 1986
Burger King.............. 2808 North Tamiami Trail Sarasota FL 1986
Burger King.............. 3212 North U.S. Highway 98 Lakeland FL 1986
Burger King.............. 4082 College Parkway Southwest Fort Meyers FL 1986
Burger King.............. 2765 Gulf to Bay Boulevard Clearwater FL 1986
Burger King.............. 1790 North Broadway Bartow FL 1986
Checker's................ 4459 West Hillsborough Tampa FL 1997
Checker's................ 9014 State Road 52 Tampa FL 1997
Checker's................ 8800 North 56th Street Tampa FL 1997
Checker's................ 15515 Dale Mabry Tampa FL 1997
Chi-Chi's................ 909 West Vine Street Kissimmee FL 1997
Crabhouse................ 1065 North Highway AIA Jupiter FL 1995
Hooter's................. 3437 Florida Avenue Lakeland FL 1997
Miami Subs............... 11860 East Colonial Orlando FL 1996
Miami Subs............... 5000 West Colonial Orlando FL 1996
Popeye's................. 2143 West Edgewood Boulevard Jacksonville FL 1996
Popeye's................. 524 Atlantic Boulevard Neptune Beach FL 1996
Sizzler Steakhouse....... 18860 South Dixie Highway Miami FL 1996
GEORGIA--32 PROPERTIES
Burger King.............. 1090 South Big A Road Toccoa GA 1986
Burger King.............. 2590 East Pinetree Boulevard Thomasville GA 1986
Burger King.............. 380 Battlefield Parkway Fort Oglethorpe GA 1986
Burger King.............. 2716 Sandy Plains Road Marietta GA 1996
Burger King.............. 765 Southwest Highway 138 Riverdale GA 1996
Burger King.............. Highway 67 & Edmoore Court Statesboro GA 1996
Caribou Coffee........... 2870 North Druid Hills Road Atlanta GA 1997
Hardee's................. 201 North Broad Street Cuthbert GA 1995
Hardee's................. 926 Pierce Street Alma GA 1996
Hardee's................. 4992 Altama Avenue Brunswick GA 1996
</TABLE>
S-40
<PAGE>
<TABLE>
<CAPTION>
YEAR OF
BRAND ADDRESS CITY STATE ACQUISITION
- ------------------------- ---------------------------------------- ------------------------ --------- ----------
<S> <C> <C> <C> <C>
Hardee's................. 132 New Jesup Highway Brunswick GA 1996
Hardee's................. Highway 301 North Claxton GA 1996
Hardee's................. 309 Highway 80 Garden City GA 1996
Hardee's................. Highway 301 South Glennville GA 1996
Hardee's................. 169 West Hendry Street Hinesville GA 1996
Hardee's................. 1190 East Cherry Street Jesup GA 1996
Hardee's................. State Route 40 & I-95, JSJ Road Kingland GA 1996
Hardee's................. Lewis & Rubye Street Metter GA 1996
Hardee's................. 100 Govenor Truetlan Road Pooler GA 1996
Hardee's................. Highway 144 & 17 Richmond Hill GA 1996
Hardee's................. Highway 21 Rincon GA 1996
Hardee's................. 3025 Osborne Road St. Mary's GA 1996
Hardee's................. 322 Mall Boulevard Savannah GA 1996
Hardee's................. 1 South Gateway Boulevard Savannah GA 1996
Hardee's................. 3715 Ogeechee Road Savannah GA 1996
Hardee's................. 612 East Northside Drive Statesboro GA 1996
Hardee's................. 501-A South Main Street Swainsboro GA 1996
Hardee's................. 700 East First Street Vidalia GA 1996
Hardee's................. 524 Memorial Drive Waycross GA 1996
Hardee's................. 499 Johnny Mercer Drive Wilmington Island GA 1996
Pizza Hut................ 4421 High Howell Road Tucker GA 1996
Tijuana Joe's............ 690 Johnson Ferry Road Marietta GA 1996
IOWA--8 PROPERTIES
Bruegger's Bagels........ 117 Third Avenue Southeast Cedar Rapids IA 1997
Bruegger's Bagels........ 225 Iowa Avenue Iowa City IA 1997
Bruegger's Bagels........ 715 South Riverside Drive Iowa City IA 1997
Burger King.............. 1020 East First Street Ankeny IA 1986
Burger King.............. 1500 86th Street Clive IA 1995
Carlos O'Kelly's......... 4055 Westown Parkway West Des Moines IA 1997
Carlos O'Kelly's......... 3331 4th Street Southwest Mason City IA 1997
Embers................... 4805 Merle Hay Road Des Moines IA 1997
IDAHO--1 PROPERTY
Chili's.................. 916 Broadway Avenue Boise ID 1996
ILLINOIS--10 PROPERTIES
Burger King.............. 3440 Broadway Mount Vernon IL 1986
Carlos O'Kelly's......... 21045 Veterans Parkway Bloomington IL 1996
Hardee's................. 1617 North Belt West Belleville IL 1997
Jack-in-the-Box.......... 500 South Illinois Street Belleville IL 1997
JCM Leasing.............. 120 Annie Glidden DeKalb IL 1997
KFC...................... 6280 East Northwest Highway Crystal Lake IL 1997
Pizza Hut................ 235 East Bolingbrook Bolingbrook IL 1997
Pizza Hut................ 4305 East New York Street Aurora IL 1997
Pizza Hut................ 1560 75th Street Downers Grove IL 1997
Popeye's................. 405 West Army Trail Road Bloomingdale IL 1997
</TABLE>
S-41
<PAGE>
<TABLE>
<CAPTION>
YEAR OF
BRAND ADDRESS CITY STATE ACQUISITION
- ------------------------- ---------------------------------------- ------------------------ --------- ----------
<S> <C> <C> <C> <C>
INDIANA--11 PROPERTIES
Burger King.............. Main Street & 18th Street Rochester IN 1986
Burger King.............. 121 West LaSalle South Bend IN 1996
Clancy's................. 7863 U.S. 31 South Greenwood IN 1997
Fazoli's................. 315 College Mall Drive Bloomington IN 1997
Fazoli's................. 465 East Carmel Drive Carmel IN 1997
Noble Roman's............ 3846 Lafayette Road Indianapolis IN 1997
Noble Roman's............ 9755 East Washington Street Indianapolis IN 1997
Noble Roman's............ 3275 West 86th Street Indianapolis IN 1997
Schlotzsky's............. 10329 Indianapolis Boulevard Highland IN 1996
Schlotzsky's............. 5228 West Southern Avenue Indianapolis IN 1997
Taco Bell................ 909 West McGalliard Muncie IN 1997
KANSAS--2 PROPERTIES
Burger King.............. 301 Poyntz Avenue Manhattan KS 1986
Burger King.............. 7736 State Avenue Kansas City KS 1996
KENTUCKY--3 PROPERTIES
Burger King.............. Kentucky Highway 281 & Chelsea Avenue Madisonville KY 1986
Burger King.............. 4641 Frederica Street Owensboro KY 1986
Burger King.............. 3100 Dixie Highway Erlanger KY 1996
LOUISIANA--3 PROPERTIES
Pizza Hut................ 11670 Florida Boulevard Baton Rouge LA 1996
Pizza Hut................ 1420 Northeast Evangeline Lafayette LA 1996
Popeye's................. 4041 Magazine Street New Orleans LA 1997
MASSACHUSETTS--4 PROPERTIES
Burger King.............. 137 Main Street Kingston MA 1986
Burger King.............. 569-573 North Main Street Palmer MA 1986
Burger King.............. 1219 Parker Street Springfield MA 1996
Wendy's.................. 500 Park Avenue Worcester MA 1997
MARYLAND--3 PROPERTIES
Burger King.............. 310 Baltimore Pike Belaire MD 1986
Burger King.............. Crossroads Shopping Center Westminster MD 1986
Pizza Hut................ 9101 Kinney Place Clinton MD 1996
MAINE--4 PROPERTIES
Burger King.............. 162 Bennett Drive Caribou ME 1986
Burger King.............. Route 1A & East Maple Street Ellsworth ME 1986
Burger King.............. Rural Fire District #4 Farmington ME 1986
Burger King.............. 12 Stillwater Avenue Orono ME 1986
</TABLE>
S-42
<PAGE>
<TABLE>
<CAPTION>
YEAR OF
BRAND ADDRESS CITY STATE ACQUISITION
- ------------------------- ---------------------------------------- ------------------------ --------- ----------
<S> <C> <C> <C> <C>
MICHIGAN--30 PROPERTIES
Arby's................... 49 North Telegraph Road Pontiac MI 1997
Arby's................... 5475 State Street Saginaw MI 1997
Arby's................... 3100 Holland Road Saginaw MI 1997
Arby's................... 3502 Pine Grove Avenue Port Huron MI 1997
Arby's................... 3742 Davison Road Flint MI 1997
Arby's................... G-5516 Fenton Road Flint MI 1997
Arby's................... 15195 West 12 Mile Road Roseville MI 1997
Arby's................... 619 North Avenue Battle Creek MI 1997
Arby's................... 27960 23 Mile Road Chesterfield MI 1997
Arby's................... 45630 North Gratiot Avenue Mt. Clemens MI 1997
Arby's................... 4229 West Vienna Road Clio MI 1997
Arby's................... 503 Lansing Road Charlotte MI 1997
Arby's................... 1881 South Scott Road St. Johns MI 1997
Arby's................... 1010 State Street Davison MI 1997
Arby's................... 7019 Eastman Road Midland MI 1997
Arby's................... 7967 Alger Road Alma MI 1997
Arby's................... 4825 Dixie Highway Waterford MI 1997
Arby's................... 8068 North Wayne Road Westland MI 1997
Arby's................... G-4325 West Pierson Road Flint MI 1997
Arby's................... 47540 Van Dyke Utica MI 1997
Arby's................... 2925 East Long Lake Road Troy MI 1997
Arby's................... 36776 Groesbeck Highway Clemens MI 1997
Arby's................... 575 Ann Arbor Road Plymouth MI 1997
Arby's................... West Pierson Road Flint MI 1997
Burger King.............. 6375 Dixie Highway Bridgeport MI 1986
Burger King.............. 17151 West 8 Mile Road Detroit MI 1986
Burger King.............. 1113 West Maple Road Walled Lake MI 1986
Burger King.............. 54 North Groesbeck Highway Mt. Clemens MI 1996
Caribou Coffee........... 19419 Mack Avenue Grosse Pointe Woods MI 1997
Schlotzsky's............. 14800 Racho Road Taylor MI 1997
MINNESOTA--16 PROPERTIES
Acapulco's............... 2880 Coon Rapids Coon Rapids MN 1997
Bruegger's Bagels........ 4953 Penn Avenue South Minneapolis MN 1997
Bruegger's Bagels........ 317-319 Fourteenth Avenue Minneapolis MN 1997
Bruegger's Bagels........ 1500-1506 West Lake Street Minneapolis MN 1997
Bruegger's Bagels........ 4404-4412 France Avenue South Edina MN 1997
Bruegger's Bagels........ 1920 Portland Avenue Minneapolis MN 1997
Burger King.............. 7278 Point Douglas Road Cottage Grove MN 1986
Embers................... 2600 Hennepin Avenue Minneapolis MN 1997
Embers................... 3300 East Lake Street Minneapolis MN 1997
Embers................... 1664 University Avenue St. Paul MN 1997
Embers................... 108 17th Avenue Southwest Rochester MN 1997
Embers................... 3240 Division Street St. Cloud MN 1997
Old Chicago.............. 2841 Hennepin Avenue Minneapolis MN 1997
Pizza Hut................ 2130 Cliff Road Eagan MN 1997
</TABLE>
S-43
<PAGE>
<TABLE>
<CAPTION>
YEAR OF
BRAND ADDRESS CITY STATE ACQUISITION
- ------------------------- ---------------------------------------- ------------------------ --------- ----------
<S> <C> <C> <C> <C>
Pizza Hut................ 5101 West 98th Street Bloomington MN 1997
Wendy's.................. 7601 Viron Road Fridley MN 1997
MISSOURI--8 PROPERTIES
Burger King.............. 10839 East Highway 40 Independence MO 1986
Burger King.............. 16901 East Highway 24 Independence MO 1986
Burger King.............. SS I-70 SVC Road & Jungerman Road St. Peters MO 1996
Carlos O'Kelly's......... 4100 South Campbell Springfield MO 1996
Fazoli's................. 1698 Country Club Plaza St. Charles MO 1997
Hardee's................. 100 Old Sugar Creek Road Fenton MO 1997
Memphis Best............. 8071 Manchester Road Brentwood MO 1997
Tippin's Rest............ 2931 South Noland Road Independence MO 1997
MISSISSIPPI--2 PROPERTIES
Burger King.............. 1720 Highway 45 North Columbus MS 1996
Burger King.............. Mississippi Highway 1 Greenville MS 1996
MONTANA--1 PROPERTY
Burger King.............. 614 North Montana Avenue Helena MT 1986
NORTH CAROLINA--18 PROPERTIES
Bruegger's Bagels........ 117 Small Pine Drive Garner NC 1997
Bruegger's Bagels........ 626 Ninth Street Durham NC 1997
Bruegger's Bagels........ 104 West Franklin Street Chapel Hill NC 1997
Bruegger's Bagels........ 2302 Hillsborough Street Raleigh NC 1997
Burger King.............. 1416 North First Street Albermarle NC 1986
Burger King.............. 1201 East Broad Avenue Rockingham NC 1986
Burger King.............. 407 Marine Boulevard/Highway 17 South Jacksonville NC 1996
Burger King.............. 3610 East 10th Street Greenville NC 1996
Burger King.............. 805 South College Road Wilmington NC 1996
Burger King.............. 1941 Sunset Avenue Rocky Mount NC 1996
Burger King.............. 4709 State Highway 55 Durham NC 1996
Burger King.............. 760 Champion Drive Canton NC 1996
Burger King.............. 3414 Roxboro Road Durham NC 1996
Schlotzsky's............. 3300 Duraleigh Road Raleigh NC 1996
Schlotzsky's............. 8812 Harvest Oaks Drive Raleigh NC 1996
Schlotzsky's............. 906 U.S. Highway 64 West Apex NC 1997
Schlotzsky's............. 4834 North Carolina Highway 55 Durham NC 1997
Schlotzsky's............. 3030 South Evans Street Greenville NC 1997
NORTH DAKOTA--1 PROPERTY
Embers................... 3838 West Main Avenue Fargo ND 1997
</TABLE>
S-44
<PAGE>
<TABLE>
<CAPTION>
YEAR OF
BRAND ADDRESS CITY STATE ACQUISITION
- ------------------------- ---------------------------------------- ------------------------ --------- ----------
<S> <C> <C> <C> <C>
NEBRASKA--2 PROPERTIES
Burger King.............. 320 South Burlington Hastings NE 1986
Chili's.................. 3202 South 143rd Plaza Omaha NE 1996
NEW JERSEY--4 PROPERTIES
Burger King.............. 520 New Road Somers Point NJ 1986
Burger King.............. Route 206 & Route I-30 North Bordentown NJ 1995
Burger King.............. 1481 Blackwood- Clementon Road Clementon NJ 1986
Burger King.............. 650 Route 72 Manahawkin NJ 1986
NEW MEXICO--4 PROPERTIES
Burger King.............. 1917 Prince Street Clovis NM 1986
Chili's.................. 426 North Telshor Las Cruces NM 1996
Grandy's................. 1917 North Turner Street Hobbs NM 1996
Scholotzsky's............ 1701 Rio Rancho Drive Southeast Rio Rancho NM 1997
NEVADA--1 PROPERTY
Burger King.............. 2500 Idaho Street Elko NV 1986
NEW YORK--35 PROPERTIES
Boston Market............ 90 Broadhollow Road Farmingdale NY 1997
Boston Market............ 194 Broadway Avenue Saratoga Springs NY 1997
Boston Market............ 753 New Loudon Road Latham NY 1997
Boston Market............ 1 Elsmere Avenue Delmar NY 1997
Boston Market............ 1720 Union Street Schenectady NY 1997
Bruegger's Bagels........ 536-548 Monroe Avenue Rochester NY 1997
Bruegger's Bagels........ 5198 West Taft Road North Syracuse NY 1997
Bruegger's Bagels........ 453 Broadway Saratoga NY 1997
Bruegger's Bagels........ 32 Learned Street Albany NY 1997
Bruegger's Bagels........ 29 North Pearl Street Albany NY 1997
Burger King.............. 1041 Central Avenue Albany NY 1997
Burger King.............. 158 Wolf Road Colonie NY 1997
Burger King.............. 580 Broadway Menands NY 1997
Burger King.............. 1991 Western Avenue Albany NY 1997
Burger King.............. 439 Central Avenue Albany NY 1997
Burger King.............. 127 South Main Street Ellenville NY 1986
Burger King.............. 1669 Route 9 Clifton Park NY 1997
Burger King.............. 2076 Street Route 208 Montgomery NY 1986
Burger King.............. 263 Route 50 Glenville NY 1997
Burger King.............. 1480 Western Avenue Albany NY 1997
Burger King.............. Route 50, Road #6 Wilton NY 1997
Burger King.............. 1 Warren Street Glen Falls NY 1997
Burger King.............. 901 Erie Boulevard Schenectady NY 1997
Burger King.............. 1860 Central Avenue Albany NY 1997
Burger King.............. 60 Saratoga Street Caohoes NY 1997
Burger King.............. 290 Main Street Binghampton NY 1996
Burger King.............. 4035 Route 31 Clay NY 1996
</TABLE>
S-45
<PAGE>
<TABLE>
<CAPTION>
YEAR OF
BRAND ADDRESS CITY STATE ACQUISITION
- ------------------------- ---------------------------------------- ------------------------ --------- ----------
<S> <C> <C> <C> <C>
Burger King.............. 7431 Route 49 Central Square NY 1996
Dunkin Donuts............ 247 Greenwich Street Hempstead NY 1997
Miami Subs............... 6150 Jericho Turnpike Commack NY 1997
Pizza Hut................ 2082 Middle Country Road Centerreach NY 1997
Pizza Hut................ 352 East Main Street Patchogue NY 1997
Pizza Hut................ 653 Montauk Highway W. Babylon NY 1997
Pizza Hut................ 3737 Hempstead Turnpike Levittown NY 1997
Tumbleweeds.............. 320 Patchogue-Port Jefferson Road Port Jefferson NY 1997
OHIO--8 PROPERTIES
Burger King.............. 882 State Route 28 Milford OH 1986
Burger King.............. 512 Ohio Pike Cincinnati OH 1996
Burger King.............. 100 West County Line Road Columbiana OH 1986
Burger King.............. 5021 S.O.M. Center Road Willoughby OH 1986
Burger King.............. 900 Bridge Street Chilicothe OH 1986
Burger King.............. 1278 Mount Vernon Avenue Marion OH 1986
Burger King.............. 3716-17th Street Northwest Canton OH 1996
Burger King.............. 560 Spring Mill Road Mansfield OH 1996
OKLAHOMA--15 PROPERTIES
Burger King.............. 104 North 32nd Street Muskogee OK 1986
Burger King.............. 1201 North Commerce Ardmore OK 1986
Burger King.............. 2001 North Harrison Street Shawnee OK 1986
Charleston's............. 300 Ed Noble Parkway Norman OK 1997
Charleston's............. 6839 South Yale Avenue Tulsa OK 1997
Grandy's................. 819 Commerce Ardmore OK 1996
Grandy's................. 4121 Northwest Expressway Oklahoma City OK 1996
Grandy's................. 701 West Main Norman OK 1996
Grandy's................. 800 South Broadway Edmond OK 1996
Grandy's................. 2233 West Memorial Drive Oklahoma City OK 1996
Grandy's................. 3645 North Lincoln Boulevard Oklahoma City OK 1996
Grandy's................. 610 Northwest 12th Street Moore OK 1996
Pizza Hut................ 1135 Midwest Boulevard Midwest City OK 1996
Tippins Rest............. 8400 Northwest Expressway Oklahoma City OK 1997
Whataburger.............. 2426 West Owen Garriott Road Enid OK 1986
OREGON--5 PROPERTIES
Burger King.............. 2785 West 11th Avenue Eugene OR 1986
Burger King.............. 2408 9th Street Corvallis OR 1986
Burger King.............. 1999 Northeast 7th Street Grants Pass OR 1986
Burger King.............. 930 Northwest Gordon Valley Roseburg OR 1986
Burger King.............. 1616 Beaver Creek Road Oregon City OR 1986
PENNSLYVANIA--19 PROPERTIES
Arby's................... 1202 Harrisburg Pike Carlile PA 1997
Arby's................... 497 Eisenhower Drive Hanover PA 1997
Arby's................... 3710 Easton-Nazareth Highway Easton PA 1997
</TABLE>
S-46
<PAGE>
<TABLE>
<CAPTION>
YEAR OF
BRAND ADDRESS CITY STATE ACQUISITION
- ------------------------- ---------------------------------------- ------------------------ --------- ----------
<S> <C> <C> <C> <C>
Arby's................... 1535 Lehigh Street Allentown PA 1997
Arby's................... 32 South 32nd Street Camp Hill PA 1997
Burger King.............. 1 West Main Street Nanticoke PA 1996
Burger King.............. 211 South Main Street Old Forge PA 1996
Burger King.............. 515 North Broad Street West Hazleton PA 1996
Burger King.............. 30th & North Church Street Hazleton PA 1996
Burger King.............. 3000 South Island Avenue Philadelphia PA 1986
Burger King.............. 503 North Third Street (Oxford Mall) Oxford PA 1986
Burger King.............. 3410 William Penn Highway Wilkins Township PA 1986
Burger King.............. 2728 South Front Street Philadelphia PA 1986
Burger King.............. 1690 Beaver Road Baden PA 1986
Burger King.............. 15 South 8th Street Philadelphia PA 1986
Burger King.............. 130 South Wyoming Avenue Kingston PA 1986
Burger King.............. R.D. 4--Route 30 Bedford PA 1986
Burger King.............. Lancaster Pike & Plank Road Paoli PA 1986
Pizza Hut................ 290 Luke Fidler Shamokin PA 1996
SOUTH CAROLINA--10 PROPERTIES
Burger King.............. 1733 Whiskey Road Aiken SC 1986
Burger King.............. 1543 Floyd Baker Boulevard Gaffney SC 1986
Burger King.............. 2820 Main Street Newberry SC 1986
Burger King.............. 2531 North Broad Street Camden SC 1995
Burger King.............. 112 North Main Street Mauldin SC 1986
Burger King.............. 2300 A. Decker Boulevard Columbia SC 1986
Burger King.............. 301 Pearman Dairy Road Anderson SC 1996
Cici's Pizza............. 6120 St. Andrews Road Columbia SC 1986
Hardee's................. 3030 Boundary Street Beaufort SC 1996
Hardee's................. Route 3, Box 386 Ridgeland SC 1996
SOUTH DAKOTA--1 PROPERTY
Embers................... 4004 West 41st Street Sioux Falls SD 1997
TENNESSEE--8 PROPERTIES
Burger King.............. 6404 Ringgold Road Chattanooga TN 1986
Burger King.............. 4417 Highway 58 Chattanooga TN 1986
Burger King.............. SWC Highway 45 & Highway 75 Milan TN 1996
Pizza Hut................ 1259 Columbia Avenue Franklin TN 1996
Pizza Hut................ 7224 Maynardville Pike Knoxville TN 1996
Schlotzsky's............. 805 Old Fort Parkway Christiana TN 1997
Schlotzsky's............. 8610 Ricky Bell Cove Memphis TN 1997
Wendy's.................. 2145 Alcoa Highway Alcoa TN 1997
TEXAS--145 PROPERTIES
Arby's................... 4263 Hemphill Street Ft. Worth TX 1997
Arby's................... 628 Pipeline Road Hurst TX 1997
Arby's................... 2480 Jacksboro Highway Ft. Worth TX 1997
</TABLE>
S-47
<PAGE>
<TABLE>
<CAPTION>
YEAR OF
BRAND ADDRESS CITY STATE ACQUISITION
- ------------------------- ---------------------------------------- ------------------------ --------- ----------
<S> <C> <C> <C> <C>
Arby's................... 2012 West 15th Street Plano TX 1997
Arby's................... 3333 East Division Street Arlington TX 1997
Arby's................... 3222 Las Vegas Trail Ft. Worth TX 1997
Arby's................... 3832 Altamesa Boulevard Ft. Worth TX 1997
Arby's................... 1439 Trinity Mills Road Carrollton TX 1997
Arby's................... 1510 West Main Street Lewisville TX 1997
Arby's................... 1707 West University Drive McKinney TX 1997
Arby's................... 423 East State Highway, 303 Plaza Grand Prairie TX 1997
Arby's................... 1902 Northwest Highway Garland TX 1997
Arby's................... 3237 Harwood Road Bedford TX 1997
Arby's................... 4725 Colleyville Boulevard Colleyville TX 1997
Arby's................... 5400 Blue Mound Road Ft. Worth TX 1997
Arby's................... 12415 Lake June Road Balch Springs TX 1997
Arby's................... 4820 South Cooper Street Arlington TX 1997
Arby's................... 801 Northeast Alsbury Boulevard Burleson TX 1997
Arby's................... 1300 William D. Tate Avenue Grapevine TX 1997
Arby's................... 9248 U.S. Highway 377 South Benbrook TX 1997
Arby's................... 4406 Little School Road Arlington TX 1997
Arby's................... 2313 Colorado Boulevard Denton TX 1997
Arby's................... 9215 Skillman Street Dallas TX 1997
Arby's................... 2608 Midway Road Carrollton TX 1997
Arby's................... 222 East FM 1382 Cedar Hill TX 1997
Arby's................... 17858 Preston Road Dallas TX 1997
Arby's................... 1821 Range Road Mesquite TX 1997
Arby's................... 1820 North Plano Road Richardson TX 1997
Arby's................... 1909 East Hebron Parkway Carrollton TX 1997
Arby's................... 2810 West Wheatland Road Dallas TX 1997
Arby's................... 2619 West Highway 2303 Grand Prairie TX 1997
Arby's................... 515 North U.S. Highway 75 Denison TX 1997
Arby's................... 7640 Grapevine Highway N. Richland Hills TX 1997
Arby's................... 4030 Great Southwest Highway Grand Prairie TX 1997
Arby's................... 6363 Forest Lane Dallas TX 1997
Arby's................... 1102 North Collins Street Arlington TX 1997
Arby's................... 1933 North Towneast Boulevard Mesquite TX 1997
Arby's................... 2131 Texoma Parkway Sherman TX 1997
Au Bon Pain.............. Dallas/Fort Worth Airport Dallas TX 1997
Au Bon Pain.............. Dallas/Fort Worth Airport Dallas TX 1997
Au Bon Pain.............. Dallas/Fort Worth Airport Dallas TX 1997
Burger King.............. 210 West Commerce Brownwood TX 1986
Burger King.............. 1603 East Main Alice TX 1986
Burger King.............. 2520 Palmer Avenue Texas City TX 1986
Burger King.............. 2209 Highway 71 Columbus TX 1986
Burger King.............. 480 West I-30 Garland TX 1996
Burger King.............. 3610 Highway #365 Nederland TX 1996
Burger King.............. 4521 Ayers Street Corpus Christi TX 1996
Burger King.............. 2950 West Parker Road Plano TX 1996
Burger King.............. 4217 Bridge Street Ft. Worth TX 1996
Burger King.............. 2640 Arkansas Lane Arlington TX 1995
Chili's.................. 3810 I-40 West Amarillo TX 1995
</TABLE>
S-48
<PAGE>
<TABLE>
<CAPTION>
YEAR OF
BRAND ADDRESS CITY STATE ACQUISITION
- ------------------------- ---------------------------------------- ------------------------ --------- ----------
<S> <C> <C> <C> <C>
Chili's.................. 2406 I-35 East South Denton TX 1995
Dairy Queen.............. 1200 Hutchins Avenue Ballinger TX 1996
Dairy Queen.............. 1101 South Chadbourne Street San Angelo TX 1996
Dairy Queen.............. 435 Pulliam Street San Angelo TX 1996
Dairy Queen.............. 103 North Marcus Street Alto TX 1996
Dairy Queen.............. 416 U.S. Highway 96 N. Buna TX 1996
Dairy Queen.............. 902 West Panola Carthage TX 1996
Dairy Queen.............. 1001 East Sabine Street Carthage TX 1996
Dairy Queen.............. 515 South Washington Cleveland TX 1996
Dairy Queen.............. Highway 59 Corrigan TX 1996
Dairy Queen.............. 104 East Highway 90 Dayton TX 1996
Dairy Queen.............. 202 North Temple Dibol TX 1996
Dairy Queen.............. West Highway 287 Groveton TX 1996
Dairy Queen.............. Highway 87 Hemphill TX 1996
Dairy Queen.............. 24022 East Lake Houston Parkway Huffman TX 1996
Dairy Queen.............. 209 South First Humble TX 1996
Dairy Queen.............. Highway 69 Huntington TX 1996
Dairy Queen.............. 3207 Highway I-45 Huntsville TX 1996
Dairy Queen.............. 902 11th Street Huntsville TX 1996
Dairy Queen.............. 987 South Wheeler Jasper TX 1996
Dairy Queen.............. 413 North Mararet Kirbyville TX 1996
Dairy Queen.............. Highway 69 South Kountze TX 1996
Dairy Queen.............. 1702 North Main Liberty TX 1996
Dairy Queen.............. 13106 North Washington Livingston TX 1996
Dairy Queen.............. 305 South Timberland Lufkin TX 1996
Dairy Queen.............. 2207 South First Lufkin TX 1996
Dairy Queen.............. 301 South John Redditt Lufkin TX 1996
Dairy Queen.............. 2305 Atkinson Drive Lufkin TX 1996
Dairy Queen.............. 933 North University Drive Nacogdoches TX 1996
Dairy Queen.............. Highway 190 Onalaska TX 1996
Dairy Queen.............. 906 West 24th Street Pineland TX 1996
Dairy Queen.............. U.S. Highway 59 East Porter TX 1996
Dairy Queen.............. 1301 Dickinson Drive Rusk TX 1996
Dairy Queen.............. 1010 Nacogdoches Highway San Augustine TX 1996
Dairy Queen.............. Highway 59 Shepherd TX 1996
Dairy Queen.............. 1180 North 5th Silsbee TX 1996
Dairy Queen.............. 335 Highway 105 East Sour Lake TX 1996
Dairy Queen.............. I-20 Spur 156 Waskom TX 1996
Dairy Queen.............. Highway 69 North Wells TX 1996
Dairy Queen.............. 1308 West Bluff Woodville TX 1996
Dairy Queen.............. 1009 South Magnolia Woodville TX 1996
Dairy Queen.............. 7813 Slide Road Lubbock TX 1997
Fresh N Lite............. 1840 North Plano Road Richardson TX 1997
Grandy's................. 1400 Pioneer Parkway Irving TX 1996
Grandy's................. 6112 Wesley Street Greenville TX 1996
Grandy's................. 620 East 15th Street Plano TX 1996
Grandy's................. 2155 Northwest Highway Garland TX 1996
Grandy's................. 41334 Buffalo Gap Road Abilene TX 1996
Grandy's................. 4631 50th Street Lubbock TX 1996
</TABLE>
S-49
<PAGE>
<TABLE>
<CAPTION>
YEAR OF
BRAND ADDRESS CITY STATE ACQUISITION
- ------------------------- ---------------------------------------- ------------------------ --------- ----------
<S> <C> <C> <C> <C>
Grandy's................. 2815 Beltline Road Irving TX 1996
Grandy's................. 3230 West Camp Wisdom Dallas TX 1996
Grandy's................. 1753 I-35 South Carrollton TX 1996
Grandy's................. 2009 North Town East Boulevard Mesquite TX 1996
Grandy's................. 4360 Little Road Arlington TX 1996
Grandy's................. 145 North Star Garland TX 1996
Grandy's................. 1907 South Buckner Dallas TX 1996
Grandy's................. 3738 Marvin D. Love Dallas TX 1996
Grandy's................. 3255 West Pleasant Run Lancaster TX 1996
Grandy's................. 4233 East Lancaster Ft. Worth TX 1996
Grandy's................. 4301 South Freeway Ft. Worth TX 1996
Grandy's................. 1100 West Beach Ft. Worth TX 1996
Grandy's................. 6969 Gulf Freeway Houston TX 1996
Grandy's................. 4180 South Cooper Arlington TX 1996
Grandy's................. 3330 East Trinity Mills Carrollton TX 1996
Grandy's................. 301 State Highway 114 Grapevine TX 1996
Huey's................... 15335 North I-45 Houston TX 1996
Joe's Crab Shack......... 14901 I-45 North Houston TX 1996
KFC...................... 1101 U.S. Highway 190 Copperas Cove TX 1996
KFC...................... 6010 Wesley Street Greenville TX 1996
Pilot Point Bank......... 2410 I-35 East South Denton TX 1995
Pizza Hut................ 4019 North 19th Street Waco TX 1996
Pizza Hut................ 4705 River Oaks Boulevard Ft. Worth TX 1997
Pizza Inn................ 11922 Elam Road Balch Springs TX 1996
Popeye's................. 506 Sheldon Road Channelview TX 1996
Popeye's................. 7139 Scott Street Houston TX 1996
Popeye's................. 6819 Lyons Street Houston TX 1996
Popeye's................. 5102 Antoine Houston TX 1996
Popeye's................. 3705 Little York Road Houston TX 1996
Popeye's................. 3432 Scott Street Houston TX 1997
Razoo's.................. 1990 Stemmons Lewisville TX 1996
Red Pepper Chinese....... 2412 I-35 East South Denton TX 1995
Schlotzsky's............. MacArthur Crossing Irving TX 1996
Schlotzsky's............. 2902 U.S. Highway 75 Sherman TX 1996
Schlotzsky's............. 12485 Westheimer Road Houston TX 1996
Steak & Ale.............. 4100 West Camp Wisdom Road Dallas TX 1995
Taco Bell................ 2575 Walnut Hill Lane Dallas TX 1996
Taco Cabana.............. 705 West Bay Area Boulevard Webster TX 1996
Taco Cabana.............. 15925 San Pedro San Antonio TX 1997
Taco Cabana.............. 4205 Fredricksburg San Antonio TX 1997
Taco Cabana.............. 8629 Perrin Beitel San Antonio TX 1997
Taco Cabana.............. 9339 Wurzbach San Antonio TX 1997
Taco Cabana.............. 11701 Blanco San Antonio TX 1997
Texas Road House......... Corner of Link Drive & I-20 Grand Prairie TX 1997
UTAH--1 PROPERTY
Chili's.................. 1047 West Riverdale Road Riverdale UT 1996
</TABLE>
S-50
<PAGE>
<TABLE>
<CAPTION>
YEAR OF
BRAND ADDRESS CITY STATE ACQUISITION
- ------------------------- ---------------------------------------- ------------------------ --------- ----------
<S> <C> <C> <C> <C>
VIRGINIA--1 PROPERTY
Pizza Hut................ 22 West 14th Street Front Royal VA 1996
VERMONT--1 PROPERTY
Burger King.............. 248 Canal Street Brattleboro VT 1986
WASHINGTON--7 PROPERTIES
Burger King.............. 23221 Pacific Highway South Kent WA 1986
Burger King.............. 223 South Lincoln Street Spokane WA 1986
Burger King.............. 2113 South First Street Yakima WA 1986
Burger King.............. East 11519 Sprague Avenue Spokane WA 1995
Burger King.............. Argonne & Knox Spokane WA 1995
Burger King.............. 7909 Evergreen Way Everett WA 1986
Burger King.............. 4637 Sunset Boulevard, Northeast Renton WA 1986
WEST VIRGINIA--3 PROPERTIES
Burger King.............. 3 Springs Drive Weirton WV 1995
Burger King.............. Route 52 Airport Square Bluefield WV 1986
Pizza Hut................ 1305 North Queen Street Martinsburg WV 1996
WISCONSIN--8 PROPERTIES
Burger King.............. 4200 Norman Coulee Road La Crosse WI 1986
Burger King.............. 1616 Academy Avenue Stevens Point WI 1986
Burger King.............. 1124 West George Street La Crosse WI 1986
Burger King.............. 530 West Sunset Drive Waukesha WI 1986
Burger King.............. 6909 Odana Road Madison WI 1986
Embers................... 2626 Rose Street La Crosse WI 1997
Embers................... 3100 East Washington Madison WI 1997
Wendy's.................. 7411 122nd Street Kenosha WI 1997
WYOMING--1 PROPERTY
Chili's.................. 1320 Dell Range Boulevard Cheyenne WY 1996
</TABLE>
S-51
<PAGE>
BRAND AFFILIATIONS
The Company intends to continue to acquire properties affiliated with major
national brands such as Burger King-Registered Trademark-, Arby's-Registered
Trademark-, Dairy Queen-Registered Trademark-, Chili's-Registered Trademark-,
Pizza Hut-Registered Trademark- and Schlotzsky's-Registered Trademark- and
regional brands such as Grandy's-Registered Trademark- and Taco
Cabana-Registered Trademark-, operated by competent, financially-stable
multi-unit restaurant operators. The Company believes that successful
restaurants operated under these types of brands will continue to offer stable,
consistent income to the Company with reduced risk of default or non-renewal of
the lease and franchise agreement. The Company believes its income stream is
further protected through the increasing diversification of the Properties by
brand affiliation. Since existing management assumed control of the Company in
May 1994, the Company has significantly expanded the number of its brand
affiliations. Of the 402 Properties acquired since May 1994, only 60 are Burger
King-Registered Trademark- restaurants and the balance are affiliated with other
national and regional chain restaurants. The following table reflects the major
brand affiliation of the Properties at September 30, 1997.
BRAND AFFILIATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMPANY
APPROXIMATE ANNUALIZED
TOTAL U.S. NUMBER OF COMPANY BASE
BRAND AFFILIATION LOCATIONS(1) PROPERTIES RENT(2)
- --------------------------------------------------------- ------------- ----------------------- -----------
<S> <C> <C> <C>
Arby's-Registered Trademark-............................. 2,890 77 $ 5,063
Burger King-Registered Trademark-........................ 6,409 181 12,285
Chili's-Registered Trademark-............................ 108 8 1,244
Dairy Queen-Registered Trademark-........................ 6,000 41 1,525
Grandy's-Registered Trademark-........................... 151 30 1,469
Hardee's-Registered Trademark-........................... 2,308 28 2,673
Pizza Hut-Registered Trademark-.......................... 9,566 23 1,090
Schlotzsky's-Registered Trademark-....................... 560 18 1,481
Other (3)................................................ N/A 114 8,886
--- -----------
Total.................................................. 520 $ 35,716
--- -----------
--- -----------
</TABLE>
- ------------------------
(1) Includes all United States locations associated with referenced brand,
including properties owned by the Company as of December 31, 1996.
(2) Annualized base rent was calculated by multiplying the monthly contractual
base rent as of October 1, 1997 for each of the Properties by 12. Annualized
base rent does not include percentage rents, if any, that may be payable
under leases covering certain of the Properties, or other adjustments to
base rent required by GAAP.
(3) Includes 46 brand affiliations, each of which contribute less than $1.3
million in annualized base rent to the Company. Such brand affiliations
include, among others, Boston Market-Registered Trademark-, Bruegger's
Bagels-Registered Trademark-, Checker's-Registered Trademark-,
Embers-Registered Trademark-, KFC-Registered Trademark-, Miami
Subs-Registered Trademark-, Popeye's-Registered Trademark- and Taco
Bell-Registered Trademark-.
DIVERSIFICATION
The Company conducts its operations in such a manner as to enhance the
predictability and sustainability of its cash flows. The Company enhances the
predictability of the operating performance of the Properties and its financial
position by diversifying its portfolio by geographic location and number of
tenants. The Company believes that geographic diversification minimizes the
effects on the Company's financial position of downturns in regional and local
economics. The Properties are further diversified by number of tenants. At
September 30, 1997, only one tenant accounted for over 10% of the Company's
total revenue. Sybra, Inc., the operator of 77 Arby's-Registered Trademark-
restaurants located on the Properties, accounted for 14%, or $5.0 million, of
the Company's revenues at September 30, 1997. No other operator accounts for
more
S-52
<PAGE>
than 10% of the Company's revenues. The following table reflects certain
information with respect to the Company's ten largest lessees at September 30,
1997.
OPERATOR CONCENTRATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERCENT OF
TOTAL
ANNUALIZED ANNUALIZED
NAME BASE RENT(1) BASE RENT
- ------------------------------------------------------------------- ------------ -----------
<S> <C> <C>
Sybra, Inc......................................................... $ 5,006 14.0%
Southeast Fast Food................................................ 2,386 6.7
Carrols Corp....................................................... 1,913 5.3
Grandy's, Inc...................................................... 1,469 4.1
Bar S Restaurants.................................................. 1,386 3.9
Burger King Corp................................................... 1,066 3.0
Sydran Food Services............................................... 990 2.8
Pizza Hut of America, Inc.......................................... 895 2.5
Texas Taco Cabana L.P.............................................. 686 1.9
Carlos O'Kelly's Inc............................................... 638 1.8
------------ -----------
Total............................................................ $ 16,435 46.0%
------------ -----------
------------ -----------
</TABLE>
- ------------------------
(1) Annualized base rent is calculated by multiplying the monthly contractual
base rent as of October 1, 1997 for the applicable Properties by 12.
Annualized base rent does not include percentage rents, if any, that may be
payable under leases covering certain of the Properties, or other
adjustments to base rent required by GAAP.
LEASES WITH RESTAURANT OPERATORS
The Company's strategy is to acquire operating restaurant properties rather
than developing new restaurant properties, although the Company has begun to
acquire newly constructed properties. Typically, the Company acquires a property
that has been operated as a fast food or casual dining restaurant and that is
subject to a lease with a remaining term of five to 20 years and a co-terminus
franchise agreement. The Company believes that this strategy reduces the
Company's financial risk because the restaurant operated on such property has a
proven operating record that mitigates the risk of default or non-renewal under
the lease.
Substantially all of the Company's existing leases are "triple net." Triple
net leases typically require the tenants to be responsible for the property
operating costs, including property taxes, insurance and maintenance. A majority
of the Company's leases provides for a base rent plus a percentage of the
restaurant's sales in excess of a threshold amount. The triple net lease
structure is designed to provide the Company with a consistent stream of income
without the obligation to reinvest in the property. For the six months ended
June 30, 1997, base rental revenues and percentage rental revenues represented
80% and 20%, respectively, of total gross rental revenues.
The Company seeks to renew and restructure leases which will provide for an
increase in the percentage of total rental revenues derived from base rental
revenues and a decrease in the percentage of total rental revenues derived from
percentage rental revenues. In addition, the Company has implemented an early
renewal program pursuant to which the Company offers remodeling financing to
tenants in consideration for renewing and restructuring leases. To date, the
Company has renewed 33 leases under this program, with an aggregate of $1.3
million paid out by the Company for remodeling. The Company considers the
remodeling financing to be prudent given the increased sales resulting at the
remodeled restaurants and the lower costs incurred because of the early lease
renewals. The early renewal program has resulted in an increase of the average
remaining lease term of the Properties to over ten years, thus mitigating the
risk of non-renewal of leases.
S-53
<PAGE>
The Company generally acquires properties from third-party lessors or from
operators in sale/ leaseback transactions in which the operator sells the
property to the Company and then enters into a long-term lease (typically 20
years) with the Company for such property. A sale/leaseback transaction is
attractive to the operator because it allows the operator to realize the value
of the real estate while retaining occupancy for the long term. A sale/leaseback
transaction may also provide specific accounting, earnings and market value
benefits to the selling operator. For example, the lease on the property may be
structured by the tenant as an off-balance sheet operating lease, consistent
with Financial Accounting Standards Board rules, which may increase the
operator's earnings, net worth and borrowing capacity. The following table sets
forth certain information regarding lease expirations for the Properties.
LEASE EXPIRATION SCHEDULE (1)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF TOTAL
LEASES PERCENT OF ANNUALIZED ANNUALIZED
YEAR EXPIRING TOTAL BASE RENT(2) BASE RENT
- --------------------------------------------------------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
1998..................................................... 11 2.1% $ 552 1.5%
1999..................................................... 37 7.1 2,047 5.7
2000..................................................... 44 8.5 2,378 6.6
2001..................................................... 23 4.4 1,491 4.2
2002..................................................... 28 5.4 1,778 5.0
2003..................................................... 37 7.1 2,293 6.4
2004..................................................... 18 3.5 1,351 3.8
2005..................................................... 5 1.0 399 1.1
2006..................................................... 7 1.3 556 1.6
2007..................................................... 15 2.9 1,529 4.3
2008-24.................................................. 290 55.8 21,342 59.8
Unleased................................................. 5 0.9 -- --
--- ----------- ------------ -----------
Total.................................................. 520 100% $ 35,716 100%
--- ----------- ------------ -----------
--- ----------- ------------ -----------
</TABLE>
- ------------------------
(1) The lease expiration schedule does not include lease extension options.
(2) Annualized base rent was calculated by multiplying the monthly contractual
base rent as of October 1, 1997 for the applicable Properties by 12.
Annualized base rent does not include percentage rents, if any, that may be
payable under leases covering certain of the Properties, or other
adjustments to base rent required by GAAP.
RESTAURANT ALTERATIONS
The Company believes that improving, expanding, rebuilding or replacing its
restaurant properties from time to time is important. In addition to normal
maintenance and repair requirements, each operator of a Burger
King-Registered Trademark- restaurant is required under Burger King
Corporation's franchise agreement and lease/ sublease, at its own cost and
expense, to make such alterations to a Burger King-Registered Trademark-
restaurant as may be reasonably required by Burger King Corporation from time to
time to modify the appearance of the restaurant to reflect the then current
image requirements for Burger King-Registered Trademark- restaurants. Most of
the Properties that are operating as Burger King-Registered Trademark-
restaurants are 15 to 20 years old. The Company believes that many of these
Properties require substantial improvements to maximize sales and that their
condition is below Burger King Corporation's current image requirements.
OWNERSHIP OF REAL ESTATE INTERESTS
Of the 520 Properties included in the Company's portfolio as of September
30, 1997, the Company (i) owned both the land and the restaurant building in fee
simple on 388 of such Properties (the "Fee Properties"), (ii) owned the land,
with the tenant owning the restaurant building, on 32 of such Properties
S-54
<PAGE>
and (iii) leased the land, the building or both from a third-party lessor on 100
of such Properties (the "Leasehold Properties"). Of the 100 Leasehold
Properties, 14 are Properties on which the Company leases from a third party the
underlying land, the restaurant building and the other improvements thereon (the
"Primary Leases") and then subleases the property to the restaurant operator.
Under the terms of the remaining 74 Leasehold Properties (the "Ground Leases"),
the Company leases the underlying land from a third party and owns the
restaurant building and the other improvements constructed thereon. Upon
expiration or termination of a Primary Lease or Ground Lease, the owner of the
underlying land generally will become the owner of the building and all
improvements thereon. The remaining terms of the Primary Leases and Ground
Leases range from one to 21 years. With renewal options exercised, the remaining
terms of the Primary Leases and Ground Leases range from five to 35 years, with
the average remaining term being 21 years.
The terms and conditions of each Primary Lease and each Ground Lease vary
substantially. Such leases, however, have certain provisions in common,
including that: (i) the initial term is 20 years or less, (ii) the rentals
payable are stated amounts that may escalate over the terms of the Primary
Leases and Ground Leases (and/or during renewal terms), but normally are not
based upon a percentage of sales of the restaurants thereon, and (iii) the
Company is required to pay all taxes and operating, maintenance and insurance
expenses for the Leasehold Properties. In addition, under substantially all of
the leases the Company may renew the term one or more times at its option
(although the provisions governing any such renewal vary significantly and some
renewal options are at a fixed rental amount while others are at fair rental
value at the time of renewal). Several Primary Leases and Ground Leases also
give the owner the right to require the Company, upon the termination or
expiration thereof, to remove all improvements situated on the property.
Although the Company, as lessee under each Primary Lease and Ground Lease,
generally has the right to freely assign or sublet all of its rights and
interests thereunder, the Company is not permitted to assign or sublet any of
its rights or interests under certain of the Primary Leases and certain of the
Ground Leases without obtaining the lessor's consent or satisfying certain other
conditions. In addition, approximately 20% of the Primary Leases and Ground
Leases require the Company to use such Leasehold Properties only for the purpose
of operating a Burger King-Registered Trademark- restaurant or another type of
restaurant thereon. In any event, no transfer will release the Company from any
of its obligations under any Primary Lease or Ground Lease, including the
obligation to pay rent.
DEBT STRUCTURE
The Company had an aggregate of approximately $169.6 million of outstanding
debt as of September 30, 1997, including $109.4 million which was outstanding
under the Existing Credit Facility and other unsecured short-term financing
arrangements. On a pro forma basis, assuming completion of this offering and the
application of the net proceeds therefrom as described under "Use of Proceeds,"
the Company's total market capitalization (based on the closing price on
September 30, 1997 of $22.958 per share of Common Stock) will be approximately
$414 million, and its debt to total market capitalization will be approximately
23%.
The Company intends to maintain a conservative capital structure with total
debt targeted at approximately 50% of total market capitalization. The Company,
however, consistently seeks to optimize its use of debt and other sources of
financing to create a flexible capital structure that will allow the Company to
continue its investment strategy and maximize the returns to its stockholders.
S-55
<PAGE>
The existing indebtedness of the Company as of September 30, 1997 is set
forth in the following table:
<TABLE>
<CAPTION>
MAXIMUM EXPIRATION OUTSTANDING
DESCRIPTION BORROWINGS INTEREST RATE DATE BALANCE
- ----------------------------------------------------- -------------- --------------- ----------- --------------
<S> <C> <C> <C> <C>
Fixed Rate Debt:
Series A Senior Notes.............................. $ 12,500,000 8.06% 1/31/2000 $ 12,500,000
Series B Senior Notes.............................. 27,500,000 8.30% 1/31/2002 27,500,000
Variable Rate Debt:
Comerica........................................... 110,000,000 (1) 7/27/1999 109,373,118
Pacific Mutual..................................... 30,000,000 (2) 5/20/1998 20,200,000
-------------- --------------
Total............................................ $ 180,000,000 $ 169,573,118
-------------- --------------
-------------- --------------
</TABLE>
- ------------------------
(1) LIBOR plus 1.80% per annum (7.58% at September 30, 1997)
(2) LIBOR plus 2.30% per annum (8.08% at September 30, 1997)
Borrowings under the Pacific Mutual Facility are secured by, among other
things, the Pledged Shares. If an event of default were to occur under the
Pacific Mutual Facility, then under the terms of the pledge agreement Pacific
Mutual could acquire ownership of the Pledged Shares. Events of default under
the Pacific Mutual Facility include (i) failure to timely pay principal and
interest due on the outstanding borrowings, (ii) failure to comply with the
covenants contained in such facility, including a prohibition on merging or
consolidating the borrower subsidiary, selling any of such subsidiary's
properties and pledging any of such subsidiary's properties to secure any of the
Company's indebtedness and (iii) the voluntary or involuntary bankruptcy of such
subsidiary.
EMPLOYEES
As of October 28, 1997, the Company employed 31 individuals on either a full
or part-time basis.
LEGAL PROCEEDINGS
The Company is not presently involved in any material litigation, nor to its
knowledge is any material litigation threatened against the Company or its
Properties, other than routine litigation arising in the ordinary course of
business.
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of the Company's policies with respect to
investments, financings, affiliate transactions and certain other activities.
The Company's policies with respect to these activities have been established by
the Board and may be amended or revised from time to time at the discretion of
the Board without a vote of the stockholders of the Company. No assurance can be
given that the Company's investment objectives will be attained or that the
value of the Company will not decrease in connection with their implementation.
USRP Managing, as the sole general partner of the Operating Partnership,
determines the investment policies of the Operating Partnership.
INVESTMENT POLICIES
INVESTMENTS IN REAL ESTATE OR INTERESTS IN REAL ESTATE. The Company seeks
to maximize sustainable growth in FFO and cash available for distribution to
stockholders through effective management, operation, acquisition and selective
development of restaurant properties. The Company believes it can achieve its
goal of increasing FFO and cash available for distribution per share by (i)
acquiring high quality restaurant properties at attractive returns, (ii)
realizing contractual rental rate escalations or percentage rent on existing
leases, (iii) releasing space at increased rental rates, when market conditions
warrant, as leases expire, (iv) selectively developing properties where the
Company can secure leases prior to construction and where such development is
expected to result in returns on investment that the Company
S-56
<PAGE>
believes will exceed returns on comparable acquisitions, and (v) actively
managing the Company's portfolio, including periodically re-evaluating all
assets for strategic disposition or repositioning. In pursuing its growth
strategy, the Company intends to maintain a conservative capital structure
providing it flexibility to access capital markets when financial and market
conditions warrant, thereby enabling it to take advantage of growth
opportunities as they arise. The Company's policy is to acquire or develop
assets where the Company believes that opportunities exist for acceptable
investment returns. See "The Company."
The Company may also participate with other entities in property ownership,
through joint ventures or other types of common ownership. Equity investments
may be subject to existing mortgage financing and other indebtedness which have
priority over the equity interests of the Company.
INVESTMENTS IN REAL ESTATE MORTGAGES. While the Company intends to
emphasize equity real estate investments, it may, in management's discretion,
invest in mortgages or other real estate interests consistent with its
qualification as a REIT. The Company may also invest in participating or
convertible mortgages if the Board concludes that the Company and its
stockholders may benefit from the cash flow or any appreciation in the value of
the subject property. Such mortgages are similar to equity participations. The
mortgages in which the Company may invest may be either first mortgages or
junior mortgages and may or may not be insured by a governmental agency.
SECURITIES OF OR INTERESTS IN PERSONS PRIMARILY ENGAGED IN REAL ESTATE
ACTIVITIES AND OTHER ISSUERS. Subject to the restrictions on ownership of voting
securities and gross income tests necessary for REIT qualification, the Company
also may invest in securities of entities engaged in real estate activities or
securities of other issuers, including for the purpose of exercising control
over such entities, although it does not intend to do so. See "--Certain Other
Policies" and "Federal Income Tax Considerations."
PERIODIC REVIEW OF ASSETS. The Company has no current intention to dispose
of any of its Properties. Nevertheless, the Company reserves the right to
dispose of any of its Properties or any property that may be acquired in the
future if the Company determines that the disposition of such property is in the
best interests of the Company and its stockholders.
FINANCING POLICIES
The Company intends to make additional investments in restaurant properties
and may incur indebtedness to make such investments or to meet the distribution
requirements imposed by the REIT provisions of the Code to the extent that cash
flows from the Company's investments and working capital is insufficient to meet
such requirements. The Company has adopted a policy to limit its total
consolidated indebtedness so that at the time any debt is incurred, the
Company's debt to total market capitalization ratio does not exceed 50%. Upon
consummation of this offering and the application of the proceeds therefrom as
described under "Use of Proceeds," the Company's debt to total market
capitalization ratio will be approximately 23%. The Charter and Company's
Bylaws, however, do not limit the amount or percentage of indebtedness that the
Company may incur. The Board may, from time to time, modify the Company's debt
policy in light of current economic conditions, relative costs of debt and
equity capital, market values of its properties, general conditions in the
market for debt and equity securities, fluctuations in the market price of the
Common Stock, growth and acquisition opportunities, the Company's continued REIT
qualification requirements and other factors. Accordingly, the Company may
increase or decrease its debt to total market capitalization ratio beyond the
limits described above. If these policies were changed, the Company could become
more highly leveraged, resulting in an increased risk of default on its
obligations and a related increase in debt service requirements that could
adversely affect the Company's financial condition and its ability to make
distributions to stockholders. See "Risk Factors--Real Estate Investment Risks"
and "--No Restrictions on Changes in Investment, Financing and Other Policies."
S-57
<PAGE>
The Company has established its debt policy relative to the total market
capitalization of the Company computed at the time debt is incurred, rather than
relative to the book value of its assets. The Company believes that the book
value of its assets (which to a large extent is the depreciated value of real
property, the Company's primary tangible asset) does not accurately reflect its
ability to borrow and to meet debt service requirements and that a debt to total
market capitalization ratio, therefore, provides a more appropriate indication
of leverage. A debt to total market capitalization ratio, however, is based, in
part, upon the aggregate market value of the outstanding shares of Common Stock
and will fluctuate with the changes in the price of the Common Stock (and the
issuance of additional shares of Common Stock). Accordingly, because the
measurement of the Company's total consolidated indebtedness to total market
capitalization is made at the time debt is incurred, the debt to total market
capitalization ratio could later exceed the 50% level.
To the extent that the Board desires to obtain additional capital, the
Company may raise such capital through additional public and private equity
offerings, debt financings, retention of cash flow (subject to satisfying the
Company's distribution requirements under the REIT provisions of the Code) or a
combination of these methods. The Company's debt may consist of a combination of
property level debt and corporate level debt, and financing may consist of
floating and/or fixed rate debt. Borrowings may be unsecured or secured by any
or all of the assets of the Company and have full or limited recourse to all or
any portion of the assets of the Company. Indebtedness may be in the form of
bank borrowings, purchase money obligations to sellers of properties, publicly
or privately placed debt instruments or financing from institutional investors
or other lenders. The proceeds from any borrowings by the Company may be used
(subject to limitations which may be contained in the instruments governing such
indebtedness) to pay distributions, to provide working capital, to pay existing
indebtedness or to finance acquisitions, expansions or selective development of
new properties. The Company has not established any limit on the number or
amount of mortgages that may be placed on any single property or on its
portfolio.
As another policy, the Company intends to generally not incur variable-rate
mortgage debt other than the indebtedness outstanding under its Existing Credit
Facility. While the organizational documents of the Company do not contain any
prohibition against the use of variable rate mortgage loans, the Company
believes that it is a more prudent and conservative financing strategy to
utilize only fixed rate mortgage loans for all long-term indebtedness.
In the event that the Board determines to raise additional equity capital,
the Board has the authority, without stockholder approval, to issue additional
shares of Common Stock or shares of Preferred Stock in any manner (and on such
terms and for such consideration) it deems appropriate, including in exchange
for property, subject to Maryland law. Existing stockholders would have no
preemptive right to purchase such shares in any offering, and any such offering
might cause a dilution of a stockholder's investment in the Company. If the
Board determines to raise additional equity capital to fund investments by the
Operating Partnership, the Company will contribute such funds to the Operating
Partnership as a contribution to capital and purchase of additional partnership
interests. The Company may issue additional shares of Common Stock in connection
with the acquisition of OP Units that have been tendered to the Operating
Partnership for redemption. The Board also has the authority to cause the
Operating Partnership to issue OP Units in exchange for property. Any OP Units
issued by the Operating Partnership in the future will be exchangeable at the
option of the holder for shares of Common Stock.
AFFILIATE TRANSACTION POLICY
The Company has adopted a policy that it will not (i) acquire from or sell
to any director, officer or employee of the Company, or any entity in which a
director, officer or employee of the Company beneficially owns more than a 1%
interest, or, except for any property in which the Company owns an economic
interest, acquire from or sell to any affiliate of any of the foregoing, any
property or other assets of the Company, (ii) make any loan to or borrow from
any of the foregoing persons, or (iii) without the approval of a majority of the
independent directors, engage in any other transaction with any of the
S-58
<PAGE>
foregoing persons. Currently, the Charter does not restrict the ability of any
director, officer, security holder or affiliate of the Company from acquiring,
owning or managing chain restaurants on the Properties or elsewhere.
CERTAIN OTHER POLICIES
The Company intends to operate in a manner that will not subject it to
regulation under the Investment Company Act of 1940. The Company does not intend
to (i) invest in the securities of other issuers for the purpose of exercising
control over such issuer, (ii) underwrite securities of other issuers, or (iii)
actively trade in loans or other investments.
The Company may make investments other than as previously described,
although it does not currently intend to do so. The Company has authority to
purchase or otherwise reacquire shares of Common Stock or any of its other
securities in the open market or otherwise and may engage in such activities in
the future. The Board has no present intention of causing the Company to
repurchase any shares of Common Stock, other than pursuant to any dividend
reinvestment plan, and any such action would be taken only in conformity with
applicable Federal and state laws and the requirements for qualifying as a REIT
under the Code.
The Company has previously made loans to third parties, and it may in the
future continue to make loans to third parties, including, without limitation,
loans to joint ventures in which it participates. The Company has not engaged in
trading, underwriting or agency distribution or sale of securities of other
issuers, and the Company does not intend to do so in the future. The Company's
policies with respect to such activities may be reviewed and modified from time
to time by the Board without the vote of the stockholders.
S-59
<PAGE>
MANAGEMENT
DIRECTORS AND OFFICERS
The officers and directors of the Company as of October 31, 1997 are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) AND OFFICES HELD
- ------------------------------------------- --- -------------------------------------------
<S> <C> <C>
Robert J. Stetson.......................... 47 Chief Executive Officer, President and
Director
Fred H. Margolin........................... 47 Chairman of the Board, Treasurer and
Secretary
Michael D. Warren.......................... 47 Director of Finance
David Pettijohn............................ 31 Director of Acquisitions
William N. Mabus........................... 52 Director of Development
Patrick K. Sauer........................... 33 Director of Development
Elizabeth Pettijohn........................ 35 Controller
Gerald H. Graham(1)........................ 59 Director
David K. Rolph............................. 48 Director
Darrel L. Rolph............................ 59 Director
Eugene G. Taper(1)......................... 59 Director
</TABLE>
- ------------------------
(1) Member of the Audit Committee.
ROBERT J. STETSON. Mr. Stetson has been the Chief Executive Officer and
President and a director of the Company since its formation in January 1997.
Since May 1994, Mr. Stetson has been Chief Executive Officer and President and a
director of QSV. From 1987 until 1992, Mr. Stetson served as the Chief Financial
Officer and later President-Retail Division of Burger King Corporation and Chief
Financial Officer and later Chief Executive Officer of Pearle Vision. As Chief
Financial Officer of Burger King Corporation, Mr. Stetson was responsible for
managing more than 950 restaurants that Burger King Corporation leased to
tenants. Prior to 1987, Mr. Stetson served in several positions with PepsiCo
Inc. and its subsidiaries, including Chief Financial Officer of Pizza Hut, Inc.
Since 1978, Mr. Stetson has been primarily engaged in restaurant chain
management, including the acquisition and management of restaurant properties.
Mr. Stetson received a bachelor of arts degree from Harvard College and an MBA
from Harvard Business School. Mr. Stetson is 47 years old.
FRED H. MARGOLIN. Mr. Margolin has been the Chairman of the Board,
Treasurer, Secretary and a director of the Company since its formation in
January 1997. Since May 1994, Mr. Margolin has been the Chairman of the Board of
Directors, Treasurer and Secretary of QSV. In 1977, Mr. Margolin founded
Intercon General Agency, a national general insurance agency specializing in the
development and marketing of insurance products for financial institutions. Mr.
Margolin served as the Chief Executive Officer of Intercon General Agency from
its inception until its sale to a public company in 1982 after having developed
it into a national presence. In 1989, Mr. Margolin founded and became the
President of American Eagle Premium Finance Company. From 1982 through 1992, Mr.
Margolin developed and then leased or sold shopping centers having an aggregate
cost of approximately $50,000,000 as well as developing land and purchasing
residential properties. Mr. Margolin received a bachelor of science degree from
the Wharton School of the University of Pennsylvania and an MBA from Harvard
Business School. Mr. Margolin is 47 years old.
S-60
<PAGE>
MICHAEL D. WARREN. Mr. Warren is the Director of Finance of the Company.
Mr. Warren is a CPA and a 15 year veteran of the food service industry with an
extensive financial background. He served 12 years with PepsiCo Inc.'s food
service operations in various financial positions, including Controller of their
international restaurant group. He also was on the team of officers that put
together the initial public stock offering for Rare Hospitality, Inc., the New
England steak house chain acquired in 1996 by Longhorn Steakhouse. Most recently
he was Chief Financial Officer for a 24 unit Hardee's-Registered Trademark-
franchise based in Savannah, Georgia. Mr. Warren is 47 years old.
DAVID PETTIJOHN. Mr. Pettijohn is the Director of Acquisitions of the
Company. Mr. Pettijohn joined USRP in April of 1995 to implement USRP's
acquisitions program. His previous experience includes over 11 years of real
estate transactions experience. Most recently Mr. Pettijohn worked for an
apartment REIT, South West Property Trust, where he acquired existing apartments
and raw land for new development. Previous to this position, he was with the L &
B Group, a real estate advisor to both public and corporate pension funds in the
acquisition of office buildings and regional malls. Mr. Pettijohn earned a
bachelor of science degree in economics from Southern Methodist University. Mr.
Pettijohn is 31 years old.
PATRICK K. SAUER. Mr. Sauer is the Director of Development of the Company.
Mr. Sauer has a bachelors degree in civil engineering, as well as an MBA.
Between 1988 and 1996, Mr. Sauer was with the Mobil Oil Corporation, where among
other things, he was responsible for the development and remodeling of retail
outlets, retail engineering design and environmental engineering activities. He
also held the position of State Legislative and Regulator Advisor, working with
business units and state regulatory agencies to develop or refine environmental
regulations. Mr. Sauer is 33 years old.
WILLIAM N. MABUS. Mr. Mabus is the Director of Development of the Company.
Mr. Mabus has 24 years experience in real estate development. In 1983 he started
his own development company, which after one year, merged with Property Company
of America. During the past six years Mr. Mabus has worked on several major
projects. He recently completed a major facility for the Super Conducting Super
Collider. Mr. Mabus has served as a past board member of the Dallas Building
Owners and Managers Association. He has a bachelor of science in industrial
engineering, an MBA and has earned certifications as a Real Property
Administrator and a Real Estate Broker. Mr. Mabus is 52 years old.
ELIZABETH PETTIJOHN. Ms. Pettijohn is the Controller of the Company. Ms.
Pettijohn is a CPA with 12 years of combined experience in federal tax, SEC and
financial reporting. Ms. Pettijohn has former experience with Price Waterhouse,
KPMG Peat Marwick, and Markborough Development. Ms. Pettijohn graduated cum
laude with a bachelors degree in accounting from Texas A & M University. Ms.
Pettijohn also earned a masters degree in federal taxation from Texas A & M
University. Ms. Pettijohn is 35 years old.
GERALD H. GRAHAM. Mr. Graham is a director of the Company and a member of
the Audit Committee. Mr. Graham is a professor and the Dean of the Barton School
of Business at Wichita State University. Mr. Graham is 59 years old.
DAVID K. ROLPH. Mr. Rolph is a director of the Company. Mr. Rolph is the
President of the Tex-Mex restaurant chain, Carlos O'Kelly's, and the Vice
President of Sasnak Management Corp., a restaurant management company, positions
he has held for the past five years. Mr. Rolph is 48 years old.
DARREL L. ROLPH. Mr. Rolph is a director of the Company. Mr. Rolph is the
Secretary of Carlos O'Kelly's and the President of the Sasnak Management Corp.,
a restaurant management company, positions he has held for the past five years.
Mr. Rolph is 59 years old.
EUGENE G. TAPER. Mr. Taper is a director of the Company and a member of the
Audit Committee. Mr. Taper has been a certified public accountant and a business
consultant since 1993. Prior to 1993, Mr. Taper was a partner of Deloitte &
Touche LLP, an international public accounting firm. Mr. Taper is 59 years old.
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<PAGE>
EXECUTIVE COMPENSATION
The Company was incorporated in January 1997. Accordingly, the Company did
not pay any cash compensation to its executive officers for the year ended
December 31, 1996. The following table sets forth the estimated annualized base
salary expected to be paid to each of the Company's executive officers for the
1997 fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------------------------
NAME AND OTHER ANNUAL
PRINCIPAL POSITION SALARY BONUS(1) COMPENSATION(1)
- --------------------------------------------------------------- ---------- ------------- -------------------
<S> <C> <C> <C>
Robert J. Stetson
Chief Executive Officer and President........................ $ 250,000 -- --
Fred H. Margolin
Chairman of the Board, Treasurer and Secretary............... $ 250,000 -- --
</TABLE>
- ------------------------
(1) Any bonuses or other annual compensation paid to the Company's executive
officers will be at the discretion of the Board and will be payable
following the conclusion of the applicable fiscal year.
EMPLOYMENT AGREEMENTS
Each of Messrs. Stetson and Margolin entered into an employment agreement
(the "Employment Agreements") with the Company as of October 15, 1997. Each of
the Employment Agreements will expire on the fourth anniversary of the date
thereof. Pursuant to the Employment Agreements, Mr. Stetson will serve as Chief
Executive Officer and President of the Company and will be paid an annual base
salary of $250,000, and Mr. Margolin will serve as Chairman of the Board,
Treasurer and Secretary of the Company and will be paid an annual base salary of
$250,000. The Employment Agreements provide for salary raises at the discretion
of the Board, provided that, prior to December 31, 2000, neither Mr. Stetson nor
Mr. Margolin will receive cash compensation (I.E., excluding the value of any
equity-based compensation, such as stock options or shares of restricted stock)
in excess of $300,000.
Under the terms of the respective Employment Agreements, if the covered
executive's employment with the Company is terminated by the Company other than
for "cause" (as defined in the Employment Agreement) or by "constructive
discharge" (as defined in the Employment Agreement), the terminated executive
will be entitled to receive an amount equal to two times the highest annualized
rate of salary prior to the date of termination. In the event such covered
executive's employment is terminated without cause or by constructive discharge
within three years following a "change in control" (as defined in the Employment
Agreement), the Employment Agreements also provide for the payment of severance
compensation in an amount equal to 2.99 times the covered executive's
compensation (which includes both salary and any cash bonus).
INDEMNIFICATION AGREEMENTS
The Company has entered into indemnification agreements requiring the
Company to indemnify its officers and directors, and advance expenses, to the
maximum extent permitted by Maryland law. See "Certain Provisions of Maryland
Law and of the Company's Charter and Bylaws--Limitation of Liability and
Indemnification."
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On October 15, 1997, the Company effected the Conversion of USRP into a
self-administered and self-managed REIT. The Conversion was effected through the
Merger of USRP Acquisition, L.P., an indirectly wholly-owned Delaware limited
partnership subsidiary of the Company, with and into USRP. As
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<PAGE>
a result of the Merger, USRP became a subsidiary of the Company and, at the
effective time of the Merger, all holders of Units became stockholders of the
Company. On October 16, 1997, the Common Stock, in replacement of the Units,
commenced trading on the NYSE under the symbol "USV."
The Company operates as a holding company with the business and operations
of the Company being conducted through the Operating Partnership. The Company
undertook the Conversion to facilitate access to lower cost debt financing and
to the capital markets, provide greater flexibility for acquisitions and to
reduce administrative burdens associated with operating as a partnership.
In connection with the Conversion, QSV withdrew as general partner of each
of USRP and the Operating Partnership effective as of October 15, 1997, and USRP
Managing was substituted as general partner of each of USRP and the Operating
Partnership. In conjunction with such withdrawal, QSV (i) converted its
interests in (a) its allocable share of income, profits, losses and
distributions of the Operating Partnership as general partner thereof and (b)
fees and disbursements for the acquisition and management of the Operating
Partnership's properties (together, the "Operating Partnership General Partner
Interest") payable to it pursuant to the terms of the partnership agreement of
the Operating Partnership and (ii) converted its general partner interest in
USRP (the "USRP Interest") (together with the conversion of its interests in the
Operating Partnership described above, the "Termination") for 1,148,420 OP Units
and 126,581 shares of Common Stock, respectively, and as a result of such
conversion will be eligible to receive additional consideration in the year 2000
(together, the "Acquisition Price").
The Acquisition Price consists of two components: (i) the initial share
consideration (the "Initial Share Consideration") and (ii) the contingent share
consideration (the "Contingent Share Consideration"). The Initial Share
Consideration was paid in the form of 1,148,420 OP Units in exchange for the
Operating Partnership General Partner Interest and 126,581 shares of Common
Stock (1% of all shares of Common Stock outstanding immediately following the
Merger) issued by the Company at the effective time of the Merger in exchange
for the USRP Interest. The Contingent Share Consideration is equal to the value
of up to 825,000 shares of Common Stock (subject to adjustment in the event of
certain dilutive events), and shall consist of OP Units (the "Contingent
Shares"). The exact number of Contingent Shares to be issued will be determined
by dividing the fees and distributions (in excess of $3,612,500) which would
otherwise have been payable to QSV for fiscal year ended December 31, 2000
pursuant to the Operating Partnership General Partner Interest and the USRP
Interest (less certain expenses to be incurred by the Company following the
Termination) by $2.83. QSV will not receive any distributions with respect to
the Contingent Shares, or otherwise have any rights with respect thereto, until
they are issued. The Contingent Shares shall be issued by the Operating
Partnership as soon as practicable following the end of the year 2000, but in no
event later than March 31, 2001. The Company anticipates that all of the
Contingent Shares will be issued.
In addition, QSV holds options (the "Options") to purchase 420,000 shares of
Common Stock pursuant to an Option Agreement, dated March 24, 1995, by and
between USRP and QSV, which Options were assumed by the Company pursuant to the
Merger. All of the Options are fully vested and exercisable. The Options are
exercisable at an exercise price of $10.33 per share. The Options are not
transferable except by operation of law pursuant to a consolidation, merger,
recapitalization or reorganization of QSV.
Messrs. Stetson, Margolin, David Rolph and Darrel Rolph are the stockholders
and directors of QSV.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of shares of Common Stock by (i) each person who is a stockholder of
the Company holding more than 5% of the outstanding shares of Common Stock, (ii)
each director and each executive officer and (iii) all directors and executive
officers of the Company as a group. Except as otherwise indicated, each person
named in the table has sole voting and investment power with respect to all
shares of Common Stock shown as beneficially owned by such person.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE
NAME AND ADDRESS OF BENEFICIALLY OF
BENEFICIAL OWNER(1) OWNED ALL SHARES
- ------------------------------------------------------ ----------------- ------------
<S> <C> <C>
Robert J. Stetson..................................... 37,650(2)(3) *
William N. Mabus...................................... -- --
Fred H. Margolin...................................... 57,847(2)(3) *
David Pettijohn....................................... 5,850 *
Elizabeth Pettijohn................................... 373 *
David K. Rolph........................................ 4,500(2) *
Darrel L. Rolph....................................... 6,000(2) *
Patrick K. Sauer...................................... -- --
Eugene G. Taper....................................... 1,612 *
Michael D. Warren..................................... 1,200 *
QSV Properties, Inc................................... 1,845,001(4) 13.0
All directors and officers as a group (11 persons).... 115,032(2)(3) *
</TABLE>
- --------------------------
* Less than 1%.
(1) The address of each of these persons and entities is 5310 Harvest Hill Road,
Suite 270, Dallas, Texas 75230.
(2) Excludes 1,845,001 shares beneficially owned by QSV, of which Messrs.
Stetson, Margolin, David Rolph and Darrel Rolph are the stockholders and
directors, and as to which each such person disclaims beneficial ownership.
(3) Includes 15,000 shares issuable upon the exercise of an option which is
immediately exercisable.
(4) Includes 1,148,420 OP Units each of which are immediately exchangeable for
one share of Common Stock and 420,000 shares of Common Stock issuable upon
the exercise of an option which is immediately exercisable.
DESCRIPTION OF SERIES A PREFERRED STOCK
THIS DESCRIPTION OF THE PARTICULAR TERMS OF THE SERIES A PREFERRED STOCK
SUPPLEMENTS AND, TO THE EXTENT INCONSISTENT THEREWITH, REPLACES THE DESCRIPTION
OF THE GENERAL TERMS AND PROVISIONS OF THE PREFERRED STOCK SET FORTH IN THE
ACCOMPANYING PROSPECTUS, TO WHICH DESCRIPTIVE REFERENCE IS HEREBY MADE.
GENERAL
The Company is authorized to issue up to 50 million shares of Preferred
Stock, of which no shares are currently outstanding. The Preferred Stock may be
issued from time to time in one or more series, without stockholder approval,
with such preferences, conversion and other rights, voting powers, restrictions
and limitations as to dividends, qualifications and terms and conditions of
redemption thereof as are permitted by Maryland law and as shall be established
by the Board.
Prior to completion of this offering of Series A Preferred Stock, the Board
will adopt an amendment to the Charter (the "Articles Supplementary")
determining the terms of a series of Preferred Stock consisting of up to
3,680,000 shares, designated $ Series A Cummulative Convertible Preferred
Stock. The following summary of the terms and provisions of the Series A
Preferred Stock does not
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purport to be complete and is qualified in its entirety by reference to the
pertinent sections of the Charter and the Articles Supplementary creating the
Series A Preferred Stock.
SERIES A PREFERRED STOCK
On September 4, 1997, the Board of Directors authorized the Company to
classify and issue the Series A Preferred Stock as part of the 50 million shares
of the Company's authorized Preferred Stock.
When issued, the Series A Preferred Stock will be validly issued, fully paid
and nonassessable. The holders of the Series A Preferred Stock will have no
preemptive rights with respect to any shares of capital stock of the Company or
any other securities of the Company convertible into or carrying rights or
options to purchase any such shares. The Series A Preferred Stock will not be
subject to any sinking fund or other obligation of the Company to redeem or
retire the Series A Preferred Stock. Unless converted into shares of Common
Stock or redeemed by the Company, the Series A Preferred Stock will have a
perpetual term, with no maturity. Application has been made to list the Series A
Preferred Stock on the NYSE under the symbol "USVpA."
In a similar manner to all other sales of the Company's capital stock, the
Company will contribute the net proceeds from this offering of Series A
Preferred Stock to the Operating Partnership in exchange for an equivalent
number of units of limited partner interest in the Operating Partnership
("Preferred Units"), and the Operating Partnership will use such contributed net
proceeds in the manner described under "Use of Proceeds." Pursuant to the
Partnership Agreement, the Preferred Units received by the Company in connection
with this offering will, in general, have, with respect to other OP Units,
rights and preferences (including preferential rights to distributions) that are
analogous to the rights and preferences that the Series A Preferred Stock has
with respect to Common Stock.
RANKING
The Series A Preferred Stock will rank senior to the Common Stock with
respect to payment of dividends and amounts upon liquidation, dissolution or
winding up of the Company.
While any shares of Series A Preferred Stock are outstanding, the Company
may not authorize, create or increase the authorized amount of any class or
series of stock that ranks prior or senior to the Series A Preferred Stock with
respect to the payment of dividends or amounts upon liquidation, dissolution or
winding up without the consent of the holders of two-thirds of the outstanding
shares of Series A Preferred Stock and all other shares of Voting Preferred
Stock (defined below), voting as a single class. However, the Company may create
additional classes of stock, increase the authorized number of shares of
Preferred Stock or issue series of Preferred Stock which rank on a parity with
the Series A Preferred Stock with respect, in each case, to the payment of
dividends and amounts upon liquidation, dissolution or winding up of the Company
(a "Parity Stock") without the consent of any holder of Series A Preferred
Stock. See "--Voting Rights."
DIVIDENDS
Holders of shares of Series A Preferred Stock will be entitled to receive,
when and as declared by the Board, out of funds of the Company legally available
for payment thereof, cumulative cash dividends payable in an amount per share
equal to the greater of (i) $ per quarter (equivalent to $ per annum) or
(ii) the cash dividends paid or payable (determined on each of the quarterly
dividend payment dates referred to below) on a number of shares of Common Stock
equal to the number of shares of Common Stock (or portion thereof) into which a
share of Series A Preferred Stock is convertible. Dividends on the Series A
Preferred Stock will be payable quarterly in arrears on or about the 15th day
(or the next succeeding business day) of March, June, September and December
commencing with respect to the period commencing on the date of
issue and ending (and in the case of any accumulated or accrued
but unpaid dividends, at such
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additional times for such interim periods, if any, as determined by the Board).
Each such dividend will be payable to holders of record as they appear on the
stock records of the Company at the close of business on such record dates, not
exceeding 60 days preceding the payment dates thereof, as shall be fixed by the
Board. Dividends will accrue from the date of original issuance of the Series A
Preferred Stock. Dividends will be cumulative from such date, whether or not in
any dividend period or periods such dividends shall be declared or there shall
be funds of the Company legally available for the payment of such dividends.
Accumulated dividends on shares of Series A Preferred Stock will not bear
interest. Dividends payable on the Series A Preferred Stock for any period less
than a full dividend period will be computed on the basis of twelve 30-day
months and a 360-day year.
Except as provided in the next sentence, no dividend will be declared or
paid or other distribution of cash or other property declared or made directly
by the Company or any affiliate or any person acting on behalf of the Company or
any of its affiliates on any Parity Stock unless full cumulative dividends have
been declared and paid or are contemporaneously declared and funds sufficient
for payment set aside on the Series A Preferred Stock for all prior and
contemporaneous dividend periods. If accumulated and accrued dividends on the
Series A Preferred Stock for all prior and contemporaneous dividend periods have
not been paid in full, then any dividend declared on the Series A Preferred
Stock for any dividend period and on any Parity Stock will be declared ratably
in proportion to accumulated, accrued and unpaid dividends on the Series A
Preferred Stock and the Parity Stock.
Neither the Company nor any affiliate nor any person acting on behalf of the
Company or any of its affiliates will (i) declare, pay or set apart funds for
the payment of any dividend or other distribution of cash or other property
declared or made directly or indirectly by the Company or any such affiliate or
person with respect to any Junior Stock (as defined below) or (ii) redeem,
purchase or otherwise acquire for consideration any Junior Stock through a
sinking fund or otherwise (other than a redemption or purchase or other
acquisition of shares of Common Stock made for purposes of an employee incentive
or benefit plan of the Company or any subsidiary) or (iii) pay or distribute any
cash or other property for the benefit of any holder of Junior Stock in respect
thereof, directly or indirectly, unless (A) all cumulative dividends with
respect to the Series A Preferred Stock and any Parity Stock at the time such
dividends are payable have been paid or such dividends have been declared and
funds have been set apart for payment of such dividends and (B) sufficient funds
have been paid or set apart for the payment of the dividend for the current
dividend period with respect to the Series A Preferred Stock and any Parity
Stock. The foregoing limitations do not restrict the Company's ability to take
the foregoing actions with respect to any Parity Stock.
As used herein, (i) the term "dividend" does not include dividends payable
solely in shares of Junior Stock on Junior Stock, or in options, warrants or
rights to holders of Junior Stock to subscribe for or purchase any Junior Stock,
and (ii) the term "Junior Stock" means the Common Stock, and any other class of
capital stock of the Company now or hereafter issued and outstanding that ranks
junior to the Series A Preferred Stock as to the payment of dividends or amounts
upon liquidation, dissolution or winding up of the Company.
REDEMPTION
Shares of Series A Preferred Stock will not be redeemable by the Company
prior to . On and after , the shares of Series
A Preferred Stock will be redeemable, in whole or in part, at the option of the
Company, either, (i) for such number of authorized but previously unissued
shares of Common Stock as equals the per share liquidation preference of the
Series A Preferred Stock to be redeemed (without regard to accumulated, accrued
and unpaid dividends, if any, to the date set for redemption, which are to be
paid in cash, whether or not earned or declared) divided by the Conversion Price
as of the opening of business on the date set for such redemption (equivalent to
a conversion rate of shares of Common Stock for each share of Series A
Preferred Stock), subject to adjustment in certain circumstances, or (ii) for
cash at a redemption price of $25.00, plus
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any accumulated, accrued and unpaid dividends, whether or not earned or
declared. The Company may exercise this option to deliver Common Stock upon
redemption only if for 20 trading days within any period of 30 consecutive
trading days, including the last trading day of such period, the closing price
of the Common Stock on the NYSE (or such other exchange or quotation system as
the Common Stock is listed or quoted on) equals or exceeds the Conversion Price
per share in effect on such trading days, subject to adjustments in certain
circumstances. In order to exercise this redemption option, the Company must
issue a press release announcing the redemption prior to the opening of business
on the second trading day after the conditions in the preceding sentences have,
from time to time, been met.
Notice of redemption will be given by mail or by publication (with
subsequent prompt notice by mail) to the holders of record of the Series A
Preferred Stock not more than four business days after the Company issues the
press release, in the case of a redemption for Common Stock, or not less than 30
nor more than 60 days prior to the date of redemption, in the case of a
redemption for cash. The redemption date will be a date selected by the Company
not less than 30 nor more than 60 days after the date on which the Company gives
the notice of redemption or issues the press release announcing its intention to
redeem the Series A Preferred Stock, as the case may be. If fewer than all of
the shares of Series A Preferred Stock are to be redeemed, the shares to be
redeemed shall be selected by lot or pro rata or in some other equitable manner
determined by the Company.
On the redemption date, the Company must pay in cash on each share of Series
A Preferred Stock to be redeemed any accumulated, accrued and unpaid dividends,
if any, on the redemption date, whether or not earned or declared. In the case
of a redemption date falling after a dividend record date and prior to the
related dividend payment date, the holders of the Series A Preferred Stock at
the close of business on such record date will be entitled to receive the
dividend payable on such shares on the corresponding dividend payment date,
notwithstanding the redemption of such shares following such dividend record
date. Except as provided for in the preceding sentences, no payment or allowance
will be made for accumulated or accrued dividends on any shares of Series A
Preferred Stock called for redemption or on the shares of Common Stock issuable
upon such redemption.
In the event that full cumulative dividends on the Series A Preferred Stock
and any Parity Stock have not been paid or declared and set apart for payment,
the Series A Preferred Stock may not be redeemed in part and the Company may not
purchase or acquire shares of Series A Preferred Stock otherwise than pursuant
to a purchase or exchange offer made on the same terms to all holders of Series
A Preferred Stock.
On and after the date fixed for redemption, provided that the Company has
made available at the office of the registrar and transfer agent a sufficient
number of shares of Common Stock and/or an amount of cash to effect the
redemption, dividends will cease to accumulate or accrue on the Series A
Preferred Stock called for redemption (except that, in the case of a redemption
date after a dividend record date and prior to the related dividend payment
date, holders of Series A Preferred Stock on the dividend record date will be
entitled on such dividend payment date to receive the dividend payable on such
shares), such shares shall no longer be deemed to be outstanding and all rights
of the holders of such shares of Series A Preferred Stock shall cease except the
right to receive the shares of Common Stock upon such redemption and/or any cash
payable upon such redemption, without interest from the date of such redemption.
At the close of business on the redemption date, each holder of Series A
Preferred Stock to be redeemed (unless the Company defaults in the delivery of
the Common Stock or cash) will be, without any further action, deemed a holder
of the number of shares of Common Stock and/or the amount of cash for which such
Series A Preferred Stock is redeemable.
Fractional shares of Common Stock will not be issued upon redemption of the
Series A Preferred Stock, but, in lieu thereof, the Company will pay an amount
in cash based on the current market price of the Common Stock on the day prior
to the redemption date.
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LIQUIDATION PREFERENCE
The holders of Series A Preferred Stock will be entitled to receive in the
event of any liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary, $25.00 per share of Series A Preferred Stock plus an
amount per share of Series A Preferred Stock equal to all dividends (whether or
not earned or declared) accumulated, accrued and unpaid thereon to the date of
final distribution to such holders (the "Liquidation Preference"), and no more.
Until the holders of the Series A Preferred Stock have been paid the
Liquidation Preference in full, no payment will be made to any holder of Junior
Stock upon the liquidation, dissolution or winding up of the Company. If, upon
any liquidation, dissolution or winding up of the Company, the assets of the
Company, or proceeds thereof, distributable among the holders of Series A
Preferred Stock are insufficient to pay in full the Liquidation Preference and
the liquidation preference with respect to any other shares of Parity Stock,
then such assets, or the proceeds thereof, will be distributed among the holders
of Series A Preferred Stock and such Parity Stock ratably in accordance with the
respective amounts which would be payable on such shares of Series A Preferred
Stock and such Parity Stock if all amounts payable thereon were paid in full.
Neither a consolidation or merger of the Company with another corporation, a
statutory share exchange by the Company nor a sale or transfer of all or
substantially all of the Company's assets will be considered a liquidation,
dissolution or winding up, voluntary or involuntary, of the Company.
VOTING RIGHTS
Except as indicated below, or except as otherwise from time to time required
by applicable law, the holders of Series A Preferred Stock will have no voting
rights.
If six quarterly dividends payable on the Series A Preferred Stock or any
other Parity Stock are in arrears, whether or not earned or declared, the number
of directors then constituting the Board will be increased by two and the
holders of Series A Preferred Stock, voting together as a class with the holders
of any other series of Parity Stock (any such other series, the "Voting
Preferred Stock"), will have the right to elect two additional directors to
serve on the Board at an annual meeting of stockholders or special meeting held
in place thereof, or at a properly called special meeting of the holders of the
Series A Preferred Stock and such Voting Preferred Stock and at each subsequent
annual meeting of stockholders or special meeting held in place thereof, until
all such dividends in arrears and dividends for the current quarterly period on
the Series A Preferred Stock and such Voting Preferred Stock have been paid or
declared and set aside for payment.
The approval of the holders of two-thirds of the outstanding shares of
Series A Preferred Stock and all other series of Voting Preferred Stock
similarly affected, voting as a single class, will be required in order to amend
the Charter to affect materially and adversely the rights, preferences or voting
power of the holders of the Series A Preferred Stock or the Voting Preferred
Stock or to authorize, create, or increase the authorized amount of, any class
of stock having rights prior or senior to the Series A Preferred Stock with
respect to the payment of dividends or amounts upon liquidation, dissolution or
winding up. However, the Company may create additional classes of Parity or
Junior Stock, increase the authorized number of shares of Parity or Junior Stock
and issue additional series of Parity or Junior Stock without the consent of any
holder of Series A Preferred Stock.
Except as required by law, the holders of Series A Preferred Stock will not
be entitled to vote on any merger or consolidation involving the Company or a
sale of all or substantially all of the assets of the Company. See "--Conversion
Price Adjustments."
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CONVERSION RIGHTS
Shares of Series A Preferred Stock will be convertible, in whole or in part,
at any time, at the option of the holder thereof, into authorized but previously
unissued shares of Common Stock at the Conversion Price. The right to convert
shares of Series A Preferred Stock called for redemption will terminate at the
close of business on the redemption date for such shares. For information as to
notices of redemption, see "--Redemption."
Conversion of shares of Series A Preferred Stock, or a specified portion
thereof, may be effected by delivering certificates evidencing such shares,
together with written notice of conversion and a proper assignment of such
certificates to the Company or in blank, to the office or agency to be
maintained by the Company for that purpose. Initially such office will be at the
principal corporate trust office of American Stock Transfer and Trust, New York,
New York.
Each conversion will be deemed to have been effected immediately prior to
the close of business on the date on which the certificates for shares of Series
A Preferred Stock shall have been surrendered and notice shall have been
received by the Company as aforesaid (and, if applicable, payment of an amount
equal to the dividend payable on such shares shall have been received by the
Company as described below) and the conversion shall be at the Conversion Price
in effect at such time and on such date.
Holders of shares of Series A Preferred Stock at the close of business on a
dividend record date will be entitled to receive the dividend payable on such
shares on the corresponding dividend payment date notwithstanding the conversion
of such shares following such dividend record date and prior to such dividend
payment date. However, shares of Series A Preferred Stock surrendered for
conversion during the period between the close of business on any dividend
record date and the opening of business on any corresponding dividend payment
date (except shares converted after the issuance of a notice of redemption with
respect to a redemption date during such period) must be accompanied by payment
of an amount equal to the dividend payable on such shares on such dividend
payment date. A holder of shares of Series A Preferred Stock on a dividend
record date who (or whose transferee) tenders any such shares for conversion
into shares of Common Stock on such dividend payment date will receive the
dividend payable by the Company on such shares of Series A Preferred Stock on
such date, and the converting holder need not include payment of the amount of
such dividend upon surrender of shares of Series A Preferred Stock for
conversion. Except as provided above, the Company will make no payment or
allowance for unpaid dividends, whether or not in arrears, on converted shares
or for dividends on the shares of Common Stock issued upon such conversion.
Fractional shares of Common Stock will not be issued upon conversion but, in
lieu thereof, the Company will pay an amount in cash based on the closing market
price of the Common Stock on the day prior to the conversion date.
CONVERSION PRICE ADJUSTMENTS
The Conversion Price is subject to adjustment upon certain events, including
(i) dividends (and other distributions) payable in Common Stock or any class of
capital stock of the Company, (ii) the issuance to all holders of Common Stock
of certain rights or warrants entitling them to subscribe for or purchase Common
Stock at a price per share less than the fair market value per share of Common
Stock, (iii) subdivisions, combinations and reclassifications of Common Stock,
and (iv) distributions to all holders of Common Stock of evidences of
indebtedness of the Company or of assets (including securities and cash, but
excluding those dividends, rights, warrants and distributions referred to in
clause (i), (ii) or (iii) above and excluding cash dividends and cash
distributions on shares of Common Stock to the extent the same either constitute
Permitted Common Stock Cash Distributions (as herein defined) or result in a
payment of an equal cash dividend to the holders of shares of Series A Preferred
Stock (see "--Dividends")). In addition to the foregoing adjustments, the
Company will be permitted to make such reductions in the Conversion Price as it
considers to be advisable in order that any event treated for federal income tax
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purposes as a dividend of stock or stock rights will not be taxable to the
holders of the Common Stock or, if that is not possible, to diminish any income
taxes that are otherwise payable because of such event.
"Permitted Common Stock Cash Distributions" means cash dividends and cash
distributions paid on the Common Stock after not in excess of
the sum of the Company's cumulative undistributed net earnings at
, plus the cumulative amount of Funds Available for
Distribution, as determined by the Board on a basis consistent with the
financial reporting practices of the Company, after , minus the
cumulative amount of dividends accumulated, accrued or paid on the Series A
Preferred Stock and all other classes of Preferred Stock after
.
In case the Company shall be a party to any transaction (including without
limitation a merger, consolidation, statutory share exchange, tender offer for
all or substantially all of the shares of Common Stock or sale of all or
substantially all of the Company's assets), in each case as a result of which
shares of Common Stock will be converted into the right to receive stock,
securities or other property (including cash or any combination thereof), each
share of Series A Preferred Stock, if convertible after the consummation of the
transaction, will thereafter be convertible into the kind and amount of shares
of stock, securities and other property receivable (including cash or any
combination thereof) upon the consummation of such transaction by a holder of
that number of shares or fraction thereof of Common Stock into which one share
of Series A Preferred Stock was convertible immediately prior to such
transaction (assuming such holder of Common Stock failed to exercise any rights
of election and received per share the kind and amount of stock, securities and
other property (including cash or any combination thereof) received per share by
a plurality of nonelecting shares). The Company may not become a party to any
such transaction unless the terms thereof are consistent with the foregoing.
No adjustment of the Conversion Price will be required to be made in any
case until cumulative adjustments amount to 1% or more of the Conversion Price.
Any adjustments not so required to be made will be carried forward and taken
into account in subsequent adjustments.
RESTRICTIONS ON OWNERSHIP
With certain exceptions no person may own, or be deemed to own by virtue of
the attribution provisions of the Code, more than 9.8% of the Company's capital
stock. See "Restrictions on Transfer of Capital Stock" in the accompanying
Prospectus.
TRANSFER AGENT, REGISTRAR, DIVIDEND DISBURSING AGENT AND REDEMPTION AGENT
The transfer agent, registrar, dividend disbursing agent and redemption
agent for the Series A Preferred Stock will be American Stock Transfer and Trust
Company, New York, New York.
PARTNERSHIP AGREEMENT
THE FOLLOWING SUMMARY OF THE PARTNERSHIP AGREEMENT, INCLUDING THE
DESCRIPTIONS OF CERTAIN PROVISIONS SET FORTH ELSEWHERE IN THIS PROSPECTUS, IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PARTNERSHIP AGREEMENTS WITH THE
SECURITIES AND EXCHANGE COMMISSION.
OPERATIONAL MATTERS
GENERAL. Holders of OP Units (other than USRP Managing in its capacity as
general partner) will hold a limited partner interest in the Operating
Partnership and all holders of OP Units (including USRP Managing in its capacity
as general partner) will be entitled to share in cash distributions from, and in
the profits and losses of, the Operating Partnership. Each OP Unit generally
will receive distributions in the same amount paid on each share of Common
Stock. See "Distributions."
Holders of OP Units will have the rights to which limited partners are
entitled under the Partnership Agreement and, to the extent not limited by the
Partnership Agreement, the Delaware Revised Uniform
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Limited Partnership Act (the "Act"). The OP Units have not been and are not
expected to be registered pursuant to any Federal or state securities laws or
listed on any exchange or quoted on any national market system. The Partnership
Agreement imposes certain restrictions on the transfer of OP Units, as described
below.
PURPOSES, BUSINESS AND MANAGEMENT. The purpose of the Operating Partnership
includes the conduct of any business that may be lawfully conducted by a limited
partnership formed under the Act, except that the Partnership Agreement requires
the business of the Operating Partnership to be conducted in such a manner that
will permit the Company to be classified as a REIT under Section 856 of the
Code, unless the Company ceases to qualify as a REIT for reasons other than the
conduct of the business of the Operating Partnership. Subject to the foregoing
limitation, the Operating Partnership may enter into partnerships, joint
ventures or similar arrangements and may own interests directly or indirectly in
any other entity.
USRP Managing, as the general partner of the Operating Partnership, has the
exclusive power and authority to conduct the business of the Operating
Partnership, subject to the consent of the limited partners in certain limited
circumstances discussed below. No limited partner may take part in the
operation, management or control of the business of the Operating Partnership by
virtue of being a holder of OP Units.
USRP Managing may not conduct any business other than the business of the
Operating Partnership without the consent of holders of a majority of the
limited partner interests (not including the limited partner interests, if any,
held by the Company in its capacity as a limited partner in the Operating
Partnership).
DISTRIBUTIONS. The Partnership Agreement provides for the quarterly
distribution of Available Cash (as defined below), as determined in the manner
provided in the Partnership Agreement to USRP Managing and the limited partners,
including USRP, in proportion to their percentage interests in the Operating
Partnership. "Available Cash" is generally defined as net income plus any
reduction in reserves and minus interest and principal payments on debt, capital
expenditures, any additions to reserves and other adjustments. Neither USRP
Managing nor the limited partners are entitled to any preferential or
disproportionate distributions of Available Cash.
BORROWING BY THE OPERATING PARTNERSHIP. USRP Managing is authorized to
cause the Operating Partnership to borrow money and to issue and guarantee debt
as it deems necessary for the conduct of the activities of the Operating
Partnership. Such debt may be secured by mortgages, deeds of trust, security
interests, pledges or other liens on properties of the Operating Partnership.
USRP Managing also may cause the Operating Partnership to borrow money to enable
the Operating Partnership to make distributions, including distributions in an
amount sufficient to permit the Company, as long as it qualifies as a REIT, to
avoid the payment of any Federal income tax.
REIMBURSEMENT OF USRP MANAGING; TRANSACTIONS WITH USRP MANAGING AND ITS
AFFILIATES. USRP Managing will not receive any compensation for its services as
general partner of the Operating Partnership. USRP Managing, however, as a
partner in the Operating Partnership, has the same right to allocations and
distributions as partners in the Operating Partnership. In addition, the
Operating Partnership will reimburse USRP Managing for substantially all
expenses it incurs relating to the ongoing operation of USRP Managing and
offerings of OP Units or shares of Common Stock (or rights, options, warrants or
convertible or exchangeable securities).
Except as expressly permitted by the Partnership Agreement, affiliates of
USRP Managing, including the Company, will not engage in any transactions with
the Operating Partnership except on terms that are fair and reasonable and no
less favorable to the Operating Partnership than would be obtained from an
unaffiliated third party.
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SALE OF ASSETS. Under the Partnership Agreement, USRP Managing generally
has the exclusive authority to determine whether, when and on what terms the
assets of the Operating Partnership (including the Properties) will be sold. A
sale of all or substantially all of the assets of the Operating Partnership (or
a merger of the Operating Partnership with another entity) generally requires an
affirmative vote of the holders of a majority of the outstanding OP Units
(including OP Units held by USRP).
NO REMOVAL OF THE GENERAL PARTNER. The Partnership Agreement provides that
the limited partners may not remove USRP Managing as general partner of the
Operating Partnership with or without cause (unless neither USRP Managing nor
the Company is a "public company," in which case USRP Managing may be removed
for cause).
ISSUANCE OF LIMITED PARTNERSHIP INTERESTS. USRP Managing is authorized,
without the consent of the limited partners, to cause the Operating Partnership
to issue OP Units to the Company, to the limited partners or to other persons
for such consideration and upon such terms and conditions as USRP Managing deems
appropriate. The Operating Partnership also may issue partnership interests in
different series or classes, which may be senior to the OP Units. If OP Units
are issued to the Company, then the Company must issue shares of Common Stock
and must contribute to the Operating Partnership the proceeds received by the
Company from such issuance. In addition, USRP Managing may cause the Operating
Partnership to issue to the Company partnership interests in different series or
classes of equity securities, which may be senior to the OP Units, in connection
with an offering of securities of the Company having substantially similar
rights upon the contribution of the proceeds therefrom to the Operating
Partnership. Consideration for partnership interests may be cash or any property
or other assets permitted by the Act. No limited partner has preemptive,
preferential or similar rights with respect to capital contributions to the
Operating Partnership or the issuance or sale of any partnership interests
therein.
AMENDMENT OF THE PARTNERSHIP AGREEMENT. Generally, the Partnership
Agreement may be amended with the approval of USRP Managing, as general partner,
and limited partners (including USRP) holding a majority of the OP Units.
Certain provisions regarding, among other things, the rights and duties of USRP
Managing as general partner or the dissolution of the Operating Partnership, may
not be amended without the approval of a majority of the OP Units not held by
the Master Partnership. Notwithstanding the foregoing, USRP Managing, as general
partner, has the power, without the consent of the limited partners, to amend
the Partnership Agreement in certain circumstances. Certain amendments that
would affect the fundamental rights of a limited partner must be approved by
USRP Managing and each limited partner that would be adversely affected by such
amendment.
DISSOLUTION, WINDING UP AND TERMINATION. The Operating Partnership will
continue until December 31, 2035, unless sooner dissolved and terminated. The
Operating Partnership will be dissolved prior to the expiration of its term, and
its affairs wound up upon the occurrence of the earliest of: (i) the withdrawal
of USRP Managing as general partner without the permitted transfer of USRP
Managing's interest to a successor general partner (except in certain limited
circumstances); (ii) the sale of all or substantially all of the Operating
Partnership's assets and properties; (iii) the entry of a decree of judicial
dissolution of the Operating Partnership pursuant to the provisions of the Act;
and (iv) the entry of a final nonappealable order for relief in a bankruptcy
proceeding of the general partner, or the entry of a final nonappealable
judgment ruling that the general partner is bankrupt or insolvent (except that,
in either such case, in certain circumstances the limited partners (other than
USRP Managing) may vote to continue the Operating Partnership and substitute a
new general partner in place of the Company. Upon dissolution, USRP Managing, as
general partner, or any liquidator will proceed to liquidate the assets of the
Operating Partnership and apply the proceeds therefrom in the order of priority
set forth in the Partnership Agreement.
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LIABILITY AND INDEMNIFICATION
LIABILITY OF USRP MANAGING AND LIMITED PARTNERS. USRP Managing, as general
partner of the Operating Partnership, is liable for all general recourse
obligations of the Operating Partnership to the extent not paid by the Operating
Partnership. USRP Managing is not liable for the nonrecourse obligations of the
Operating Partnership. Assuming that a limited partner does not take part in the
control of the business of the Operating Partnership and otherwise acts in
conformity with the provisions of the Partnership Agreement and the Act, the
liability of a limited partner for obligations of the Operating Partnership
under the Partnership Agreement and the Act will be limited, subject to certain
exceptions, generally to the loss of such limited partner's investment in the
Operating Partnership represented by his OP Units. The Operating Partnership
will operate in a manner that USRP Managing deems reasonable, necessary or
appropriate to preserve the limited liability of the limited partners.
EXCULPATION AND INDEMNIFICATION OF USRP MANAGING. The Partnership Agreement
generally provides that USRP Managing, as general partner of the Operating
Partnership, will incur no liability to the Operating Partnership or any limited
partner for losses sustained, liabilities incurred or benefits not derived as a
result of errors in judgment or mistakes of fact or law or of any act or
omission, if USRP Managing carried out its duties in good faith. In addition,
USRP Managing is not responsible for any misconduct or negligence on the part of
its agents, provided USRP Managing appointed such agents in good faith.
The Partnership Agreement also provides for indemnification (including, in
certain circumstances, the advancement of expenses) of USRP Managing, the
directors and officers of USRP Managing and such other persons as USRP Managing
may from time to time designate against any judgments, penalties, fines,
settlements and reasonable expenses that are actually (or will be) incurred by
such person in connection with a proceeding in which any such person in
involved, or is threatened to be involved, as a party or otherwise, unless it is
established that: (i) the act or omission of the indemnified person was material
to the matter giving rise to the proceeding and either was committed in bad
faith or was the result of active and deliberate dishonesty; (ii) the
indemnified person actually received an improper benefit in money, property or
services; or (iii) in the case of any criminal proceeding, the indemnified
person had reasonable cause to believe that the act or omission was unlawful.
TRANSFERS OF INTERESTS
RESTRICTIONS ON TRANSFER OF USRP'S INTEREST. USRP may not transfer any of
its interests as a limited partner in the Operating Partnership, except in
connection with a merger or sale of all or substantially all of the Company's
assets, in which (i) the limited partners in the Operating Partnership either
will receive, or will have the right to receive, substantially the same
consideration as holders of shares of Common Stock, and (ii) such transaction
has been approved by the holders of a majority of the interests in the Operating
Partnership (including interests held by USRP).
RESTRICTIONS ON TRANSFERS OF UNITS BY LIMITED PARTNERS. Limited Partners
(other than USRP) will be permitted to transfer all or any portion of their OP
Units without restriction as long as they satisfy certain requirements set forth
in the Partnership Agreement. In addition, limited partners will be permitted to
dispose of their OP Units by exercising the exchange right described below. See
"--Exchange of OP Units" below.
The right of any permitted transferee of OP Units to become a substituted
limited partner is subject to the consent of USRP Managing, which consent USRP
Managing may withhold in its sole and absolute discretion. If USRP Managing does
not consent to the admission of a transferee of OP Units as a substituted
limited partner, then the transferee will succeed to all economic rights and
benefits attributable to such OP Units (including the exchange right described
below), but will not become a limited partner or possess any other rights of
limited partners (including the right to vote).
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EXCHANGE OF OP UNITS. Subject to certain limitations and exceptions,
holders of OP Units (other than USRP) have the right to exchange each of their
OP Units for one share of Common Stock, subject to adjustment in the event of
certain events as provided for in the Partnership Agreement, and, upon such
exchange, the Company will become the owner of such OP Units. The exchange
generally will occur on the tenth business day after the notice of exchange has
been delivered to the Company, except that no exchange can occur if delivery of
shares of Common Stock would be prohibited either under the provisions of the
Charter designed primarily to protect the Company's qualification as a REIT or
under applicable Federal or state securities laws as long as the shares of
Common Stock are publicly traded.
FIDUCIARY DUTY
The limited partners have agreed that in the event of a conflict in the
fiduciary duties owed by USRP Managing to its stockholders and by USRP Managing
to such limited partners, USRP Managing will fulfill its fiduciary duties to
such limited partnership by acting in the best interests of USRP Managing's
stockholders.
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CERTAIN PROVISIONS OF MARYLAND LAW
AND OF THE COMPANY'S CHARTER AND BYLAWS
The following discussion summarizes certain provisions of the Maryland
General Corporation Law ("MGCL") and the Charter and the Company's Bylaws. This
summary does not purport to be complete and is subject to and qualified in its
entirety by reference to the Charter and the Company's Bylaws, copies of which
have been filed as exhibits to the Registration Statement of which this
Prospectus constitutes a part. See "Available Information."
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Charter limits the liability of the Company's directors and officers to
the Company and its stockholders to the fullest extent permitted from time to
time by the MGCL. The MGCL presently permits the liability of directors and
officers to a corporation or its stockholders for money damages to be limited,
except (i) to the extent that it is proved that the director or officer actually
received an improper benefit or profit or (ii) to the extent that a judgment or
other final adjudication is entered adverse to the director or officer in a
proceeding based on a finding that the director's or officer's action, or
failure to act, was the result of active and deliberate dishonesty and was
material to the cause of action adjudicated in the proceeding. This provision
does not limit the ability of the Company or its stockholders to obtain other
relief, such as an injunction or rescission.
The Charter requires the Company to indemnify its directors, officers and
certain other parties to the fullest extent permitted from time to time by the
MGCL. The MGCL permits a corporation, subject to certain exceptions, to
indemnify its directors, officers and certain other parties against judgments,
penalties, fines, settlements and reasonable expenses, including attorneys'
fees, actually incurred by them in connection with any proceeding to which they
may be made a party by reason of their service to or at the request of the
corporation, unless it is established that (i) the act or omission of the
indemnified party was material to the matter giving rise to the proceeding and
was committed in bad faith or was the result of active and deliberate
dishonesty, (ii) the indemnified party actually received an improper personal
benefit, or (iii) in the case of any criminal proceeding, the indemnified party
had reasonable cause to believe that the act or omission was unlawful.
Indemnification may be made against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by the director or officer in connection
with the proceeding; provided, however, that if the proceeding is one by or in
the right of the corporation, indemnification may not be made with respect to
any proceeding in which the director or officer has been adjudged to be liable
to the corporation. In addition, a director or officer may not be indemnified
with respect to any proceeding charging improper personal benefit to the
director or officer in which the director or officer was adjudged to be liable
on the basis that personal benefit was improperly received. The termination of
any proceeding by conviction, or upon a plea of nolo contendere or its
equivalent, or an entry of any order of probation prior to judgment, creates a
rebuttable presumption that the director or officer did not meet the requisite
standard of conduct required for indemnification to be permitted. It is the
position of the Commission that indemnification of directors and officers for
liabilities arising under the Securities Act is against public policy and is
unenforceable pursuant to Section 14 of the Securities Act.
BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange or, in certain circumstances, an asset transfer or
issuance or reclassification of equity securities) between a Maryland
corporation and any Interested Stockholder or an affiliate thereof, are
prohibited for five years after the most recent date on which the Interested
Stockholder became an Interested Stockholder. Thereafter, any such business
combination must be recommended by the board of directors of such corporation
and approved by the affirmative vote of at least (i) 80% of the votes entitled
to be cast by holders of outstanding voting shares of the corporation voting
together as a single voting group and (ii) two-thirds of the votes entitled to
be cast by holders of outstanding voting shares of the corporation
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other than shares held by the Interested Stockholder with whom the business
combination is to be effected, unless, among other things, the corporation's
stockholders receive a minimum price (as defined in the MGCL) for their shares
and the consideration is received in cash or in the same form as previously paid
by the Interested Stockholder for its shares. These provisions of the MGCL do
not apply, however, to business combinations that are approved or exempted by
the board of directors of the corporation prior to the time that the Interested
Stockholder becomes an Interested Stockholder. The Bylaws of the Company contain
a provision exempting from these provisions of the MGCL any business combination
involving QSV (or its affiliates) or any other person acting in concert as a
group with any of the foregoing persons.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares of stock owned by the acquirer, by officers or by directors who
are employees of the corporation. "Control shares" are voting shares of stock
which, if aggregated with all other such shares of stock previously acquired by
such person, or in respect of which such person is able to exercise or direct
the exercise of voting power, would entitle the acquirer to exercise voting
power in electing directors within one of the following ranges of voting power:
(i) one-fifth or more but less than one-third, (ii) one-third or more but less
than a majority, or (iii) a majority. Control shares do not include shares the
acquiring person is then entitled to vote as a result of having previously
obtained stockholder approval. A "control share acquisition" means the
acquisition of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors to call a special meeting of stockholders to
be held within 50 days of demand to consider the voting rights of the shares. If
no request for a meeting is made, the corporation may itself present the
question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the MGCL, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the control shares (except those for which voting rights have previously
been approved) for fair value determined, without regard to the absence of
voting rights for control shares, as of the date of the last control share
acquisition or of any meeting of stockholders at which the voting rights of such
shares are considered and not approved. If voting rights for control shares are
approved at a stockholders meeting and the acquirer becomes entitled to vote a
majority of the shares entitled to vote, all other stockholders may exercise
appraisal rights. The fair value of the shares as determined for purposes of
such appraisal rights may not be less than the highest price per share paid by
the acquiring person in the control share acquisition, and certain limitations
and restrictions otherwise applicable to the exercise of dissenters' rights do
not apply in the context of a control share acquisition.
The control share acquisition statute does not apply to shares acquired in a
merger, consolidation or share exchange if the corporation is a party to the
transaction, or to acquisitions approved or exempted by the charter or bylaws of
the corporation.
AMENDMENT TO THE CHARTER
The Charter may be amended by the affirmative vote of the holders of a
majority of all shares entitled to be voted on the matter, except for the
provision relating to the classification of the Board which may be amended only
by the affirmative vote of the holders of not less than two-thirds of all shares
entitled to be voted on the matter.
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DISSOLUTION OF THE COMPANY
The Charter permits the dissolution of the Company by (i) the affirmation or
vote of a majority of the entire Board declaring such dissolution to be
advisable and directing that the proposed dissolution be submitted for
consideration at an annual or special meeting of stockholders and (ii) upon
proper notice, stockholder approval by the affirmative vote of the holders of
not less than a majority of all of the votes entitled to be cast on the matter
or the written consent of all the votes entitled to be cast on this matter.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Company's Bylaws provide that with respect to an annual meeting of
stockholders, nominations of persons for election to the Board and the proposal
of business to be considered by stockholders may be made only (i) by, or at the
direction of, a majority of the Board or (ii) by a stockholder who is entitled
to vote at the meeting and has complied with the advance notice procedures set
forth in the Company's Bylaws.
The business combination and control share acquisition provisions of the
MGCL and the advance notice provisions of the Company's Bylaws could have the
effect of discouraging a takeover or other transaction in which holders of some,
or a majority, of the shares of Common Stock might receive a premium for their
shares of Common Stock over the then prevailing market price or which such
holders might believe to be otherwise in their best interests.
MEETINGS OF STOCKHOLDERS
Beginning in 1998, an annual meeting of the stockholders for the election of
directors and the transaction of any business within the powers of the Company
shall be held on the last Thursday in April or such date within 30 days of such
day as set by the Board.
Subject to the rights, if any, of the holders of any series of Preferred
Stock to elect additional directors under specified circumstances, special
meetings of the stockholders may be called by the Chairman of the Board, by the
Chief Executive Officer of the Company, by the President of the Company, by the
Board pursuant to a resolution adopted by a majority of all directors or by the
Secretary of the Company upon the written request of the holders of 25% or more
of the outstanding voting stock. Such request shall state the purpose or
purposes of such meeting and the matters proposed to be acted upon at such
meeting.
TAXATION OF HOLDERS OF SERIES A PREFERRED STOCK
The following is a summary of the material federal income tax considerations
affecting holders of Series A Preferred Stock. This discussion is directed
principally at investors who are United States citizens or residents or domestic
corporations, and does not address in all material respects considerations that
might adversely affect the treatment of investors who are subject to special
treatment under the tax laws (such as insurance companies, cooperatives,
financial institutions, broker-dealers, tax exempt organizations or foreign
investors). The discussion in this section is based on existing provisions of
the Code, existing and proposed Treasury regulations, existing court decisions,
rulings and other administrative interpretations. There can be no assurance that
future Code provisions or other legal authorities will not alter significantly
the tax consequences described below. No rulings have been obtained from the IRS
concerning any of the matters discussed in this section. Because the following
represents only a summary, it is qualified in its entirety by the applicable
provisions of the Code, and regulations, court decisions and IRS rulings and
other IRS pronouncements.
Each prospective purchaser of shares of Series A Preferred Stock is advised
to consult his or her own tax advisor about the federal, state, local, foreign
and other tax consequences of buying, holding and selling shares of Series A
Preferred Stock.
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TAXABLE DISTRIBUTIONS
Distributions made to the holders of Series A Preferred Stock out of current
or accumulated earnings and profits (and not designated as capital gain
dividends) will be taken into account by such holders as ordinary income and
will not be eligible for the dividends received deduction for stockholders that
are corporations. For purposes of determining whether distributions on the
Series A Preferred Stock are out of current or accumulated earnings and profits,
the earnings and profits of the Company will be allocated first to the Series A
Preferred Stock and second to the Common Stock. Distributions not designated as
capital gain dividends which exceed the Company's earnings and profits will not
be taxable to the extent of the basis in such holder's Series A Preferred Stock
(which basis will be reduced by the amount of such distributions), and will be
taxable capital gain to the extent such distributions exceed such basis.
Dividends that are designated as capital gain dividends will be taxed as
long-term capital gains (to the extent that they do not exceed the Company's
actual net capital gain for the taxable year) without regard to the period for
which the holder has held the Series A Preferred Stock. However, corporate
stockholders may be required to treat up to 20% of certain capital gain
dividends as ordinary income. If any portion (the "Capital Gain Amount") of the
Company's distributions are designated by the Company as capital gain dividends,
then the portion of the Capital Gain Amount for the year so designated that will
be allocable to the holders of Series A Preferred Stock will be the Capital Gain
Amount multiplied by a fraction, the numerator of which will be the total
dividends paid or made available to the holders of the Series A Preferred Stock
for the year and the denominator of which will be the total dividends paid by
the Company.
REDEMPTION OF SERIES A PREFERRED STOCK
A redemption of shares of Series A Preferred Stock for shares of Common
Stock will be treated for federal income tax purposes in the same manner as a
conversion into shares of Common Stock. See "--Conversion of Series A Preferred
Stock into Common Stock" below. A redemption of shares of Series A Preferred
Stock for cash will be treated under Section 302 of the Code, as a distribution
taxable as a dividend (to the extent of the Company's current and accumulated
earnings and profits) at ordinary income rates unless the redemption satisfies
one of the tests set forth in Section 302(b) of the Code and is therefore
treated as a sale or exchange of the redeemed shares. The redemption will be
treated as a sale or exchange if it (i) is "substantially disproportionate" with
respect to the holder, (ii) results in a "complete termination" of the holder's
stock interest in the Company, or (iii) is "not essentially equivalent to a
dividend" with respect to the holder, all within the meaning of Section 302(b)
of the Code. In determining whether any of these tests has been met, shares of
Stock considered to be owned by the holder by reason of certain constructive
ownership rules set forth in the Code, as well as shares of capital stock of the
Company actually owned by the holder, must generally be taken into account.
Because the determination as to whether any of the alternative tests of Section
302(b) of the Code will be satisfied with respect to any particular holder of
Series A Preferred Stock depends upon the facts and circumstances at the time
that the determination must be made, prospective holders of Series A Preferred
Stock are advised to consult their own tax advisors to determine such tax
treatment.
If a redemption of shares of Series A Preferred Stock is treated as a
distribution taxable as a dividend, the amount of the distribution will be
measured by the amount of cash and the fair market value of any property
received by the holder. The holder's adjusted basis in the redeemed shares of
Series A Preferred Stock for tax purposes will be transferred to the holder's
remaining shares of capital stock of the Company, if any. If the holder owns no
other shares of capital stock of the Company, such basis may, under certain
circumstances, be transferred to a related person or it may be lost entirely.
If a redemption of shares of Series A Preferred Stock is not treated as a
distribution taxable as a dividend to a particular holder, it will be treated,
as to that holder, as a taxable sale or exchange. As a result, such holder will
recognize gain or loss for federal income tax purposes in an amount equal to the
difference between (i) the amount of cash and the fair market value of any
property received (less any portion thereof attributable to accumulated and
declared but unpaid dividends, which will be taxable as a
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dividend to the extent of the Company's current and accumulated earnings and
profits) and (ii) the holder's adjusted basis in the shares of Series A
Preferred Stock for tax purposes. Such gain or loss will be capital gain or loss
if the shares of Series A Preferred Stock have been held as a capital asset and
will be short-term, mid-term or long-term gain or loss depending on the length
of time the holder has held such shares.
REDEMPTION PREMIUM
Under Section 305(c) of the Code and applicable Treasury Regulations, if the
redemption price of a Series A Preferred Stock exceeds its issue price by more
than a reasonable redemption premium, the amount of such excess may be deemed to
be a constructive distribution (treated as a dividend to the extent of the
Company's current and accumulated earnings and profits and otherwise subject to
the treatment described above for distributions) taxable to the holder ratably
over the period during which the Series A Preferred Stock cannot be redeemed.
A redemption premium is considered to be reasonable if it is in the nature
of a penalty for a premature redemption of redeemable preferred stock and if
such premium does not exceed the amount which the issuer would be required to
pay for such redemption right under market conditions existing at the time of
issuance of the stock. Applicable Treasury Regulations currently provide that a
redemption premium not exceeding 10% of the issue price of preferred stock which
is not redeemable for five years from the date of issue will be considered
reasonable. Although the Revenue Reconciliation Act of 1990 substituted a 0.25%
de minimis rule for the 10% "safe harbor" set forth in the Treasury Regulations,
the applicable legislative history provides that the reduced de minimis test
will not apply to stock which (like the Series A Preferred Stock) is neither
mandatorily callable by the issuer or puttable by the holder.
The amount, if any, of the redemption premium for the Series A Preferred
Stock will depend upon the issue price of such stock. Although the potential
redemption premiums on the Series A Preferred Stock will not fall within such
"safe harbor" guidelines, the Company believes that any redemption premium on
the Series A Preferred Stock will be considered a reasonable redemption premium.
There can be no assurance, however, that the IRS will regard the redemption
premiums on the Series A Preferred Stock as reasonable. If the Series A
Preferred Stock were deemed to have an unreasonable redemption premium, holders
would be required to accrue the premium over the period of time during which the
Series A Preferred Stock cannot be called for redemption.
CONVERSION OF SERIES A PREFERRED STOCK INTO COMMON STOCK
In general, no gain or loss will be recognized for federal income tax
purposes upon conversion of the Series A Preferred Stock solely into shares of
Common Stock. The basis that a holder will have for tax purposes in the shares
of Common Stock received upon conversion will be equal to the adjusted basis of
such holder in the shares of Series A Preferred Stock so converted, and,
provided that the shares of Series A Preferred Stock were held as a capital
asset, the holding period for the shares of Common Stock received would include
the holding period for the shares of Series A Preferred Stock converted. A
holder will, however, recognize gain or loss on the receipt of cash in lieu of
fractional shares of Common Stock in an amount equal to the difference between
the amount of cash received and the holder's adjusted basis in such fractional
shares for tax purposes. Furthermore, under certain circumstances, a holder of
shares of Series A Preferred Stock may recognize gain or dividend income to the
extent there are dividends in arrears on such shares at the time of conversion
into Common Stock.
ADJUSTMENTS TO CONVERSION PRICE
Adjustments in the conversion price (or the failure to make such
adjustments) pursuant to the antidilution provisions of the Series A Preferred
Stock or otherwise may result in constructive distributions to the holders of
Series A Preferred Stock that could, under certain circumstances, be taxable to
them as
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dividends pursuant to Section 305 of the Code. If such constructive distribution
were to occur, a holder of Series A Preferred Stock could be required to
recognize ordinary income for tax purposes without receiving a corresponding
distribution of cash.
BACKUP WITHHOLDING
The Company will report to its domestic stockholders and the IRS the amount
of dividends paid during each calendar year and the amount of tax withheld, if
any, with respect thereto. Under the backup withholding rules, a stockholder may
be subject to backup withholding at the rate of 31% with respect to dividends
paid unless such holder (i) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact, or (ii) provides a
taxpayer identification number and certifies as to no loss of exemption, and
otherwise complies with the applicable requirements of the backup withholdings
rules. Any amount paid as backup withholding will be creditable against the
stockholder's income tax liability. The United States Treasury has recently
issued final regulations (the "Final Regulations") which affects the procedures
to be followed by a non-US Holder regarding the withholding and information
reporting rules discussed above. In general, the Final Regulations do not alter
the substantive withholding and information reporting requirements but unify
current certification procedures and forms and clarify and modify reliance
standards. The Final Regulations are generally effective for payments made on or
after January 1, 1999, subject to certain transition rules. Prospective
investors should consult their own tax advisors concerning the adoption of the
Final Regulations and the potential effect on their ownership of Common Stock.
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UNDERWRITING
Subject to the terms and conditions in the underwriting agreement (the
"Underwriting Agreement"), the Company has agreed to sell to each of the
Underwriters named below, for whom PaineWebber Incorporated, Morgan Keegan &
Company, Inc., EVEREN Securities, Inc. and Crowell, Weedon & Co. are acting as
representatives (the "Representatives"), and each of such Underwriters has
severally agreed to purchase from the Company the number of shares of Series A
Preferred Stock set forth opposite their respective names. Pursuant to the terms
of the Underwriting Agreement, the Underwriters are obligated to purchase all
such shares of Series A Preferred Stock if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
SHARES TO
BE
UNDERWRITERS PURCHASED
- --------------------------------------------------------------------------------- -----------
<S> <C>
PaineWebber Incorporated.........................................................
Morgan Keegan & Company, Inc.....................................................
EVEREN Securities, Inc...........................................................
Crowell, Weedon & Co.............................................................
-----------
Total........................................................................ 3,200,000
-----------
-----------
</TABLE>
The Representatives have advised the Company that the Underwriters propose
to offer the Series A Preferred Stock to the public at the offering price set
forth on the cover page of this Prospectus Supplement and to certain dealers at
such price less a concession not in excess of $ per share of Series A
Preferred Stock. The Underwriters may allow, and such dealers may re-allow, a
discount not in excess of $ per share of Series A Preferred Stock on
sales to certain other brokers and dealers. The public offering price,
concession and discount may be changed by the Underwriters after the Series A
Preferred Stock is released for sale to the public.
The Company has granted to the Underwriters an option, exercisable for 30
days after the date of this Prospectus Supplement, to purchase up to 480,000
additional shares of Series A Preferred Stock to cover over-allotments, if any,
at the public offering price, less the underwriting discounts and commissions
set forth on the cover page of this Prospectus Supplement. If the Underwriters
exercise this option, each of the Underwriters will have a firm commitment,
subject to certain conditions, to purchase approximately the same percentage
thereof that the number of shares of Series A Preferred Stock to be purchased by
it shown in the foregoing table bears to the Series A Preferred Stock initially
offered hereby.
In the Underwriting Agreement, the Company has agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
federal securities laws, or to contribute to payments that the Underwriters may
be required to make in respect thereof.
Subject to certain exceptions, the Company has agreed not to offer, sell,
contract to sell, pledge, grant any option to purchase or otherwise dispose of
any shares of Common Stock, or any securities convertible into, or exercisable,
exchangeable or redeemable for, shares of Common Stock, or register for sale
under the Securities Act any shares of Common Stock, or any securities
convertible into, or exercisable, exchangeable or redeemable for, shares of
Common Stock, except for the shares of Series A Preferred Stock offered hereby,
for a period of 180 days from the date of this Prospectus Supplement, without
the prior written consent of PaineWebber Incorporated.
The Underwriters do not intend to exercise discretion in confirming sales to
any account over which they otherwise have discretionary authority.
Application has been made to list the Series A Preferred Stock on the NYSE
under the symbol "USVpA."
In connection with this offering of Series A Preferred Stock, the rules of
the Securities and Exchange Commission permit the Underwriters to engage in
certain transactions that stabilize the price of the Series A Preferred Stock.
Such transactions consist of bids or purchases for the purpose of pegging,
fixing or maintaining the price of the Series A Preferred Stock.
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If the Underwriters create a short position in the Series A Preferred Stock
in connection with this offering (I.E., if they sell more shares of Series A
Preferred Stock than are set forth on the cover page of this Prospectus
Supplement), the Underwriters may reduce that short position by purchasing
Series A Preferred Stock in the open market. The Underwriters may also elect to
reduce any short position by exercising all or part of the over-allotment option
described above.
PaineWebber Incorporated, on behalf of the Underwriters, may also impose a
penalty bid on certain of the Underwriters. This means that if PaineWebber
Incorporated, on behalf of the Underwriters, purchases shares of Series A
Preferred Stock in the open market to reduce the Underwriters' short position or
to stabilize the price of the Series A Preferred Stock, it may reclaim the
amount of the selling concession from the Underwriters who sold those shares as
part of this offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above might have on the price of the Series A Preferred Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Underwriters will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
In the ordinary course of their business, certain of the Underwriters and/or
their affiliates have in the past engaged and may in the future engage in
financial advisory, investment banking and other transactions with the Company
for which customary compensation has been, and will be, received. PW Real Estate
Investments Inc., an affiliate of PaineWebber Incorporated, is the provider of
the Acquisition Facility.
LEGAL MATTERS
Certain legal matters, including the legality of the Series A Preferred
Stock, will be passed upon for the Company by Winstead Sechrest & Minick P.C.,
Dallas, Texas as securities and tax counsel to the Company, and for the
Underwriters by Rogers & Wells, New York, New York. As to matters of Maryland
law, Winstead Sechrest & Minick P.C. and Rogers & Wells will rely on the opinion
of Piper & Marbury L.L.P., Baltimore, Maryland.
EXPERTS
The consolidated balance sheets of USRP as of December 31, 1996 and 1995,
the related consolidated statements of income, partners' capital and cash flows
for each of the three years in the period ended December 31, 1996 included
herein and the balance sheet of the Company as of February 4, 1997, which is
also included herein have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports which are included herein, and have been
included in reliance upon the reports of such firm given upon their authority as
experts in accounting and auditing.
The financial statements listed below of the following entities which are
incorporated herein by reference from USRP's Current Report on Form 8-K dated
October 15, 1997 have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports which are incorporated by reference herein
and have been so incorporated in reliance upon the reports of such firm given
upon their authority as experts in accounting and auditing: (i) Statement of
Revenues and Certain expenses of TW South, Inc. El Chico #209 acquired by U.S.
Restaurant Properties Master L.P. for the period January 16, 1996 (inception)
through December 31, 1996; (ii) Statement of Revenues and Certain Expenses of
the Property Sold to U.S. Restaurant Properties Master L.P. by 500 Park Avenue
Realty Corporation for the year ended December 31, 1996; (iii) Combined
Statement of Revenues and Certain Expenses of Selected Properties Sold to U.S.
Restaurant Properties Master L.P. (Checkers Acquisition) for the year ended July
31, 1997; (iv) Combined Statement of Revenues and Certain Expenses of the
Properties Sold to U.S.
S-82
<PAGE>
Restaurant Properties Master L.P. by Jackson-Shaw Partners, No. 51, Ltd. for the
year ended December 31, 1996; and (v) Combined Statement of Revenues and Certain
Expenses of Selected Properties Sold to U.S. Restaurant Properties Master L.P.
(Harrigan's Acquisition) for the year ended June 30, 1997.
The financial statements listed below of the following entities which are
incorporated herein by reference from USRP's Current Report on Form 8-K dated
August 21, 1997 have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports which are incorporated by reference herein,
and have been so incorporated in reliance upon the reports of such firm given
upon their authority as experts in accounting and auditing: (i) Charleston's of
Norman, Inc. Statement of Revenues and Certain Expenses for the fifty-two week
period ended March 23, 1997; (ii) Statement of Revenues and Certain Expenses of
the Property Sold to U.S. Restaurant Properties Master L.P. by David E. Rodgers,
Trustee for the year ended December 31, 1996; (iii) Statement of Revenues and
Certain Expenses of Magazine Company Property Sold to U.S. Restaurant Properties
Master L.P. for the year ended December 31, 1996; (iv) Statement of Revenues and
Certain Expenses of Ribbit Holdings, Inc. Property Sold to U.S. Restaurant
Properties Master L.P. for the nine months ended June 30, 1997; (v) Combined
Statement of Revenues and Certain Expenses of Selected Properties Sold to U.S.
Restaurant Properties Master L.P. (Taco Cabana Acquisition) for the year ended
December 31, 1996; (vi) Combined Statement of Revenues and Certain Expenses of
BCL II, L.P. Properties Sold to U.S. Restaurant Properties Master L.P. for the
year ended December 31, 1996; and (vii) Combined Statement of Revenues and
Certain Expenses of Selected Properties Sold to U.S. Restaurant Properties
Master L.P. (Midon Acquisition) for the year ended December 31, 1996.
The financial statements listed below of the following entities which are
incorporated herein by reference from USRP's Current Report on Form 8-K dated
April 14, 1997 have been audited by Deloitte & Touche LLP, independent auditors,
as stated in their reports which are incorporated by reference herein and have
been so incorporated in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing: (i) Combined Statement of
Revenues and Certain Expenses of RR Restaurant 1986-1 Properties Sold to U.S.
Restaurant Properties Master L.P. for the year ended December 31, 1996; (ii)
Selected Properties Sold to U.S. Restaurant Properties Master L.P. (Bruegger's
Acquisition) for the year ended December 31, 1996; and (iii) Statement of
Revenues and Certain Expenses of Tulip Properties Limited Property Sold to U.S.
Restaurant Properties Master L.P. for the year ended December 31, 1996.
The Statement of Revenues and Direct Operating Expenses Applicable to the
Acquisition of Ten Properties of Embers Corporations by U.S. Restaurant
Properties Master L.P. for the year ended June 30, 1997 which has been
incorporated herein by reference from USRP's Current Report of Form 8-K dated
October 15, 1997, has been audited by Schechter Dokken Kanter Andrews & Selcer
Ltd., independent auditors, as stated in their reports and included and
incorporated herein by reference, and have been so included and incorporated in
reliance upon the reports of such firm given upon their authority as experts in
accounting and auditing.
The Statement of Revenues and Certain Expenses of Superpumper, Inc.-Belfield
Location for the year ended December 31, 1996 which has been incorporated herein
by reference from USRP's Current Report of Form 8-K dated October 15, 1997, has
been audited by Brady, Martz & Associates, P.C., independent auditors, as stated
in their reports and included and incorporated herein by reference, and have
been so included and incorporated in reliance upon the reports of such firm
given upon their authority as experts in accounting and auditing.
The Statement of Revenues and Direct Operating Expenses Applicable to
Seventy-Five Arby's Restaurant Properties Acquired by U.S. Restaurant Properties
Master L.P. for the year ended December 28, 1996 which has been incorporated
herein by reference from USRP's Current Report on Form 8-K dated April 14, 1997,
has been audited by Coopers & Lybrand L.L.P., independent auditors, as stated in
their reports and included and incorporated herein by reference, and have been
so included and incorporated in reliance upon the reports of such firm given
upon their authority as experts in accounting and auditing.
S-83
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
U.S. RESTAURANT PROPERTIES, INC.
PRO FORMA FINANCIAL STATEMENTS
Pro Forma Financial Information.................................................... F-2
Pro Forma Consolidated Balance Sheet as of June 30, 1997 (unaudited) and Notes
thereto.......................................................................... F-4
Pro Forma Condensed Consolidated Statement of Income for the year ended December
31, 1997 (unaudited) and Notes thereto........................................... F-7
Pro Forma Condensed Consolidated Statement of Income for the six months ended June
30, 1997 (unaudited) and Notes thereto........................................... F-9
FINANCIAL STATEMENTS
Independent Auditors' Report....................................................... F-10
Balance Sheet at February 4, 1997.................................................. F-11
Notes to Balance Sheet at February 4, 1997......................................... F-12
U.S. RESTAURANT PROPERTIES MASTER L.P.
FINANCIAL STATEMENTS
Independent Auditors' Report....................................................... F-13
Consolidated Balance Sheets at December 31, 1995 and 1996 and June 31, 1997
(unaudited)...................................................................... F-14
Consolidated Statements of Income for the years ended December 31, 1994, 1995 and
1996 and the six months ended June 30, 1996 and 1997 (unaudited)................. F-15
Consolidated Statements of Partners' Capital for the years ended December 31, 1994,
1995 and 1996 and the six months ended June 30, 1997 (unaudited)................. F-16
Consolidated Statements of Cash Flows for the years ended December 31, 1995 and
1996 and the six months ended June 30, 1996 and 1997 (unaudited)................. F-17
Notes to Consolidated Financial Statements for the years ended December 31, 1994,
1995 and 1996 and for the six months ended June 30, 1996 and 1997 (unaudited).... F-18
</TABLE>
F-1
<PAGE>
U.S. RESTAURANT PROPERTIES, INC.
PRO FORMA FINANCIAL INFORMATION
(UNAUDITED)
The following pro forma consolidated financial statements of U.S. Restaurant
Properties, Inc. (the "Company") should be read in conjunction with the
consolidated financial statements of U.S. Restaurant Properties Master L.P.
("USRP") and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contained elsewhere in this Prospectus Supplement. The
pro forma consolidated financial statements are not necessarily indicative of
what the Company's financial position or results of operations would have been
had the transactions described below occurred on the assumed dates. Such
financial statements also do not purport to represent the future financial
position or results of operations of the Company.
The attached pro forma consolidated financial statements have been prepared
based upon the Company consolidating the operations of USRP including U.S.
Restaurant Properties Operating L.P. and other majority owned entities (USRP and
other majority owned entities collectively, the "Partnerships") and adjusted to
reflect the effects of the offering had both events occurred on the first day of
the period indicated. The basis for the consolidation is because a wholly-owned
subsidiary of the Company on October 15, 1997 became the managing general
partner of the Partnerships and has complete control over the Partnerships
through its right to make major decisions such as the acquisition, sale,
financing or refinancing of principal partnership assets, issuance of debt or
equity securities, declaration and payment of dividends or distributions and all
other business matters.
The pro forma consolidated balance sheet of the Company as of June 30, 1997
is based upon USRP's June 30, 1997 unaudited balance sheet adjusted to reflect
as of June 30, 1997 (i) the acquisition of 65 operating properties for
$45,978,000 completed since June 30, 1997, including the value of 502,827 units
of $10,477,000, (ii) the acquisition of eight newly constructed and five
undeveloped properties for $6,212,000, (iii) the sale of 3 properties for
$2,042,000 between July 1, and October 15, 1997, (iv) the issuance of $6,000,000
of mortgage notes receivable, (v) the additional borrowings of $42,197,000
required to purchase the properties acquired, (vi) The Managing General
Partner's conversion of its property management contract rights (the "Property
Management Contract") and converting its aggregate 1.98% partnership interest in
the Partnerships into 1,275,000 shares of Common Stock or its equivalent, (vii)
consolidation with the Company, and (viii) the offering. The property
acquisitions will be accounted for as purchases and the assignment of the
Property Management Contract and the cost of the transaction will be expensed as
nonrecurring items.
The pro forma condensed consolidated statement of income of the Company for
the year ended December 31, 1996 is based on USRP's audited statement of income
for the year ended December 31, 1996 adjusted to reflect as of January 1, 1996
(i) the operations relating to the period between January 1, 1996 and the date
of acquisition for the 1996 acquisitions, comprised of 184 properties acquired
on various dates from January 1, 1996 through December 31, 1996, for
$105,336,000 including the value of 577,254 units issued in connection with the
acquisitions, (ii) the acquisition of 209 properties for $136,651,000 including
the value of 680,695 issued in connection with the acquisitions and the sale of
4 properties sold on various dates between January 1, 1997 and October 15, 1997
for $3,217,000, (iii) the issuance of 2,700,000 units in June 1996 with net
proceeds of $40,203,000, (iv) the issuance of 1,434,831 units in five separate
transactions to individual investors for net proceeds of $25,000,000, (v)
additional borrowings of $162,427,000 required to purchase the properties
acquired, (iv) the issuance of 1,275,000 Initial Shares of Common Stock or its
equivalent issued to the Managing General Partner for its interests in the
Partnerships and termination of its property management contract and shares of
Common Stock issued by the Company to the Managing General Partner upon
formation of the Company at $1 per share, (v) the three-for-two stock split
declared on October 20, 1997, and (vi) the Preferred Stock
F-2
<PAGE>
dividends required and the reduction of interest expense as a result of the
offering based on the use of offering proceeds to reduce the total debt
outstanding by $76,320,000 (see "Use of Proceeds").
The pro forma condensed consolidated statement of income of the Company for
the six months ended June 30, 1997 is based on USRP's unaudited statement of
income for the six months ended June 30, 1997 adjusted to reflect as of January
1, 1997 (i) the acquisition of 209 properties for $136,651,000 including the
value of 680,695 units issued in connection with the acquisitions and the sale
of 4 properties on various dates between January 1, 1997 and October 15, 1997
for $3,217,000, (ii) the issuance of 1,434,831 units in five separate
transactions to individual investors for net proceeds of $25,000,000, (iii)
additional borrowings of $103,872,000 required to purchase the properties
acquired, (iv) the issuance of 1,275,000 Initial Shares of Common Stock or its
equivalent issued to the Managing General Partner for its interests in the
Partnerships and termination of its property management contract and shares of
Common Stock issued by the Company to the Managing General Partner upon
formation of the Company at $1 per share, (v) the three-for-two stock split
declared on October 20, 1997, and (vi) the Preferred Stock dividends required
and the reduction of interest expense as a result of the offering based on the
use of offering proceeds to reduce the total debt outstanding by $76,320,000
(see "Use of Proceeds").
F-3
<PAGE>
U.S. RESTAURANT PROPERTIES, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
U.S. RESTAURANT
U.S. RESTAURANT PROPERTIES MASTER L.P. PROPERTIES, INC.
----------------------------------------------------------------------- ------------------------
OPERATING
PROPERTY NEWLY CONSTRUCTED REIT COMPANY PRO
HISTORICAL ACQUISITIONS(A) ACQUISITIONS(B) SALES(C) ADJUSTED CONVERSION FORMA
----------- --------------- ----------------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and Equivalents............. $ 1,777 $ -- $ -- $ -- $ 1,777 $ 1(d) $ 1,778
Receivables, net................. 2,340 14 2,354 2,354
Deferred rent receivable......... 1,137 1,137 1,137
Purchase deposits and escrows.... 1,090 (434) (47) 609 609
Prepaid expenses................. 924 12 936 936
Notes receivable................. 1,321 6,176 689 8,186 8,186
Notes receivable - related
parties......................... 3,411 3,411 3,411
Net investment in direct
financing leases................ 15,679 (191) 15,488 15,488
Land............................. 78,679 13,138 3,458 (795) 94,480 94,480
Building and leasehold
improvements, net............... 139,298 32,840 2,445 (596) 173,987 173,987
Machinery & Equipment, net....... 3,743 309 4,052 4,052
Intangibles, net................. 12,116 138 (46) 12,208 12,208
----------- ------- ------ ----------- --------- ----------- -----------
$ 261,515 $ 51,884 $ 6,165 $ (939) $ 318,625 $ 1 $ 318,626
----------- ------- ------ ----------- --------- ----------- -----------
----------- ------- ------ ----------- --------- ----------- -----------
Accounts payable................. $ 3,173 $ 579 $ 46 $ -- $ 3,798 $ 75 $ 3,873
Deferred rent payable............ 88 88 88
Deferred gain on sale of
property........................ 590 213 803 803
Lines of credit.................. 92,313 36,078 6,119 (1,152) 133,358 133,358
Notes payable.................... 40,000 40,000 40,000
Capitalized lease obligations.... 263 263 263
General Partner's capital........ 1,093 1,093 (1,093)(e) --
Limited Partner's capital........ 123,995 15,227 139,222 (139,222)(e) --
Stockholders' Equity............. 140,241(f) 140,241
----------- ------- ------ ----------- --------- ----------- -----------
$ 261,515 $ 51,884 $ 6,165 $ (939) $ 318,625 $ 1 $ 318,626
----------- ------- ------ ----------- --------- ----------- -----------
----------- ------- ------ ----------- --------- ----------- -----------
<CAPTION>
COMPANY PRO
OFFERING FORMA AS
ADJUSTMENTS ADJUSTED
------------- -----------
<S> <C> <C>
Cash and Equivalents............. $ $ 1,778
Receivables, net................. 2,354
Deferred rent receivable......... 1,137
Purchase deposits and escrows.... 609
Prepaid expenses................. 936
Notes receivable................. 8,186
Notes receivable - related
parties......................... 3,411
Net investment in direct
financing leases................ 15,488
Land............................. 94,480
Building and leasehold
improvements, net............... 173,987
Machinery & Equipment, net....... 4,052
Intangibles, net................. 12,208
------------- -----------
$ -- $ 318,626
------------- -----------
------------- -----------
Accounts payable................. $ $ 3,873
Deferred rent payable............ 88
Deferred gain on sale of
property........................ 803
Lines of credit.................. (76,320)(g) 57,038
Notes payable.................... 40,000
Capitalized lease obligations.... 263
General Partner's capital........ --
Limited Partner's capital........ --
Stockholders' Equity............. 76,320(g) 216,561
------------- -----------
$ -- $ 318,626
------------- -----------
------------- -----------
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Balance Sheet.
F-4
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(a) Reflects pro forma adjustments for acquisitions completed since June 30,
1997 which consist of the purchase of 65 operating properties and the
borrowings required to complete the purchase of these properties as follows:
<TABLE>
<CAPTION>
NUMBER OF
PROPERTIES OPERATING
--------------- -----------
<S> <C> <C>
Midon Acquisition............................................... 17 $ 13,449
QSR Acquisition................................................. 16 7,904
Embers.......................................................... 10 4,106
Taco Cabana..................................................... 5 5,657
Checkers Acquisition............................................ 5 1,487
Harrigan's Acquisition.......................................... 3 3,898
BCL II, L.P..................................................... 2 1,559
Jackson-Shaw.................................................... 2 3,119
Ribbit Holdings................................................. 1 931
El Chico........................................................ 1 1,271
500 Park Avenue Realty.......................................... 1 1,137
Superpumper..................................................... 1 1,229
Other Property.................................................. 1 231
--
-----------
65 45,978
--
--
Plus notes ($6,176) and other ($14) receivable.......................... 6,190
-----------
$ 52,168
-----------
Add prepaid assets...................................................... 12
Add intangibles......................................................... 138
Less June 30, 1997purchase deposits relating to acquisitions............ (434)
Less tenant security deposit and escrow received........................ (579)
Less value of 502,827 units issued for property......................... (10,477)
Less proceeds from sale of stock........................................ (4,750)
-----------
Increase in line of credit and notes payable............................ $ 36,078
-----------
-----------
Costs of the acquisitions are allocated as follows:
Land.................................................................. $ 13,138
Buildings and leasehold improvements.................................. 32,840
-----------
$ 45,978
-----------
-----------
</TABLE>
The respective purchase price for the properties has been allocated between
land and buildings and leasehold improvements, on a preliminary basis. Final
determination of the proper allocation between these accounts will be made
prior to finalizing the financial statements for the year ending December
31, 1997. Management does not expect material adjustments to occur.
(b) Reflects pro forma adjustments for acquisitions completed since June 30,
1997 which consist of the purchase of eight newly constructed and five
undeveloped properties and the borrowings required to complete the purchase
of these properties as follows:
<TABLE>
<CAPTION>
NUMBER OF NEWLY
PROPERTIES CONSTRUCTED
--------------- -----------
<S> <C> <C>
Schlotzsky's.................................................... 7 $ 3,457
Other Properties................................................ 6 2,755
--
-----------
13 6,212
--
--
Less June 30, 1997 purchase deposits relating to acquisitions........... (47)
Less tenant security deposit and escrow received........................ (46)
-----------
Increase in line of credit and notes payable............................ $ 6,119
-----------
-----------
Costs of the acquisitions are allocated as follows:
Land.................................................................. $ 3,458
Buildings and leasehold improvements.................................. 2,445
Machinery and equipment............................................... 309
-----------
$ 6,212
-----------
-----------
</TABLE>
F-5
<PAGE>
The respective purchase price for the properties has been allocated between
land and buildings and leasehold improvements, on a preliminary basis. Final
determination of the proper allocation between these accounts will be made
prior to finalizing the financial statements for the year ending December
31, 1997. Management does not expect material adjustments to occur.
(c) Reflects pro forma adjustments for restaurant properties sold since June 30,
1997 which consist of the sale of three operating properties and the
reduction in borrowings resulting from the sale of these properties as
follows:
<TABLE>
<CAPTION>
NUMBER OF
PROPERTIES SALES
--------------- -----------
<S> <C> <C>
Burger King..................................................... 2 $ (867)
Other Property.................................................. 1 (524)
--
-----------
3 (1,391)
--
--
Add note receivable on sale............................................. 689
Less DFL portion of sale................................................ (191)
Less intangibles........................................................ (46)
Less deferred gain on sale.............................................. (213)
-----------
Decrease in line of credit.............................................. $ (1,152)
-----------
-----------
Costs of the sales are allocated as follows:
Land.................................................................. $ (795)
Buildings and leasehold improvements.................................. (596)
-----------
$ (1,391)
-----------
-----------
</TABLE>
(d) Reflects pro forma adjustment for the contribution of $1 by QSV Properties
to capitalize the Company.
(e) Reflects pro forma adjustments to convert the General Partner's and Limited
Partners' capital acounts into stockholders' equity.
(f) Reflects the following pro forma adjustment to stockholders' equity relating
to the Managing General Partner's conversion of its Property Management
Contract or the assignment thereof to USRP and converting its aggregate
1.98% Partnership Interests into 1,275,000 shares of Common Stock or its
equivalent with the Common Stock valued at $19.00 per share which
represented the current market price as of the date the transaction was
approved by the Board of Directors.
<TABLE>
<S> <C> <C>
Value of 1,275,000 Initial Shares of Common Stock at $19.00 market value
issued to the Managing General Partner................................ $ 24,225
Cost of property management contract to be expensed..................... (23,132)
Accrual for additional costs of conversion.............................. (75)
Equity related to Limited Partners upon Conversion...................... 139,222
REIT Corporation equity................................................. 1
-----------
$ 140,241
-----------
-----------
</TABLE>
(g) Reflects pro forma adjustments to give effect to the consumation of the
Offering and the application of the estimated net proceeds from the Offering
(See "Use of Proceeds.").
F-6
<PAGE>
U. S. RESTAURANT PROPERTIES, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
U.S. RESTAURANT PROPERTIES MASTER L.P.
-------------------------------------------------------- U.S. RESTAURANT PROPERTIES, INC.
1997 -------------------------------------------
1996 ACQUISITIONS REIT OFFERING
HISTORICAL ACQUISITIONS(A) AND SALES(B) ADJUSTED CONVERSION(H) ADJUSTMENTS PRO FORMA
----------- --------------- ------------- ----------- --------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Total Revenues............... $ 18,324 $ 7,365 $ 16,962 $ 42,651 $ 42,651
Expenses:
Ground Lease expense....... 2,080 232 211 2,523 2,523
Depreciation and
amortization............. 3,978 1,855 5,137 10,970 $ (91)(d) 10,879
Taxes, general and
administrative........... 2,461 684 1,402 4,547 (2,477)(e) 2,070
Interest expense
(income)................. 2,364 3,038 7,128 12,530 $ (5,495)(g) 7,035
----------- ------ ------------- ----------- ------- ------------- -----------
Total expenses............. 10,883 5,809 13,878 30,570 (2,568) (5,495) 22,507
Gain on sale of equipment.... 32 32 32
----------- ------ ------------- ----------- ------- ------------- -----------
Net income................... $ 7,473 $ 1,556 $ 3,084 $ 12,113 $ 2,568 5,495 20,176
----------- ------ ------------- ----------- -------
----------- ------ ------------- ----------- -------
Preferred stock dividend..... (5,600)(i) (5,600)
------------- -----------
Net income allocable to
unitholders/common
shareholders............... $ 7,325 $ 1,525 $ 3,023 $ 11,873 $ (105) $ 14,576
------------- -----------
------------- -----------
Average number of
units/shares outstanding... 9,161 1,014(c) 12,680 1,277(f) 13,956
Net income per unit/share.... $ 0.80 $ 0.94 $ 1.04
</TABLE>
- ------------------------------
(a) Reflects pro forma adjustments to operations relating to the period between
January 1, 1996 and the date of acquisition for the 1996 acquisitions,
comprised of 184 properties acquired on various dates from January 1, 1996
through December 31, 1996.
(b) Reflects pro forma adjustments for the completed 1997 acquisitions and
sales, comprising 209 properties acquired and 4 properties sold on various
dates between January 1, 1997 and October 15, 1997 as follows (in
thousands):
<TABLE>
<CAPTION>
ACQUISITIONS SALE NET AMOUNT
------------- --------- -----------
<S> <C> <C> <C>
Total Revenues................................................ $ 17,232 $ (270) $ 16,962
------------- --------- -----------
------------- --------- -----------
Expenses:
Ground Lease expense........................................ $ 211 $ $ 211
Depreciation and amortization............................... 5,174 (37) 5,137
Taxes, general and administrative........................... 1,402 1,402
Interest expense (income)................................... 7,128 7,128
------------- --------- -----------
Total expenses................................................ $ 13,915 $ (37) $ 13,878
------------- --------- -----------
------------- --------- -----------
</TABLE>
(c) Reflects pro forma adjustments for 1,014 Units issued in connection with the
acquisition of properties in 1997.
(d) Reflects pro forma adjustment to depreciation and amortization expense due
to a decrease in fees paid to the Managing General Partner in connection
with the termination of the Property Management Contract. Such fees consist
of 1% of the contracted purchase price for the respective properties which
is capitalized as part of the purchase price.
(e) Pro forma adjustments to general and administrative expense are comprised of
the following:
<TABLE>
<S> <C>
Decrease in management fees.............................................................. $ (3,227)
Increase in payroll expenses (previously paid by the Managing General Partner)........... 750
---------
Net decrease............................................................................. $ (2,477)
---------
---------
</TABLE>
F-7
<PAGE>
All other general and administrative expenses are not expected to increase as
a result of the conversion to a REIT since the Partnership is already a
public entity exempt from federal income taxes.
(f) Pro forma adjustment reflects the 1,275 Initial shares of Common Stock or
its equivalent issued to the Managing General Partner for its interests in
the Partnerships and termination of its property management contract and
shares of Common Stock issued by the Company to the Managing General Partner
upon formation of the Company at $1 per share.
(g) Reflects pro forma adjustment of interest expense as a result of the
Offering based on the use of Offering proceeds to reduce the total debt
outstanding by $76,320 (see "Use of Proceeds").
(h) Reflects pro forma adjustments relating to the conversion of USRP to a REIT.
No adjustment is shown in the Unaudited Statement of Income for the cost of
terminating the Managing General Partner's property management contract
which amounted to $23,132, or the legal, filing, printing, fairness opinion
and related costs of completing the REIT conversion of $819 since both of
these amounts are considered to be nonrecurring expenses. Costs related to
the reorganization have been charged to expense in the period incurred and
the cost related to the property management contract was expensed at the
time the contract was terminated.
(i) Reflects pro forma adjustment for preferred stock dividends assuming a 7%
dividend rate.
F-8
<PAGE>
U. S. RESTAURANT PROPERTIES, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
U.S. RESTAURANT PROPERTIES MASTER L.P.
--------------------------------------- U.S. RESTAURANT PROPERTIES, INC.
1997 -------------------------------------------
ACQUISITIONS REIT OFFERING
HISTORICAL AND SALES(A) ADJUSTED CONVERSION(G) ADJUSTMENTS PRO FORMA
----------- ------------- ----------- --------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Total Revenues............................... $ 14,544 $ 6,451 $ 20,995 $ 20,995
Expenses:
Ground Lease expense....................... 1,189 105 1,294 1,294
Depreciation and amortization.............. 3,366 1,935 5,301 (46)(c) 5,255
Taxes, general and administrative.......... 1,987 541 2,528 (1,239)(d) 1,289
Interest expense, net...................... 3,425 2,840 6,265 (2,748)(f) 3,517
----------- ------ ----------- ------- ------------- -----------
Total expenses............................. 9,967 5,421 15,388 (1,285) (2,748) 11,355
Gain on sale of property..................... 266 266 266
REIT conversion costs........................ (744) (744) 744(g)
----------- ------ ----------- ------- ------------- -----------
Net income................................... $ 4,099 $ 1,030 $ 5,129 $ 2,029 2,748 9,906
----------- ------ ----------- -------
----------- ------ ----------- -------
Preferred stock dividend..................... (2,800)(h) (2,800)
------------- -----------
Net operating income allocable to
unitholders/ shareholders.................. $ 4,018 $ 1,010 $ 5,027 $ (52) $ 7,106
------------- -----------
------------- -----------
Average number of units outstanding
(Primary).................................. 11,114 1,014(b) 12,770 1,276(e) 14,046
Net income per unit/share.................... $ 0.36 $ 0.39 $ 0.51
</TABLE>
- ------------------------------
(a) Reflects pro forma adjustments for the completed 1997 acquisitions and
sales, comprising 209 properties acquired and 4 properties sold on various
dates between January 1, 1997 and October 15, 1997 as follows (in
thousands):
<TABLE>
<CAPTION>
ACQUISITIONS SALE NET AMOUNT
------------- --------- -------------
<S> <C> <C> <C>
Total Revenues................................................. $ 6,586 $ (135) $ 6,451
------ --------- ------
------ --------- ------
Expenses:
Ground Lease expense......................................... $ 105 $ $ 105
Depreciation and amortization................................ 1,954 (19) 1,935
Taxes, general and administrative............................ 541 541
Interest expense (income).................................... 2,840 2,840
------ --------- ------
Total expenses................................................. $ 5,440 $ (19) $ 5,421
------ --------- ------
------ --------- ------
</TABLE>
(b) Reflects pro forma adjustments for 1,014 Units issued in connection with the
acquisition in 1997.
(c) Reflects pro forma adjustment to depreciation and amortization expense due
to a decrease in fees paid to the Managing General Partner in connection
with the termination of the Property Management Contract. Such fees consist
of 1% of the contracted purchase price for the respective properties which
is capitalized as part of the purchase price.
(d) Pro forma adjustments to general and administrative expense are comprised of
the following:
<TABLE>
<S> <C>
Decrease in management fees.............................................................. $ (1,614)
Increase in payroll expenses (previously paid by the Managing General Partner)........... 375
---------
Net decrease............................................................................. $ (1,239)
---------
---------
</TABLE>
All other general and administrative expenses are not expected to increase as
a result of the conversion to a REIT since the Partnership is already a
public entity exempt from federal income taxes.
(e) Pro forma adjustment reflects the 1,275 Initial shares of Common Stock
issued to the Managing General Partner for its interests in the Partnerships
and termination of its property management contract and shares of Common
Stock issued by the REIT Corporation to the Managing General Partner upon
formation of the Company at $1 per share.
(f) Reflects pro forma adjustment of interest expense as a result of the
Offering based on the use of Offering proceeds to reduce the total debt
outstanding by $76,320 (see "Use of Proceeds").
(g) Reflects pro forma adjustment relating to the conversion of USRP to a REIT.
No adjustment is shown in the Unaudited Statement of Income for the cost of
terminating the Managing General Partner's property management contract
which amounted to $23,132, or the legal, filing, printing, fairness opinion
and related costs of completing the REIT conversion of $819 since both of
these amounts are considered to be nonrecurring expenses. Costs related to
the reorganization have been charged to expense in the period incurred and
the cost related to the property management contract was expensed at the
time the contract was terminated.
(h) Reflects pro forma adjustment for preferred stock dividends assuming a 7%
dividend rate.
F-9
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Directors and Stockholder of
U.S. Restaurant Properties, Inc.
We have audited the accompanying balance sheet of U.S. Restaurant
Properties, Inc. as of February 4, 1997. This balance sheet is the
responsibility of the management of U.S. Restaurant Properties, Inc. Our
responsibility is to express an opinion on this balance sheet based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, such balance sheet presents fairly, in all material
respects, the financial position of U.S. Restaurant Properties, Inc. at February
4, 1997, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 5, 1997 (October 20, 1997 as to Note 4)
F-10
<PAGE>
U.S. RESTAURANT PROPERTIES, INC.
BALANCE SHEET
FEBRUARY 4, 1997
ASSETS
<TABLE>
<S> <C>
Cash................................................................................ $ 1,000
---------
---------
STOCKHOLDER'S EQUITY
Preferred stock, $.001 par value per share; 10,000,000 shares authorized, no shares
issued
Common Stock, $.001 par value per share; 45,000,000 shares authorized; 1,500 shares
issued and outstanding............................................................ $ 1
Excess Stock, $.001 par value per share; 5,000,000 shares authorized, no shares
issued
Additional paid-in capital.......................................................... 999
---------
$ 1,000
---------
---------
</TABLE>
See Notes to Balance Sheet.
F-11
<PAGE>
U.S. RESTAURANT PROPERTIES, INC.
NOTES TO BALANCE SHEET
1. ORGANIZATION
U.S. Restaurant Properties, Inc. (the "Company") is a newly-organized
Maryland corporation formed to continue the restaurant property management
operations of U.S. Restaurant Properties Master, L.P. (collectively, with its
subsidiaries, "USRP"). The Company is authorized to issue up to 45,000,000
shares of common stock, par value $.001 per share (the "Common Stock"),
10,000,000 shares of Preferred Stock, par value $.001 per share (the "Preferred
Stock") and 5,000,000 shares of Excess Stock, par value $.001 per share.
Pursuant to the Company's Articles of Incorporation (the "Articles"), any
purported transfer of shares of Common Stock or Preferred Stock that would
result in a person owning shares of Common Stock or Preferred Stock in excess of
certain limits set out in Articles will result in the shares subject to such
purported transfer being automatically exchanged for an equal number of shares
of Excess Stock.
The Company was capitalized upon the sale of 1,000 shares of Common Stock
for $1,000 to QSV Properties, Inc. ("QSV"). The Company will be a self-advised
real estate investment trust ("REIT") formed to continue the restaurant property
management, acquisition and development operations, related business objectives
and strategies of USRP. The consolidated financial statements of U.S. Restaurant
Properties, Inc. will include the operations of USRP. The Company intends to
qualify as a REIT as defined under the Internal Revenue Code of 1986, as
amended.
2. BUSINESS
The Company shall invest in U.S. Restaurant Properties Operating, L.P. (the
"Operating Partnership" or "OP" and, together with USRP, the "Partnerships"),
which will include and continue all operations of USRP. The purpose of this
investment is to facilitate the Conversion of USRP's ownership structure from a
master limited partnership to a REIT. The Company was formed on February 4, 1997
and will not have any operations until the Conversion is effected.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company shall succeed to the operations of USRP, and accordingly, will
follow all accounting principles established by USRP in addition to the
following:
INCOME TAXES--Provisions for income taxes will be made in accordance
with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("SFAS 109").
4. SUBSEQUENT EVENTS
QSV has agreed to convert its interests in the Partnerships in exchange for
126,580 shares of Common Stock and 1,148,420 OP Units. An additional 825,000
shares or its equivalent in OP Units may be issued to QSV if certain earnings
targets are met by the year 2000. QSV is an entity that is primarily owned by
Mr. Robert J. Stetson and Mr. Fred H. Margolin.
The Company has entered into employment agreements with Messrs. Stetson and
Margolin. The agreements are for three years, beginning with the closing of the
Acquisition. Pursuant to the Employment Agreements, Mr. Stetson will serve as
President and Chief Executive Officer of the Company and Mr. Margolin will serve
as Chairman of the Board of the Company and each will be paid an annual base
salary of $250,000.
On June 27, 1997, the USRP unitholders approved the Conversion of USRP into
a REIT pursuant to the merger of a partnership subsidiary of the Company with
and into USRP with USRP being the surviving entity. This conversion of USRP to a
REIT occurred on October 15, 1997 and as a result, the OP Units are exchangeable
for shares of the REIT's Common Stock on a one-for-one basis. On October 20,
1997, the REIT declared a three-for-two stock split. All share amounts have been
restated to reflect this stock split.
The Articles of Incorporation were amended in October 1997 to increase the
authorized shares of common stock to 100,000,000, the authorized shares of
preferred stock to 50,000,000 and the shares of excess stock to 15,000,000.
F-12
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
U.S. Restaurant Properties Master L.P.
We have audited the accompanying consolidated balance sheets of U.S.
Restaurant Properties Master L.P. (the Partnership) as of December 31, 1996 and
1995, and the related consolidated statements of income, partners' capital, and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 our audits provide a reasonable
basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of U.S. Restaurant
Properties Master L.P. as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 28, 1997 (October 20, 1997 as to Note 15)
F-13
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1995 1996 1997
--------- ---------- -----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Cash and equivalents......................................................... $ 7 $ 381 $ 1,777
Receivables, net............................................................. 951 2,117 2,340
Deferred rent receivable..................................................... -- 536 1,137
Purchase deposits............................................................ 1,792 908 1,090
Prepaid expenses............................................................. 315 403 924
Notes receivable............................................................. -- 1,308 1,321
Notes receivable--related parties............................................ 269 2,738 3,411
Net investment in direct financing leases.................................... 19,371 17,105 15,679
Land......................................................................... 27,493 61,340 78,679
Buildings and leasehold improvements, net.................................... 7,900 75,339 139,298
Machinery and equipment, net................................................. 224 2,980 3,743
Intangibles, net............................................................. 13,161 12,263 12,116
--------- ---------- -----------
$ 71,483 $ 177,418 $ 261,515
--------- ---------- -----------
--------- ---------- -----------
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable............................................................. $ 677 $ 2,642 $ 3,173
Deferred rent payable........................................................ -- 55 88
Deferred gain on sale of property............................................ -- 590 590
Lines of credit.............................................................. 10,931 69,486 92,313
Notes payable................................................................ -- -- 40,000
Capitalized lease obligations................................................ 563 362 263
Commitments (Notes 8 and 9)
General Partners' capital.................................................... 1,241 1,163 1,093
Limited Partners' capital.................................................... 58,071 103,120 123,995
--------- ---------- -----------
$ 71,483 $ 177,418 $ 261,515
--------- ---------- -----------
--------- ---------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-14
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- --------- SIX MONTHS ENDED JUNE
30,
------------------------
1997
1996 -----------
----------- (UNAUDITED)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues from leased properties:
Rental income....................................... $ 6,340 $ 7,540 $ 16,346 $ 6,238 $ 13,687
Amortization of unearned income on direct financing
leases............................................ 2,453 2,240 1,978 1,026 857
--------- --------- --------- ----------- -----------
Total Revenues.................................... 8,793 9,780 18,324 7,264 14,544
Expenses:
Rent................................................ 1,348 1,405 2,080 897 1,189
Depreciation and amortization....................... 1,361 1,541 3,978 1,375 3,366
Taxes, general and administrative................... 1,144 1,419 2,461 851 1,987
Interest expense (income), net...................... (4) 192 2,364 957 3,425
Provision for write down or disposition of
properties........................................ 11 -- -- -- --
--------- --------- --------- ----------- -----------
Total Expenses.................................... 3,860 4,557 10,883 4,080 9,967
--------- --------- --------- ----------- -----------
Income before unusual items......................... 4,933 5,223 7,441 3,184 4,577
--------- --------- --------- ----------- -----------
Gain on sale of equipment............................. -- -- 32 -- 266
REIT conversion costs................................. -- -- -- -- (744)
--------- --------- --------- ----------- -----------
Net income............................................ $ 4,933 $ 5,223 $ 7,473 $ 3,184 $ 4,099
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Net income allocable to unitholders................... $ 4,834 $ 5,119 $ 7,325 $ 3,121 $ 4,018
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Average number of outstanding units
(Primary)............................................. 6,953 6,957 9,161 7,814 11,114
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Net income per unit................................... $ 0.70 $ 0.74 $ 0.80 $ 0.40 $ 0.36
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-15
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(IN THOUSANDS)
<TABLE>
<CAPTION>
GENERAL LIMITED
UNITS PARTNERS PARTNERS TOTAL
--------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at January 1, 1994........................................... 6,953 $ 1,357 $ 62,757 $ 64,114
Net income........................................................... 99 4,834 4,933
Cash distributions................................................... (148) (7,230) (7,378)
--------- ----------- ---------- ----------
Balance at December 31, 1994......................................... 6,953 1,308 60,361 61,669
--------- ----------- ---------- ----------
Special general partner interest transfer............................ (13) (3) (16)
Net income........................................................... 104 5,119 5,223
Purchase of partnership units........................................ (45) -- (547) (547)
Units issued for property............................................ 81 -- 985 985
Cash distributions................................................... (158) (7,844) (8,002)
--------- ----------- ---------- ----------
Balance at December 31, 1995......................................... 6,989 1,241 58,071 59,312
--------- ----------- ---------- ----------
Net income........................................................... 148 7,325 7,473
Units issued for property............................................ 577 -- 7,912 7,912
Proceeds from units issued in public offering........................ 2,700 -- 40,203 40,203
Proceeds from exercised unit options................................. 75 -- 775 775
Cash distributions................................................... (226) (11,166) (11,392)
--------- ----------- ---------- ----------
Balance at December 31, 1996......................................... 10,341 1,163 103,120 104,283
--------- ----------- ---------- ----------
Net income--Unaudited................................................ 81 4,018 4,099
Units issued for cash--Unaudited..................................... 1,249 -- 21,025 21,025
Units issued for property--Unaudited................................. 179 -- 3,320 3,320
Cash distributions--Unaudited........................................ (151) (7,488) (7,639)
--------- ----------- ---------- ----------
Balance at June 30, 1997--Unaudited.................................. 11,769 $ 1,093 $ 123,995 $ 125,088
--------- ----------- ---------- ----------
--------- ----------- ---------- ----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-16
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
------------------------------- ------------------------
1994 1995 1996 1996 1997
--------- --------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income....................................... $ 4,933 $ 5,223 $ 7,473 $ 3,184 $ 4,099
--------- --------- --------- ----------- -----------
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization.................... 1,361 1,541 3,978 1,332 3,366
Amortization of deferred financing costs......... -- -- 162 42 145
Other, net....................................... (843) 854 (32) -- (266)
Increase in receivables, net..................... (301) (236) (1,166) (288) (223)
Increase in prepaid expenses..................... (36) (192) (88) (157) (601)
Increase in deferred rent receivable............. -- -- (536) (73) (521)
Reduction in net investment in direct financing
leases......................................... 1,673 1,866 2,041 1,002 1,130
Increase in accounts payable..................... 203 232 1,965 513 531
Increase in deferred rent payable................ -- -- 55 -- 33
--------- --------- --------- ----------- -----------
2,057 4,065 6,379 2,371 3,594
--------- --------- --------- ----------- -----------
Cash provided by operating activities.......... 6,990 9,288 13,852 5,555 7,693
Cash flows from investing activities:
Proceeds from sale of property and equipment..... -- -- 122 1,683 1,171
Purchase of property............................. -- (9,746) (95,918) (60,483) (81,005)
Purchase of machinery and equipment.............. -- (232) (3,032) (2,716) (981)
Purchase deposits (paid) used.................... -- (1,792) 884 72 (182)
Increase in notes receivable..................... -- (269) (3,034) (3,529) (686)
--------- --------- --------- ----------- -----------
Cash used in investing activities.............. -- (12,039) (100,978) (64,973) (81,683)
Cash flows from operating activities:
Proceeds from line of credit..................... -- 12,453 104,805 67,447 62,467
Payments on line of credit....................... (1,522) (46,250) (43,313) (39,640)
Cash distributions............................... (7,378) (8,002) (11,392) (4,630) (7,639)
Proceeds from issuance of stock.................. -- -- 40,978 40,203 21,025
Loan origination costs and other intangibles..... -- (77) (440) (178) (728)
Payments on capitalized lease obligations........ (191) (212) (201) (104) (99)
Purchase of partnership units.................... -- (547) -- -- --
Proceeds from notes payable...................... -- -- -- -- 40,000
Purchase of special general partner interest..... -- (16) -- -- --
--------- --------- --------- ----------- -----------
Cash flows provided by (used in) financing
activities................................... (7,569) 2,077 87,500 59,425 75,386
--------- --------- --------- ----------- -----------
Increase (decrease) in cash and equivalents........ (579) (674) 374 7 1,396
Cash and equivalents at beginning of year.......... 1,260 681 7 7 381
--------- --------- --------- ----------- -----------
Cash and equivalents at end of year................ $ 681 $ 7 $ 381 $ 14 $ 1,777
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Supplemental disclosure:
Interest paid during the year...................... $ 90 $ 256 $ 2,431 $ 505 $ 3,267
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Non-cash investing activities
Units issued for property.......................... $ -- $ 985 $ 7,912 $ 6,596 $ 3,320
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Deferred gain on sale of property.................. $ -- $ -- $ 590 $ 590 $ --
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Note received on sale of property.................. $ -- $ -- $ 743 $ -- $ --
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Sale of property on direct financing lease......... $ -- $ -- $ 225 $ 225 $ --
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 (UNAUDITED)
1. ORGANIZATION
U.S. Restaurant Properties Master L.P. (Partnership), formerly Burger King
Investors Master L.P., a Delaware limited partnership, was formed on December
10, 1985. The Partnership, through its 99.01% limited partnership interest in
U.S. Restaurant Properties Operating Limited Partnership (Operating
Partnership), also a Delaware Limited Partnership, acquired from Burger King
Corporation (BKC) for $94,592,000 in February 1986 an interest in 128 restaurant
properties owned or leased by BKC and leased or subleased on a net lease basis
to BKC franchisees. The Partnership is the sole limited partner of the Operating
Partnership, and they are referred to collectively as the "Partnerships" or the
"Partnership". QSV Properties, Inc., (QSV), formerly U.S. Restaurant Properties,
Inc., the Managing General Partner and BKC, the special general partner, were
both indirect wholly-owned subsidiaries of Grand Metropolitan PLC prior to May
17, 1994, at which time QSV was sold to the current owners. On January 20, 1995,
the Partnership paid Burger King Corporation $16,000 for its 0.02% interest in
the Operating and Master Limited Partnership.
In 1996, the Partnership established certain other wholly owned operating
entities consisting of U.S. Restaurant Properties Business Trust I, U.S.
Restaurant Properties Business Trust II, Restaurant Acquisition Corporation,
Restaurant Renovation Partners L.P., U.S. Restaurant Properties West Virginia
Partners L.P., U.S. Restaurant Properties Carolina LTD., U.S. Restaurant
Properties Lincoln LTD., and U.S. Restaurant Properties Norman LTD.
Collectively, these entities in addition to the Partnerships are referred to as
the "Company." All of these entities are included in the consolidated financial
statements.
The Partnership may issue an unlimited number of units. The units
outstanding as of December 31, 1995 and 1996 and June 30, 1997 totaled
6,988,750, 10,341,004 and 11,769,381, respectively.
QSV Properties, Inc. (formerly named U.S. Restaurant Properties, Inc.), is
the Managing General Partner of the Partnership.
2. ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles; however, this will not be the basis
for reporting taxable income to unitholders (see Note 10 for a reconciliation of
financial reporting income to taxable income). The consolidated financial
statements reflect the accounts of the Company after elimination of significant
inter-entity transactions.
Cash and cash equivalents include short-term, highly liquid investments with
maturities at the date of purchase of three months or less.
An intangible asset was recorded for the excess of cost over the net
investment in direct financing leases in 1986. This intangible asset represents
the acquired value of future contingent rent receipts (based on a percentage of
each restaurant's sales) and is being amortized on a straight-line basis over 40
years. The Company's management routinely reviews the carrying amount of
intangibles based on projected cash flows. Based on the Company's policy for
evaluating impairment of intangibles, no valuation allowance was recorded as of
December 31, 1996 and 1995.
Rent revenues and expenses under operating leases are recognized on a
straight-line basis.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 (UNAUDITED)
2. ACCOUNTING POLICIES (CONTINUED)
DEPRECIATION
Depreciation is computed using the straight-line method over estimated
useful lives of 6 to 20 years for financial reporting purposes. Accelerated and
straight-line methods are used for tax purposes.
USE OF ESTIMATES
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect reported amounts of certain assets, liabilities,
revenues and expenses as of and for the reporting periods. Actual results may
differ from such estimates.
LONG-LIVED ASSETS
Long-lived assets include real estate, direct financing leases, and
intangibles which are evaluated on an individual property basis. The
Partnership's management routinely reviews its investments for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Based on the Company's policy for reviewing
impairment of long-lived assets, no valuation allowance was recorded as of
December 31, 1996 and 1995.
INCOME TAXES
No federal or, in most cases, state income taxes are reflected in the
consolidated financial statements because the Partnerships are not taxable
entities. The partners must report their allocable shares of taxable income or
loss in their individual income tax returns.
EQUITY-BASED COMPENSATION
In 1995, Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," ("SFAS 123") was issued, effective for fiscal
years beginning after December 15, 1995. This Statement requires companies to
use recognized option pricing models to estimate the fair value of equity based
compensation, including options. This Statement also applies to transactions in
which an entity issues its equity instruments to acquire goods or services from
non-employees. Those transactions must be accounted for based on the fair value
of the consideration received or the fair value of the equity instruments
issued, whichever is more reliably measurable. The Company has elected not to
recognize compensation expense for employee equity based compensation as
calculated under SFAS 123, but will recognize any related expense in accordance
with the provisions of APB Opinion No. 25. Disclosure of amounts required by
SFAS 123 are included in Note 6.
ENVIRONMENTAL REMEDIATION COSTS
The Company accrues for losses associated with environmental remediation
obligations when such losses are probable and reasonably estimable. Accruals for
estimated losses from environmental remediation obligations generally are
recognized no later than completion of the remediation feasibility study. Such
accruals are adjusted as further information develops or circumstances change.
Recoveries of environmental remediation costs from other parties are recorded as
assets when their receipt is deemed
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 (UNAUDITED)
2. ACCOUNTING POLICIES (CONTINUED)
probable. Company management is not aware of any environmental remediation
obligations which would materially affect the operations, financial position or
cash flows of the Company.
In 1996 the American Institute of Certified Public Accountants issued
Statement of Position 96-1, "Environmental Remediation Liabilities", ("SOP
96-1"), which provides guidance for the recognition, measurement, display and
disclosure of environmental remediation liabilities. The Company will adopt the
provisions of SOP 96-1 in 1997, as required, and does not expect such adoption
to have a material impact on its results of operations, financial position, or
cash flows.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
INTERIM FINANCIAL DATA
The Balance Sheet as of June 30, 1997 and the Statements of Income and Cash
Flows for the six months ended June 30, 1997 and 1996 and the Statement of
Partners' Capital for the six months ended June 30, 1997 and related Notes to
Consolidated Financial Statements are unaudited. In the opinion of management,
the accompanying unaudited consolidated financial statements contain all the
adjustments (consisting of only normal recurring accruals) necessary to present
fairly the financial position of the Company as of June 30, 1997, and the
results of their operations and changes in their cash flow for the six months
ended June 30, 1997 and 1996.
3. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
The following disclosure of estimated fair value was determined by the
Company using available market information and appropriate valuation
methodologies. However, considerable judgment is necessary to interpret market
data and develop the related estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that could be
realized upon disposition of the financial instruments. The use of different
market assumptions and/or estimation methodologies may have a material effect on
the estimated fair value amounts.
Cash and cash equivalents, receivables (including deferred rent receivable),
accounts payable (including deferred rent payable), and the line of credit are
carried at amounts that approximate their fair value.
The fair value of notes receivable totaling $4,046,000 and $269,000 as of
December 31, 1996 and 1995, respectively, have a fair value of $3,672,000 and
$269,000, respectively, as based upon interest rates for notes with similar
terms and remaining maturities.
The fair value estimates presented herein are based on information available
to management as of December 31, 1996 and 1995. Although management is not aware
of any factors that would significantly affect the estimated fair value amounts,
such amounts have not been comprehensively revalued for purposes of these
financial statements since that date, and current estimates of fair value may
differ significantly from the amounts presented herein.
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 (UNAUDITED)
4. OTHER BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
($000'S) ($000'S)
---------- ---------- JUNE 30,
1997
($000'S)
-----------
(UNAUDITED)
<S> <C> <C> <C>
RECEIVABLES, NET
Receivables.............................................. $ 1,068 $ 2,234 $ 2,480
Less allowance for doubtful accounts..................... (117) (117) (140)
---------- ---------- -----------
$ 951 $ 2,117 $ 2,340
---------- ---------- -----------
---------- ---------- -----------
BUILDINGS AND LEASEHOLD IMPROVEMENTS, NET
Buildings and leasehold improvements..................... $ 10,545 $ 80,528 $ 147,072
Less accumulated depreciation............................ (2,645) (5,189) (7,774)
---------- ---------- -----------
$ 7,900 $ 75,339 $ 139,298
---------- ---------- -----------
---------- ---------- -----------
MACHINERY AND EQUIPMENT, NET
Machinery and equipment.................................. $ 232 $ 3,244 $ 4,225
Less accumulated depreciation............................ (8) (264) (482)
---------- ---------- -----------
$ 224 $ 2,980 $ 3,743
---------- ---------- -----------
---------- ---------- -----------
INTANGIBLES, NET
Intangibles.............................................. $ 26,515 $ 27,003 $ 27,525
Less accumulated amortization............................ (13,354) (14,740) (15,409)
---------- ---------- -----------
$ 13,161 $ 12,263 $ 12,116
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
Total purchase deposits of $908,000, $1,792,000 and $1,090,000 at December
31, 1996 and 1995 and June 30, 1997, respectively, included $167,000,
$1,075,000, and $330,000 of non-refundable deposits, respectively.
5. PROPERTY ACQUISITIONS AND DISPOSITIONS
In March, 1995, the Partnership agreement was amended to expand the purpose
of the Partnership and allow for the diversification of the Partnership's
restaurant property portfolio through the acquisition of additional fast-food
and casual dining restaurant properties. Since the amendment in March, 1995, the
Partnership has acquired 200 restaurant properties.
During 1996, the Company completed the purchase of 184 restaurant properties
for an aggregate purchase price of $105,336,000 including the value of 577,254
Partnership Units issued as part of the aggregate purchase price. Three
restaurant properties were purchased with only Partnership Units; 15 restaurant
properties were purchased with a combination of cash and Partnership Units; and
166 restaurant properties were purchased with only cash. The 184 restaurant
properties include 45 Burger King restaurants, 40 Dairy Queen restaurants, 30
Grandy's restaurants, 25 Hardee's restaurants, 12 Pizza Hut restaurants, two KFC
restaurants, six Schlotzsky's restaurants, six Chili's restaurants and 18
regional brand restaurants. The 577,254 Partnership Units issued in four of
these transactions have guaranteed Partnership Unit values (See Note 6).
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 (UNAUDITED)
5. PROPERTY ACQUISITIONS AND DISPOSITIONS (CONTINUED)
During 1995, the Partnership completed the purchase of 16 restaurant
properties for an aggregate purchase price of $10,731,000, including the value
of 81,250 Partnership Units issued. The 16 restaurant properties include nine
Burger King restaurant properties, two Chili's restaurant properties and five
regional brand restaurant properties. The 81,250 Partnership Units issued
include provisions for guaranteed Partnership Unit values in the future (See
Note 6).
During 1996, the Company sold one restaurant property for $815,000. The
Company received cash of $72,000 and a note from the buyer of $743,000. In
accordance with Statement of Financial Accounting Standards No. 66, "Accounting
for Real Estate Sales", the Company recorded a deferred gain on the sale of
$590,000.
On December 31, 1996 the Company owned land at 243 restaurant properties and
leased the land at 79 restaurant properties from third party lessors under
operating leases. The Company in turn leased or subleased the land primarily to
fast food and casual dining restaurant operators under operating leases.
On December 31, 1996, the Company owned the buildings on 277 restaurant
properties and leased the buildings on 14 restaurant properties from third party
lessors under leases accounted for as capital leases. The Company owns 31
restaurant properties in which only the land is owned and leased. The Company
leased 183 buildings to franchisees under operating leases. These 183 buildings
are stated at cost, net of accumulated depreciation, on the balance sheet. A
total of 108 buildings are leased primarily to franchisees under direct
financing leases. The net investment in the direct financing leases represents
the present value of the future minimum lease receipts for these 108 buildings.
One restaurant property was sold during 1996.
On December 31, 1996 and 1995, there were 321 and 138 Company restaurant
sites respectively, in operation, and there was one closed site. The Company
continues to seek a suitable tenant for the remaining site. The write-down of
the closed site was $11,000 in 1994. No write-downs were recorded in 1996 or
1995.
In the normal course of business, the Company may sign purchase agreements
to acquire restaurant properties. Such agreements become binding obligations
upon the completion of a due diligence period ranging usually from 15--30 days.
On December 31, 1996, earnest money purchase deposits amounting to $908,000
were on deposit for the purchase of six Pizza Hut restaurants, four Schlotzsky's
restaurants, three Wendy's restaurants, two Arby's restaurants, two Hardee's
restaurants, one Taco Bell restaurant, one Kentucky Fried Chicken restaurant,
and 19 other regional chain restaurants.
During the quarter ended June 30, 1997, the Company completed the purchase
of 99 restaurant properties for an aggregate purchase price of $63,704,000. The
restaurant properties were purchased with only cash. The 99 restaurant
properties include 75 Arby's, five Schlotzsky's, four Pizza Hut's, two Popeye's,
two Carlos O'Kelly's, and 11 regional restaurant properties. Allocation of the
cost of the properties has been done on a preliminary basis and will be
finalized at year end. The Carlos O'Kelly's restaurant properties were acquired
from Carlos O'Kelly's, Inc. Carlos O'Kelly's, Inc. is owned by a director of the
Managing General Partner.
During the quarter ended March 31, 1997, the Company completed the purchase
of 32 restaurant properties for an aggregate purchase price of $20,757,000,
including the value of 177,868 Partnership Units
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 (UNAUDITED)
5. PROPERTY ACQUISITIONS AND DISPOSITIONS (CONTINUED)
issued as part of the aggregate purchase price. The 177,868 Partnership units
have a guaranteed market value of $16.87 on the second anniversary date of the
closing. The Partnership Units' market value on the closing date equaled $18.67
per Partnership Unit. Sixteen restaurant properties were purchased with a
combination of cash and Partnership Units; and 16 restaurant properties were
purchased with only cash. The 32 restaurant properties include 16 Bruegger's
Bagel's, four Pizza Hut's, three Schlotzsky's, two Arby's, and seven regional
restaurant properties.
On April 29, 1997, a restaurant property located in Forest Park, OH was sold
for $1,171,000, net of closing costs at a gain of $266,000.
On June 30, 1997, earnest money purchase deposits amounting to $1,090,000
were on deposit for the purchase of five Hardee's restaurants, five Taco Cabana
restaurants, three Wendy's restaurants, two Pizza Hut restaurants, and 29 other
regional chain restaurants.
6. PARTNERSHIP UNIT OPTIONS AND GUARANTEED STOCK PRICE
Three restaurant properties were acquired on October 10, 1995, with a
combination of cash and 81,250 Partnership Units. The Partnership Units are
guaranteed to have a value of $16 per unit three years from the transaction
date. The unit price on the date issued was $12.25. Any difference between the
guaranteed value and the actual value of the units at the end of the three year
period is to be paid in cash. These properties were recorded at the guaranteed
value of the Partnership Units discounted to reflect the present value on the
date the Partnership Units were issued.
During 1996, 577,254 Partnership Units were used to purchase 18 of the 184
properties in four separate transactions. Of the 577,254 Partnership Units
issued, 486,862 Partnership Units are guaranteed to have a market value of $16
per unit two years from the transaction date, 42,392 Partnership Units are
guaranteed to have a market value of $15.33 per unit three years from the
transaction date and 48,000 Partnership Units are guaranteed to have a value of
$16.67 per unit two years from the transaction date. The accounting described in
the paragraph above was used to record these transactions.
During the six months ended June 30, 1997, the Partnership issued 177,868
Partnership Units for the acquisition of restaurant properties. The Partnership
units have a guaranteed market value of $16.87 on the second anniversary date of
the closing. The Partnership units' market value on the closing date equaled
$18.67 per Partnership unit.
The Partnership has one fixed option plan. Under this plan the Limited
Partners on March 17, 1995 granted the Managing General Partner options to
acquire up to 600,000 Partnership Units, subject to certain adjustments under
anti-dilution provisions. The exercise price of each option is $10.33 which is
the average closing price of the depository receipts for the Partnership Units
on the New York Stock Exchange for the five trading days immediately after the
date of grant. The options are non-transferable except by operation of law and
vest and became exercisable in March 1996. The term of the options expires in
March 2005. As of December 31, 1996, the Managing General Partner had exercised
75,000 Partnership Units at the option price of $10.33 for a total purchase
price of $775,000.
In accordance with SFAS 123, the fair value of each option is estimated on
the date of the grant using the binomial option-pricing model with the following
weighted-average assumptions: dividend yield of
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 (UNAUDITED)
6. PARTNERSHIP UNIT OPTIONS AND GUARANTEED STOCK PRICE (CONTINUED)
7.3% for all years; expected volatility of 17.8%, risk free interest rate of
5.7% for the options; and expected lives of 4 years for the plan options.
As of March 17, 1995, the 600,000 options which are described above had a
fair value as of the grant date of $724,000 representing a value per option of
$1.21.
Under the fixed option plan, if these options were considered as
compensation, net income would have been $7,292,000 and $4,680,000 as of
December 31, 1996 and 1995, respectively. Net income per unit would have been
$0.78 and $0.66 as of December 31, 1996 and 1995, respectively.
7. LINES OF CREDIT
On December 31, 1996 and 1995, $65,396,000 and $10,931,000, respectively,
had been drawn on the Company's primary line of credit. The Company's line of
credit was increased to $95 million in December 1996 and matures on December 23,
1998. Substantially all properties are included as collateral on this line of
credit. The interest rate on this debt floats at 180 basis percentage points
above LIBOR. The effective interest rate at December 31, 1996, was 7.3625%.
There is an unused line of credit fee of .25% per annum on the average daily
excess of the commitment amount over the aggregate unpaid balance of the
revolving loan which is charged and is payable on a quarterly basis. The line of
credit requires the Company to maintain a combined tangible net worth, as
defined in the loan document, in excess of $85,000,000; maintain a combined GAAP
Partners' Capital, as defined in the loan document, of not less than
$100,000,000; maintain a cash flow coverage ratio of not less than .95 to 1
based upon a proforma five year bank debt amortization; and maintain certain
other financial covenants as defined in the loan agreement. The Company's
management believes it is in compliance with all loan provision requirements as
of December 31, 1996 and June 30, 1997. On December 31, 1996, the balance
available on the line of credit equaled $29,600,000 (considers $.4 million
subject to outstanding letter of credit). During the quarter ended June 30, 1997
the Company's line of credit was increased to $110 million which matures on June
27, 1999. On June 30, 1997, the outstanding balance was $92,313,000 and the
available borrowing balance was $17,287,000.
A revolving credit facility of $20,000,000 was established with a national
mortgage company on April 29, 1996. The interest rate on this credit facility
was LIBOR plus 300 basis points which resulted in an interest rate of 8.5625% at
December 31, 1996. This revolving credit facility is secured by approximately 63
properties. On December 31, 1996, the total amount due equaled $4,090,000. This
revolving credit facility was paid in full in January 1997 and no additional
draws are available.
On February 26, 1997, the Company issued $40,000,000 in privately placed
debt which consists of $12,500,000 Series A Senior Secured Guaranteed Notes with
a 8.06% interest rate, due date of January 31, 2000; and $27,500,000 Series B
Senior Secured Guaranteed Notes with a 8.30% interest rate, due date of January
31, 2002. The debt and the revolving credit facility is collateralized by
substantially all the assets of the Company.
8. INVESTMENTS AND COMMITMENTS AS LESSOR
The Company leases land and buildings to a variety of national and regional
fast food chain and casual dining restaurants. The building portions on 108 of
these properties, which are leased by BKC franchisees, are accounted for as
direct financing leases while the land portions are operating leases. These
leases
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 (UNAUDITED)
8. INVESTMENTS AND COMMITMENTS AS LESSOR (CONTINUED)
generally provide for a term of 20 years from the opening of the related
restaurant, and do not contain renewal options. The Partnerships, however, have
agreed to renew a franchise lease if BKC or any of the other franchise chains
renews or extends the lessee's franchise agreement.
As of December 31, 1996, the remaining lease terms of all leases described
in the above paragraph and Note 5 ranged from 1 to 28 years and include various
renewal options. The leases provide for minimum rents and contingent rents based
on a percentage of each restaurant's sales, and require the franchisee to pay
executory costs.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 JUNE 30, 1997
--------------------- ------------------------
DIRECT DIRECT
FINANCING OPERATING FINANCING OPERATING
LEASES LEASES LEASES LEASES
($000'S) ($000'S) ($000'S) ($000'S)
--------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
MINIMUM FUTURE LEASE RECEIPTS FOR YEARS
ENDING DECEMBER 31:
1997........................................ $ 4,071 $ 17,060 $ 1,990 $ 13,216
1998........................................ 3,759 17,209 3,719 26,787
1999........................................ 2,978 16,944 2,939 26,516
2000........................................ 2,036 16,203 1,997 25,911
2001........................................ 1,331 15,216 1,292 25,043
2002........................................ -- -- 760 24,489
Later....................................... 1,274 165,798 478 274,825
--------- ---------- ----------- -----------
$ 15,449 $ 248,430 $ 13,175 $ 416,787
--------- ---------- ----------- -----------
--------- ---------- ----------- -----------
<CAPTION>
DECEMBER 31, 1996
--------------------- JUNE 30,
1995 1996 1997
--------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET INVESTMENT IN DIRECT FINANCING LEASES AT
DECEMBER 31:
Minimum future lease receipts............... $ 19,778 $ 15,449 $ 13,175
Estimated unguaranteed residual values...... 7,562 7,437 7,349
Unearned amount representing interest....... (7,969) (5,781) (4,845)
--------- ---------- -----------
$ 19,371 $ 17,105 $ 15,679
--------- ---------- -----------
--------- ---------- -----------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30
----------------------------------- ----------------------
1994 1995 1996 1996 1997
($000'S) ($000'S) ($000'S) ($000'S) ($000'S)
----------- ----------- --------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
RENTAL INCOME:
Minimum rental income.................... $ 3,062 $ 3,584 $ 11,022 $ 3,879 $ 10,925
Contingent rental income................. 3,278 3,956 5,324 2,359 2,762
----------- ----------- --------- ----------- ---------
$ 6,340 $ 7,540 $ 16,346 $ 6,238 $ 13,687
----------- ----------- --------- ----------- ---------
----------- ----------- --------- ----------- ---------
</TABLE>
If Burger King properties are not adequately maintained during the term of
the tenant leases of which there are 173, such properties may have to be rebuilt
before the leases can be renewed, either by the
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 (UNAUDITED)
8. INVESTMENTS AND COMMITMENTS AS LESSOR (CONTINUED)
Company as it considers necessary or pursuant to Burger King's successor policy.
The successor policy, which is subject to change from time to time in Burger
King's discretion, is intended to encourage the reconstruction, expansion, or
other improvement of older Burger King restaurants and generally affects
properties that are more than ten years old or are the subject of a franchise
agreement that will expire within five years.
Under the current operating partnership agreement, Burger King can require
that a restaurant property be rebuilt. If the tenant does not elect to undertake
the rebuilding, the Partnership would be required to make the required
improvement itself. However, as a condition to requiring the Partnership to
rebuild, Burger King would be required to pay the Partnership its percentage
share ("Burger King's Percentage Share") of the rebuilding costs. Such
percentage share would be equal to (i) the average franchise royalty fee
percentage rate payable to Burger King with respect to such restaurant, divided
by (ii) the aggregate of such average franchise royalty fee percentage rate and
the average percentage rate payable to the Partnership with respect to such
restaurant property. The Managing General Partner believes that Burger King's
Percentage Share would typically be 29% for a restaurant property.
The Managing General Partner believes it is unlikely that any material
amount of rebuilding of Burger King restaurant properties will be required in
the next several years, if ever.
The Company believes that improving, expanding, rebuilding or replacing its
restaurant properties from time to time is important. In addition to normal
maintenance and repair requirements, each franchisee is required under BKC's
franchise agreement and lease/sublease, at its own cost and expense, to make
such alterations to a Burger King restaurant as may be reasonably required by
BKC from time to time to modify the appearance of the restaurant to reflect the
then current image requirements for Burger King restaurants. Most of the
properties that are operating as Burger King restaurants are 15 to 20 years old.
The Company believes that many of these properties require substantial
improvements to maximize sales and that their condition is below BKC's current
image requirements.
To encourage the early renewal of existing leases/subleases, the Company
recently established an "early renewal program" whereby the Company has offered
to certain tenants the right to renew existing leases/subleases for up to an
additional 20 years in consideration for remodeling financing. The purpose of
this program is to extend the term of existing leases/subleases prior to the end
of the lease term and enhance the value of the underlying property to the
Company. As a result of this program, the Company has extended the lease term
for 31 leases/subleases as a result of remodel grants and lease riders. Two
leases were renewed with loans. During 1996, the Company paid remodeling costs
of $1,118,000 in conjunction with this Program.
9. COMMITMENTS
The land at 79 restaurant properties and the land and buildings at 14
restaurant properties are leased by the Company from third party lessors. The
building portions of the leases are generally capital leases while the land
portions are operating leases. These leases provide for an original term of 20
years and most are renewable at the Company's option. As of December 31, 1996,
the remaining lease terms (excluding renewal option terms) ranged from 1 to 15
years. If all renewal options are taken into account, the terms
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 (UNAUDITED)
9. COMMITMENTS (CONTINUED)
ranged from 5 to 35 years. Rents payable may escalate during the original lease
and renewal terms. For nine properties, the leases provide for contingent rent
based on each restaurant's sales.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 JUNE 30, 1997
------------------------ --------------------------
CAPITAL OPERATING CAPITAL OPERATING
LEASES LEASES LEASES LEASES
($000'S) ($000'S) ($000'S) ($000'S)
----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
MINIMUM FUTURE LEASE OBLIGATIONS FOR YEARS
ENDING DECEMBER 31:
1997......................................... $ 199 $ 2,103 $ 84 $ 1,052
1998......................................... 140 2,145 140 2,145
1999......................................... 60 1,930 60 1,930
2000......................................... 4 1,675 4 1,675
2001......................................... 1 1,248 1 1,248
2002......................................... -- -- -- 972
Later........................................ -- 3,530 -- 2,558
----- ----------- ----- -----------
Total minimum obligations (a)................ 404 $ 12,631 $ 289 $ 11,580
----------- -----------
----------- -----------
Amount representing interest................. (42) (26)
----- -----
Present value of minimum obligations......... $ 362 $ 263
----- -----
----- -----
</TABLE>
- ------------------------
(a) Minimum lease obligations have not been reduced by minimum sublease rentals.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEARS ENDED DECEMBER 31, 30
----------------------------------- ----------------------
1994 1995 1996 1996 1997
($000'S) ($000'S) ($000'S) ($000'S) ($000'S)
----------- ----------- --------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
RENTAL EXPENSE
Minimum rental expense..................... $ 1,246 $ 1,304 $ 1,992 $ 852 $ 1,146
Contingent rental expense.................. 102 101 88 45 43
----------- ----------- --------- ----------- ---------
$ 1,348 $ 1,405 $ 2,080 $ 897 $ 1,189
----------- ----------- --------- ----------- ---------
----------- ----------- --------- ----------- ---------
</TABLE>
On July 21, 1995, the Managing General Partner authorized the Partnership to
repurchase up to 450,000 of its Units in the open market. Through December 31,
1996, the Partnership repurchased 45,000 Units for $547,000. No further
repurchases have been made or are contemplated.
During 1996, the Company agreed to make available to USRP Development
Company a revolving line of credit in the principal amount of $5,000,000, to be
used solely for paying for the acquisition and development of restaurant
properties which will be purchased by the Company upon completion of the
development. The line of credit is secured by certain development properties and
bears interest at an annual rate of 9%. The line of credit is payable in monthly
installments beginning July 1997 and matures in October 2001. At December 31,
1996 and June 30, 1997, the outstanding balance was $1,414,000 and $2,090,000,
respectively, and is included in Notes Receivable--related parties.
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 (UNAUDITED)
10. RECONCILIATION OF FINANCIAL REPORTING INCOME TO TAXABLE INCOME
Financial reporting income differs from taxable income primarily because
generally accepted accounting principles reflect the building portion of leases
from the Company to franchisees as a net investment in direct financing leases.
For tax purposes, these leases are treated as operating leases. In addition,
differences exist in depreciation methods and asset lives, and in the accounting
for escalating rents.
A reconciliation between financial reporting income and taxable income for
the year ended December 31, 1996 is as follows:
<TABLE>
<CAPTION>
FINANCIAL
REPORTING RECONCILING TAXABLE
INCOME DIFFERENCES INCOME
($000'S) ($000'S) ($000'S)
----------- ----------- ---------
<S> <C> <C> <C>
REVENUES FROM LEASED PROPERTIES:
Rental income................................................................ $ 16,346 $ 3,485 $ 19,831
Amortization of unearned income on direct financing leases................... 1,978 (1,978) --
----------- ----------- ---------
18,324 1,507 19,831
----------- ----------- ---------
EXPENSES:
Rent......................................................................... 2,080 192 2,272
Depreciation and amortization................................................ 3,978 1,242 5,220
General and administrative................................................... 2,461 -- 2,461
Interest expense (income), net............................................... 2,364 (47) 2,317
----------- ----------- ---------
10,883 1,387 12,270
Gain on sale of properties and equipment..................................... 32 28 60
----------- ----------- ---------
Net income................................................................... $ 7,473 $ 148 $ 7,621
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
11. RELATED PARTY TRANSACTIONS
The Managing General Partner is responsible for managing the business and
affairs of the Company. The Company pays the Managing General Partner a
non-accountable annual allowance (adjusted annually to reflect increases in the
Consumer Price Index and additions to the property portfolio), plus
reimbursement of out-of-pocket costs incurred to other parties for services
rendered to the Partnerships. The allowance for the years ended December 31,
1996, 1995, and 1994, and June 30, 1996 and 1997 was $1,175,000, $585,000,
$542,000, $458,000 and $973,000, respectively.
The Partnerships' accounts payable balance includes $416,000, $187,000,
$136,000 and $593,000 for this allowance as of December 31, 1996, 1995, and 1994
and June 30, 1997, respectively. The Managing General Partner paid no
out-of-pocket costs to other parties on behalf of the Partnerships during 1996,
1995, and 1994.
To compensate the Managing General Partner for its efforts and increased
internal expenses with respect to additional properties, the Partnership pays
the Managing General Partner, with respect to each additional property
purchased: (i) a one-time acquisition fee equal to one percent of the purchase
price for such property and (ii) an annual fee equal to one percent of the
purchase price for such property, adjusted for increases in the Consumer Price
Index. For 1996 and 1995 and the six months ended June 30, 1997, the one-time
acquisition fee equaled $1,043,000, $109,000 and $820,000 respectively, which
was capitalized, and the increase in the non-accountable annual fee equaled
$495,000 and $29,000 respectively. In addition, if the Rate of Return (as
defined) on the Partnership's equity on all additional properties exceeds 12
percent per annum for any fiscal year, the Managing General Partner will be paid
an additional fee
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 (UNAUDITED)
11. RELATED PARTY TRANSACTIONS (CONTINUED)
equal to 25 percent of the cash flow received with respect to such additional
properties in excess of the cash flow representing a 12 percent Rate of Return
thereon. For 1996, this additional fee equaled $93,000 and there was no fee paid
in 1995 and 1994. However, to the extent such distributions are ultimately
received by the Managing General Partner in excess of those provided by its 1.98
percent Partnership interest, they will reduce the fee payable with respect to
such excess cash flow from any additional properties.
In 1994, the Partnerships with the consent and financial participation of
BKC, continued rent relief for three properties.
The Managing General Partner has agreed to make available to the Partnership
an unsecured, interest-free, revolving line of credit in the principal amount of
$500,000 to provide the Company with the necessary working capital to minimize
or avoid seasonal fluctuation in the amount of quarterly cash distributions. No
loans were made or were outstanding at any time during the years ended December
31, 1996, 1995, and 1994.
A note receivable of $267,000, $255,000 and $255,000 is due from Arkansas
Restaurants #10 L.P. (Arkansas) at December 31, 1996 and 1995 and June 30, 1997,
respectively. The note receivable is due on September 1, 1997, and has an
interest rate of 9.0% per annum. At December 31, 1996, tenant and other
receivables from Arkansas were $63,000. In addition, during 1996 the Company
paid remodel costs of $443,000 on behalf of Arkansas for three restaurants
operated by Arkansas under the Company's early-renewal program. (See Note 8) The
Managing General Partner of Arkansas Restaurants #10 L.P. is owned by an officer
of the Partnership's Managing General Partner, but receives no compensation for
its services.
As of December 31, 1996 and June 30, 1997, notes receivable of $920,000 are
due from Southeast Fast Food Partners, L.P. (SFF). The notes receivable are due
on July 1, 1997 ($57,000) and July 1, 1999 ($863,000) and have an interest rate
of 9.0% per annum. As of December 31, 1996 and June 30, 1997, a note receivable
of $136,000 is due from the owners of SFF. This note receivable is due on July
1, 1999 and has an interest rate of 9.0% per annum. At December 31, 1996, tenant
and other receivables from SFF were $125,000. In addition, during 1996, the
Company incurred remodeling costs of $180,000 on behalf of SFF for restaurants
operated by SFF under the Company's early-renewal program (See Note 8). These
remodeling costs are included in accounts payable at December 31, 1996. The
Managing General Partner of Southeast Fast Food Partners, L.P. is owned by an
officer of the Partnership's Managing General Partner.
On July 30, 1996, the Company completed a sale/leaseback transaction with
Carlos O'Kelly's, Inc. Carlos O'Kelly's, Inc. is owned by a director of the
Managing General Partner.
12. DISTRIBUTIONS AND ALLOCATIONS
Under the amended partnership agreement, cash flow from operations of the
Partnerships each year will be distributed 98.02% to the unitholders and 1.98%
to the general partners until the unitholders have received a 12% simple
(noncumulative) annual return for such year on the unrecovered capital per unit
($20.00, reduced by any prior distributions of net proceeds of capital
transactions); then any cash flow for such year will be distributed 75.25% to
the unitholders and 24.75% to the general partners until the unitholders have
received a total simple (noncumulative) annual return for such year of 17.5% on
the unrecovered capital per unit; and then any excess cash flow for such year
will be distributed 60.40% to the unitholders and 39.60% to the general
partners. The unitholders received 98.02% of all cash flow distributions for
1996 and 1995 and 98% for 1994.
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 (UNAUDITED)
12. DISTRIBUTIONS AND ALLOCATIONS (CONTINUED)
Under the amended partnership agreement, net proceeds from capital
transactions (for example, disposition of the Properties) will be distributed
98.02% to the unitholders and 1.98% to the general partners until the
unitholders have received an amount equal to the unrecovered capital per unit
plus 12.0% cumulative, simple return on the unrecovered capital per unit
outstanding from time to time (to the extent not previously received from the
distribution of cash flow or proceeds of prior capital transactions); then such
proceeds will be distributed 75.25% to the unitholders and 24.75% to the general
partners until the unitholders have received the total cumulative, simple return
of 17.5% on the unrecovered capital per unit; and then such proceeds will be
distributed 60.40% to the unitholders and 39.60% to the general partners. There
were no capital transactions in 1996 or 1995. The deferred gain on disposition
of property recorded in 1996 will be distributed upon the recognition of the
gain by the Company.
All operating income and loss of the Partnership for each year generally
will be allocated among the partners in the same aggregate ratio as cash flow is
distributed for that year. Gain and loss from a capital transaction generally
will be allocated among the partners in the same aggregate ratio as proceeds of
the capital transactions are distributed except to the extent necessary to
reflect capital account adjustments.
13. SUMMARY BY QUARTER (UNAUDITED)
<TABLE>
<CAPTION>
PER UNIT
----------------------------
ALLOCABLE CASH RELATED*
REVENUES NET INCOME NET INCOME DISTRIBUTIONS
--------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
1994
First quarter................................................. $ 1,984 $ 1,100 $ 0.16 $ 0.26
Second quarter................................................ 2,297 1,341 0.19 0.26
Third quarter................................................. 2,330 1,392 0.19 0.27
Fourth quarter................................................ 2,182 1,100 0.16 0.28
--------- ----------- ----- -----
Annual........................................................ $ 8,793 $ 4,933 $ 0.70 $ 1.07
--------- ----------- ----- -----
--------- ----------- ----- -----
1995
First quarter................................................. $ 2,123 $ 1,090 $ 0.16 $ 0.28
Second quarter................................................ 2,495 1,407 0.20 0.28
Third quarter................................................. 2,592 1,496 0.21 0.29
Fourth quarter................................................ 2,570 1,230 0.17 0.29
--------- ----------- ----- -----
Annual........................................................ $ 9,780 $ 5,223 $ 0.74 $ 1.14
--------- ----------- ----- -----
--------- ----------- ----- -----
1996
First quarter................................................. $ 2,955 $ 1,323 $ 0.17 $ 0.31
Second quarter................................................ 4,309 1,862 0.22 0.32
Third quarter................................................. 5,748 2,590 0.24 0.33
Fourth quarter................................................ 5,312 1,698 0.17 0.33
--------- ----------- ----- -----
Annual........................................................ $ 18,324 $ 7,473 $ 0.80 $ 1.29
--------- ----------- ----- -----
--------- ----------- ----- -----
1997
First quarter................................................. $ 6,153 $ 1,952 $ 0.18 $ 0.34
Second quarter................................................ 8,391 2,147 0.18 0.35
</TABLE>
- ------------------------
*Represents amounts declared and paid in the following quarter.
F-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 (UNAUDITED)
14. PROFORMA (UNAUDITED)
The following proforma information was prepared by adjusting the actual
consolidated results of the Company for the years ended December 31, 1996 and
1995 for the effects of:
a. the purchase of 184 restaurant properties on various dates during 1996
for an aggregate purchase price of $105,336,000 including the value of
577,254 Partnership Units issued to sellers and other related financing
transactions including the sale of 2,700,000 Partnership Units in June
1996; and
b. the purchase of 16 restaurant properties on various dates from March
1995 through December 1995 for an aggregate purchase price of $10,963,000
including the value of 81,251 Partnership Units issued to sellers and
other related financing transactions as if all such transactions had
occurred as of January 1, 1995. Interest expense for proforma purposes
was calculated assuming interest rates of 7.2% and 7.5% per annum for
1996 and 1995, respectively, which approximates the rates the Company
paid during such periods.
The pro forma information for the six month periods ended June 30, 1997 and
1996 was prepared by adjusting the actual consolidated results of the Company
for the effects of:
a. the purchase of 131 restaurant properties on various dates from January
1 through June 30, 1997 for an aggregate purchase price of $84,461,000
including the value of 177,868 Partnership units issued to sellers; and
other related financing transactions, including the sale of 1,250,508
Partnership units for $21,025,000 on various dates through June 30, 1997
b. the purchase of 184 properties on various dates during 1996 and the
related financing transactions as if all such transactions had occurred
as of January 1, 1996. Interest expense for pro forma purposes was
calculated assuming a weighted average interest rate of 7.5% per annum
for the six month periods ended June 30, 1997 and 1996, which
approximates the rates the Company paid during such periods.
F-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 (UNAUDITED)
14. PROFORMA (UNAUDITED) (CONTINUED)
These proforma operating results are not necessarily indicative of what the
actual results of operations of the Company would have been assuming all of the
restaurant properties were acquired as of January 1, 1995 and they do not
purport to represent the results of operations for future periods.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER SIX MONTHS ENDED
31, JUNE 30,
-------------------- --------------------
1995 1996 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES FROM LEASED PROPERTIES:
Rental income....................................................... $ 23,198 $ 23,711 $ 16,795 $ 16,770
Amortization of unearned income on direct financing leases.......... 2,241 1,978 1,026 857
--------- --------- --------- ---------
Total revenues.................................................... 25,439 25,689 17,821 17,627
EXPENSES
Rent................................................................ 2,213 2,312 1,132 1,189
Depreciation and amortization....................................... 5,822 5,834 4,432 4,432
Taxes, general and administrative................................... 2,689 2,949 1,664 2,236
Interest expense (income), net...................................... 5,182 4,984 4,860 4,549
--------- --------- --------- ---------
Total expenses.................................................... $ 15,906 $ 16,079 $ 12,088 $ 12,406
--------- --------- --------- ---------
Income before unusual items........................................... 9,533 9,610 5,733 5,221
--------- --------- --------- ---------
Gain on sale of property.............................................. -- -- -- 266
REIT conversion costs................................................. -- -- -- (744)
--------- --------- --------- ---------
Net income............................................................ $ 9,533 $ 9,610 $ 5,773 $ 4,743
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income allocable to unitholders................................... $ 9,344 $ 9,419 $ 5,619 $ 4,649
--------- --------- --------- ---------
--------- --------- --------- ---------
Average number of outstanding units................................... 10,460 10,347 11,978 11,978
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per unit................................................... $ 0.89 $ 0.91 $ 0.47 $ 0.39
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
15. SUBSEQUENT EVENTS (UNAUDITED)
In January and February of 1997 the Company acquired six properties in four
separate transactions. The total purchase price approximated $2,556,000 in cash.
Among the restaurant properties acquired were two Arby's, two Pizza Huts and two
Schlotzky's.
On January 29, 1997, a distribution of $0.33 per Partnership Unit was
declared. The date of record was March 6, 1997, and the distribution date was
March 13, 1997.
On February 7, 1997, a proxy statement for an exchange offer and
registration statement was filed with the Securities and Exchange Commission.
This filing pertains to an exchange of restaurant properties for Partnership
Units. This exchange was valued as of February 7, 1997 at $7,850,000 and was
consummated on July 31, 1997 for cash instead of units in the amount of
$7,897,000.
On February 7, 1997, a proxy and registration statement, Form S-4, was filed
with the Securities and Exchange Commission regarding the conversion of U.S.
Restaurant Properties Master L.P. to a real estate investment trust (REIT)
entity.
On February 26, 1997, the Company issued $40,000,000 in debt which consist
of $12,500,000 Series A Senior Secured Guaranteed Notes with a 8.06% interest
rate and due date of January 31, 2000; and $27,500,000 Series B Senior Secured
Guaranteed Notes with a 8.30% interest rate and due date of
F-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 (UNAUDITED)
15. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
January 31, 2002. The proceeds were primarily utilized to reduce the amount
outstanding under the line of credit and to improve the Company's cash position.
The debt is collateralized by substantially all the assets of the Company.
Between February 29, 1997 and October 15, 1997, the Company purchased 205
properties for $134,095,000, including the fair value ($13,797,000) of 680,695
units.
The master limited partnership was converted to a REIT (U.S. Restaurant
Properties, Inc.) on October 15, 1997 for shares of Common Stock of the REIT and
partnership units of the Operating Partnership issued to QSV in connection
therewith being exchangeable for shares of the REIT's common stock on a
one-for-one basis. On October 20, 1997 the REIT declared a three-for-two stock
split. All of the historical units and per unit information has been restated to
reflect this stock split.
F-33
<PAGE>
PROSPECTUS
$150,000,000
U.S. RESTAURANT PROPERTIES, INC.
COMMON STOCK, COMMON STOCK WARRANTS, PREFERRED
STOCK AND DEPOSITARY SHARES
------------------
U.S. Restaurant Properties, Inc. (together with its subsidiaries, the
"Company") may from time to time offer in one or more series (i) shares of its
common stock, par value $.001 per share (the "Common Stock"); (ii) warrants to
purchase Common Stock (the "Common Stock Warrants"); or (iii) shares or
fractional shares of its preferred stock, par value $.001 per share (the
"Preferred Stock"), which may be issued in the form of depositary shares (the
"Depositary Shares") evidenced by depositary receipts, with an aggregate public
offering price of up to $150,000,000. The Common Stock, Common Stock Warrants,
Preferred Stock and Depositary Shares (collectively, the "Offered Securities")
may be offered separately or together, in separate series, in amounts, at prices
and on terms to be determined at the time of offering and set forth in one or
more supplements to this Prospectus (each, a "Prospectus Supplement").
The specific terms of the Offered Securities in respect of which this
Prospectus is being delivered will be set forth in the applicable Prospectus
Supplement and will include, where applicable: (i) in the case of Common Stock,
any public offering price; (ii) in the case of Common Stock Warrants, the
duration, offering price, exercise price and detachability features; (iii) in
the case of Preferred Stock, the specific title, any distribution, liquidation,
redemption, conversion, voting and other rights and any initial public offering
price; and (iv) in the case of Depositary Shares, the fractional share of
Preferred Stock represented by each such Depositary Share. In addition, such
specific terms may include limitations on direct or beneficial ownership and
restrictions on transfer of the Offered Securities, in each case as may be
appropriate to preserve the status of the Company as a real estate investment
trust ("REIT") for federal income tax purposes.
The applicable Prospectus Supplement will also contain information, where
applicable, concerning all material federal income tax considerations relating
to, and any listing on a securities exchange of, the Offered Securities covered
by such Prospectus Supplement.
The Offered Securities may be offered directly, through agents designated
from time to time by the Company, or to or through underwriters or dealers. If
any agents or underwriters are involved in the sale of any of the Offered
Securities, their names, and any applicable purchase price, fee, commission or
discount arrangement between or among them, will be set forth, or will be
calculable from the information set forth, in the applicable Prospectus
Supplement. See "Plan of Distribution." No Offered Securities may be sold
without delivery of the applicable Prospectus Supplement describing the method
and terms of the offering of such series of Offered Securities.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is October 16, 1997
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITERS, AGENTS OR DEALERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER
TO BUY SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE HEREIN IS CORRECT AT ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
AVAILABLE INFORMATION
In connection with the conversion of U.S. Restaurant Properties Master L.P.
(the "Predecessor") into a real estate investment trust, which was effected
through the Merger (the "Merger") of a subsidiary partnership of the Company
with and into the Predecessor with the Predecessor being the surviving entity,
the Company has succeeded to the business, operations, assets and liabilities of
the Predecessor and is the successor registrant to the Predecessor for purposes
of the Securities Act of 1933, as amended (the "Securities Act"), and the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company
is, and prior to the conversion the Predecessor was, subject to the
informational requirements of the Exchange Act and, in accordance therewith, the
Company files, and prior to the conversion the Predecessor filed, reports, proxy
statements and other information, with the Securities and Exchange Commission
(the "Commission"). The Company's Registration Statement on Form S-3 (the
"Registration Statement"), the exhibits and schedules forming a part thereof and
the reports, proxy statements and other information filed by the Company and the
Predecessor can be obtained from the web site that the Commission maintains at
http://www.sec.gov, or can be inspected and copied, at the prescribed rates, at
the public reference facilities of the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
at Seven World Trade Center, Suite 1300, New York, New York 10048, and
Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60661.
The Common Stock is listed on the New York Stock Exchange (the "NYSE") and
similar information concerning the Company may be inspected at the offices of
the NYSE at 20 Broad Street, New York, New York 10005.
This Prospectus constitutes a part of the Registration Statement filed by
the Company with the Commission under the Securities Act. This Prospectus omits
certain of the information contained in the Registration Statement and the
exhibits and schedules thereto, in accordance with the rules and regulations of
the Commission. For further information concerning the Company and the Offered
Securities, reference is hereby made to the Registration Statement and the
exhibits and schedules filed therewith, which may be inspected without charge at
the office of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549
and copies of which may be obtained from the Commission at prescribed rates. Any
statements contained herein concerning the provisions of any document are not
necessarily complete and, in each instance, reference is made to the copy of
such document filed as an exhibit to the Registration Statement or otherwise
filed with the Commission. Each such statement is qualified in its entirety by
such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below have been filed by the Company or the Predecessor
(Commission File No. 1-9079) under the Exchange Act with the Commission and are
incorporated herein by reference:
(a) The Predecessor's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, as amended by the Form 10-K/A filed May 2, 1997;
(b) The Predecessor's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 1997;
2
<PAGE>
(c) The Predecessor's Quarterly Report on Form 10-Q for the fiscal quarter
ended June 30, 1997;
(d) The Predecessor's Current Report on Form 8-K dated April 14, 1997, as
amended by the Form 8-K/A filed May 30, 1997;
(e) The Predecessor's Current Report on Form 8-K dated August 21, 1997;
(f) The Company's Current Report on Form 8-K dated August 22, 1997; and
(g) The Company's Registration Statement on Form 8-A filed February 20,
1996.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of the Offered Securities shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
respective dates of filing such documents.
Any statement or information contained in a document incorporated or deemed
to be incorporated by reference herein shall be deemed modified or superseded
for the purposes of this Prospectus to the extent that a statement contained
herein or in any subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person to
whom this Prospectus is delivered, upon the written or oral request of such
person, a copy of any or all of the documents incorporated by reference herein
(not including any exhibits to the information that is incorporated by reference
unless such exhibits are specifically incorporated by reference to the
information that this Prospectus incorporates). Requests should be directed to:
U.S. Restaurant Properties, Inc., 5310 Harvest Hill Road, Suite 270, Dallas,
Texas 75230, Attention: Michael D. Warren, telephone (972) 387-1487.
FORWARD-LOOKING INFORMATION
Certain information both included and incorporated by reference herein may
contain forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act, and as such may involve
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of the Company to be materially
different from future results, performance or achievements expressed or implied
by such forward-looking statements. Forward-looking statements, which are based
on certain assumptions and describe future plans, strategies and expectations of
the Company, are generally identifiable by use of the words "may," "will,"
"should," "expect," "anticipate," "estimate," "believe," "intend" or "project"
or the negative thereof or other variations thereon or comparable terminology.
Factors which could have a material adverse effect on the operations and future
prospects of the Company include, but are not limited to, changes in: economic
conditions generally and the real estate market specifically,
legislative/regulatory changes (including changes to laws governing the taxation
of REITs), availability of capital, interest rates, competition, supply and
demand for properties in current and proposed market areas of the Company and
general accounting principles, policies and guidelines applicable to REITs.
These risks and uncertainties should be considered in evaluating any
forward-looking statements contained herein.
3
<PAGE>
THE COMPANY
U.S. Restaurant Properties, Inc. (together with its subsidiaries, the
"Company"), a fully integrated, self-administered and self-managed REIT,
acquires, owns, manages and selectively develops income-producing properties
that it leases on a triple net basis primarily to operators of national and
regional fast food and casual dining chain restaurants such as Burger
King-Registered Trademark-, Arby's-Registered Trademark-, Dairy Queen-Registered
Trademark-, Grandy's-Registered Trademark- and Pizza Hut-Registered Trademark-.
At July 31, 1997, the Company's portfolio consisted of 494 restaurant properties
located in 44 states operated by approximately 200 operators and representing
over 45 franchise affiliations. Approximately 99.5% of the Company's portfolio
is leased with an average remaining lease term of over ten years.
The Company, together with its predecessors, has been engaged in the
business of leasing restaurant properties since 1986. Prior to 1994, the
Company's portfolio was limited to approximately 125 Burger King-Registered
Trademark- restaurant properties. In May 1994, existing management assumed
control of the Company and began restructuring operations in a manner that has
allowed the Company to implement a number of new strategies intended to
encourage Company growth. These strategies have involved the Company in new
property acquisitions, merchant banking activities in which the Company acquires
entire restaurant chains but retains only the real estate in order to enhance
investment returns, new property developments of co-branded service centers,
securing a $95 million revolving line of credit and the Merger.
The business and operations of the Company are conducted through U.S.
Restaurant Properties Operating L.P. (the "Operating Partnership"). The
Operating Partnership is a totally-owned Delaware limited partnership subsidiary
of the Company. The Operating Partnership does not conduct any operations that
are independent from those of the Company.
The Company is a Maryland corporation which intends to elect to be taxed as
a REIT for federal income tax purposes commencing with its taxable year ending
December 31, 1997. The Common Stock is traded on the NYSE under the symbol
"USV." The principal executive offices of the Company are located at 5310
Harvest Hill Road, Suite 270, Dallas, Texas 75230. The telephone number is (972)
387-1487.
USE OF PROCEEDS
Except as otherwise provided in the applicable Prospectus Supplement, the
Company intends to use the net proceeds from any sale of the Offered Securities
for working capital and for general corporate purposes, which may include the
repayment of indebtedness, the financing of capital commitments and possible
future acquisitions associated with the continued expansion of the Company's
business.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the Company's consolidated ratios of earnings
to combined fixed charges for the periods shown:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31,
--------------------------------- -----------------
1992 1993 1994 1995 1996 6/30/96 6/30/97
----- ----- ----- ----- ----- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges.......................... 20.73x 42.60x 55.86x 20.77x 3.74x 4.02x 2.06x
</TABLE>
The ratios of earnings to fixed charges were computed by dividing the
Company's earnings by fixed charges. For this purpose, earnings have been
calculated by adding fixed charges (excluding capitalized interest) to pretax
income from continuing operations. Fixed charges consist of interest costs,
whether expensed or capitalized, the interest component of rental expense, if
any, and amortization of deferred financing costs (including amounts
capitalized). To date, the Company has not issued any Preferred Stock;
therefore, the ratios of earnings to combined fixed charges and Preferred Stock
distributions are the same as the ratios of earnings to fixed charges.
4
<PAGE>
Prior to 1995, the operations of, and the amount of indebtedness which could
be incurred by, the Predecessor were limited by its partnership agreement. In
connection with the restructuring of its operations in 1995, the Predecessor's
partnership agreement was amended to permit the expansion of its portfolio.
Since that time, the Predecessor's acquisitions have been funded through a
mixture of debt and equity, resulting in an increased fixed charge for interest
expense.
DESCRIPTION OF COMMON STOCK
GENERAL
Under the Company's Amended and Restated Articles of Incorporation (the
"Charter"), the Company has authority to issue 165 million shares of capital
stock, par value $.001 per share, with 100 million of such shares designated as
Common Stock. Upon completion of the Merger, the Company had outstanding
8,438,742 shares of Common Stock. Under Maryland law, stockholders generally are
not responsible for a corporation's debts or obligations. The following
descriptions do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the more complete descriptions thereof set forth
in the following documents: (i) the Charter and (ii) the Company's By-Laws (the
"By-Laws"), which documents are exhibits to the Registration Statement of which
this Prospectus is a part.
TERMS
Subject to the preferential rights of any other shares or series of capital
stock and to the provisions of the Charter regarding excess stock ("Excess
Stock"), holders of shares of Common Stock will be entitled to receive
distributions on shares of Common Stock if, as and when authorized and declared
by the Board of Directors out of assets legally available therefor and to share
ratably in the assets of the Company legally available for distribution to its
stockholders in the event of its liquidation, dissolution or winding up after
payment of, or adequate provision for, all known debts and liabilities of the
Company.
Subject to the provisions of the Charter regarding Excess Stock, each
outstanding share of Common Stock entitles the holder to one vote on all matters
submitted to a vote of stockholders, including the election of directors, and,
except as otherwise required by law or except as provided with respect to any
other class or series of stock, the holders of such shares will possess the
exclusive voting power. There is no cumulative voting in the election of
directors, which means that the holders of a majority of the outstanding shares
of Common Stock, together with any other voting stock of the Company, can elect
all of the directors then standing for election and the holders of the remaining
shares will not be able to elect any directors.
Holders of Common Stock have no conversion, sinking fund or redemption
rights, or preemptive rights to subscribe for any securities of the Company,
except that Common Stock is convertible into Excess Stock as provided in the
Charter.
The Company intends to furnish its stockholders with annual reports
containing audited consolidated financial statements and an opinion thereon
expressed by an independent public accounting firm and quarterly reports for the
first three quarters of each fiscal year containing unaudited financial
information.
Subject to the provisions of the Charter regarding Excess Stock, shares of
Common Stock will have equal distribution, liquidation and other rights, and
will have no preference, appraisal or exchange rights.
Pursuant to the Maryland General Corporation Law ("MGCL"), a corporation
generally cannot dissolve, amend its charter, merge, sell all or substantially
all of its assets, engage in a share exchange or engage in similar transactions
outside the ordinary course of business unless approved by the affirmative vote
of stockholders holding at least two-thirds of the shares entitled to vote on
the matter unless a lesser percentage (but not less than a majority of all of
the votes entitled to be cast on the matter) is set forth in the corporation's
charter. The Charter provides that in such situations the approval of a majority
of the total number of the shares entitled to vote on the matter is required.
5
<PAGE>
Provisions of the Charter described below under "Restrictions on Transfers
of Capital Stock," together with other provisions of the Charter and of the
MGCL, may discourage a takeover or other transaction which holders of some, or a
majority, of the shares of Common Stock might believe to be in their best
interests or in which holders of some, or a majority, of the shares of Common
Stock might receive a premium for their shares of Common Stock over the
then-prevailing market price of such shares of Common Stock.
RESTRICTIONS ON TRANSFER AND OWNERSHIP
The Company intends to elect to be treated as a REIT for federal income tax
purposes commencing with its taxable year ending December 31, 1997. For the
Company to qualify as a REIT under the Internal Revenue Code of 1986, as amended
(the "Code"), not more than 50% in value of its outstanding shares of capital
stock may be owned, directly or indirectly, by five or fewer individuals (as
defined in the Code to include certain entities) during the last half of a
taxable year. To assist the Company in meeting this requirement, the Charter
contains certain provisions restricting certain transfers and limiting the
beneficial ownership, directly or indirectly, of the Company's Common Stock. See
"Restrictions on Transfers of Capital Stock."
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is American Stock
Transfer and Trust Company.
DESCRIPTION OF COMMON STOCK WARRANTS
The Company may issue Common Stock Warrants for the purchase of Common
Stock. Common Stock Warrants may be issued independently or together with any
other Offered Securities offered by any Prospectus Supplement and may be
attached to or separate from such Offered Securities. Each series of Common
Stock Warrants will be issued under a separate warrant agreement (each, a
"Warrant Agreement") to be entered into between the Company and a warrant agent
specified in the applicable Prospectus Supplement (the "Warrant Agent"). The
Warrant Agent will act solely as an agent of the Company in connection with the
Common Stock Warrants of such series and will not assume any obligation or
relationship of agency or trust for or with any holders or beneficial owners of
Common Stock Warrants. The following description of the Common Stock Warrants
sets forth certain general terms and provisions of the Common Stock Warrants to
which any Prospectus Supplement may relate. The statements below describing the
Common Stock Warrants and the applicable Warrant Agreements are in all respects
subject to and qualified in their entirety by any further terms and provisions
that may be set forth in any applicable Prospectus Supplement.
The applicable Prospectus Supplement will describe the terms of the Common
Stock Warrants in respect of which this Prospectus is being delivered,
including, where applicable, the following: (i) the title of such Common Stock
Warrants; (ii) the aggregate number of such Common Stock Warrants; (iii) the
price or prices at which such Common Stock Warrants will be issued; (iv) the
designation, number and terms of the shares of Common Stock purchasable upon
exercise of such Common Stock Warrants; (v) the designation and terms of the
other Offered Securities with which such Common Stock Warrants are issued and
the number of such Common Stock Warrants issued with each such Offered Security;
(vi) the date, if any, on and after which such Common Stock Warrants and the
related Common Stock will be separately transferable; (vii) the price at which
each share of Common Stock purchasable upon exercise of such Common Stock
Warrants may be purchased; (viii) the date on which the right to exercise such
Common Stock Warrants shall commence and the date on which such right shall
expire; (ix) the minimum or maximum amount of such Common Stock Warrants which
may be exercised at any one time; (x) information with respect to book-entry
procedures, if any; (xi) a discussion of all material federal income
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tax considerations; and (xii) any other terms of such Common Stock Warrants,
including terms, procedures and limitations relating to the exchange and
exercise of such Common Stock Warrants.
Each Common Stock Warrant will entitle the holder thereof to purchase such
number of shares of Common Stock, as the case may be, at such exercise price as
shall, in each case, be set forth in, or calculable from, the applicable
Prospectus Supplement relating to the offered Common Stock Warrants. Prior to
the exercise of any Common Stock Warrants, holders of such Common Stock Warrants
will not have any rights of holders of Common Stock, including the right to
receive payments of distributions, if any, on such Common Stock, or to exercise
any applicable right to vote. After the close of business on the expiration date
of any series of Common Stock Warrants (or such later date to which such
expiration date may be extended by the Company), unexercised Common Stock
Warrants will become void.
Common Stock Warrants may be exercised by delivering to the Warrant Agent
payment, as provided in the applicable Prospectus Supplement, of the amount
required to purchase the Common Stock purchasable upon such exercise and
otherwise by following the procedures specified in such Prospectus Supplement.
The Warrant Agreements may be amended or supplemented without the consent of
the holders of the Common Stock Warrants issued thereunder to effect changes
that are not inconsistent with the provisions of the Common Stock Warrants and
that do not adversely affect the interests of the holders of the Common Stock
Warrants.
Reference is made to the section captioned "Description of Common Stock" for
a general description of the Common Stock to be acquired upon the exercise of
the Common Stock Warrants, including a description of certain restrictions on
the ownership or transfer of Common Stock.
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DESCRIPTION OF PREFERRED STOCK
GENERAL
Under the Charter, the Company has authority to issue 50 million shares of
Preferred Stock, none of which is outstanding as of the date of this Prospectus.
Prior to issuance of shares of each series, the Board of Directors is required
by the MGCL and the Charter to fix for each series, subject to the provisions of
the Charter regarding Excess Stock, the number of shares to be included in each
series and the preferences, conversion or other rights, voting powers,
restrictions (including restrictions on transfers of shares), limitations as to
dividends, qualifications and terms or conditions of redemption, and to file
articles supplementary to the Charter (the "Articles Supplementary") reflecting
such terms, preferences and other rights. Except as may be expressly provided
with respect to any class or series of Preferred Stock, no holder of the
Preferred Stock will have any preemptive rights. The Board of Directors could
authorize the issuance of shares of Preferred Stock with terms and conditions
that could have the effect of discouraging a takeover or other transaction which
holders of some, or a majority, of the shares of Common Stock might believe to
be in their best interests or in which holders of some, or a majority, of the
shares of Common Stock might receive a premium for their shares of Common Stock
over the then-prevailing market price of such shares of Common Stock.
TERMS
The following description of the Preferred Stock sets forth certain general
terms and provisions of the Preferred Stock to which any Prospectus Supplement
may relate. The statements below describing the Preferred Stock are in all
respects subject to and qualified in their entirety by reference to the
applicable provisions of the Charter and the By-Laws and any Articles
Supplementary designating the terms of a series of Preferred Stock.
Reference is made to the Prospectus Supplement relating to the Preferred
Stock offered thereby for the specific terms thereof, including, where
applicable, the following:
(1) The title of such Preferred Stock;
(2) The number of shares of such Preferred Stock offered, the liquidation
preference per share and the offering price of such Preferred Stock;
(3) The distribution rate(s), period(s) and/or payment date(s) or method(s)
of calculation thereof applicable to such Preferred Stock;
(4) The date from which distributions on such Preferred Stock shall
accumulate, if applicable;
(5) The provision for a sinking fund, if any, for such Preferred Stock;
(6) The provision for redemption, if applicable, of such Preferred Stock;
(7) Any listing of such Preferred Stock on any securities exchange;
(8) The terms and conditions, if applicable, upon which such Preferred Stock
will be convertible into Common Stock, including the conversion price or
rate (or manner of calculation thereof);
(9) Any other specific terms, preferences, rights, limitations or
restrictions of such Preferred Stock;
(10) A discussion of all material federal income tax considerations
applicable to such Preferred Stock;
(11) The relative ranking and preference of such Preferred Stock as to
distribution rights and rights upon liquidation, dissolution or winding
up of the affairs of the Company;
(12) Any limitations on issuance of any series of Preferred Stock ranking
senior to or on a parity with such series of Preferred Stock as to
distribution rights and rights upon liquidation, dissolution or winding
up of the affairs of the Company; and
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(13) Any limitations on direct or beneficial ownership and restrictions on
transfer, in each case as may be appropriate to preserve the status of
the Company as a REIT.
RANK
Unless otherwise specified in the applicable Prospectus Supplement, the
Preferred Stock will, with respect to distribution rights and rights upon
liquidation, dissolution or winding up of the Company, rank (i) senior to the
Common Stock and to all equity securities ranking junior to such Preferred Stock
with respect to distribution rights or rights upon liquidation, dissolution or
winding up of the Company; (ii) on a parity with all equity securities issued by
the Company, the terms of which specifically provide that such equity securities
rank on a parity with the Preferred Stock with respect to distribution rights or
rights upon liquidation, dissolution or winding up of the Company; and (iii)
junior to all equity securities issued by the Company, the terms of which
specifically provide that such equity securities rank senior to the Preferred
Stock with respect to distribution rights or rights upon liquidation,
dissolution or winding up of the Company.
DISTRIBUTIONS
Holders of the Preferred Stock of each series will be entitled to receive,
when, as and if declared by the Board of Directors, out of assets of the Company
legally available for payment, cash distributions at such rates and on such
dates as will be set forth in the applicable Prospectus Supplement. Each such
distribution shall be payable to holders of record as they appear on the stock
transfer books of the Company on such record dates as shall be fixed by the
Board of Directors.
Distributions on any series of the Preferred Stock may be cumulative or
noncumulative, as provided in the applicable Prospectus Supplement.
Distributions, if cumulative, will be cumulative from and after the date set
forth in the applicable Prospectus Supplement. If the Board of Directors fails
to declare a distribution payable on a distribution payment date on any series
of the Preferred Stock for which distributions are noncumulative, then the
holders of such series of the Preferred Stock will have no right to receive a
distribution in respect of the distribution period ending on such distribution
payment date, and the Company will have no obligation to pay the distribution
accrued for such period, whether or not distributions on such series are
declared payable on any future distribution payment date.
If Preferred Stock of any series is outstanding, no distributions will be
declared or paid or set apart for payment on any capital stock of the Company of
any other series ranking, as to distributions, on a parity with or junior to the
Preferred Stock of such series for any period, unless (i) if such series of
Preferred Stock has a cumulative distribution, full cumulative distributions
have been or contemporaneously are declared and paid, or declared and a sum
sufficient for the payment thereof is set apart for such payment on the
Preferred Stock of such series for all past distribution periods and the then
current distribution period, or (ii) if such series of Preferred Stock does not
have a cumulative distribution, full distributions for the then current
distribution period have been or contemporaneously are declared and paid, or
declared and a sum sufficient for the payment thereof is set apart for such
payment on the Preferred Stock of such series. When distributions are not paid
in full (or a sum sufficient for such full payment is not so set apart) upon
Preferred Stock of any series and the shares of any other series of Preferred
Stock ranking on a parity as to distributions with the Preferred Stock of such
series, all distributions declared upon Preferred Stock of such series and any
other series of Preferred Stock ranking on a parity as to distributions with
such Preferred Stock shall be declared pro rata so that the amount of
distributions declared per share of Preferred Stock of such series and such
other series of Preferred Stock shall in all cases bear to each other the same
ratio that accrued distributions per share on the Preferred Stock of such series
(which shall include any accumulation in respect of unpaid distributions for
prior distribution periods if such Preferred Stock provides for a cumulative
distribution) and such other series of Preferred Stock bear to each other. No
interest, or sum of money in lieu of interest, shall be payable in respect of
any distribution payment or payments on Preferred Stock of such series that may
be in arrears.
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Except as provided in the immediately preceding paragraph, unless (i) if
such series of Preferred Stock has a cumulative distribution, full cumulative
distributions on the Preferred Stock of such series have been or
contemporaneously are declared and paid, or declared and a sum sufficient for
the payment thereof is set apart for payment for all past distribution periods
and the then current distribution period, or (ii) if such series of Preferred
Stock does not have a cumulative distribution, full distributions on the
Preferred Stock of such series have been or contemporaneously are declared and
paid, or declared and a sum sufficient for the payment thereof is set apart for
payment for the then current distribution period, no distributions (other than
in shares of Common Stock or other shares of capital stock ranking junior to the
Preferred Stock of such series as to distributions and upon liquidation) shall
be declared or paid or set aside for payment nor shall any other distribution be
declared or made upon the Common Stock or any other capital stock of the Company
ranking junior to or on a parity with the Preferred Stock of such series as to
distributions or upon liquidation, nor shall any shares of Common Stock or any
other shares of capital stock of the Company ranking junior to or on a parity
with the Preferred Stock of such series as to distributions or upon liquidation,
be redeemed, purchased or otherwise acquired for any consideration (or any
moneys be paid to or made available for a sinking fund for the redemption of any
such shares) by the Company (except by conversion into or exchange for other
capital stock of the Company ranking junior to the Preferred Stock of such
series as to distributions and upon liquidation).
Any distribution payment made on shares of a series of Preferred Stock shall
first be credited against the earliest accrued but unpaid distribution due with
respect to shares of such series that remain payable.
REDEMPTION
If so provided in the applicable Prospectus Supplement, the Preferred Stock
will be subject to mandatory redemption or redemption at the option of the
Company, as a whole or in part, in each case upon the terms, at the times and at
the redemption prices set forth in such Prospectus Supplement.
The applicable Prospectus Supplement relating to a series of Preferred Stock
that is subject to mandatory redemption will specify the number of shares of
such Preferred Stock that shall be redeemed by the Company in each year
commencing after a date to be specified, at a redemption price per share to be
specified, together with an amount equal to all accrued and unpaid distributions
thereon (which shall not, if such Preferred Stock does not have a cumulative
distribution, include any accumulation in respect of unpaid distributions for
prior distribution periods) to the date of redemption. The redemption price may
be payable in cash or other property, as specified in the applicable Prospectus
Supplement. If the redemption price for Preferred Stock of any series is payable
only from the net proceeds of the issuance of shares of capital stock of the
Company, the terms of such Preferred Stock may provide that if no such shares of
capital stock shall have been issued, or to the extent the net proceeds from any
issuance are insufficient to pay in full the aggregate redemption price then
due, such Preferred Stock shall automatically and mandatorily be converted into
the applicable shares of capital stock of the Company pursuant to conversion
provisions specified in the applicable Prospectus Supplement.
Notwithstanding the foregoing, unless (i) if a series of Preferred Stock has
a cumulative distribution, full cumulative distributions on all outstanding
shares of such series of Preferred Stock shall have been or contemporaneously
are declared and paid, or declared and a sum sufficient for the payment thereof
set apart for payment for all past distribution periods and the then current
distribution period, or (ii) if a series of Preferred Stock does not have a
cumulative distribution, full distributions on all shares of the Preferred Stock
of such series have been or contemporaneously are declared and paid, or declared
and a sum sufficient for the payment thereof set apart for payment for the then
current distribution period, no shares of such series of Preferred Stock shall
be redeemed unless all outstanding shares of Preferred Stock of such series are
simultaneously redeemed; provided, however, that the foregoing shall not prevent
the purchase or acquisition of Preferred Stock of such series to preserve the
REIT status of the Company or pursuant to a purchase or exchange offer made on
the same terms to holders of all outstanding shares of Preferred Stock of such
series. In addition, unless (i) if such series of Preferred Stock has a
cumulative distribution,
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full cumulative distributions on all outstanding shares of such series of
Preferred Stock have been or contemporaneously are declared and paid, or
declared and a sum sufficient for the payment thereof set apart for payment for
all past distribution periods and the then current distribution period, or (ii)
if such series of Preferred Stock does not have a cumulative distribution, full
distributions on the Preferred Stock of such series have been or
contemporaneously are declared and paid, or declared and a sum sufficient for
the payment thereof set apart for payment for the then current distribution
period, the Company shall not purchase or otherwise acquire directly or
indirectly any shares of such series of Preferred Stock (except by conversion
into or exchange for capital shares of the Company ranking junior to the
Preferred Stock of such series as to distributions and upon liquidation);
provided, however, that the foregoing shall not prevent the purchase or
acquisition of shares of Preferred Stock of such series to preserve the REIT
status of the Company or pursuant to a purchase or exchange offer made on the
same terms to holders of all outstanding shares of Preferred Stock of such
series.
If fewer than all of the outstanding shares of Preferred Stock of any series
are to be redeemed, the number of shares to be redeemed will be determined by
the Company and such shares may be redeemed pro rata from the holders of record
of such shares in proportion to the number of such shares held or for which
redemption is requested by such holder (with adjustments to avoid redemption of
fractional shares) or by any other equitable manner determined by the Company.
Notice of redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each holder of record of Preferred Stock of
any series to be redeemed at the address shown on the stock transfer books of
the Company. Each notice shall state: (i) the redemption date; (ii) the number
of shares and series of the Preferred Stock to be redeemed; (iii) the redemption
price; (iv) the place or places where certificates for such Preferred Stock are
to be surrendered for payment of the redemption price; (v) that distributions on
the shares to be redeemed will cease to accrue on such redemption date; and (vi)
the date upon which the holder's conversion rights, if any, as to such shares
shall terminate. If fewer than all the shares of Preferred Stock of any series
are to be redeemed, the notice mailed to each such holder thereof shall also
specify the number of shares of Preferred Stock to be redeemed from each such
holder. If notice of redemption of any Preferred Stock has been given and if the
funds necessary for such redemption have been set aside by the Company in trust
for the benefit of the holders of any Preferred Stock so called for redemption,
then from and after the redemption date distributions will cease to accrue on
such Preferred Stock, and all rights of the holders of such shares will
terminate, except the right to receive the redemption price.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Company, then, before any distribution or payment shall be
made to the holders of any Common Stock or any other class or series of capital
stock of the Company ranking junior to the Preferred Stock in the distribution
of assets upon any liquidation, dissolution or winding up of the Company, the
holders of each series of Preferred Stock shall be entitled to receive out of
assets of the Company legally available for distribution to stockholders
liquidating distributions in the amount of the liquidation preference per share,
if any, set forth in the applicable Prospectus Supplement, plus an amount equal
to all distributions accrued and unpaid thereon (which shall include any
accumulation in respect of unpaid cumulative distributions for prior
distribution periods). After payment of the full amount of the liquidating
distributions to which they are entitled, the holders of Preferred Stock will
have no right or claim to any of the remaining assets of the Company. In the
event that, upon any such voluntary or involuntary liquidation, dissolution or
winding up, the available assets of the Company are insufficient to pay the
amount of the liquidating distributions on all outstanding shares of Preferred
Stock and the corresponding amounts payable on all shares of other classes or
series of capital stock of the Company ranking on a parity with the Preferred
Stock in the distribution of assets, then the holders of the Preferred Stock and
all other such classes or series of capital
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stock ranking on parity with the Preferred Stock shall share ratably in any such
distribution of assets in proportion to the full liquidating distributions to
which they would otherwise be respectively entitled.
If liquidating distributions shall have been made in full to all holders of
Preferred Stock, the remaining assets of the Company shall be distributed among
the holders of any other classes or series of capital stock ranking junior to
the Preferred Stock upon liquidation, dissolution or winding up, according to
their respective rights and preferences and in each case according to their
respective number of shares. For such purposes, the consolidation or merger of
the Company with or into any other corporation, trust or entity, or the sale,
lease or conveyance of all or substantially all of the property or business of
the Company, shall not be deemed to constitute a liquidation, dissolution or
winding up of the Company.
VOTING RIGHTS
Holders of the Preferred Stock will not have any voting rights, except as
set forth below or as otherwise from time to time required by law or as
indicated in the applicable Prospectus Supplement.
Unless provided otherwise for any series of Preferred Stock, so long as any
shares of Preferred Stock of a series remain outstanding, the Company will not,
(i) without the affirmative vote or consent of the holders of at least a
majority of the shares of such series of Preferred Stock outstanding at the
time, given in person or by proxy, either in writing or at a meeting (such
series voting separately as a class), authorize or create, or increase the
authorized or issued amount of, any class or series of capital stock ranking
senior to such series of Preferred Stock with respect to payment of
distributions or the distribution of assets upon liquidation, dissolution or
winding up of the Company or reclassify any authorized capital stock of the
Company into such shares, or create, authorize or issue any obligation or
security convertible into or evidencing the right to purchase any such shares,
or (ii) without the affirmative vote or consent of the holders of at least a
majority of the shares of such series of Preferred Stock outstanding at the
time, given in person or by proxy, either in writing or at a meeting (such
series voting separately as a class), amend, alter or repeal the provisions of
the Charter or the Articles Supplementary for such series of Preferred Stock,
whether by merger, consolidation or otherwise (an "Event"), so as to materially
and adversely affect any right, preference, privilege or voting power of such
series of Preferred Stock or the holders thereof; PROVIDED, HOWEVER, with
respect to the occurrence of any Event set forth in (ii) above, so long as the
Preferred Stock remains outstanding with the terms thereof materially unchanged,
taking into account that upon the occurrence of an Event the Company may not be
the surviving entity, the occurrence of any such Event shall not be deemed to
materially and adversely affect such rights, preferences, privileges or voting
power of holders of Preferred Stock, and PROVIDED FURTHER that (i) any increase
in the amount of the authorized Preferred Stock or the creation or issuance of
any other series of Preferred Stock or (ii) any increase in the amount of
authorized shares of such series or any other series of Preferred Stock, in each
case ranking on a parity with or junior to the Preferred Stock of such series
with respect to payment of distributions or the distribution of assets upon
liquidation, dissolution or winding up, shall not be deemed to materially and
adversely affect such rights, preferences, privileges or voting powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of such series of Preferred Stock shall have
been redeemed or called for redemption and sufficient funds shall have been
deposited in trust to effect such redemption.
CONVERSION RIGHTS
The terms and conditions, if any, upon which any series of Preferred Stock
is convertible into Common Stock will be set forth in the applicable Prospectus
Supplement relating thereto. Such terms will include the number of shares of
Common Stock into which the shares of Preferred Stock are convertible, the
conversion price or rate (or manner of calculation thereof), the conversion
period, provisions as to whether conversion will be at the option of the holders
of the Preferred Stock or the Company, the events
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requiring an adjustment of the conversion price and the provisions affecting
conversion in the event of the redemption of such series of Preferred Stock.
RESTRICTIONS ON TRANSFER AND OWNERSHIP
The provisions contained in the Charter restricting certain transfers and
limiting the beneficial ownership, directly or indirectly, of the Company's
outstanding capital stock will effect any shares of Preferred Stock that may
from time to time be issued by the Company. See "Restrictions on Transfers of
Capital Stock."
TRANSFER AGENT
The transfer agent and registrar for the Preferred Stock will be set forth
in the applicable Prospectus Supplement.
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DESCRIPTION OF DEPOSITARY SHARES
GENERAL
The Company may issue receipts ("Depositary Receipts") for Depositary
Shares, each of which will represent a fractional interest of a share of a
particular series of Preferred Stock, as specified in the applicable Prospectus
Supplement. Shares of Preferred Stock of each series represented by Depositary
Shares will be deposited under a separate deposit agreement (each, a "Deposit
Agreement") among the Company, the depositary named therein (a "Preferred Stock
Depositary") and the holders from time to time of the Depositary Receipts.
Subject to the terms of the applicable Deposit Agreement, each owner of a
Depositary Receipt will be entitled, in proportion to the fractional interest of
a share of a particular series of Preferred Stock represented by the Depositary
Shares evidenced by such Depositary Receipt, to all the rights and preferences
of the Preferred Stock represented by such Depositary Shares (including
distribution, voting, conversion, redemption and liquidation rights).
The Depositary Shares will be evidenced by Depositary Receipts issued
pursuant to the applicable Deposit Agreement. Immediately following the issuance
and delivery of the Preferred Stock by the Company to a Preferred Stock
Depositary, the Company will cause such Preferred Stock Depositary to issue, on
behalf of the Company, the Depositary Receipts. Copies of the applicable form of
Deposit Agreement and Depositary Receipt may be obtained from the Company upon
request, and the statements made hereunder relating to Deposit Agreements and
the Depositary Receipts to be issued thereunder are summaries of certain
anticipated provisions thereof and do not purport to be complete and are subject
to, and qualified in their entirety by reference to, all of the provisions of
the applicable Deposit Agreement and related Depositary Receipts.
DISTRIBUTIONS
A Preferred Stock Depositary will be required to distribute all cash
distributions received in respect of the applicable Preferred Stock to the
record holders of Depositary Receipts evidencing the related Depositary Shares
in proportion to the number of such Depositary Receipts owned by such holders,
subject to certain obligations of holders to file proofs, certificates and other
information and to pay certain charges and expenses to such Preferred Stock
Depositary.
In the event of a distribution other than in cash, a Preferred Stock
Depositary will be required to distribute property received by it to the record
holders of Depositary Receipts entitled thereto, subject to certain obligations
of holders to file proofs, certificates and other information and to pay certain
charges and expenses to such Preferred Stock Depositary, unless such Preferred
Stock Depositary determines that it is not feasible to make such distribution,
in which case such Preferred Stock Depositary may, with the approval of the
Company, sell such property and distribute the net proceeds from such sale to
such holders.
No distribution will be made in respect of any Depositary Share to the
extent that it represents any Preferred Stock which has been converted or
exchanged.
WITHDRAWAL OF STOCK
Upon surrender of the Depositary Receipts at the corporate trust office of
the applicable Preferred Stock Depositary (unless the related Depositary Shares
have previously been called for redemption or converted), the holders thereof
will be entitled to delivery at such office, to or upon each such holder's
order, of the number of whole or fractional shares of the applicable Preferred
Stock and any money or other property represented by the Depositary Shares
evidenced by such Depositary Receipts. Holders of Depositary Receipts will be
entitled to receive whole or fractional shares of the related Preferred Stock on
the basis of the proportion of Preferred Stock represented by each Depositary
Share as specified in the applicable Prospectus Supplement, but holders of such
shares of Preferred Stock will not thereafter be
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entitled to receive Depositary Shares therefor. If the Depositary Receipts
delivered by the holder evidence a number of Depositary Shares in excess of the
number of Depositary Shares representing the number of shares of Preferred Stock
to be withdrawn, the applicable Preferred Stock Depositary will be required to
deliver to such holder at the same time a new Depositary Receipt evidencing such
excess number of Depositary Shares.
REDEMPTION OF DEPOSITARY SHARES
Whenever the Company redeems shares of Preferred Stock held by a Preferred
Stock Depositary, such Preferred Stock Depositary will be required to redeem as
of the same redemption date the number of Depositary Shares representing shares
of the Preferred Stock so redeemed, provided the Company shall have paid in full
to such Preferred Stock Depositary the redemption price of the Preferred Stock
to be redeemed plus an amount equal to any accrued and unpaid distributions
thereon to the date fixed for redemption. The redemption price per Depositary
Share will be equal to the redemption price and any other amounts per share
payable with respect to the Preferred Stock. If fewer than all the Depositary
Shares are to be redeemed, the Depositary Shares to be redeemed will be selected
pro rata (as nearly as may be practicable without creating fractional Depositary
Shares) or by any other equitable method determined by the Company that
preserves the REIT status of the Company.
From and after the date fixed for redemption, all distributions in respect
of the shares of Preferred Stock so called for redemption will cease to accrue,
the Depositary Shares so called for redemption will no longer be deemed to be
outstanding and all rights of the holders of the Depositary Receipts evidencing
the Depositary Shares so called for redemption will cease, except the right to
receive any moneys payable upon such redemption and any money or other property
to which the holders of such Depositary Receipts were entitled upon such
redemption upon surrender thereof to the applicable Preferred Stock Depositary.
VOTING OF THE PREFERRED STOCK
Upon receipt of notice of any meeting at which the holders of the applicable
Preferred Stock are entitled to vote, a Preferred Stock Depositary will be
required to mail the information contained in such notice of meeting to the
record holders of the Depositary Receipts evidencing the Depositary Shares which
represent such Preferred Stock. Each record holder of Depositary Receipts
evidencing Depositary Shares on the record date (which will be the same date as
the record date for the Preferred Stock) will be entitled to instruct such
Preferred Stock Depositary as to the exercise of the voting rights pertaining to
the amount of Preferred Stock represented by such holder's Depositary Shares.
Such Preferred Stock Depositary will be required to vote the amount of Preferred
Stock represented by such Depositary Shares in accordance with such
instructions, and the Company will agree to take all reasonable action which may
be deemed necessary by such Preferred Stock Depositary in order to enable such
Preferred Stock Depositary to do so. Such Preferred Stock Depositary will be
required to abstain from voting the amount of Preferred Stock represented by
such Depositary Shares to the extent it does not receive specific instructions
from the holders of Depositary Receipts evidencing such Depositary Shares. A
Preferred Stock Depositary will not be responsible for any failure to carry out
any instruction to vote, or for the manner or effect of any such vote made, as
long as such action or non-action is in good faith and does not result from
negligence or willful misconduct of such Preferred Stock Depositary.
LIQUIDATION PREFERENCE
In the event of the liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, the holders of each Depositary Receipt will be
entitled to the fraction of the liquidation preference accorded each share of
Preferred Stock represented by the Depositary Share evidenced by such Depositary
Receipt, as set forth in the applicable Prospectus Supplement.
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CONVERSION OF PREFERRED STOCK
The Depositary Shares, as such, will not be convertible into Common Stock or
any other securities or property of the Company. Nevertheless, if so specified
in the applicable Prospectus Supplement relating to an offering of Depositary
Shares, the Depositary Receipts may be surrendered by holders thereof to the
applicable Preferred Stock Depositary with written instructions to such
Preferred Stock Depositary to instruct the Company to cause conversion of the
Preferred Stock represented by the Depositary Shares evidenced by such
Depositary Receipts into whole shares of Common Stock, other shares of Preferred
Stock of the Company or other shares of stock, and the Company will agree that
upon receipt of such instructions and any amounts payable in respect thereof, it
will cause the conversion thereof utilizing the same procedures as those
provided for delivery of Preferred Stock to effect such conversion. If the
Depositary Shares evidenced by a Depositary Receipt are to be converted in part
only, a new Depositary Receipt or Depositary Receipts will be issued for any
Depositary Shares not to be converted. No fractional shares of Common Stock will
be issued upon conversion, and if such conversion will result in a fractional
share being issued, an amount will be paid in cash by the Company equal to the
value of the fractional interest based upon the closing price of the Common
Stock on the last business day prior to the conversion.
AMENDMENT AND TERMINATION OF A DEPOSIT AGREEMENT
Any form of Depositary Receipt evidencing Depositary Shares which will
represent Preferred Stock and any provision of a Deposit Agreement will be
permitted at any time to be amended by agreement between the Company and the
applicable Preferred Stock Depositary. However, any amendment that materially
and adversely alters the rights of the holders of Depositary Receipts or that
would be materially and adversely inconsistent with the rights granted to the
holders of the related Preferred Stock will not be effective unless such
amendment has been approved by the existing holders of at least two-thirds of
the applicable Depositary Shares evidenced by the applicable Depositary Receipts
then outstanding. No amendment shall impair the right, subject to certain
anticipated exceptions in the Deposit Agreements, of any holders of Depositary
Receipts to surrender any Depositary Receipt with instructions to deliver to the
holder the related Preferred Stock and all money and other property, if any,
represented thereby, except in order to comply with any applicable law. Every
holder of an outstanding Depositary Receipt at the time any such amendment
becomes effective shall be deemed, by continuing to hold such Depositary
Receipt, to consent and agree to such amendment and to be bound by the
applicable Deposit Agreement as amended thereby.
A Deposit Agreement will be permitted to be terminated by the Company upon
not less than 30 days' prior written notice to the applicable Preferred Stock
Depositary if (i) such termination is necessary to preserve the Company's status
as a REIT or (ii) a majority of each series of Preferred Stock affected by such
termination consents to such termination, whereupon such Preferred Stock
Depositary will be required to deliver or make available to each holder of
Depositary Receipts, upon surrender of the Depositary Receipts held by such
holder, such number of whole or fractional shares of Preferred Stock as are
represented by the Depositary Shares evidenced by such Depositary Receipts
together with any other property held by such Preferred Stock Depositary with
receipts to such Depositary Receipts. The Company will agree that if a Deposit
Agreement is terminated to preserve the Company's status as a REIT, then the
Company will use its best efforts to list the Preferred Stock issued upon
surrender of the related Depositary Shares on a national securities exchange. In
addition, a Deposit Agreement will automatically terminate if (i) all
outstanding Depositary Shares thereunder shall have been redeemed; (ii) there
shall have been a final distribution in respect of the related Preferred Stock
in connection with any liquidation, dissolution or winding up of the Company and
such distribution shall have been distributed to the holders of Depositary
Receipts evidencing the Depositary Shares representing such Preferred Stock; or
(iii) each share of the related Preferred Stock shall have been converted into
stock of the Company not so represented by Depositary Shares.
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CHARGES OF A PREFERRED STOCK DEPOSITARY
The Company will pay all transfer and other taxes and governmental charges
arising solely from the existence of a Deposit Agreement. In addition, the
Company will pay the fees and expenses of a Preferred Stock Depositary in
connection with the performance of its duties under a Deposit Agreement.
However, holders of Depositary Receipts will pay the fees and expenses of a
Preferred Stock Depositary for any duties requested by such holders to be
performed which are outside of those expressly provided for in the applicable
Deposit Agreement.
RESIGNATION AND REMOVAL OF A PREFERRED STOCK DEPOSITARY
A Preferred Stock Depositary will be permitted to resign at any time by
delivering to the Company notice of its election to do so, and the Company will
be permitted at any time to remove a Preferred Stock Depositary, any such
resignation or removal to take effect upon the appointment of a successor
Preferred Stock Depositary. A successor Preferred Stock Depositary will be
required to be appointed within 60 days after delivery of the notice of
resignation or removal and will be required to be a bank or trust company having
its principal office in the United States and having a combined capital and
surplus of at least $50 million.
MISCELLANEOUS
A Preferred Stock Depositary will be required to forward to holders of
Depositary Receipts any reports and communications from the Company which are
received by such Preferred Stock Depositary with respect to the related
Preferred Stock.
Neither a Preferred Stock Depositary nor the Company will be liable if it is
prevented from or delayed in, by law or any circumstances beyond its control,
performing its obligations under a Deposit Agreement. The obligations of the
Company and a Preferred Stock Depositary under a Deposit Agreement will be
limited to performing their duties thereunder in good faith and without
negligence (in the case of any action or inaction in the voting of Preferred
Stock represented by the applicable Depositary Shares), gross negligence or
willful misconduct, and neither the Company nor any applicable Preferred Stock
Depositary will be obligated to prosecute or defend any legal proceeding in
respect of any Depositary Receipts, Depositary Shares or shares of Preferred
Stock represented thereby unless satisfactory indemnity is furnished. The
Company and any Preferred Stock Depositary will be permitted to rely on written
advice of counsel or accountants, or information provided by persons presenting
shares of Preferred Stock represented thereby for deposit, holders of Depositary
Receipts or other persons believed in good faith to be competent to give such
information, and on documents believed in good faith to be genuine and signed by
a proper party.
In the event a Preferred Stock Depositary shall receive conflicting claims,
requests or instructions from any holders of Depositary Receipts, on the one
hand, and the Company, on the other hand, such Preferred Stock Depositary shall
be entitled to act on such claims, requests or instructions received from the
Company.
RESTRICTIONS ON TRANSFERS OF CAPITAL STOCK
For the Company to maintain its status as a REIT under the Code, shares of
Common Stock must be beneficially owned by 100 or more persons during at least
335 days of the taxable year of 12 months (other than the first year) or during
a proportionate part of a shorter taxable year. Also, not more than 50% of the
value of the outstanding shares of capital stock may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year (other than the first
year) or during a proportionate part of a shorter taxable year.
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Because the Board of Directors believes it is essential for the Company to
qualify as a REIT, the Charter, subject to certain exceptions, provides that no
holder may own, or be deemed to own by virtue of the attribution provisions of
the Code, more than (i) 9.8% of the number of issued and outstanding shares of
Common Stock of the Company, except for QSV Properties, Inc. ("QSV") which may
own initially no more than 12% of the number of such outstanding shares, or (ii)
9.8% of the number of outstanding shares of Preferred Stock of any series of
Preferred Stock (together, the "Ownership Limit").
Any purported transfer of shares of Common Stock that would (i) result in a
person (other than QSV with respect to shares of Common Stock) owning, directly
or indirectly, shares of Common Stock or Preferred Stock in excess of the
Ownership Limit, (ii) result in QSV owning, directly or indirectly, in excess of
12% of the number of outstanding shares of Common Stock (or the decreased
percentage that may be applicable), (iii) result in the Common Stock and
Preferred Stock being owned by fewer than 100 persons (determined without
reference to any rules of attribution), (iv) result in the Company being
"closely held" within the meaning of Section 856(h) of the Code, or (v) cause
the Company to own, directly or constructively, 10% or more of the ownership
interests in a tenant of the Company's or the Operating Partnership's real
property, within the meaning of Section 856(d)(2)(B) of the Code, shall be null
and void, and the intended transferee will acquire no rights in such shares of
Common Stock or Preferred Stock. Such Common Stock or Preferred stock will be
designated as Excess Stock and will be transferred automatically to a trust (the
"Trust") effective on the day before the purported transfer of such Common Stock
or Preferred Stock. The record holder of the shares of Common Stock or Preferred
Stock that are designated as Excess Stock (the "Prohibited Owner") will be
required to submit such number of shares of Common Stock or Preferred Stock to
the Company for registration in the name of the Trust. The Trustee of the Trust
will be designated by the Company, but will not be affiliated with the Company
or any Prohibited Owner. The beneficiary of the Trust (the "Beneficiary") will
be one or more not-for-profit organizations that are named by the Company.
Excess Stock will remain issued and outstanding shares of Common Stock or
Preferred Stock and will be entitled to the same rights and privileges as all
other shares of the same class or series. The Trust will receive all dividends
and distributions on the Excess Stock and will hold such dividends and
distributions in trust for the benefit of the Beneficiary. The Trustee will vote
all Excess Stock. The Trustee will designate a permitted transferee of the
Excess Stock, provided that the permitted transferee (i) purchases such Excess
Stock for valuable consideration and (ii) acquires such Excess Stock without
such acquisition resulting in a transfer to another Trust and resulting in the
redesignation of such shares of Common Stock or Preferred Stock as Excess Stock.
The Prohibited Owner with respect to Excess Stock will be required to repay
the Trust the amount of any dividends or distributions received by the
Prohibited Owner (i) that are attributable to any Excess Stock and (ii) the
record date for which was on or after the date that such shares became Excess
Stock. The Prohibited Owner generally will receive from the Trustee the lesser
of (a) the price per share such Prohibited Owner paid for the shares of Common
Stock or Preferred Stock that were designated as Excess Stock (or, in the case
of a gift or devise, the Market Price (as defined below) per share on the date
of such transfer) and (b) the price per share received by the Trustee from the
sale of such Excess Stock. Any amounts received by the Trustee in excess of the
amounts to be paid to the Prohibited Owner will be distributed to the
Beneficiary.
The Excess Stock will be deemed to have been offered for sale to the
Company, or its designee, at a price per share equal to the lesser of (i) the
price per share in the transaction that created such Excess Stock (or, in the
case of a gift or devise, the Market Price per share on the date of such
transfer) or (ii) the Market Price per share on the date that the Company, or
its designee, accepts such offer. The Company will have the right to accept such
offer for a period of 90 days after the later of (i) the date of the purported
transfer which resulted in such Excess Stock and (ii) the date the Company
determines in good faith that a transfer resulting in such Excess Stock
occurred.
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"Market Price" means the average of the Closing Prices for the ten
consecutive trading days immediately preceding the relevant date. "Closing
Price" on any day means the last sale price, regular way on such day, or, if no
such sale takes place on that day, the average of the closing bid and asked
prices, regular way, in either case as reported on the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the NYSE, or if the affected class or series of capital stock is not
so listed or admitted to trading, as reported in the principal consolidated
transaction reporting system with respect to securities listed on the principal
national securities exchange (including the National Market System of the
National Association of Securities Dealers, Inc. Automated Quotation System) on
which the affected class or series of capital stock is listed or admitted to
trading or, if the affected class or series of capital stock is not so listed or
admitted to trading, the last quoted price or, if not quoted, the average of the
high bid and low asked prices in the over-the-counter market, as reported by the
National Association of Securities Dealers, Inc. Automated Quotation System or,
if such system is no longer in use, the principal automated quotation system
then in use or, if the affected class or series of capital stock is not so
quoted by any such system, the average of the closing bid and asked prices as
furnished by a professional market maker selected by the Board making a market
in the affected class or series of capital stock, or, if there is no such market
maker or such closing prices otherwise are not available, the fair market value
of the affected class or series of capital stock as of such day, as determined
by the Board in its discretion.
Any person who acquires or attempts to acquire shares of Common Stock or
Preferred Stock in violation of the foregoing restrictions, or any person who
owned shares of Common Stock or Preferred Stock that were transferred to a
Trust, will be required (i) to give immediate written notice to the Company of
such event and (ii) to provide to the Company such other information as the
Company may request in order to determine the effect, if any, of such transfer
on the Company's status as a REIT.
All certificates representing shares of Common Stock will bear a legend
referring to the restrictions described above.
All persons who own, directly or by virtue of the attribution provisions of
the Code, more than 5% (or such other percentage between 0.5% and 5%, as
provided in the rules and regulations promulgated under the Code) of the number
or value of the outstanding shares of Common Stock of the Company must give a
written notice to the Company by January 31 of each year stating the name and
address of such person, the number of shares of each class or series so owned
and a description of how such shares are owned. In addition, each stockholder
shall upon demand be required to disclose to the Company in writing such
information with respect to the direct, indirect and constructive ownership of
shares of Common Stock as the Board of Directors deems reasonably necessary to
comply with the provisions of the Code applicable to a REIT, to comply with the
requirements of any taxing authority or governmental agency or to determine any
such compliance.
These ownership limitations could have the effect of discouraging a takeover
or other transaction in which holders of some, or a majority, of shares of
Common Stock might believe to be in their best interests or in which holders of
some, or a majority, of the shares of Common Stock might receive a premium for
their shares over the then-prevailing market price of such shares of Common
Stock or which such holders might believe to be otherwise in their best
interest.
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PLAN OF DISTRIBUTION
The Company may sell the Offered Securities through underwriters or dealers,
directly to one or more purchasers (including executive officers of the Company
or other persons that may be deemed affiliates of the Company), through agents
or through a combination of any such methods of sale. Any underwriter involved
in the offer and sale of the Offered Securities will be named in the applicable
Prospectus Supplement.
The distribution of the Offered Securities may be effected from time to time
in one or more transactions at a fixed price or prices, which may be changed, at
market prices prevailing at the time of the sale, at prices related to such
prevailing market prices or at negotiated prices. Further, the distribution of
any Common Stock in one or more special offerings pursuant to a dividend
reinvestment plan or other similar plan of the Company may be effected from time
to time at a fixed price or prices, which may be changed, at market prices
prevailing at the time of the sale, at prices related to such prevailing market
prices or at negotiated prices.
In connection with the sale of the Offered Securities, underwriters or
agents may receive compensation from the Company or from purchasers of the
Offered Securities, for whom they may act as agents in the form of discounts,
concessions or commissions. Underwriters may sell the Offered Securities to or
through dealers, and such dealers may receive compensation in the form of
discounts, concessions or commissions from the underwriters and/or commissions
from the purchasers for whom they may act as agents. Underwriters, dealers and
agents that participate in the distribution of the Offered Securities may be
deemed to be underwriters under the Securities Act, and any discounts or
commissions they receive from the Company and any profit on the resale of the
Offered Securities they realize may be deemed to be underwriting discounts and
commissions under the Securities Act. Any such underwriter or agent will be
identified, and any such compensation received from the Company will be
described, in the applicable Prospectus Supplement.
Unless otherwise specified in the applicable Prospectus Supplement, each
series of the Offered Securities will be a new issue with no established trading
market, other than the Common Stock which is listed on the NYSE. Any shares of
Common Stock sold pursuant to a Prospectus Supplement will be listed on the
NYSE, subject to official notice of issuance. The Company may elect to list any
series of Common Stock Warrants, Preferred Stock or Depositary Shares on an
exchange, but is not obligated to do so. It is possible that one or more
underwriters may make a market in a series of the Offered Securities, but will
not be obligated to do so and may discontinue any market making at any time
without notice. Therefore, no assurance can be given as to the liquidity of, or
the trading market for, the Offered Securities.
Under agreements into which the Company may enter, underwriters, dealers and
agents who participate in the distribution of the Offered Securities may be
entitled to indemnification by the Company, as the case may be, against certain
liabilities, including liabilities under the Securities Act.
Underwriters, dealers and agents may engage in transactions with, or perform
services for, or be tenants of, the Company in the ordinary course of business.
FEDERAL INCOME TAX CONSIDERATIONS
The Company will elect to be treated as a REIT for federal income tax
commencing with its taxable year ending December 31, 1997. Based on certain
assumptions and representations that are summarized below, Winstead Sechrest &
Minick P.C., counsel to the Company, is of the opinion that beginning with its
taxable year ending December 31, 1997, the Company will be organized in
conformity with the requirements for qualification as a REIT and that its
proposed method of operations described in this Prospectus will enable it to
satisfy the requirements for such qualification. The rules governing REITs are
highly technical and require ongoing compliance with a variety of tests that
depend, among other things, on future operating results. Winstead Sechrest &
Minick P.C. will not monitor the Company's compliance with
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these requirements. While the Company expects to satisfy these tests, and will
use its best efforts to do so, no assurance can be given that the Company will
qualify as a REIT for any particular year, or that the applicable law will not
change and adversely affect the Company and its stockholders. See "--Failure to
Qualify as a REIT." The Taxpayer Relief Act of 1997 (the "Tax Act") contains
several provisions affecting REITs and is generally effective January 1, 1998.
The following is a summary of the material federal income tax considerations
affecting the Company as a REIT and its stockholders:
REIT QUALIFICATION. Entities like the Company that invest principally in
real estate and that otherwise would be taxed as regular corporations may elect
to be treated as REITs when they satisfy certain detailed requirements imposed
by the Code. If the Company qualifies for taxation as a REIT, it generally will
not be subject to corporate income tax to the extent the Company currently
distributes its REIT taxable income to its stockholders. This treatment
effectively eliminates the "double taxation" (I.E., taxation at both the
corporate and stockholder levels) imposed on investments in most corporations. A
qualifying REIT, however, may be subject to certain excise and other taxes, as
well as to normal corporate tax on taxable income that is not currently
distributed to its stockholders. See "-- Taxation of the Company as a REIT." In
addition, if the Company fails to qualify as a REIT in any taxable year, it will
be subject to federal income tax at regular corporate rates on all of its
taxable income.
GENERAL QUALIFICATION REQUIREMENTS. The Company must be organized as an
entity that would, if it does not maintain its REIT status, be taxable as a
regular corporation. It cannot be a financial institution or an insurance
company. The Company must be managed by one or more directors. The Company's
taxable year must be the calendar year. The Company expects to meet each of
these requirements. The Company also expects to satisfy the requirements that
are separately described below concerning share ownership and reporting, the
nature and amounts of the Company's income and assets and the levels of required
annual distributions.
SHARE OWNERSHIP; REPORTING. Beneficial ownership of the Company must be and
is evidenced by transferable shares. The Company's capital stock must be held by
at least 100 persons during at least 335 days of a taxable year of 12 months or
during a proportionate part of a taxable year of less than 12 months. Not more
than 50% of the value of the shares of capital stock of the Company may be held,
directly or indirectly, applying certain constructive ownership rules, by five
or fewer individuals at any time during the last half of each of the Company's
taxable years. The Company is not required to satisfy the 100 person and 50%
tests until its second taxable year for which an election is made to be taxed as
a REIT. The Company believes that its shares of Common Stock will be owned by a
sufficient number of investors and in appropriate proportions to permit it to
satisfy these requirements. To protect against violations of these requirements,
the Articles will provide that no person is permitted to own (applying certain
constructive ownership tests) more than 9.8% of the outstanding Common Stock
(except for QSV which can initially own up to 12% of the outstanding Common
Stock, subject to reduction under certain circumstances) or 9.8% of the
outstanding Preferred Stock. In addition, the Articles will contain restrictions
on transfers of capital stock, as well as provisions that automatically convert
shares of stock into nonvoting, non-dividend paying Excess Stock to the extent
that the ownership otherwise might jeopardize the Company's REIT status.
To monitor the Company's compliance with the share ownership requirements,
the Company is required to and will maintain records disclosing the actual
ownership of common shares. To do so, the Company will demand written statements
each year from the record holders of certain percentages of shares in which the
record holders are to disclose the actual owners of the shares (I.E., the
persons required to include in gross income the REIT dividends). A list of those
persons failing or refusing to comply with this demand will be maintained as
part of the Company's records. Stockholders who fail or refuse to comply with
the demand must submit a statement with their tax returns disclosing the actual
ownership of the shares and certain other information.
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SOURCES OF GROSS INCOME. In order to qualify as a REIT for a particular
year, the Company also must meet three tests governing the sources of its
income. These tests are designed to ensure that a REIT derives its income
principally from passive real estate investments. In evaluating a REIT's income,
the REIT will be treated as receiving its proportionate share of the income
produced by any partnership in which the REIT invests, and any such income will
retain the character that it has in the hands of the partnership. The Code
allows the Company to own and operate a number of its properties through wholly-
owned subsidiaries which are "qualified REIT subsidiaries." The Code provides
that a qualified REIT subsidiary is not treated as a separate corporation, and
all of its assets, liabilities and items of income, deduction and credit are
treated as assets, liabilities and such items of the REIT.
75% GROSS INCOME TEST. At least 75% of a REIT's gross income for each
taxable year must be derived from specified classes of income that principally
are real estate related. The permitted categories of principal importance to the
Company are: (i) rents from real property; (ii) interest on loans secured by
real property; (iii) gain from the sale of real property or loans secured by
real property (excluding gain from the sale of property held primarily for sale
to customers in the ordinary course of the Company's trade or business, referred
to below as "dealer property"); (iv) income from the operation and gain from the
sale of certain property acquired in connection with the foreclosure of a
mortgage securing that property ("foreclosure property"); (v) distributions on,
or gain from the sale of, shares of other qualifying REITs; (vi) abatements and
refunds of real property taxes; and (vii) "qualified temporary investment
income" (described below). In evaluating the Company's compliance with the 75%
income test (as well as the 95% income test described below), gross income does
not include gross income from "prohibited transactions." A prohibited
transaction is one involving a sale of dealer property, not including
foreclosure property and certain dealer property held by the Company for at
least four years.
The Company expects that substantially all of its operating gross income
will be considered rent from real property. Rent from real property is
qualifying income for purposes of the 75% income test only if certain conditions
are satisfied. Rent from real property includes charges for services customarily
rendered to tenants, and rent attributable to personal property leased together
with the real property so long as the personal property rent is less than 15% of
the total rent. The Company does not expect to earn material amounts in these
categories. Rent from real property generally does not include rent based on the
income or profits derived from the property. The Company does not intend to
lease property and receive rentals based on the tenant's net income or profit.
However, rent based on a percentage of gross income is permitted as rent from
real property and the Company will have leases where rent is based on a
percentage of gross income. Also excluded from "rents from real property" is
rent received from a person or corporation in which the Company (or any of its
10% or greater owners) directly or indirectly through the constructive ownership
rules contained in Section 318 of the Code, owns a 10% or greater interest
("Related Party Tenant Rent"). The Company, through such attribution rules, owns
greater than a 10% interest in one tenant which leases three (3) Burger King
restaurant properties from the Operating Partnership. However, such
non-qualifying income is less than 3.5% of total gross income of the Operating
Partnership. A third exclusion covers amounts received with respect to real
property if the Company furnishes services to the tenants or manages or operates
the property, other than through an "independent contractor" from whom the
Company does not derive any income. The obligation to operate through an
independent contractor generally does not apply, however, if the services
provided by the Company are "usually or customarily rendered" in connection with
the rental of space for occupancy only and are not considered rendered primarily
for the convenience of the tenant (applying standards that govern in evaluating
whether rent from real property would be unrelated business taxable income when
received by a tax exempt owner of the property). The Tax Act provides a DE
MINIMIS rule for non-customary services which is effective for taxable years
beginning after August 5, 1997. If the value of the non-customary service income
with respect to a property (valued at no less than 150% of the Company's direct
cost of performing such services is 1% or less of the total income derived from
the property, then all rental income except the non-customary service income
will qualify as "rents from real property." This provision will be effective for
the Company's taxable year ending December 31, 1998.
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The Company will, in most instances, directly operate and manage its assets
without using an "independent contractor." The Company believes that the only
material services to be provided to tenants will be those usually or customarily
rendered in connection with the rental of space for occupancy only. The Company
will not provide services that might be considered rendered primarily for the
convenience of the tenants, such as hotel, health care or extensive recreational
or social services. Consequently, the Company believes that substantially all of
its rental income will be qualifying income under the 75% income test, and that
the Company's provision of services will not cause the rental income to fail to
be included under that test.
Upon the Company's ultimate sale of properties, any gains realized also are
expected to constitute qualifying income, as gain from the sale of real property
(not involving a prohibited transaction).
95% GROSS INCOME TEST. In addition to earning 75% of its gross income from
the sources listed above, at least an additional 20% of the Company's gross
income for each taxable year must come either from those sources, or from
dividends, interest or gains from the sale or other disposition of stock or
other securities that do not constitute dealer property. This test permits a
REIT to earn a significant portion of its income from traditional "passive"
investment sources that are not necessarily real estate related. The term
"interest" (under both the 75% and 95% tests) does not include amounts that are
based on the income or profits of any person, unless the computation is based
only on a fixed percentage of receipts or sales.
FAILING THE 75% OR 95% TESTS; REASONABLE CAUSE. As a result of the 75% and
95% tests, REITs generally are not permitted to earn more than 5% of their gross
income from active sources (such as brokerage commissions or other fees for
services rendered) the Company may receive certain types of such income. This
type of income will not qualify for the 75% test or 95% test but is not expected
to be significant and such income and other nonqualifying income (including
Related Party Tenant Rent, as discussed above) are expected to be at all times
less than 5% of the Company's annual gross income. While the Company does not
anticipate that it will earn substantial amounts of nonqualifying income, if
nonqualifying income exceeds 5% of the Company's gross income, the Company could
lose its status as a REIT. The Company may establish subsidiaries of which the
Company will hold less than 10% of the Voting Stock to hold assets generating
non-qualifying income. The gross income generated by these subsidiaries would
not be included in the Company's gross income. However, dividends from such
subsidiaries to the Company would be included in the Company's gross income and
qualify for the 95% income test.
If the Company fails to meet either the 75% or 95% income tests during a
taxable year, it may still qualify as a REIT for that year if (i) it reports the
source and nature of each item of its gross income in its federal income tax
return for that year; (ii) the inclusion of any incorrect information in its
return is not due to fraud with intent to evade tax; and (iii) the failure to
meet the tests is due to reasonable cause and not to willful neglect. However,
in that case the Company would be subject to a 100% tax based on the greater of
the amount by which it fails either the 75% or 95% income tests for such year.
See "--Taxation of the Company as a REIT."
30% INCOME TEST. The Company also must earn less than 30% of its gross
income from the sale or other disposition of: (i) real property and loans
secured by real property held for less than four years (other than foreclosure
property and involuntarily conversions), (ii) stock or securities held by the
Company for less than one year and (iii) property in a prohibited transaction.
The 30% income test does not have a reasonable cause exception as do the 75% and
95% income tests. Consequently, a failure to meet the 30% income test would
terminate the Company's status as a REIT. Because the Company expects to hold
its assets for long-term investment and does not anticipate selling them within
four years, the Company expects to comply with this requirement. The Tax Act
repeals the 30% gross income test for taxable years beginning after its
enactment on August 5, 1997. Thus, the 30% gross income test will apply only to
the Company's taxable year ending December 31, 1997.
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<PAGE>
CHARACTER OF ASSETS OWNED. On the last day of each calendar quarter, the
Company also must meet two tests concerning the nature of its investments.
First, at least 75% of the value of the total assets of the Company generally
must consist of real estate assets, cash, cash items (including receivables) and
government securities. For this purpose, "real estate assets" include interests
in real property, interests in loans secured by mortgages on real property or by
certain interests in real property, shares in other REITs and certain options,
but exclude mineral, oil or gas royalty interests. The temporary investment of
new capital in debt instruments also qualifies under this 75% asset test, but
only for the one-year period beginning on the date the Company receives the new
capital. Second, although the balance of the Company's assets generally may be
invested without restriction, the Company will not be permitted to own (i)
securities of any one non-governmental issuer that represent more than 5% of the
value of the Company's total assets or (ii) more than 10% of the outstanding
voting securities of any single issuer. A REIT, however, may own 100% of the
stock of a qualified REIT subsidiary, in which case the assets, liabilities and
items of income, deduction and credit of the subsidiary are treated as those of
the REIT. In evaluating a REIT's assets, if the REIT invests in a partnership,
it is deemed to own its proportionate share of the assets of the partnership.
The Company anticipates that it will comply with these asset tests. While
some portion of its assets initially may be invested in qualifying temporary
debt investments, substantially all of the Company's investments will be in
properties which should represent qualifying real estate assets.
ANNUAL DISTRIBUTIONS TO STOCKHOLDERS. To maintain REIT status, the Company
generally must distribute to its stockholders in each taxable year at least 95%
of its net ordinary income (capital gain is not required to be distributed).
More precisely, the Company must distribute an amount equal to (i) 95% of the
sum of (a) its "REIT Taxable Income" before deduction of dividends paid and
excluding any net capital gain and (b) any net income from foreclosure property
less the tax on such income, minus (ii) certain limited categories of "excess
noncash income" (including as a result of the Tax Act, INTER ALIA, cancellation
of indebtedness and original issue discount income). REIT Taxable Income is
defined to be the taxable income of the REIT, computed as if it were an ordinary
corporation, with certain modifications. For example, the deduction for
dividends paid is allowed, but neither net income from foreclosure property, nor
net income from prohibited transactions, is included. In addition, the REIT may
carry over, but not carry back, a net operating loss for 15 years following the
year in which it was incurred.
A REIT may satisfy the 95% distribution test with dividends paid during the
taxable year and with certain dividends paid after the end of the taxable year.
Dividends paid in January that were declared during the last calendar quarter of
the prior year and were payable to stockholders of record on a date during the
last calendar quarter of that prior year are treated as paid on December 31 of
the prior year (for both the Company and its stockholders). Other dividends
declared before the due date of the Company's tax return for the taxable year
(including extensions) also will be treated as paid in the prior year for the
Company if they are paid (i) within 12 months of the end of such taxable year
and (ii) no later than the Company's next regular distribution payment.
Dividends that are paid after the close of a taxable year and do not qualify
under the rule governing payments made in January that is described above will
be taxable to the shareholders in the year paid, even though they may be taken
into account by the Company for a prior year. A nondeductible excise tax equal
to 4% will be imposed on the Company for each calendar year to the extent that
dividends declared and distributed or deemed distributed before December 31 are
less than the sum of (a) 85% of the Company's "ordinary income" plus (b) 95% of
the Company's capital gain net income plus (c) any undistributed income from
prior periods.
The Company will be taxed at regular corporate rates to the extent that it
retains any portion of its taxable income (E.G., if the Company distributes only
the required 95% of its taxable income, it would be taxed on the retained 5%).
Under certain circumstances the Company may not have sufficient cash or other
liquid assets to meet the distribution requirement. This could arise because of
competing demands for the Company's funds, or due to timing differences between
tax reporting and cash receipts and disbursements (I.E., income may have to be
reported before cash is received, or expenses may have to be
24
<PAGE>
paid before a deduction is allowed). Although the Company does not anticipate
any difficulty in meeting this requirement, no assurance can be given that
necessary funds will be available. In the event that such circumstances do
occur, then in order to meet the 95% distribution requirement, the Company may
cause the Operating Partnership to arrange for short-term, or possibly
long-term, borrowings to permit the payment of required dividends.
If the Company fails to meet the 95% distribution requirement because of an
adjustment to the Company's taxable income by the IRS, the Company may be able
to cure the failure retroactively by paying a "deficiency dividend" (as well as
applicable interest and penalties) within a specified period.
TAXATION OF THE COMPANY AS A REIT. The Company will adopt the calendar year
for federal income tax purposes, and will use the accrual method of accounting.
For each taxable year in which the Company qualifies as a REIT, it generally
will be taxed only on the portion of its taxable income that it retains (which
will include any undistributed net capital gain), because the Company will be
entitled to a deduction for dividends paid to shareholders during the taxable
year. A dividends paid deduction is not available for dividends that are
considered preferential within any given class of shares or as between classes
except to the extent such class is entitled to such preference. The Company does
not anticipate that it will pay any such preferential dividends. The Articles
provide for the automatic exchange of outstanding shares for Excess Stock in
circumstances in which the Company's REIT status might otherwise be put into
jeopardy (I.E., if a person attempts to acquire a block of shares that would be
sufficient to cause the Company to fail the requirement that five or fewer
individuals may not own more than 50% of the value of the outstanding shares).
Because Excess Stock will represent a separate class of outstanding shares, the
fact that those shares will not be entitled to dividends should not adversely
affect the Company's ability to deduct its dividend payments.
Even if it qualifies as a REIT, the Company will be subject to tax in
certain circumstances. The Company would be subject to tax on any income or gain
from foreclosure property at the highest corporate rate (currently 35%). A
confiscatory tax of 100% applies to any net income from prohibited transactions.
In addition, if the Company fails to meet either the 75% or 95% source of income
tests described above, but still qualifies for REIT status under the reasonable
cause exception to those tests, a 100% tax would be imposed equal to the amount
obtained by multiplying (i) the greater of the amount, if any, by which it
failed either the 75% income test or the 95% income test, times (ii) the ratio
of the Company's REIT Taxable Income to the Company's gross income (excluding
capital gain and certain other items). The Company also will be subject to the
alternative minimum tax on items of tax preference (excluding items specifically
allocable to the Company's stockholders). Finally, under regulations that are to
be promulgated, the Company also may be taxed at the highest regular corporate
tax rate on any built-in gain (I.E., the excess of value over adjusted tax
basis) attributable to assets that the Company acquires in certain tax-free
corporate transactions, to the extent the gain is recognized during the first
ten years after the Company acquires such assets.
FAILURE TO QUALIFY AS A REIT. For any taxable year in which the Company
fails to qualify as a REIT and certain relief provisions do not apply, it would
be taxed at regular corporate rates on all of its taxable income. Distributions
to its stockholders would not be deductible in computing that taxable income,
and distributions would no longer be required to be made. Any corporate level
taxes generally would reduce the amount of cash available to the Company for
distribution to its stockholders and, because the stockholders would continue to
be taxed on the distributions they receive, the net after tax yield to the
shareholders from their investment in the Company likely would be reduced
substantially. As a result, the Company's failure to qualify as a REIT during
any taxable year could have a material adverse effect upon the Company and its
stockholders. If the Company loses its REIT status, unless certain relief
provisions apply, the Company will not be eligible to elect REIT status again
until the fifth taxable year which begins after the first year for which the
Company's election was terminated.
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<PAGE>
TAXATION OF STOCKHOLDERS. Distributions generally will be taxable to
stockholders as ordinary income to the extent of the Company's earning and
profits. Dividends declared during the last quarter of a calendar year and
actually paid during January of the immediately following calendar year are
generally treated as if received by the stockholders on December 31 of the
calendar year during which they were declared. Distributions paid to
stockholders will not constitute passive activity income, and as a result
generally cannot be offset by losses from passive activities of a stockholder
who is subject to the passive activity rules. Distributions designated by the
Company as capital gains dividends generally will be taxed as long term capital
gains to stockholders to the extent that the distributions do not exceed the
Company's actual net capital gain for the taxable year. Corporate stockholders
may be required to treat up to 20% of any such capital gains dividends as
ordinary income. The Tax Act provides that beginning with the taxable year ended
December 31, 1998, if the Company elects to retain and pay income tax on any net
long-term capital gain, stockholders of the Company would include in their
income as long-term capital gain their proportionate share of such net long-term
capital gain. Such stockholders would receive a credit for such stockholder's
proportionate share of the tax paid by the Company on such retained capital
gains and an increase in basis in the stock of the Company in an amount equal to
the difference between the undistributed long-term capital gains and the amount
of tax paid by the Company. Distributions by the Company, whether characterized
as ordinary income or as capital gains, are not eligible for the dividends
received deduction for corporations. Stockholders are not permitted to deduct
losses or loss carry-forwards of the Company. Future regulations may require
that the stockholders take into account, for purposes of computing their
individual alternative minimum tax liability, certain tax preference items of
the Company.
The Company may generate cash in excess of its net earnings. If the Company
distributes cash to stockholders in excess of the Company's current and
accumulated earnings and profits (other than as a capital gain dividend), the
excess cash will be deemed to be a return of capital to each stockholder to the
extent of the adjusted tax basis of the shareholder's shares. Distributions in
excess of the adjusted tax basis will be treated as gain from the sale or
exchange of the shares of stock. A stockholder who has received a distribution
in excess of current and accumulated earnings and profits of the Company may,
upon the sale of the shares, realize a higher taxable gain or a smaller loss
because the basis of the shares as reduced will be used for purposes of
computing the amount of the gain or loss.
Generally, gain or loss realized by a stockholder upon the sale of Common
Stock will be reportable as capital gain or loss. If a stockholder receives a
long-term capital gain dividend from the Company and has held the shares of
stock for six months or less, any loss incurred on the sale or exchange of the
shares is treated as a long-term capital loss, to the extent of the
corresponding long-term capital gain dividend received.
In any year in which the Company fails to qualify as a REIT, the
stockholders generally will continue to be treated in the same fashion described
above, except that none of the Company dividends will be eligible for treatment
as capital gains dividends, corporate stockholders will qualify for the
dividends received deduction and the stockholders will not be required to report
any share of the Company's tax preference items.
BACKUP WITHHOLDING. The Company will report to its stockholders and the IRS
the amount of dividends paid during each calendar year and the amount of tax
withheld, if any. If a stockholder is subject to backup withholding, the Company
will be required to deduct and withhold from any dividends payable to that
stockholder a tax of 31%. These rules may apply (i) when a stockholder fails to
supply a correct taxpayer identification number, (ii) when the IRS notifies the
Company that the stockholder is subject to the rules or has furnished an
incorrect taxpayer identification number, or (iii) in the case of corporations
or others within certain exempt categories, when they fail to demonstrate that
fact when required. A stockholder that does not provide a correct taxpayer
identification number may also be subject to penalties imposed by the IRS. Any
amount withheld as backup withholding may be credited against the stockholder's
federal income tax liability. The Company also may be required to withhold a
portion of capital gain distributions made to stockholders who fail to certify
their non-foreign status to the Company.
26
<PAGE>
TAXATION OF TAX EXEMPT ENTITIES. In general, a tax exempt entity that is a
stockholder of the Company will not be subject to tax on distributions from the
Company or gain realized on the sale of shares. In Revenue Ruling 66-106, the
IRS specifically confirmed that a REIT's distributions to a tax exempt
employees' pension trust did not constitute unrelated business taxable income
("UBTI"). A tax exempt entity may be subject to UBTI, however, to the extent
that it has financed the acquisition of its shares with "acquisition
indebtedness" within the meaning of the Code. The Revenue Reconciliation Act of
1993 has modified the rules for tax exempt employees' pension and profit sharing
trusts which qualify under Section 401(a) of the Code and are exempt from tax
under Section 501(a) of the Code ("qualified trusts") for tax years beginning
after December 31, 1993. Under the new rules, in determining the number of
stockholders a REIT has for purposes of the "50% test" described above under
"--REIT Qualification-- Share Ownership; Reporting," generally, any stock held
by a qualified trust will be treated as held directly by its beneficiaries in
proportion to their actuarial interests in such trust and will not be treated as
held by such trust.
A qualified trust owning more than 10% of a REIT may be required to treat a
percentage of dividends from the REIT as UBTI. The percentage is determined by
dividing the REIT's gross income (less direct expenses related thereto) derived
from an unrelated trade or business for the year (determined as if the REIT were
a qualified trust) by the gross income of the REIT for the year in which the
dividends are paid. However, if this percentage is less than 5%, dividends are
not treated as UBTI. These UBTI rules apply only if the REIT qualifies as a REIT
because of the change in the 50% test discussed above and if the trust is
"predominantly held" by qualified trusts. A REIT is predominantly held by
qualified trusts if at least one pension trust owns more than 25% of the value
of the REIT or a group of pension trusts each owning more than 10% of the value
of the REIT collectively own more than 50% of the value of the REIT. The Company
does not expect to meet either of the requirements.
For social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts and qualified group legal services plans exempt from
federal income taxation under Sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of
the Code, respectively, income from an investment in the Company will constitute
UBTI unless the organization is able to deduct an amount properly set aside or
placed in reserve for certain purposes so as to offset the unrelated business
taxable income generated by the investment in the Company. These prospective
investors should consult their own tax advisors concerning the "set aside" and
reserve requirements.
TAXATION OF FOREIGN INVESTORS. The rules governing federal income taxation
of nonresident alien individuals, foreign corporations, foreign partnerships and
other foreign stockholders (collectively, "Non-U.S. Stockholders") are complex
and no attempt will be made herein to provide more than a summary of such rules.
Prospective Non-U.S. Stockholders should consult with their own tax advisors to
determine the impact of federal, state and local income tax laws with regard to
an investment in shares of Common Stock, including any reporting requirements,
as well as the tax treatment of such an investment under the laws of their home
country.
Dividends that are not attributable to gain from sales or exchanges by the
Company of United States real property interests and not designated by the
Company as capital gain dividends will be treated as dividends of ordinary
income to the extent that they are made out of current or accumulated earnings
and profits of the Company. Such dividends ordinarily will be subject to a
withholding tax equal to 30% of the gross amount of the dividend unless an
applicable tax treaty reduces or eliminates that tax. However, if income from
the investment in the Common Stock is treated as effectively connected with the
Non-U.S. Stockholder's conduct of a United States trade or business, the
Non-U.S. Stockholder generally will be subject to a tax at graduated rates, in
the same manner as U.S. stockholders are taxed with respect to such dividends
(and may also be subject to the 30% branch profits tax in the case of a
stockholder that is a foreign corporation). The Company expects to withhold
United States income tax at the rate of 30% on the gross amount of any such
dividends paid to a Non-U.S. Stockholder unless (i) the Non-U.S. Stockholder
files on IRS Form 1001 claiming that a lower treaty rate applies or (ii) the
Non-U.S.
27
<PAGE>
Stockholder files an IRS Form 4224 with the Company claiming that the dividend
is effectively connected income. Dividends in excess of current and accumulated
earnings and profits of the Company will not be taxable to a stockholder to the
extent that they do not exceed the adjusted basis of the stockholder's shares,
but rather will reduce the adjusted basis of such shares. To the extent that
such dividends exceed the adjusted basis of a Non-U.S. Stockholder's shares of
stock, they will give rise to tax liability if the Non-U.S. Stockholder would
otherwise be subject to tax on any gain from the sale or disposition of his
shares, as described below. If it cannot be determined at the time a dividend is
paid whether or not such dividend will be in excess of current and accumulated
earnings and profits, the dividends will be subject to such withholding. The
Company does not intend to make quarterly estimates of that portion of dividends
that are in excess of earnings and profits, and, as a result, all dividends will
be subject to such withholding. However, the Non-U.S. Stockholder may seek a
refund of such amounts from the IRS.
For any year in which the Company qualifies as a REIT, dividends that are
attributable to gain from sales or exchanges by the Company of United States
real property interests will be taxed to a Non-U.S. Stockholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, those dividends are taxed to a Non-U.S. Stockholder as
if such gain were effectively connected with a United States business. Non-U.S.
Stockholders would thus be taxed at the normal capital gain rates applicable to
U.S. stockholders (subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals). Also,
dividends subject to FIRPTA may be subject to a 30% branch profits tax in the
hands of a corporate Non-U.S. Stockholder not entitled to treaty exemption. The
Company is required by the Code and applicable Treasury Regulations to withhold
35% of any dividend that could be designated by the Company as a capital gain
dividend. This amount is creditable against the Non-U.S. Stockholder's FIRPTA
tax liability.
Gain recognized by a Non-U.S. Stockholder upon a sale of shares generally
will not be taxed under FIRPTA if the Company is a "domestically controlled
REIT," defined generally as a REIT in which at all times during a specified
testing period less than 50% in value of the shares was held directly or
indirectly by foreign persons. It is currently anticipated that the Company will
be a "domestically controlled REIT," and therefore the sale of shares will not
be subject to taxation under FIRPTA. Because the shares of Common Stock will be
publicly traded, however, no assurance can be given that the Company will remain
a "domestically controlled REIT." However, gain not subject to FIRPTA will be
taxable to a Non-U.S. Stockholder if (i) investment in the shares of Common
Stock is effectively connected with the Non-U.S. Stockholder's United States
trade or business, in which case the Non-U.S. Stockholder will be subject to the
same treatment as U.S. stockholders with respect to such gain (and may also be
subject to the 30% branch profits tax in the case of a corporate Non-U.S.
Stockholder, or (ii) the Non-U.S. Stockholder is a nonresident alien individual
who was present in the United States for 183 days or more during the taxable
year and has a "tax home" in the United States, in which case the nonresident
alien individual will be subject to a 30% tax on the individual's capital gains.
If the Company were not a domestically controlled REIT, whether or not a
Non-U.S. Stockholder's sale of shares of Common Stock would be subject to tax
under FIRPTA would depend on whether or not the shares of Common Stock were
regularly traded on an established securities market (such as the NYSE) and on
the size of selling Non-U.S. Stockholder's interest in the Company. If the gain
on the sale of shares were to be subject to taxation under FIRPTA, the Non-U.S.
Stockholder will be subject to the same treatment as U.S. stockholders with
respect to such gain (subject to applicable alternative minimum tax and a
special alternative minimum tax in the case of nonresident alien individuals)
and the purchaser of such shares of Common Stock may be required to withhold 10%
of the gross purchase price.
Upon the death of a foreign individual stockholder, the investor's shares
will be treated as part of the investor's U.S. estate for purposes of the U.S.
estate tax, except as may be otherwise provided in an applicable estate tax
treaty.
STATE AND LOCAL TAXES. The Company and its stockholders may be subject to
state or local taxation in various state or local jurisdictions, including those
in which it or they transact business or reside.
28
<PAGE>
Consequently, prospective stockholders should consult their own tax advisors
regarding the effect of state and local tax laws on an investment in the
Company.
LEGAL MATTERS
The validity of the Offered Securities issued hereunder, as well as legal
matters described under "Federal Income Tax Considerations," will be passed upon
for the Company by Winstead Sechrest & Minick P.C., Dallas, Texas, and certain
legal matters will be passed upon for any underwriters, dealers or agents by the
counsel named in the applicable Prospectus Supplement. Winstead Sechrest &
Minick P.C. will rely as to certain matters of Maryland law on the opinion of
Piper & Marbury L.L.P., Baltimore, Maryland.
EXPERTS
The consolidated financial statements of the Predecessor as of December 31,
1996 and 1995, the related consolidated statements of income, partners' capital
and cash flows for each of the three years in the period ended December 31, 1996
which are incorporated herein by reference from the Predecessor's Annual Report
on Form 10-K and the balance sheet of the Company as of February 4, 1997, which
is incorporated herein by reference from the Company's Current Report on Form
8-K dated August 22, 1997, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports which are incorporated by
reference herein, and have been so incorporated in reliance upon the reports of
such firm given upon their authority as experts in accounting auditing.
The financial statements listed below of the following entities which are
incorporated herein by reference from the Predecessor's Current Report on Form
8-K dated August 21, 1997 have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports which are incorporated by
reference herein, and have been so incorporated in reliance upon the reports of
such firm given upon their authority as experts in accounting and auditing: (i)
Charleston's of Norman, Inc. Statement of Revenues and Certain Expenses for the
fifty-two week period ended March 23, 1997; (ii) Statement of Revenues and
Certain Expenses of the Property Sold to U.S. Restaurant Properties Master L.P.
by David E. Rodgers - Trustee for the year ended December 31, 1996; (iii)
Statement of Revenues and Certain Expenses of Magazine Company Property Sold to
U.S. Restaurant Properties Master L.P. for the year ended December 31, 1996;
(iv) Statement of Revenues and Certain Expenses of Ribbit Holdings, Inc.
Property Sold to U.S. Restaurant Properties Master L.P. for the nine months
ended June 30, 1997; (v) Combined Statement of Revenues and Certain Expenses of
Selected Properties Sold to U.S. Restaurant Properties Master L.P. (Taco Cabana
Acquisition) for the year ended December 31, 1996; (vi) Combined Statement of
Revenues and Certain Expenses of BCL II, L.P. Properties Sold to U.S. Restaurant
Properties Master L.P. for the year ended December 31, 1996; and (vii) Combined
Statement of Revenues and Certain Expenses of Selected Properties Sold to U.S.
Restaurant Properties Master L.P. (Midon Acquisition) for the year ended
December 31, 1996.
The financial statements listed below of the following entities which are
incorporated herein by reference from the Predecessor's Current Report on Form
8-K dated April 14, 1997 have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports which are incorporated by reference herein
and have been so incorporated in reliance upon the reports of such firm given
upon their authority as experts in accounting and auditing: (i) Combined
Statement of Revenues and Certain Expenses of RR Restaurant 1986-1 Properties
Sold to U.S. Restaurant Properties Master L.P. for the year ended December 31,
1996; (ii) Selected Properties Sold to U.S. Restaurant Properties Master L.P.
(Bruegger's Acquisition) for the year ended December 31, 1996; and (iii)
Statement of Revenues and Certain Expenses of Tulip Properties Limited Property
Sold to U.S. Restaurant Properties Master L.P. for the year ended December 31,
1996.
29
<PAGE>
The audit of the Statement of Revenues and Direct Operating Expenses
Applicable to Seventy-Five Arby's Restaurant Properties Acquired by U.S.
Restaurant Properties Master L.P. for the year ended December 28, 1996 which has
been incorporated herein by reference from the Predecessor's Current Report on
Form 8-K dated April 14, 1997, has been audited by Coopers & Lybrand L.L.P.,
independent auditors, as stated in their reports and included and incorporated
herein by reference, and have been so included and incorporated in reliance upon
the reports of such firm given upon their authority as experts in accounting and
auditing.
30
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THE OFFERING OF SECURITIES MADE HEREBY OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE
UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE
ACCOMPANYING PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR
A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED
SECURITIES TO WHICH THEY RELATE. THE PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary............................................. S-3
Risk Factors.............................................................. S-15
The Company............................................................... S-23
Market and Industry Information........................................... S-26
Use of Proceeds........................................................... S-28
Capitalization............................................................ S-29
Selected Historical and Pro Forma Financial Information and Other Data.... S-30
Management's Discussion and Analysis of Results of Operations and
Financial Condition..................................................... S-33
Business and Properties................................................... S-37
Policies with Respect to Certain Activities............................... S-56
Management................................................................ S-60
Certain Relationships and Related Transactions............................ S-62
Principal Stockholders.................................................... S-64
Description of Series A Preferred Stock................................... S-64
Partnership Agreement..................................................... S-70
Certain Provisions of Maryland Law and of The Company's Charter and
Bylaws.................................................................. S-75
Taxation of Holders of Series A Preferred Stock........................... S-77
Underwriting.............................................................. S-81
Legal Matters............................................................. S-82
Experts................................................................... S-82
Index to Financials....................................................... F-1
PROSPECTUS
Available Information..................................................... 2
Incorporation of Certain Documents by Reference........................... 2
Forward-Looking Information............................................... 3
The Company............................................................... 4
Use of Proceeds........................................................... 4
Ratio of Earnings to Fixed Charges........................................ 4
Description of Common Stock............................................... 5
Description of Common Stock Warrants...................................... 6
Description of Preferred Stock............................................ 8
Description of Depositary Shares.......................................... 14
Restrictions on Transfers of Capital Stock................................ 17
Plan of Distribution...................................................... 20
Federal Income Tax Considerations......................................... 20
Legal Matters............................................................. 29
Experts................................................................... 29
</TABLE>
3,200,000 SHARES
[LOGO]
$ SERIES A CUMULATIVE
CONVERTIBLE PREFERRED STOCK
--------------
PROSPECTUS SUPPLEMENT
-----------------
PAINEWEBBER INCORPORATED
MORGAN KEEGAN & COMPANY, INC.
EVEREN SECURITIES, INC.
CROWELL, WEEDON & CO.
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, 1997
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